Corporate Governance of Australian Pharmaceutical Industries Limited

This report discusses the corporate governance approach adopted by Australian Pharmaceutical Industries Limited, a health and beauty company situated in Australia. It covers the board structure, remuneration policy, board orientation, and communication strategy of the company.

Running Head: ETHICS AND GOVERNANCE 0
Ethics and Governance
Student’s Name
10/2/2019

Ethics and Governance 1
Executive Summary
Good governance is the core of every organization and therefore it is required to keep
interest of all the stakeholders in consideration. Many of the aspects of Australian
Pharmaceutical Industries Limited have been discussed in this report to check the compliance
level and level of corporate governance. The company is active in the healthcare sector and
providing the best services and products for 105 years. The majority of directors are independent
and they have appointed to serve better to shareholders and customers. The remuneration policy
of the company also been discussed in the report. Further, the board orientation of the company
reflects managerial branch theory where the focus of the company remains on the need of most
powerful stakeholders. Lastly the company does not seem to be legitimate considering
communication of the same as no voluntary disclosure has been made that can reflect efforts of
the company in a social and environmental context.

Ethics and Governance 2
Introduction
As discussed above, corporate governance becomes an important aspect of discussion
these days due to the increasing expectations of stakeholders and competition in the businesses.
The lead purpose of presenting this report is to develop an understanding of the corporate
governance approach adopted by Australian Pharmaceutical Industries Limited, which is a health
and beauty company situated in Australia (Roth, 2019). To prepare this report, thorough research
of the website and annual reports of the company and media news have done. Further different
types of board orientation and theories been studied where the most appropriate theory was the
stakeholder managerial branch. The legitimacy theory has been applied to providing an
interpretation of company communication. After the study of this report, one may be able to
know the board structure of the selected company, remuneration policy adopted by the same,
board orientation and type of communication that the company has been adopted as these points
will be summarized in this report. At the end of the report conclusion of the report will be
provided.
Summary of the company
The chosen company is Australian Pharmaceutical Industries Limited that is active in the
healthcare industry (Simplywall.st, 2019). The lead motive of the company is to update the
standard of beauty, health, and wellbeing of people. It is engaged in the wholesale distribution of
pharmaceutical and similar products to hospitals, pharmacies, and doctors. In other words to say
that the services of the company include marketing programs, wholesale product delivery,
business advisory services, and retail services. From one location in Sydney to almost every

Ethics and Governance 3
state, the company spread its roots. In conjunction with this, the company also owns an OTC
manufacturing facility in New Zealand.
The company counts in one of the leading pharmaceutical distributors of the country. API
has been established in 1910 and was listed on the Australian Stock Exchange in 1997
(Asx.com.au, 2019). Further, the same is the parent company of Soul Pattinson Chemist,
Priceline Pharmacy, and Pharmacist Advice (Tcs.com, 2019). The company has several high
profile banners and brands in retail beauty and health industry and pharmacy. Pharmacist
Advice, Clear Skincare, Club Premium are some of such brands and banners. Currently, it is
employing more than 3000 people. In 2017, Mr. Richard Vincent has been appointed as CEO of
the company.
If to discuss the history of the company, this is to state that over the past 105 years, the
company has developed itself from a small cooperative to the multi-national organization. In
2012, the company has rebranded its API club card to the sister club program. At present, it has
more than 5.2 million members. 2014 was another important year for the company where it
crossed funding of $1 million in the form of charity and sisterhood gained foundation status. API
has completed and celebrated 105 years of establishment, reported revenue of $3.35 billion. The
other leading development was to introduce SAP that was the first wholesale and retail project of
its scale worldwide. Further, by 2015, the company has developed nearly 25 Priceline Pharmacy
stores. In 2015 only, the company also made another significant change where it has adopted the
enterprise-reporting system to provide efficiency between wholesale and retail operations.
Priceline Pharmacy is one of the largest retail programs in the nation. At per the information
available on the website of the company, the same has 72 Pharmacist Advice pharmacies, 420
Priceline Pharmacy stores, 750 pharmacies participating in Club Premium and 100 Soul

