Corporate Governance and Ethical Outlook of Charter Hall Retail Units (CQR)

This report analyses the corporate governance structure and ethical outlook of a selected ASX listed corporation, Charter Hall Retail Units (CQR). It examines the composition, orientation and focus of the Board and applies relevant governance theories such as stewardship, legitimacy and agency. The report also evaluates the effectiveness of the corporate governance framework of the company for maintaining transparency and integrity in its overall operations.

Ethics and Governance
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Executive Summary
This report has undertaken an analysis of the corporate governance structure and ethical
outlook of a selected ASX listed corportaion, that is, Charter Hall Retail Units (CQR). In this
regard, it has been illustrated within the report that CQR has attained a leading position within
real estate sector of Australia by creating higher value for its customers. This has been achieved
through marinating an effective corporate governance structure that is characterized by majority
of independent director in comparison to the non-independent directors.
The board orientation of the company is recognized to be shareholder-agency in which
shareholders appoints the Board members for conducting business operations on their behalf and
maximizing the long-term growth for the shareholders. Also, it has been identified by the
application of legitimacy theory to the key disclosures prepared by the company that it has
adequately presented its social and environmental performance within its annual report to
develop a legitimate position in the mind of all its stakeholders.
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Introduction
The business companies are emphasizing on developing the voluntary disclosures such as
corporate governance statement and sustainability reports for improving their credibility and
ethical outlook in the mind of its stakeholders. In this context, the present report has been
developed for gaining an insight into the importance of voluntary disclosures developed by
businesses for determining their governance and ethical outlook. This has been carried out by
examining the corporate governance structure of an ASX listed entity that is Charter Hall Retail
Units (CQR).
The report involves researching the corporate governance framework of the selected
entity and then applying relevant governance theories such as stewardship, legitimacy and
agency for examining its likely governance and ethical outlook. The corporate governance
framework of company has been analysed through examining its annual report for determining
the composition, orientation and focus of the Board. The evaluation carried out report intends to
determine the effective of corporate governance framework of the company for maintaining
transparency and integrity in its overall operations.
Part 1: Company Introduction
Charter Hall Retail REIT is a leading property company within Australia. The company
is highly dedicated for providing optimum returns to the investors and is having about 28 years
of experience in managing high quality office, industrial, retail and social infrastructure property.
The company is managed by Charter Hall Group that is known to be one of leading property
groups within country. The company is estimated to manage about $6.9 billion of convenience
asset retail portfolio within Australia (Charter Hall, 2018). Charter Hall Retail (CQR) operates
within the real estate sector of Australia and its major activity is investing within property. The
major type of property investment services provided by CQR includes active asset management,
improving the portfolio quality and prudent capital management. The company is having long-
time experience in investing in supermarket sector of Australia and at present is recognized to be
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a leading owner of convenience space retail of the country. The main focus of the company is to
promote investment within infrastructure of four major sectors that are, office, and industrial,
retail and social. The company at present is depicting higher growth with boom experienced in
the residential property market (Charter Hall Retail unit: Annual Report, 2018).
The incentives provided by the government and decline in the interest rates over the
period have driven economic growth within the sector. The annual growth of the industry is
predicted to be 1.2% and is expected to provide revenue of about $26 billion on an annual basis
IBIS WORLD, 2019). The property expertise that CQR has realized has enabled it to create
higher value and delivering higher returns to the customers. The company is able to attain a
leading position within the real estate sector of Australia mainly due to owing a team of over 600
property and investment experts and implementing the use of an entrepreneurial approach to
business. The company places highly emphasis on developing a team of expertise people that is
able to deliver value to its customers. The employees are motivated to achieve the company’s
goals and objectives by fostering an organizational culture of reward and teamwork. The close
relations with customers are developed through understanding their investment needs and
creating higher value for them. The success achieved by the company can be attributed to its
high emphasis placed on sustainable growth and development (Charter Hall, 2018).
The company manages all its property and funds in an effective manner through
conducting all its operations in an integrated manner. As such, it ensures that all its systems and
practices adhere to high standards of corporate governance and its organizational culture is
developed on the basis of high ethical standards. The strong and effective governance framework
developed by the company helps it to attain its business objectives effectively by regular
reviewing and addressing the business risks. The company also strives to monitor regularly its
environmental performance and ensures that all its operational activities do not have any
negative impact on the nearby communities. The company has adequately aligned its
sustainability framework with its corporate strategy that has enabled it create higher value for all
its stakeholders (Charter Hall Retail unit: Annual Report, 2018).
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Part 2: Summary of Corporate Governance at Charter Hall Retail
The company is an ASX listed entity and therefore implements and follows ASX
Corporate governance principle for stating its corporate governance duties and responsibilities.
