Corporate Governance Adherence: Commonwealth Bank of Australia Report

This report provides an in-depth analysis of corporate governance principles and their application to the Commonwealth Bank of Australia. It begins with an introduction to corporate law and its significance, followed by an examination of the bank's adherence to key principles of good corporate governance, including ethical conduct, transparency, risk management, and director's duties. The report highlights instances where the bank has fallen short of these principles, referencing specific cases and regulatory actions. Furthermore, the report explores the implications of non-adherence to good corporate governance, covering legal, social, and economic impacts. It also includes a case study of Australian Securities & Investments Commission v Adler, illustrating the consequences of breaching director's duties. The report concludes by emphasizing the importance of corporate governance for the bank's success and reputation, offering valuable insights for students of corporate law and finance. It highlights the importance of the ASX corporate governance principles and their impact on listed companies.

Corporate Law

Table of Contents
INTRODUCTION ..........................................................................................................................1
TASK...............................................................................................................................................1
A).Discuss whether your chosen company adheres to the principles of good corporate
governance..............................................................................................................................1
B). Implications of non-adherence to good corporate governance principles........................6
CONCLUSION ...............................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Corporate law can be simply defined as the body of law which commonly deals with the
creation and operations of corporations, businesses and organisations1. This is to be noted that it
is affiliated with the commercial and contract law. It is referring to the legitimate practices
relating to or the theory of corporations. The main purpose of designing this report is to explore
the importance of Australian corporate law. In this regard, a famous firm named 'Commonwealth
Bank' is considered which is offering banking services to the civilians living in Australia. In this
assignment the principles of good corporate governance adhered by the organisation is
highlighted.
TASK
A).Discuss whether your chosen company adheres to the principles of good corporate
governance
Commonwealth Bank of Australia is a famous Australian international bank whose is
offering an assortment of financial services such as insurance, management of funds, investment
and broking services, etc. Australian government had set up this organisation in 1911. This
association was listed on the ASX (i.e. Australian Stock Exchange ) in the year of 1991 and their
conducts are being considered by the Royal Commission. It has been noticed that the mentioned
firm is now concentrating on principles outlined by Corporate governance and members existed
in organisation are trying to adhere the same. Corporate governance is nothing but the system of
norms, regulations, practices and processes through which a corporations are directed , managed
& controlled2. This basically concern with balancing the interests of stakeholders like
consumers, shareholders, suppliers, management, financiers, communities and the government
involved in a firm. In addition to this, corporate governance is also providing them the structure
to attain their predetermined aims and objectives. There are some especial principles of good
corporate governance that should be followed by all the ventures existed in corporate world.
Core principles outlined by corporate governance are described below :
1 Jacoby, S. M., 2018. The embedded corporation: Corporate governance and
employment relations in Japan and the United States. Princeton University Press.
2 Velnampy, T., 2013. Corporate governance and firm performance: a study of Sri
Lankan manufacturing companies.
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 Act ethically & responsibly : According to the policy, each and every company has to run
their businesses in an ethical as well as responsible manner so that no one would face any
kind of difficulties in present and upcoming days. In case of 'Commonwealth bank',
proper and ethical decorum was not being maintained. In-fact, they are also not
responsible towards their clients. According to Royal Commission, this venture has was
doing illegal activities. For example, in 2013, lots of complaints are coming from the side
of customers related to interest rate of overdrafts3. they were being charged two interest
rates for their overdrafts i.e. nearly thirty-four percent (34 %) in place of single sixteen
percent (16%) rate. Ensure transparency : This is another important principle which depicts that
transparency have to be exists in business environment of a corporation. For creating a
transparent atmosphere, stakeholders ought be well – informed regarding every
commercial activities4. 'Commonwealth bank' is not abiding the similar since they were
hiding various facts and figures associated with overdrafts from their key stakeholders
(i.e. shareholders, customers, etc. ). For instance, this firm is not making them aware
about eminent plans such as interest rate which would be charged. They are doing so to
improve their current level of profitability by stealing money of innocent and simple
clients. Recognise and manage risks : As per the principle of Corporate governance, every
association should determine and remove the risky factors existing at workstation in order
to sustain its achievement. Commonwealth Bank of Australia is not following this norm
which is impacting negatively on their entire performances. If company wish to regain
their brand image then their 'executive committees' should abide this principle of
recognising as well as managing risks. They should determine risky factors by executing
a suitable risk & internal control supervision framework. In this context, executive
3 Banking royal commission: Commonwealth Bank delayed writing to overcharged
business customers. 2018. [Online]. Available
through:<http://www.abc.net.au/news/2018-05-24/banking-royal-commission-
commonwealth-bank-overcharged-business/9797120>.