Ethics and Governance 4
Pattinson Chemists. Whenever it comes to the discussion of API, it is necessary to discuss the
Priceline sisterhood foundation. It is a foundation developed by API where the same help to a
woman who suffers from a serious illness. The company has different charity founders, which
provides funds for social cause. These charity partners include dementia Australia, children's first
foundation, raise- the youth mentoring foundation and so on. Hence to state that in recent years,
many significant changes have been done.
Summary of corporate governance
To check the corporate governance of the company, the latest available annual report
(2018) has been reviewed. As per this report, the company has seven directors out of which the
majority of directors are independent. Mr. Mark Smith is the chairperson of the board who has
been appointed on this position (Zoominfo.com, 2019). He is an independent director. Out of
seven directors, five are independent. In such a way, the ratio of dependent and independent is
nearly 3:7.
Chairperson as well as CEO of the company addressed to stakeholders and provided their
report, which further became part of the annual report itself. As per the chairman and CEO, the
company keeps an important position in the healthcare industry. Priceline pharmacy is becoming
Australia's favorite health and beauty retailer as it is improving the products and services. They
have further stated that to maintain a strong market position of Priceline pharmacy, the company
is trying to offer more exclusive brands. Further, despite price deflation and other challenges, the
pharmacy distribution business of the company is doing well continuously. The company has a
range of products and services that provides its confidence for ongoing success. In the subjective
report addressed by the chairman and CEO, the operation performance of the company also been

Ethics and Governance 5
highlighted. The report presents a picture of the corporate governance of the company. The
company has ended up the year by a reduction in debt of $55.9 million. They have highlighted
2018 as a transformation year for the company as the company has diversified the earning into
new growth vehicles.
Moving towards the discussion of the remuneration report of the company this is to state
that the same has provided remuneration to directors and executives as per the remuneration
strategy and structure. While developing these strategies and policies, the company has
considered provisions of section 300A of Corporations Act 2001 (Cth). The remuneration report
of the company is divided into two parts where one is for non-executive directors and the other is
for executive remuneration, which also includes the CEO and managing director (Api.net.au,
2019a). The first section states that the remuneration of non-executive directors also includes
Board Committee fee, superannuation at the statutory rate and non-monetary benefits. While
determining this remuneration, many aspects need to be considered including date given by
independent remuneration consultants, the fee provided by other similar companies, the
requirement to retain qualified directors and board judgment that whether the decided fee level is
appropriate or not. Following is a picture of remuneration received by non-executive directors of
the company excluding CEO and managing director

Ethics and Governance 6
The second section of the report highlights the manner in which the CEO, managing
directors, and executives are remunerated. These people are eligible to receive fixed
remuneration as well as performance-linked remuneration. Fixed remuneration includes Fringe
Benefits Tax and other employee benefits, which CEO and MD are entitled to receive on a
guaranteed basis. On the different side, performance-linked remuneration works as incentives
and has both kinds of duration i.e. short term and long term. Different performances measures
are there that had different weightings for 2018 as under-
(Api.net.au, 2018)

Ethics and Governance 7
Hence, this is to state that the company has two policies, one is for non-executive directors, and
another is for CEO, MD, and other executives.
Board Orientation
Board of directors of different companies adopts different approaches. Some of the focus
on profit maximization where some other focuses on value creation. This shows how a company
deals with corporate governance. There are different theoretical models of corporate governance.
Some of these theory focuses on resources and some of them focus on stakeholders. Board
orientation is one such aspect, looking up to that corporate governance of a company can be
evaluated. Board orientation can be understood as a process where board members are provided
with information regarding the corporation and their duties and responsibility (Price, 2018a). In
other words, it reflects the method of interaction of board members with their stakeholders. As
discussed above various kinds of theories can be applicable while determining board orientation.
For instance stakeholder theory that focuses on all the stakeholders, shareholder theory that
believes that board should only consider interest of shareholders. Other theories such as resource
management theory, agency theory are also there that have different believe and can be
understood by having a look upon to the table mentioned below. Mainly three elements of board
orientation are there namely board composition, board focus, and key communications. Under
the different theories, these elements are different. Before discussing related theories, elements
of board orientation need to be discussed that are also known as criteria. These criteria show how
a company takes the matter of corporate governance and adopts the same in practices. The first
criteria to determine board orientation is board composition. In general, board composition refers
to the ratio of independent and non-independent directors (Muchemwa, Padia & Callaghan,
2016). However, in addition to independency, other aspects such as diversity, skills, qualification