An analysis of the corporate governance framework of the company is carried out through
analysis of the following points:
(i)Board Composition stating the ratio of independent to non-independent
directors
As per the ASX corporate governance principle, there should be high proportion of
independent directors within the board of an ASX listed entity. The independent directors within
Board act in independence of management and are not significantly influenced by any of their
relationship that could prevent them making objective and independent judgments. The Board is
made up of two executive and five non-executive directors. The non-executive director’s act as
independent and therefore the composition of independent to non-independent directors can be
regarded as 5:2. The chairperson of the Board, John Harkness, is also an independent non-
executive director. Therefore, it can be said that Board has maintained independency within its
structure to ensure that it acts with utmost integrity to meet its various roles and responsibilities
(Charter Hall Retail unit: Annual Report, 2018). The same has been illustrated below:
(ii) Reports from the Chairperson and the CEO
As depicted from the Chairperson and the CEO report published within the annual report
of the company, CQR is able to drive its sustaible growth and development by delivering value
to its investors. The growth is mainly driven by strong performance of its portfolio that is
achieved through active asset management and maintaining of a prudent capital position. The
Chairperson has also offered thanks to the fellow board members and its entire workforce who
works in integration with each other to make CQR one of the high performing companies within
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the sector. It has been clearly mentioned within the Chairperson report that highly experienced
senior management has enabled it to achieve a stable leadership that is responsible for its
continued growth and development (Charter Hall Retail unit: Annual Report, 2018).
(iii) Remuneration report
The Board has developed a remuneration committee for over-viewing the remuneration
provided to the key executives and directors (Reda, Reifler & Stevens, 2014). The remuneration
of independent directors is approved by the Board and the fess provided to them is not in relation
to the performance of the REIT. There are remunerated by the Charter Hall and the base fee is
calculated as 0.45% per annum of the value of total assets and it is calculated on a monthly and
quarterly basis. In addition to this, a performance fee is also provided to the executives and
directors that are related to the relative performance of REIT as compared to retail REIT
accumulation index. The index is calculated on the basis of peer group of property securities that
have major focus within the retail sector (Charter Hall Retail unit: Annual Report, 2018).. The
overall structure of remuneration of directors and key executives as illustrated within the annual
report is depicted below:
Part 3: Board Orientation
The Board orientation refers to its composition which governs the proportion of
independent to non-independent directors maintained within the structure of the Board. The
orientation of the Board can be determined on the basis of agency and stewardship theory of
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corporate governance. The agency theory of corporate governance has determined the relation
between the agents that represents business managers and principals are the shareholders of the
business (Zhao, 2011). As per the theory, the major responsibility of the business managers is to
safeguard the interest of the owners and maximize the value created for them. As such, the
board orientation as per the agency theory will consists of high proportion of independent
directors appointed by the shareholders to act in the best interest of them and maximize the value
created for the shareholders. Thus, an agency board will mainly prioritize the goals and
objectives given to them by the shareholders such as increasing profits and dividends (Desender,
2009).
On the other hand, as per the stewardship theory of corporate governance it is the prime
responsibility of the Board to be responsible for the shareholders. As such, the board orientation
in accordance with the theory consists of mainly non-independent directors who are mainly focus
on growing the assets of the business. The stewardship board prioritizes to attain business growth
on the perspective of the shareholders (Hussain, 2017). Thus, it can be said that as per the
stewardship theory of board orientation a board focuses on promoting the welfare all
stakeholders while in agency board the main focus is on maximizing the growth for the most
powerful stakeholders. As such, in agency board the major type of communication form
involves financial statements and the remuneration report to depict the effectiveness of business
managers to achieve the shareholders objectives. On the other hand, as per the stewardship
theory the major form of communication that is adopted by the Board involves voluntary
disclosures such as disclosing corporate social responsibility reports and others (O’Donovan,
2012).
The major type of board orientation that has been stated on the basis of the agency and
stewardship theory are regarded as shareholder-agency, shareholder-stewardship, stakeholder-
managerial, stakeholder-ethical branch and resources. The board composition in the case of
shareholder-agency consists of mainly independent directors where the major focus is on
meeting the needs of the shareholders by driving increase in business profits and dividends
(Hussain, 2017). The major type of communication channel adopted by the Board includes
developing remuneration report, income statement and balance sheet. The shareholder-
stewardship orientation refers to the board having major composition of non-independent
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director who focus mainly on promoting the growth of the assets of the company. The focus of
the Board is on promoting internal growth through adequately managing its capital reserves. The
major disclosures the Board focus in this type of orientation is Chairperson’s report, balance
sheet and cash flow statement (Pickett, 2010).
The stakeholder-ethical type of board orientation has majority of independent directors
and it intends to maximize the interests of all stakeholders and the key communication of the
Board is voluntary disclosures. The stakeholder-managerial branch orientation of Board also
refers to having majority of independent directors but the focus is on maximizing the welfare of
the powerful stakeholders and the major type of communication channel adopted by Board
includes voluntary disclosures (Crowther & Seifi, 2017). Lastly, is the board orientation of
resources where the board is mainly composed of having a mix of independent and non-
independent directors so that there is an adequate mix of skills and expertise. The focus of the
Board is on promoting capital and resource flow management and the type of disclosures
prepared depends on the needs and resources of the company.
The CG statement of the Charter Hall Retail Units has stated that it possess majority of
non-executive directors who act independently as compared to the non-independent directors.