4 Corporate Governance Principles. 2016. [Online]. Available
through:<https://www.interrao.ru/en/investors/corporate-governance/basic-principles/>.
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committee should assist in increasing the probability that corporation would meet its pre-
setted ambitions.
 Director's duty in context to accountability : As per this principle, the board of directors
is having accountability to shape the corporate governance system ensuring the better
management monitoring through board itself. This is also their responsibilities in regard
of managing shareholder and other stakeholder for any made transaction and productive
practices i.e. organised by an enterprise5. In case of Commonwealth Bank, the board of
directors is not performing their roles regarding responsibilities since cases of fraud was
occurring continuously in the year of 2012 - 2013.
5
Corporate governance principles. 2015. [Online].Available
through<http://www.agedcareconsultancy.com.au/media/six-corporate-governance-
principles-to-improve-your-organisation>.
3

Illustration 1: Corporate governance principles
(Source : Corporate governance principles, 2015)
Duty of director to prevent insolvent trading
A director comprises of positive duty for preventing insolvent trading under the section 588G of
Corporations Act 2001. Some of the duties played by a director according to the principles of
corporate-governance are described below :
 A director should prevent the organisation from incurring a debt if
◦ the venture is already insolvent during when a debt is incurred, or
◦ by acquiring that debt or by taking a huge amount or ranges of debts involving that
debt, the firm become insolvent.
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This is to be noted that while borrowing money, there would be logical basis for suspecting on
such venture that they are already insolvent, or may be become insolvent by attaining the debt.
Consequences of breaching the duty
If any director is detected or found by a tribunal to have violated the principles or civil
penalties provision in s588G(2), the Australian assembly can made following decisions : Compensation order : According to court, a director is personally responsible for paying
compensated amount to the enterprise equivalent to the sum of losses faced, if director
become failed in safeguarding the corporation from taking loans at that time when it was
insolvent.
 Pecuniary penalty order : If director is founded guilty since he/she get failed in
eliminating or preventing insolvent trading, then Judges has decided that the director of a
venture has to pay a pecuniary penalty to the commonwealth of approximately $200,000.
Therefore, director of Commonwealth bank of Australia has to focus on above mentioned duties
and the results of violating any principle. This will surely show them right path and helps in
regaining their lost brand image.
Case related to Australian Securities & Investments Commission v Adler
This case of Adler is associated with the breaching of director's duty. HIH Casualty and
General Insurance Ltd (HIHC) has offered an unsecured as well as undocumented payment of
approx. $10 million loan to Pacific Eagle Equity Pty Ltd (PEE). PEE is an organisation handled
by Alder who is also the trustee of Australian Equities Unit Trust (AEUT). He is designed as
non-executive director along with a substantial shareholder of HIH. PEE become the trustee of
AEUT after receiving the loan. This is to be noted that the transaction of loan had conducted
without showing proper document as well as no security is given by loaner also. On the other
hand, the director of HIH was not familiar or none of the information was provide to him. Hence,
Alder has breached the obligation of being a officer of HIHIC & HIH. Therefore, under the
section 180 (duty of acting diligently and carefulness), 181 (duty of acting in good faith and for
suitable purpose), 182 (obligation of not appropriately using the position) and 183 (responsibility
of not to improperly utilise the facts & figures), Alder was proved to be a real culprit. He was
charged with penalties of around $450,000 and was banned from acting as a director for any
company for 20 years, whereas the other director was banned for same but the duration was less
i.e. 10 years. The other culprits are also punished as per the Australian legislation.
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B). Implications of non-adherence to good corporate governance principles
A good corporate governance commonly needs an effective and clearly elaborated
procedures in order to assure transparency, sound determinations or decisions, accountability &
documented policies and processes. Every company should follow polices and principles framed
by corporate governance in order to work properly at market place. These principles show right
direction to companies and business owners. Thus, help the firm in achieving all missions and
visions. Therefore, it can be said that principles made by corporate governance is playing a
crucial rule in the success of any organisation.
