Corporate Governance Principles and Commonwealth Bank Analysis

This report provides an in-depth analysis of corporate governance principles, exploring their significance and practical application within the context of the Commonwealth Bank of Australia (CBA). The report begins with an introduction to corporate governance, emphasizing its role in protecting investor rights and fostering stakeholder confidence. It then delves into six key principles: establishing a solid management foundation, structuring the board for value, adopting ethical and responsible practices, ensuring timely and accurate disclosures, effectively managing risks, and implementing fair remuneration policies. Each principle is examined in detail, with specific examples from the CBA to illustrate both adherence and non-compliance. The report highlights instances where the CBA has demonstrated good governance practices, such as implementing a structured board and a code of conduct. However, it also points out significant failures, including data breaches, regulatory fines for money laundering, and non-disclosure of risks, which undermine the bank's governance framework. The analysis underscores the importance of each principle in promoting firm performance and political will, ultimately impacting the confidence of investors and stakeholders. The report concludes by emphasizing the critical role of corporate governance in ensuring transparency, accountability, and ethical behavior within organizations.

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1.0 Introduction
Corporate governance is an overarching principle that ensures that the right of investors in a
company are protected and to boost the confidence of other stakeholders of the company. Good
corporate governs implies that the values of the company are anchored on integrity and
accountability. Corporate governance is also a formidable principle that provides for various
ways in the conduct and behavior the managers and directors in a company is strictly monitored.
It is of interest to note that incorporation of the corporate governance principles in a company
ensures that the company, its members and another person such as the director conform to the
laws and policies of company law in general. Corporate governance has been defined as the
relationship that is created between the stake holders of the company, the shareholders of the
company and the directors of the company while they perform their duties and roles in the
company.
2.0 Principles of Good Governance
Principle No. 1
The company must incorporate a solid foundation for the management and ensure that there is
effective oversight of the company activities. This is achieved by ensuring that the board of
management creates strategic framework for the management of the company. The board of
directors and other senior executives of the company must have clear roles and responsibilities.
The powers of the directors and the senior executive members of the company should be
carefully balanced to ensure that no single executive uses power arbitrarily or has unfettered
powers. This creates better accountability in the management of the affairs of the company.
Ideally, the roles and responsibility of the board of management and the structure of how the
company conducts its oversight must be disclosed. The company should also have a sound risk
management policy.
The Commonwealth Bank of Australia has showed lack of compliance with this first principle of
governance after it recently lost data of 20 million customers.1 This implies that the roles and
responsibilities of the company officers are not carefully balanced. In addition, the events show
1 BBC NEWS, 3 May 2018Australia's Commonwealth Bank lost data of 20m accounts
https://www.bbc.com/news/business-43985233

the bank lacks competent directors and commitment from the senior executive members of the
bank. Due to the numerous scandals company has been involved in it has recently agreed its
activities to be monitored by the banking regulator which is an oversight authority. According to
the Australian Prudential Regulation Authority the board of Commercial Bank of Australia has a
weak oversight system over financial, non-financial and reputational risks.2 In addition, the board
of the bank has also been accused by the Australian Prudential Regulation Authority of being
complacent in addressing the risks that emerge. The bank has internal auditing system that
works inline with a Credit Portfolio Assurance team as an oversight body that make independent
observations about various issues affecting the bank.
Principle No. 2
The structure of the board of management of the company should be placed in a manner that it
adds value to the growth and development of the company. This implies that the composition and
size of the board of management should be appropriate and effective. The board should be
competent and committed to adhere to their respective roles and responsibilities in the company.
In addition the board should be able to adopt to current and emerging issues that affect the
company. The directors of the company should be independent from the management of the
company. This includes making independent judgments about the affair of the company and
avoiding any conflict of interest that may arise from the management of the company. The Board
should ensure that all the directors of the company are independent and make independent
judgments. During decision making the directors should make impendent judgments that are not
influenced by other external factors.
The Commonwealth Bank has demonstrated that it has adhered to this second principle of good
corporate governance by ensuring that it has a structured board of management. Although the
board of management of the bank has added immense value to the growth and development of
the company, the numerous unethical cases it has had overshadow this reality. The bank has
failed to adopt the current and emerging issues in the banking technology after its online banking
system recently broke down leading to many customers getting stuck.3 Earlier in the year, the
2 Sarah Dancker 'We let you down': CBA boss sorry as regulator slams culture The Sydney Morning Herald
https://www.smh.com.au/business/banking-and-finance/we-let-you-down-cba-boss-sorry-as-regulator-slams-
culture-20180430-p4zcjy.html