The Board focus is to maximize the return of the shareholders that are investors. As such, it can
be said board members appointed by the shareholders have the major interest in creating higher
value for them as stated by the agency theory (Desender, 2009). The directors mainly act
independent that is they perform their duties without having any personal interest in the business
affairs. The Board appoints key management personnel for performing various operational
activities of the business and acts to maximize the interest of shareholders. Thus, it can be said
that shareholders are principal and the Board act as agents of the shareholders whose major focus
is to increase the dividend growth for the shareholders through increasing the financial
performance of the company (Zhao, 2011). The Board in turn appoints the key management
personnel and also performs the responsibility of aligning their interest with the long-term goals
of the shareholders. This is done by using the remuneration plans that tends to link the
remuneration of the key management people with the company objectives. This helps in reducing
the agency costs that occur due to conflict between the business managers and the shareholders
due to non-alignment of their goals and objectives (Charter Hall Retail REIT, 2018).
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The Board also holds the responsibility of monitoring the performance of the key
management people to identify the gaps in performance and thus implementing adequate plans
for achieving their strategic goals and objectives. In addition to this, the Board also holds the
responsibility for ensuring that all business operations are carried out in an integrated manner
and ensuring transparency in the financial reporting process to protect the interest of the
shareholders. As such, the Board also appoints an audit committee for maintaining objective and
accountability in the financial reporting process of the company and thus reducing the risk of
manipulating the financial information. The Board of CQR as per this orientation develops key
disclosures such as remuneration report, income statement and balance sheet that enables the
shareholders to gain an analysis of the integrity and transparency in the business operations and
financial reporting(Charter Hall Retail unit: Annual Report, 2018). These types of disclosures
ensures to shareholders that Board members are adequately meeting their various roles and
responsibilities and acting in their best interests for maximizing the returns created for them
(Rezaee, 2008).
Part 4: Interpreting Company Communications with the use of
Legitimacy theory
The research article of Deggan (2002) has illustrated the significance of social and
environmental reporting that is done by the business companies for promoting its legitimacy in
the mind of its stakeholders. Such type of disclosures plays an important role in enhancing
transparency within the business operations and gain trust of its relevant stakeholders. The
motivation for business companies to develop and disclose its social and environmental
performance is linked to their desire for improving its goodwill among the stakeholders and thus
promoting its sustainable growth. As such, Charter Hall Retail is also involved in disclosing its
social and environmental performance through developing its sustainability report. The
sustainability report provides information about the social and environmental performance of the
company and as such achieving reliability and accountability within its business operations
(Charter Hall Retail unit: Annual Report, 2018).
Similarly, the research article of Deegan, Ranking and Tobin (2002) has illustrated the
example of a real-life company that is BHP Billiton, to demonstrate the impact of social and
environment disclosures provided by a company on its legitimacy image. The research study has
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emphasized that such type of disclosures provided by the company within its annual report helps
in developing its legitimate position in the mind of its stakeholders. In this regard, it has been
analyzed form the annual report of CQR that it has adequately presented the information related
to its social and environmental sustainability within its annual report. Such type of information
ahs helped it to a large extent in improving its credibility among the society members at large
which in turn promote its sustainable growth (Charter Hall Retail unit: Annual Report, 2018)..
Lastly, the research article of Milne & Patter (2002) has placed emphasis on the role of
environmental disclosures developed by a company on maximizing its legitimate position among
its stakeholders. The article has presented the overall discussion in relation to the chemical
industry. The chemical industry need to place large emphasis on reducing its environmental
impact as it is involved in emission of different types of toxic materials into the atmosphere that
degrade its quality to a large extent. Therefore, it is largely essential for the firms operating
within the chemical industry to disclose information about their environmental performance for
ensuring that their operations are not having a detrimental effect on the quality of environment.
As such, it can be stated on the basis of analyzing the environmental disclosures of CQR that it
places large emphasis on improving the quality of environment and promoting its sustainable
growth. This has largely assisted it in improving its legitimate position within the society and
gaining the support of its associated stakeholders (Charter Hall Retail unit: Annual Report,
2018).
Conclusion
Thus, it can be stated on the basis of analyzing the governance and ethical outlook of
Charter Hall Retail Units that it has maintained an effective corporate governance framework
which ensures that all its operations are carried out in an ethical manner. In this context, the
report has examined the governance and ethical aspects in context of stewardship and agency
theory. It has been examined on the basis of board composition and focus that it has adopted the
use of shareholder-agency orientation to create value for its shareholders. The company strictly
adheres to the ASX corporate governance principles in an effective manner that ensures all its
different operations are carried out in an integrated manner. In addition to this, it has also been
interpreted on the basis of analyzing the given research articles that business companies need to
provide information about their social and environmental performance for improving their
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legitimate position in the mind of its stakeholders. In this context, CQR develops sustainability
reports and also provides information about its social and environmental performance within the
annual report that has enabled it to achieve a legitimate position within its community and also
among wide range of its stakeholders.
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References
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https://charterhall.reportonline.com.au/fy17/files/cqr/CQR2017_Corporate_Governance_
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Charter Hall Retail unit. (2018). Annual Report. Retrieved 1 October, 2019, from
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results/cqr-2018/cqr-2018-annual-report.pdf?sfvrsn=db949d55_7
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