Importance of considering corporate-governance principally by ASX
Corporate Governance Principles should also be considered by ASX (Australian Stock
Exchange) since they are having duty of monitoring the entire commercial or business activities
of companies falling under them. If any misconduct would happen then ASX is accountable for
those illegal actions. Therefore, this is very important for them to implement the principles of
corporate governance such as director's accountability, transparency, etc. within firms. This will
definitely reduce the number of misconducts and fraud related actions in efficient manner.
The above explained principles of corporate-governance such as acting ethically &
responsibly, director's duty, etc. should be considered by ASX since it helps in setting out
recommendations for ASX listed companies like Commonwealth Bank of Australia. It assist in
attaining good corporate-governance results by meeting the logical or reasonable expectations of
investors in various situation.
This has been seen that the Board of directors are able to take action on behalf of
Commonwealth Bank of Australia. Thereby, these members are responsible for taking care of
organisation. In this context, they ought to make appropriate decisions in favour of company. For
doing so, they have to focus and follow principles of good corporate governance. If they get
failed in observing the same or they are not adhering those policies then this will give negative
impacts on the growth of association. Some of the influences of not abiding principles of
corporate governance on Commonwealth Bank are explained below : Legal impacts : If board of directors are not working as per the norms and regulations of
corporate governance, then they will be treated as guilty in the eyes of government body
of Australia. For instance, Commonwealth Bank was taking high amount of interest rate
nearly double while offering overdraft facilities to their customers. When consumers
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realises this bitter truth, they file petition against the same. As a negative consequence of
not adhering the policies of corporate governance, this banking institution was charged
with around A$700 million fine along with legal costs by the Federal Court6. Social consequences : When decision maker will not consider the policy designed by
corporate governance, then they have to be ready for the worst implications on the
ground of society also. Customers may not prefer them and would move to other their
competitors in search of good medical services. This will decrease the overall sales rate
of firm. For example, people have made a serious complain against Commonwealth bank
after realising their crime. The overall positive brand image of venture get ruined and
punishment was also given to them. Besides this, after examining the information
associated with anti-money laundering and counter-terrorism financing laws in context
to Commonwealth Bank; the faith and reliability of citizens living in Australia and other
countries got broken. They are not now trusting any more on this venture because of
their fraudulentness. As a bad result, they are moving to other firms in search of better
services.
 Economic impacts : The activity of non-adherence in context to principles of corporate
governance would negatively impact upon the entire economical balance of firm. For
example, the economic condition of Commonwealth bank has been decreasing
continuously since they were not following the norms and principles laid by corporate
governance. They were proved as a culprit that was carrying on amerciable chores.
Australian government had charged a huge amount of revenue for their misconduct in
the form of penalty of approx. A$700 million. Subsequently, clients were also
disappointed from similar activities and not preferring them for any banking related
services. Hence, due to decrement in customer base, entire economical state of
Commonwealth bank is being impacted badly. If they wish to re-establish their
marketing position, then rules of corporate governance should be abided by them
properly.
 Political implications : Political implications can be seen if any organisation will not
run their business as per the policies of corporate-governance. An active or authorised
6 Commonwealth Bank’s $700 million fine will end up punishing its customers. 2018.
[Online]. Available through:<http://www.abc.net.au/news/2018-05-24/banking-royal-
commission-commonwealth-bank-overcharged-business/9797120>.
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politician used to pass any bill, thus enactment of each and every principle occurred after
their approval. So, if any law passed by them would not be abided by any firm, then
political bodies can take strict action against that company. Hence, it can be said that
political factor of a nation can indirectly influence upon the performance of a venture.
For instance, Commonwealth bank was charged with money laundering due to their
contraband actions. In this context, political factor has also contributed while taking
similar decision.
Theories
There are various theories existing in business world wherein theorists have presented
their ideas in respect to the corporate governance. The important one are described below :
 Stakeholders theory : This is considered as a vital philosophy of corporate governance
which was given by Freeman in 1970. It is to be noted that this theory was designed on
the assumption that shareholders are not treated as single group who possesses stake of a
firm. On the other hand, according to the theorist, stakeholders such as customers,
surrounding community and suppliers are also an important part of an organisation
which are having a stake in company7. These members are being effected by the failure
and success of the association. Thus, employers consist of special duty to assure that
each and every stakeholders should receive an appropriate returns from their stakes
within organisation. This hypothesis also advocating for few forms of CSR (i.e.