Ethics and Governance 8
also form a part of board composition but these are not as relevant as to evaluate board
orientation (Price, 2018b). Different types of board composition can be there such as an equal
number of independent and non-independent directors, majority of non-independent directors
who have business knowledge, the majority of independent directors to fulfill shareholders needs
and so on.
Orientation Shareholder
Agency
Shareholder-
Stewardship
Stakeholder-
Managerial
branch
Stakeholder
-Ethical
branch
Resources
Board
composition
Majority
independent,
installed by
shareholders
Majority non
independent
with good
knowledge of
business
operations
Majority
independent,
mainly for
powerful
stakeholders
Majority
independent,
to show the
diversity
Mix of
dependent and
non-
independent
directors for
skills as well
as knowledge
Board focus Needs of
shareholders
such as profit
and dividend
Internal
growth
Need of most
powerful
stakeholder
Management
of all
stakeholder
External
growth and
management
Key
communicati
on
Finance related
disclosures such
as balance sheet,
remuneration
Finance
related
disclosures
alongwith
Voluntary
disclosure
Voluntary
disclosure
focusing on
CSR
Disclosure
focusing on
resources
management.

Ethics and Governance 9
report report of
chairperson
The other criterion is the board focus. As the name implies, it refers to the priorities of
the board. Board focus shows what is most important to the directors. Board focus can be
anything such as the internal growth of the company, all stakeholder management, to fulfill the
needs of shareholders such as dividends, growth, and profits. Under different theories, the board
has different focus will be further discussed in this part of the report.
The last criterion is key communication. Key communication refers to the mode and
manner in which the board of directors of the company communicates with stakeholders in
general. Board can communicate through various documents and reports such as remuneration
reports, annual reports, and chairperson reports, voluntary disclose and so on. Different theories
of corporate governance suggest a different mode of communication. Here it is clear that after
looking at three criteria, the theory of board orientation can be determined. Now discussing these
theories this is to state that mainly five theories are there of board orientation namely shareholder
agency, shareholder- stewardship theory, stakeholder managerial theory, stakeholder-ethical
branch theory and resources theory. Under all these theories, different board composition, board
focus, and key communications are suggested. For instance, agency theory states that in board
composition there must be the majority of independent directors appointed by powerful
shareholders, the board must focus on shareholder needs and must be communicated through the
balance sheet, income statement, and remuneration report.

Ethics and Governance 10
After reading the latest annual report of API and related media articles, it has been
observed that the stakeholder managerial branch most likely affects the orientation of the board.
This theory of corporate governance requires a board composition where the majority of board
directors are independent but the purpose of their appointment should be to satisfy the needs of
most powerful stakeholders (Van der Laan, 2009). In the case of API, shareholders and
customers seem to be the most powerful stakeholders of the company. By reviewing the annual
report of the company, one can easily identify that these two groups of stakeholders are the most
powerful and significant to the company. In the report of chairman and CEO also, they have
mentioned these two groups as their lead focus. Now moving towards the board composition of
the company, the majority of directors are independent. If to look after their qualifications and
experience, it is clear that they have been introduced to the board to consider and fulfill the
requirement of shareholders and customers. For instance, Gerard J Masters, one of the
independent directors of the company has been managing director of one largest profitable
business of Coles Myer (Wallmine.com, 2019). Here it shows that the company appointed him to
make the business more profitable. The same goes for the chairperson of the company who is
also an independent director and has years of experience in the consumer good industry. Another
criterion i.e. board focus again reflects the stakeholder managerial branch. The focus of the board
of API seems to be centered on shareholders and customers. In the annual report of the company,
it is mentioned that the objective of the establishment of this company is to provide long-term
benefits to shareholders. Further, in the report of chairperson and CEO, it has been stated that the
lead focus of Priceline pharmacy is to provide the best beauty and healthcare products to
consumers. Although in the sustainability report, other stakeholders such as employees,
community, and partners are mentioned but the same cannot be considered as the focus of board

Ethics and Governance 11
considering the whole annual report as it is mentioned that in future financial years, API shall
drive continued value accretion for its shareholders. In this manner, it is to state the board focus
is associated with the stakeholder managerial branch.
The third and last criteria again reflect the above-mentioned theory i.e. key
communication. In addition to the annual report and other mandatory disclosures, the company
adopts voluntary disclosure. The company provides a Tax transparency code report for
communicating with stakeholders and in this method, it is not wrong to state that the company is
acting as stakeholder managerial branch theory. Sometimes ethical branch theory also reflects in
the practices of the board but considering all three criteria, the most suitable theory seems to be
the one which has been discussed i.e. stakeholder managerial branch.
Company communications: Legitimacy Theory
Communication with stakeholders is another aspect of corporate governance. The
manners in which a corporation communicates with the stakeholders also reflect its corporate
governance approach. Whenever it comes to the discussion of standard practices adopted by the
company, legitimacy theory is required to discuss. It is a powerful theory which states that what
could to be disclosed, why it is being disclosed and who could be the audience for the same.
Apart from legitimacy theory, no other theory is there in this area and this is the only theory that
explains corporate disclosure from the board. The board of every company wants their company
to be called legitimate but such determination is not in the control of the company. A society in
which companies work determines whether a company can be considered as legitimate and
which one is not (Eccles & Krzus, 2014). According to the belief of this theory, a company has a

