IBU5GW: Governance in a Globalizing World - La Trobe University

This essay explores governance in a globalizing world, discussing topics such as gender diversity on boards, agency theory, the role of independent directors, Elon Musk's future with Tesla, and executive compensation. It analyzes articles related to these issues, including gender representatio...Read More

Governance in a Globalizing World

Table of Contents
Introduction......................................................................................................................................3
Part 1 a)............................................................................................................................................3
Part 1 b)............................................................................................................................................5
Part 2................................................................................................................................................6
Conclusion.......................................................................................................................................9
References........................................................................................................................................9

Introduction
Globalization has taken over the world markets and created various changes in the corporate
governance which have negative and positive impact. While, it has created awareness of gender
diversity on boards, but at the same time created group think mentality. In the preceding essay,
we will also discuss agency theory and its risks and benefits, should independent directors be
included on board, Tesla’s future with or without Elon Musk and downsizing the bank’s
employees’ pay the right way to protect from wrong doing.
Part 1 a)
“ASX200 boards near 30pc gender target: AICD”
The gender diversity progress report in Australia is showing marked improvement. The
proportion of women on board in Australia’s biggest 200 companies is substantially increasing
and there has been increase in the number of women on senior leadership positions. The AICD
chairman Proust stated that they are heading steadily and achieving the target of 30% which is a
remarkable achievement as compared to 2009 when only 10% women were on board of major
companies (AICD, 2018).
Proust justifies that a diverse board consisting of both genders facilitates in better
discussions, diverse opinions and better outcomes. It is not just filling numbers but there are
talented women who are being hired. Actually, the pressure from shareholders to have diversity
in boards is creating an impact and the result is that companies like Mirvac, NIB Holdings,
MetCash, Boral group has 50% plus women directors. The Australian council has warned
companies that have no women directors and the result is that women are being hired to fill the

top positions. The proportion of women on board in Australian top 100 companies is 30.5%
which is higher than Britain, USA and Canada (Patten, 2018).
Company boards are stacked with friends of friends so how can we expect change?
In contrast to the above article, this article argues that social connections are majorly
driving board appointments and the result is there are very few outsiders. The corporate
governance crisis cannot improve with gender diversity because the board usually excludes
outsiders or most qualified persons but recruits people whom they know. Board membership
recruitment is rather unstructured and based on background and reputation. The gender diversity
is increasing in Australia, but only closed social networks are doing the recruitment and
eliminating the ‘boys’ club’ and increasing the girls’ club. Furthermore, this closed network also
enhances the ‘group think’ and this increases the likes of members which ultimately guarantee
their perks and position. This kind of ‘group think mentality is nothing but a recipe of disaster as
it can impair judgment and motivate directors to serve their own interest and ignore the interest
of the shareholders and the company as it happened with HIH Australia. (Smith, 2018)
The definition of corporate governance is “to pursue objectives that are in the best interests of
the company and shareholders whilst recognizing the interests of employees and other
stakeholders and their important role in contributing to the long-term success and performance
of the company”.
Corporate governance as mentioned has to work towards long-term success and hence it must
make balanced decisions which can be drawn from diverse board members and talented pool of
people from outside. Boards are elected to monitor the performance of management and upheld
the corporate governance principles which include ethical and responsible decision making,
safeguarding the integrity and financial reporting and recognizing the risks, benefits and interests

of shareholders while enhancing the performance of the company. But when boards are stacked
with insiders as mentioned in the above articles then the security laws become liberal which
leads to high debts and slow restructuring. Furthermore, it inhibits radical innovations and group
think mentality replaces with competitive marketing. Proust justifies that diversity amongst
board members helps in improving governance and has better outcomes but this can be possible
only if there is fair and just recruitment and outsiders are brought in the board (Ryan, 2018).
Thus for a successful corporate governance, it is highly relevant that there is just and fair
recruitment and this will have long-term positive effect.
Part 1 b)
Use relevant theory to support your points being made in part
As per the agency theory, there are owners and agents and there is contractual relationship
between the two. The agents represent the owners or principals and make decisions, business
transactions and deals with business matters on behalf of the principal without any self interest.
But this is not always the case as seen in the case of Enron and various Ponzi schemes.
The main issues are having 30% females on board and recruiting only those that are qualified
and are genuinely capable for that position. However in some instances, the board recruits
insider on the basis of reputation and background and this agency problem can lead to severe
legal and financial consequences for everyone. The vested interests of agents fail to carry out
their regulatory, legal and ethical responsibilities and venture in to illegal activities and practices
(Investopedia, 2018).
Furthermore, the female ratio must increase in corporate boards to make better decisions and
get superior outcomes. But as per agency theory if all agents are known to each other and are
insiders then they become partners in crime and act in their best interests and make decisions that