bank also admitted that it had problem with its visa transactions.4 This also shows lack of
competence in the management and inability to adapt to current and emerging challenges.
Principle No. 3
The company should adopt ethical and responsible practices. This helps in bolstering the
reputation of the company. It is imperative to note that ethical and responsible practices within
the company not only implies comply with legal obligation buts also acting with honesty and
integrity. A company is deemed to adhere to this principles if respects the human rights of its
employees, avoids discriminatory practices in the workplace, is honest and fair to the suppliers
and customers and cooperates with other business partner that embrace ethical and responsible
practices. It is worth noting that good corporate governance is conditional on the personal
integrity of those vested with various responsibilities in the management of the company.
Therefore the company must have a code of conduct and solid core value that are strictly adhered
to. The company should have a sound policy against unethical behaviors such as taking of bribes
and conflict of interest.
In a bid to promote ethical and responsible practices in Commonwealth Bank of Australia, the
board management has ensured that there is a strict code of conduct and a statement of
professional practice. The bank’s ethical code of code conduct shows its willingness to act with
integrity and honesty in all its endeavors. In addition, the bank has adopted measures to
promote sustainable practices such as policies to combat and prevent financial crime. It also has
put in place an anti-bribery and corruption policy and framework. Conversely, the bank has
demonstrated its reluctance to abide to ethical and responsible practices after it was ordered to
pay a hefty fine of $534 since it was found liable for allowing dug gangs to launder money and
deposit with its bank.5 The bank has allowed criminal gangs to exploit its services thereby
lowering the investor and stakeholder confidence. The bank has also previously been accused of
3 David Chau, 20 Aug 2018. Commonwealth Bank customers hit with online banking outage
http://www.abc.net.au/news/2018-08-20/cba-customers-plagued-by-online-banking-outage/10142966
4 Rohan Pearce 08 May, 2018 Commonwealth Bank confirms problem with Visa transactions Computer world
https://www.computerworld.com.au/article/640889/commonwealth-bank-confirms-problem-visa-transactions/
5 Daniel Shane June 4, 2018 Australia's biggest bank hit with record fine for money-laundering scandal
https://money.cnn.com/2018/06/04/investing/cba-fine-money-laundering/index.html

falsifying documents and rouge financial planning hence showing that it is not acting with
integrity and honesty.
Principle No. 4
To promote good corporate governance the disclosures of the company must be timely, balanced
and accurate. The disclosures entail any information that has or is likely to have a material effect
on the price value of its securities. The company should have a clear policy lying out the
measures hat it will adopt to promote compliance with the legal requirements for disclosure.
During the disclosure it should timely give the correct information about the financial position,
performance, ownership and governance of the company. This promotes better disclosures to the
investors of the company. This principle is also achieved if the company ensures that
confidential corporate information that is likely to have a material effect on the price and value
of the securities is not released prematurely.
The Commercial Bank of Australia has been committed to adhere to this principle by making
various statement of disclosures and reports to the. This includes regular reports by the Australia
Securities Exchange and the Australian Prudential Regulation Authority. It bears noting that he
bank releases annual reports that disclose various issues concerning the bank. Against this back
drop, the bank been accused of non disclosure of crucial information in numerous cases. Last
year, the shareholders of the bank in Abrahams v. Commonwealth Bank of Australia sue the bank
for failure to disclose certain risks associated to climate change.6 This is a bad corporate
governance practice since it is against the company’s role of Corporate Social Responsibility.
Principle No. 5
The company should be to asses, identify and manage risks. It bears noting that poor risk
management can have an adverse effect on the security holders such as employees, customers,
suppliers, consumes and creditors. To achieve this principle the company should have an
appropriate risk management and assessment framework. This should be accompanied by an
6 Emma Younger 8 Aug 2017, Commonwealth Bank faces legal action over failure to disclose climate change risk in
report ABC NEWS http://www.abc.net.au/news/2017-08-08/commonwealth-bank-legal-action-over-climate-
change-disclosure/8786046

effective implementation policy ensure that the risks do not have a deleterious impact on the
company. As a measure of best practice in promoting good corporate governance the company
should have a risk management committee that for identifying any incident that involves fraud.
The significance of the risk management committee is that it applies an independent judgment
different from that of the board of management and other executive members of the company. It
is also prudent that the company should review its risk management policy annually so as to
adapt to the changes that occur within the economy.
The Commonwealth Bank of Australia has adopted a risk management policy framework in bid
to promote good corporate governance. In its 2018 statement on good corporate governance it ha
noted that it has adopted a risk management strategy that entails Group’s risk Management. The
significance of the Group’s Risk Management is asses, evaluate and mage the external and
internal sources of risk that are likely to affect the company. According to the bank’s 2018
statement on good corporate governance it has engendered a strategic plan of identifying
assessing, evaluating managing of material risks including economic, social, environmental and
legal risks that are likely to hinder the bank from attaining its objectives. It is of interest to note
that the bank usually releases annual audit report of the risk management process in a bid
strengthen its risk management policy an implementation program.
Principle No. 6
The remuneration of the company officers and employees should be fair and responsible. Good
remuneration policy attracts competent directors and employees of the company. The
remuneration policy should include awarding the directors and employees that encourage them to
promote the growth and development of the company. It is instructive to note that the
remuneration and incentives given to the directors should not affect their ability to make
independent judgments when discharging their responsibilities for the company. The
remuneration policy should not exit any bias between the remuneration that is awarded among
senior executive or other company officers. The company must have an independent
remuneration committee whose mandate is not interfered with by a conflict of interest from the
senor management executives of the company.