Ethics and Governance 12
social contract to its stakeholders and in this manner, the same becomes liable towards them. The
theory further states that a company that wants to be called legitimate must show the society that
the same is working in the best interest of the same (Crowther, Gomez, & Vargas, L. (2017).
Here it is necessary to understand that when a company would be treated as legitimate in the
opinion of the society. Social and environmental reporting plays an important in legitimacy
theory where a company seems to be legitimate when it provides voluntary disclosures regarding
conduct in the social and environmental areas. In totality, legitimacy theory demands a company
to publish voluntary disclosures to society and to let the company know regarding adopted good
practices (Van der Laan, 2009).
If to discuss, communication done by API, this is to state that the same only provides Tax
transparency code report. Most powerful stakeholders of the company are stakeholders and
customers and the company is making voluntary disclosures for them by supplying Tax
transparency code report. However, these are not the only stakeholders of the company. The
company has not provided any disclosures regarding steps taken by the same in the social and
environmental sectors. Here for being legitimate, the company is required to make voluntary
disclosure regarding other CSR and sustainability efforts, which the company failed to do. The
annual report of the company also does not include any voluntary disclosures. Further if to
search the website of the company, again one may only find two documents as communication
namely annual report and Tax transparency code report (Api.net.au, 2019b). In this manner, it is
clear that the company cannot be considered as legitimate as it has not provided enough
voluntary disclosures as were required to be legitimate.

Ethics and Governance 13
Conclusion
To conclude the report this is to state that corporate governance is a highly significant
topic in today's era. In this report, firstly a basic introduction of the company and recent history
has been disclosed. Further company has its remuneration policy, which has also been discussed
in this report. Various theories of corporate governance and criteria of board orientation have
been discussed. The most likely orientation founds to be associated with managerial branch
theory. Lastly, the communication made by the company has been reviewed and this is to
conclude that the company does not seem to be legitimate. Overall, the company has good
corporate governance as it is focusing on all the stakeholders but the main focus is limited to
shareholders and customers of the company and company provide very limited voluntary
disclosure.

Ethics and Governance 14
References
Api.net.au. (2018). Annual Report. Retrieved from:
http://www.api.net.au/wp-content/uploads/2018/12/2018-Annual-Report-to-
Shareholders-1.pdf
Api.net.au. (2019a). Annual Reports. Retrieved from: http://www.api.net.au/investor/annual-
reports/
Api.net.au. (2019b). Annual Reports. Retrieved from: http://www.api.net.au/investor/annual-
reports/
Asx.com.au. (2019). Australian Pharmaceutical Industries Ltd (ASX: API). Retrieved from:
https://www.asx.com.au/spotlight/asia/documents/presentations/cp-api.pdf
Corporations Act 2001 (Cth).
Crowther, D., Gomez, L., & Vargas, L. (2017). Corporate Social Responsibility and Corporate
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http://www.scielo.org.za/scielo.php?script=sci_arttext&pid=S2222-34362016000400003

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Price, N., J. (2018a). Board Orientation 101. Retrieved from:
https://insights.diligent.com/board-orientation/board-orientation-101/
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single ERP platform. Retrieved from: https://www.tcs.com/australian-pharmaceutical-
unites-retail-wholesale-on-single-erp-platform
Van der Laan, S. (2009). The role of theory in explaining motivation for corporate social
disclosures: Voluntary disclosures vs ‘solicited’disclosures. Australasian Accounting,
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Wallmine.com. (2019). Gerard Masters Net Worth. Retrieved from:
https://in.wallmine.com/asx/api/officer/999407/gerard-masters

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Zoominfo.com. (2019). Mark G. Smith Business Profile. Retrieved from:
https://www.zoominfo.com/p/Mark-Smith/-1882352196