Sandfire Resources: Corporate Governance and Ethics Analysis

This report provides an analysis of the ethics and corporate governance practices of Sandfire Resources, an Australian Stock Exchange-listed company in the exploration and mining sector. The report details the company's background, focusing on its successful De Grussa Copper Gold Mine project. It examines the composition of the board of directors, reports from the chairperson and CEO, and the remuneration structure for directors and executives, noting the balance between fixed and variable components tied to performance indicators and shareholder returns. The report further interprets the company's communications through the lens of legitimacy theory and explores board orientation using agency and stewardship theories, assessing how the board relates to stakeholders. Ultimately, the report aims to evaluate whether Sandfire Resources adheres to ethical business practices and maintains sound corporate governance.

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ETHICS AND GOVERNANCE – SANDFIRE RESOURCES
Student Name: Student ID:
5/29/2019

EXECUTIVE SUMMARY
Ethics and governance plays a very important role in the functioning of the company. Through
this report the ethics and the corporate governance has been evaluated of the company which is
listed in the Australian Stock Exchange. The report does not contain any form of analysis of
financial data of the company rather it has detailed the governance of the company including the
composition of the board of directors and the manner the remuneration is paid to them.
The main reason is to make the shareholders and the other stakeholders of the company aware
about the functioning of the company. The results have been concluded as positive in response to
the industry norms.
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Contents
EXECUTIVE SUMMARY.................................................................................................................................2
INTRODUCTION...........................................................................................................................................4
DETAILS OF THE COMPANY.........................................................................................................................4
SUMMARY OF CORPORATE GOVERNANCE..................................................................................................6
COMPOSITION OF THE BOARD................................................................................................................6
REPORTS – CHAIRPERSON AND CEO........................................................................................................7
REMUNERATION REPORT........................................................................................................................8
BOARD ORIENTATION..................................................................................................................................8
INTERPRETATION OF COMPANY COMMUNICATIONS USING LEGITIMACY THEORY..................................12
CONCLUSION.............................................................................................................................................14
REFERENCES..............................................................................................................................................14
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INTRODUCTION
The Global financial crisis has been faced during the period from 2008 till 2014 and till date its
effects are visible. The crisis has occurred majorly due to the non availability of the strict norms
and regulations due to which the industries have played with the ethics and the governance team
has acted on their own discretion. The great example was of the Lehman Brothers.
The main purpose of the report is to analyze the ethics and corporate governance of the allotted
company that is listed in the Australian Stock Exchange. The company allotted for the purpose of
the report is – Sandfire Resources. The report has started with the details of the company with
respect to the nature of business and origin. Then the corporate governance of the company has
been discussed in detail with respect to the composition of the board of directors and nexus with
the related reports. The main body of the report is then has been highlighted in detail. It is related
to orientation of the board as related to the stakeholders and the shareholders of the company.
This has been detailed with reference to the different theories including agency theory,
stakeholder theory and etc. Lastly the interpretation has been given as to how the company
communicates with all the stakeholders of the company using the legitimacy theory.
The possible and essential outcomes have been whether the company is following all the ethics
in business and the corporate governance of the company is good. The report has then ended up
with the conclusion as to the likely governance and the ethical climate of the company. The data
for the report has been obtained from primary as well as the secondary resources. The primary
sources include the annual report of the company and the information contained in the official
website and the secondary includes the material of the different authors on the same subject.
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DETAILS OF THE COMPANY
The company that has allotted for the purpose of the report is – Sandfire Resources. The
company is in the sector of the exploration and mining and is registered in Australia and
Australian Stock Exchange as SFR. The company is very well known for its successful
construction and commissioning of the project – De Grussa Copper Gold Mine which is the
company 100% owned segment. It is located nine hundred Kilometer far from the North of Perth
in Western Australia. It is after this project only the company has been able to enter the ranks of
the companies producing copper in Australia. Within three years of the project, the company has
been ranked as first company among the copper producers (Sandfire Resources official website,
2018). It has created the standard for the other company producing the resources in the Western
Australia. The company has one aim to have strong cash inflows from the De Grussa project so
as to develop the platform for mining companies in Australia with diversity and with the proper
growth rate in the future. The growth includes the substantial exploration of the area of the 5000
Km2 and entering in the different portfolios of joint ventures, associates and the initiatives for the
exploration and mining in the areas where there are more chances of having the mineral
resources in Western Australia and also in overseas.
The history of the company originates from the year of 2004 with the month of March when the
company has been listed on the stock exchange of Australia which aims to discover the mineral
resources along with the different projects. Then in the year of May 2008 Company has entered
into the alliance with the POSCO which is the fourth largest producer of the steel and has been
the long term partner for the company in strategic terms. In the year of May 2009, the company