will benefit them. Thus, if gender diversity is increased to 30% or even more will not benefit the
company if the agents are irresponsible. The interests of agents must be monitored and aligned
with the principal’s interests. Agency problem occur when there is conflict of interest between
the owners and agents which result in rejecting oversight responsibilities and indulging in illegal
practices which may result in unnatural demise of a company like Enron. Corporate governance
will get a setback if there is no honesty and integrity in the governance. (Thomas, 2002).
Part 2
Article 1 is “ASX200 boards near 30pc gender target: AICD”
This article talks about increase in female members in the boards of the top 200
companies in Australia. There has been a steady and graduate rise in female colleagues on top
positions in big companies and in some companies it has reached 50%. This drive of increasing
female executives came when shareholders demanded that gender diversity can result in better
outcomes. But despite the warning, still some companies are struggling in the gender balance and
fail to reach the ‘ideal target’ of 30%. Gender diversity as argued helps in making balance
decision and has positive outlook which is a must for good corporate governance
Article 2 is “Company boards are stacked with friends of friends so how can we expect
change?”
The issue discussed in this article is about favorism in recruitment adopted by many
companies. Recruitment is done not on basis of skill, efficiency, and experience but on the basis
of background and reputation. References are taken in to consideration and the boards are
stacked with friends and relatives and the result is agency problem and ‘group think’ mentality.
This is highly detrimental for a good company and can have devastating consequences.

Article 3 is “Experienced shareholders better than independent directors for business”
The new research shows that businesses benefit by having substantial experiences
shareholders on board if they are involved in swing trades. Research demonstrates that in swing
trades, the directors who are also shareholders increase the stock price and company returns. On
the other hand, independent directors are professional directors who lack detailed knowledge of
the company’s affairs and do not have any shareholdings and thus do not have any company
orientation. Furthermore, this article also argues that shareholders as directors can negotiate and
monitor company’s performance and check the CEO’s activities which is not possible by
independent directors as they serve multiple boards and are not ‘skin in the game’ (Swan, 2016).
Thus, this is a debatable subject so the best option is to have both experienced shareholders and
independent directors on board
Article 4 is: “Is Elon Musk running out of time at Tesla?”
Elon Musk’s future as CEO of Tesla is in doldrums after he dumped his plans to take
Tesla private. Tesla, the giant electric car manufacturing company’s share price fell on the
disclosure of the plans. Most investors believe that there is no proven path and guarantee to
retain their stakes in this company (Leonhardt & David, 2018).Wall Street analysts cast doubt on
Elon’s ability and his lack of remorse on his erratic tweets. But his supporters believe that Elon
must remain as CEO as he has the ability to work under pressure and motivate staff and raise
money. Only time will prove and decide Musk’s future at Tesla (Greber, 2018).
Article 5 is “APRA chairman Wayne Byres says banking executive pay is out of step and
must change”
The Australian Prudential Regulation Authority’s chairman Wayne Byres has stated that
the bankers’remuneration are not at par with the international best practice and thus need to be

changed. Due to wrong management and illegal practices, the banks suffered heavy losses and as
a result the remuneration was revised downwards. However, the senior executives managed to
shield themselves from negative outcomes, but the juniors experienced monetary consequences
because of mismanagement. Mr. Byres argues that wrong remuneration practices possibly do not
serve the purpose of delivering consistent, effective and long-term financial soundness. He
argues that since the senior executives are well-insulated, the juniors pay must be revised as
heavy regulations do not guarantee trust and shield from wrong doing (Frost, 2018).
Recommendations
Globalization has taken over the world markets but the corporate environment and
structures can vary although the objectives are universal. Whether the corporate governance
system is Anglo-Saxon as in USA, Britain or Australia or Japanese model like in Japan, the
issues discussed in the above articles are prevalent in all countries. Gender diversity is a must
for smooth and efficient governance but it must not just be filled but real talent must be pooled
out. Recruitment must be just and fair to draw in best skills and must be free from any bias.
Outsiders must be brought on boards to bring innovation and change and get rid of group think
mentality. The board is the link between the shareholders and the owners and thus has to play
multiple roles of monitoring, controlling, advising, counseling, managing and maintaining the
interests of all (Lipto & Lorsch, 1992).
Corporate governance system can be improved in Australia and Japan whether they are
one tier or two tier by adopting best practices and abiding with the international and national
policy of corporate governance like remunerating according to the international scales, having
right number of independent directors on board, recruiting on the basis of experience, skill and
only after determining independence. Different committees like shareholders committee, risk