Corporate Social Responsibility) which are having obligations of operating in an ethical
manner. In this regard, the board of directors has the responsibility to become guardian
of stakeholders and thereby should treat them properly. Thus, Freeman is stating that if
any enterprise is not giving importance to their stakeholders by considering the
principles of corporate governance, then they may face negative social implications. The
key stakeholders will support them in reaching their targets. Thus, without attaining
assistance from clients, workers, suppliers, etc. Commonwealth bank of Australia can
not be able to run their business in Australia or anywhere surviving in the world.
 Resource-Dependence theory : This philosophy is arguing that a board exists as a
supplies of resources to the executives for helping them in achieving organisational aims
7 GOVERNANCE THEORIES. 2018.Available
through<https://ebrary.net/8636/business_finance/governance_theories>.
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and objectives. It is to be noted that identical theory is recommending interventions by
the board during advocating about stronger fiscal, intangible and human supports to
executives8. For example, if company's executive can utilise their expertises in providing
innovational training and development sessions to their workforces, they can improve
their quality of services or merchandises. This can improve their economical condition
by accelerating service quality. On the another side, if organisation is not offering
suitable training to the personnels, then they may suffer from great loss since customers
would not get satisfied by receiving low quality goods and facilities. This will directly
impact on the economy of organisation as it totally depends on the performance of
workforces. If performance of staffs is not good then, it is obvious that they will not
manufacture effective and high standards products. Therefore, Commonwealth bank is
recommended to provide effective and appropriate training programmes to their
personnels so that they can improve overall quality of services. This also assist in
minimising the overall number of complaints which is coming from the side of
customers.
CONCLUSION
This has been concluded from above report that corporate governance is highly
indispensable for the success of an association because it helps in classifying rules and
regulations between various authorities. Throughout the assessment it has been understood that
company which is listed under Australian stock exchange needs to consider necessary terms and
conditions which is set by corporate governance. As a result, it helps in minimizing the
probabilities of risk and uncertainty as well as heavy losses. Hence, selected organization needs
to focus on each or every aspects such as ethical, transparent, responsible, etc. of corporate
governance for managing business activities at workplace.
8 GOVERNANCE THEORIES. 2018.Available
through<https://ebrary.net/8636/business_finance/governance_theories>.
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REFERENCES
Books and Journals
Bednar, M. K., 2012. Watchdog or lapdog? A behavioral view of the media as a corporate
governance mechanism. Academy of Management Journal. 55(1). pp.131-150.
Filatotchev, I. and Wright, M., 2011. Agency perspectives on corporate governance of
multinational enterprises. Journal of Management Studies.48(2). pp.471-486.
Jacoby, S. M., 2018. The embedded corporation: Corporate governance and employment
relations in Japan and the United States. Princeton University Press.
Mallin, C. A. ed., 2011. Handbook on international corporate governance: country analyses.
Edward Elgar Publishing.
Michelon, G. and Parbonetti, A., 2012. The effect of corporate governance on sustainability
disclosure. Journal of Management & Governance. 16(3). pp.477-509.
Sami, H., Wang, J. and Zhou, H., 2011. Corporate governance and operating performance of
Chinese listed firms. Journal of International Accounting, Auditing and Taxation.20(2).
pp.106-114.
Siebels, J. F. and zu Knyphausen‐Aufseß, D., 2012. A review of theory in family business
research: The implications for corporate governance. International Journal of
Management Reviews. 14(3). pp.280-304.
Velnampy, T., 2013. Corporate governance and firm performance: a study of Sri Lankan
manufacturing companies.
Westphal, J. D. and Zajac, E. J., 2013. A behavioral theory of corporate governance: Explicating
the mechanisms of socially situated and socially constituted agency. The Academy of
Management Annals. 7(1). pp.607-661.
Online
Banking royal commission: Commonwealth Bank delayed writing to overcharged business
customers. 2018. [Online]. Available through:<http://www.abc.net.au/news/2018-05-
24/banking-royal-commission-commonwealth-bank-overcharged-business/9797120>.
Commonwealth Bank’s $700 million fine will end up punishing its customers. 2018. [Online].
Available through:<https://theconversation.com/commonwealth-banks-700-million-
fine-will-end-up-punishing-its-customers-97918>.
Corporate governance principles. 2015. [Online].Available
through<http://www.agedcareconsultancy.com.au/media/six-corporate-governance-
principles-to-improve-your-organisation>.
Corporate Governance Principles. 2016. [Online]. Available
through:<https://www.interrao.ru/en/investors/corporate-governance/basic-principles/>.
GOVERNANCE THEORIES. 2018.Available
through<https://ebrary.net/8636/business_finance/governance_theories>.
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