It is noting that the Commonwealth Bank of has a formidable remuneration policy. This is
evidenced by the fact that it has a remuneration committee that is tasked with the responsibility
of assessing and regulating all the salaries that are received by all the employees. The
remunerations policy of the bank is consistent with best practices. According to the Banks
statement on good corporate governance the remuneration of the employees is evaluated based
on the performance of each employee.
3.0 Effects of Good Corporate Governance
3.1 Firm performance and Political Will.
According to the agency theory the investors of the company hire agents to bolster the
performance of a company. However, most of the agents such as the directors and managers are
involved in a lot of mischief that dwindles don the performance of the company. Good corporate
governance increases the performance of the firm and the political will to provide for the
citizens. This in turn enhances the job security of the employee of the firm. The employees of the
company are able to meet their day today responsibilities including taking their children to
school. During the financial crisis many companies went into liquidation because they could not
be able to pay their debts o the suppliers and creditors. His w largely attributed to poor
performance of the company and the poor corporate governance practices. As the companies
were closing down, many people lost their jobs leading to high unemployment rates. It can
therefore be argued that good corporate governance creates more job opportunities thereby
causing a decrease in unemployment rates. Ideally, it improves the living standards of those that
depended on the company remuneration and incentives as a source of livelihood.
3.2 Promotes Legal Compliance
The Australian Securities Exchange (ASX) has set harsh measures on companies that practice
poor corporate governance measures. This has compelled many listed companies that practice
good governance principles to establish a compliance policy framework that ensures that the
companies have complied with the company law regulations and those set by the ASX.
Compliance with legal regulation promotes satisfaction and confidence in the investors and other
stakeholders of the company. Going by the agency theory it is the obligation of the agents of the
company o ensue hat the company has complied with all the legal requirements. Since there

have been numerous cases showing the unethical and irresponsible practices of the directors and
senior executive members of the company, the principles of good corporate governance
engendered by the ASX have gone a along way to ensure that there is honesty and integrity with
respect to legal compliance.
3.3 Economic Growth
The stakeholder theory provides that the well being of the company is not the sole responsibility
of the shareholders but a collected effort from customer, suppliers, creditor and the community.
Economic growth and development is bound to follow if all these groups join hands to create a
positive impact in the company. Undoubtedly, good corporate governance principles promote
economic growth by increasing the stability of a company. The industries lead to the
development of infrastructure and creation of job opportunities. It is worth noting that good
corporate governance also attracts foreign direct investments that contribute to the growth and
development of the economy. Suffice to say, the growth and development of the economy of a
nation is dependent on the stability of the corporate sector. Good corporate governance plays a
significant role in the growth and development of the economy because it encourages return on
investments. One can not cast aspersions on the fact that if the important factors of the domestic
market such as the capital market, money and labor are working well the performance of the
economy increases. It can therefore be conceded that or a sustainable economy growth it is
prudent that the principles of good governance are adhered to strictly.
3.4 Promote Corporate Social Responsibility
The stakeholder theory is also focused on the well being of the community and the environment.
Good corporate governance practices must involve the community around the company. Good
corporate governance ensures that there is social, economical and environment benefit to all
stakeholders. This is the primary aim of corporate social responsibility in a company. A company
that embraces the principles of corporate governance must have a sound environmental impact
policy to ensure that it creates a safe environment for the society to dwell in. Corporate social
responsibility boosts the confidence of the society n the company leading to its growth.

4.0 Conclusion
It is evident that all the unethical practices associated with the Commonwealth Bank of Australia
are continuously diminishing the reputation of the bank. However, the bank has also embraced
most of the principles of good corporate governance despite the challenges. The recent
appointment of the new CEO of the bank is evidence that it willing to make a positive change in
the corporate governance structure of the company. By and large, the serious scandals that have
bedeviled the company show that the bank is still facing unable to adhere to the principles of
good corporate governance in toto. However, being the largest bank in Australia it has
comparatively demonstrated the ability to promote good cooperate governance.
References
Chau David, 20 Aug 2018. Commonwealth Bank customers hit with online banking outage
http://www.abc.net.au/news/2018-08-20/cba-customers-plagued-by-online-banking-outage/
10142966
BBC NEWS, 3 May 2018Australia's Commonwealth Bank lost data of 20m accounts
https://www.bbc.com/news/business-43985233
Shane Daniel June 4, 2018 Australia's biggest bank hit with record fine for money-laundering
scandal https://money.cnn.com/2018/06/04/investing/cba-fine-money-laundering/index.html
Pearce Rohan 08 May, 2018 Commonwealth Bank confirms problem with Visa transactions
Computer world https://www.computerworld.com.au/article/640889/commonwealth-bank-
confirms-problem-visa-transactions/
Dancer Sarah 'We let you down': CBA boss sorry as regulator slams culture The Sydney
Morning Herald https://www.smh.com.au/business/banking-and-finance/we-let-you-down-cba-
boss-sorry-as-regulator-slams-culture-20180430-p4zcjy.html
Younger Emma 8 Aug 2017, Commonwealth Bank faces legal action over failure to disclose
climate change risk in report ABC NEWS
http://www.abc.net.au/news/2017-08-08/commonwealth-bank-legal-action-over-climate-change-
disclosure/8786046