management committee, etc must be formed that are independent of management, transparent,
and can exercise control over the board. The director’s remuneration must be sufficient to retain
them and attract them but at the same time must not be excessive. Compensation and incentives
must be given on performance and not on preferential basis.
In a nutshell, the board’s principles must align by the corporate governance principles
and cover five main areas namely the protection of the rights of shareholders, equitable treatment
to all shareholders, transparency of corporate structure operation, timely disclosure of all
resources, and responsibilities of the corporate board towards its employees, company and the
investors (Nestor, 2001).
Conclusion
Issues related to corporate governance vary from one to another. There is ‘no one size that fits
all’. Hence, the committees and board will have to analyze various factors and make right
decisions that will benefit the company and its shareholders and stakeholders. Corporate
governance system can vary but the principles, rights of shareholders and transparency of
operation should be maintained for a successful business.
References
AICD, 2018. 30 percent by 2018. [Online] Available at:
https://aicd.companydirectors.com.au/advocacy/board-diversity/30-percent-by-2018 [Accessed
31 October 2018].
Anon., n.d. [Online].
Frost, J., 2018. APRA chairman Wayne Byres says banking executive pay is out of step and must
change. [Online] Available at: https://www.afr.com/business/banking-and-finance/financial-

services/apra-chairman-wayne-byres-says-banking-executive-pay-is-out-of-step-and-must-
change-20180904-h14x9g [Accessed 31 October 2018].
Greber, J., 2018. Is Elon Musk running out of time at Tesla? [Online] Available at:
https://www.afr.com/leadership/company-culture/is-elon-musk-running-out-of-time-at-tesla-
20180827-h14ld3 [Accessed 31 October 2018].
Investopedia, 2018. Agency Theory. [Online] Available at:
https://www.investopedia.com/terms/a/agencytheory.asp [Accessed 31 October 2018].
Leonhardt, M. & David, J.E., 2018. Elon Musk: Tesla could produce a $25,000 car in around 3
years. [Online] Available at: https://www.cnbc.com/2018/08/18/elon-musk-tesla-could-produce-
a-25000-car-in-3-years--.html [Accessed 31 October 2018].
Lipto, M. & Lorsch, J.W., 1992. A modest proposal for improved corporate governance. The
business lawyer, 48(1), pp.59-77.
Nestor, S., 2001. International Efforts to Improve Corporate Governance: Why and How.
[Online] OECD Available at:
http://www.oecd.org/corporate/ca/corporategovernanceprinciples/1932028.pdf [Accessed 31
October 2018].
Patten, S., 2018. ASX200 boards near 30pc gender target: AICD. [Online] Available at:
https://www.afr.com/leadership/asx200-boards-near-30pc-gender-target-aicd-20180906-h1501q
[Accessed 31 October 2018].
Ryan, P., 2018. Corporate Australia is still a boys club but things are changing for female
executives. [Online] Available at: https://www.abc.net.au/news/2018-09-04/corporate-australia-
boys-club-despite-increase-in-women/10198884 [Accessed 31 October 2018].
Smith, S., 2018. Company boards are stacked with friends of friends so how can we expect
change? [Online] Available at: https://theconversation.com/company-boards-are-stacked-with-
friends-of-friends-so-how-can-we-expect-change-95790 [Accessed 31 october 2018].
Swan, P., 2016. Experienced shareholders better than independent directors for business.
[Online] Available at: https://theconversation.com/experienced-shareholders-better-than-
independent-directors-for-business-61160 [Accessed 31 October 2018].
Thomas, C.W., 2002. The rise and fall of Enron. Journal of Accountancy, 193(4), pp.41-52.