has seen the bigger transformation from junior explorer to the leading mid tier producer. The
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change has occurred only in the three years. Mr. Margaret Hawke has drilled the holes of the
Doolgunna project of the company in Western Australia. These holes are known for the gold and
in huge quantity sulphide mineralization has been explored. Later the drill hole containing the
diamond has been explored. In August 2014, DeGrussa copper mine has generated the turnover
of one billion dollar since its inception in the year of 2012 (Sandfire Resources official website,
2018). In the same year the company has declared the dividend for the first time amounting to 10
cents for each share. Again in the year of February 2015, the company has laid other milestone
by starting the operation of establishing the solar power plant at the De Grussa project and which
is regarded as the largest mining and processing operations which will run through the solar
energy. In the year of February 2016, the company has celebrated US $ 1.5 billion as turnover
from the De Grussa project. (Sandfire Resources Official Website, 2018)
In 2016 the company has awarded with the Best First Time Report for Sustainability Reporting
for 2015 in Corporate Register Reporting Awards.
SUMMARY OF CORPORATE GOVERNANCE
For the purpose of analyzing the corporate governance of the company, the annual report for the
year ending 2018 has been considered. The analysis has been divided into three sections. First
will deal with composition of the board of directors, second with the reports of the chairperson
and CEO and the last will deal with remuneration pattern of the directors (Dyck, 2012).
COMPOSITION OF THE BOARD
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The Board of Directors consists of six directors namely Mr. Derik la Ferla, Mr. Karl M Simich,
Mr. Robert Scott, Mr. Paul Hallam, Ms Maree Arnason and Dr Roric Smith.
Mr. Derik La Ferla is independent non executive director and is the chairperson of the company.
Mr. Karl M Simich is the managing director and Chief Executive Officer of the company.
Mr. Robert Scott, Mr. Paul Hallam, Ms Maree Arnason and Dr Roric Smith are the Independent
non executive director (Sandfire Resources official website, 2018).
The ratio of independent director to non independent director is thus 5:1.
REPORTS – CHAIRPERSON AND CEO
Chairperson message has started with the addressing to shareholders detailing that the company
has been able to achieve the higher performance not only in the terms of the financial but also in
the terms of the operational areas and has continued to achieve the objective of safety,
responsibility and sustainability. The company is totally debt free and all the operations have
been done through the cash mode only and in this sector the term “cash harvest” mode has been
used. In the starting months of the year, challenge has been faced by the company with regard to
the increasing interest rates of the dollar in United States and the strengthening of the dollar. In
Spite of this fact the company has been able to cover the increase in the changing market
conditions only due to the flagship project of De Grussa and the cash mode of the operations of
the company. In the subsequent years the company will focus on investment opportunities and
will target the junior resources ventures which have highly attractive mining and exploration
operations. It includes the acquisition of White rocks minerals Limited, Adriatic Metals Plc and
etc (Sandfire Resources official website, 2018).
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CEO message has been started with the glorious words that the company has come up as the
strongest company in the exploration and mining sector in this year from the past six years of
operations. The company has developed the Monty Copper Gold Mine which will cater the De
Grussa operation by providing the high grade satellite feed (Sandfire Resources official website,
2018).
REMUNERATION REPORT
The remuneration of the directors and the executives consists of two components – one is fixed
and other one is variable. Fixed remuneration comprises of base salary and superannuation
contribution (Farrar, 2012). Variable remuneration consists of two components – Short term
incentive plans and Long term incentive plans. Short term incentive plan is concerned with the
reward which is determined in accordance with the annual financial and non financial key
performance indicators. Long term Incentive depends upon the total shareholders return. Higher
the return higher will be the incentive. Remuneration of CEO is at risk of 56% whereas other
executives have the risk of 47% (Sandfire Resources official website, 2018).
BOARD ORIENTATION
The term board orientation is referred as to how the board is related to the different stakeholders
of the company. The board orientation has been explained and detailed with the help of the
following theories along with the annual report of the company:
1. Agency Theory – This theory states that the board of directors and executives of the
company are the agents of the shareholders of the company which in turn are regarded as
the owners of the company. Practically, the board and the executives of the company will
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not serve the interest of the shareholders of the company rather they will work for their
own benefits (Roberts, 2015). Therefore, there comes the necessity on the part of the
board to have such a system where the motive of self interest shall be removed and rather
focus on the interest of the shareholders shall be placed. The interest of the shareholders
is growth of the company, higher dividends and higher profits. In order to have focus on
the interest of shareholders, board has included the clause in the remuneration report of
the company which details that the variable part of the remuneration of the board shall be
related directly to the total shareholders return. If it is higher than their remuneration will
be high otherwise it will be lesser (Sandfire Resources Official Website, 2018)
It can be verified with the Income Statement where Earning Per share of the company has
been increased from 49.16 cents in 2017 to 77.85 cents in 2018. The same can inferred
from the magazines of the corporate world which shows the EPS and the dividends and
thus satisfying the agency theory as medium for board orientation.
2. Stewardship Theory – According to this theory, board of directors and the executives are
regarded as the stewards of the company who only focus on the operations of the
company and how the growth of assets of the company can be increased. They act on
behalf of the shareholders and less focused on the demands of the shareholders. In the
board of directors of the company, out of six five of them are the independent directors
and therefore their decision will not be affected by the interest of any other person.
Secondly the increase in growth of the company can be inferred from the Chairman
Message given in the annual report stating that the company has been able to generate
higher profits and is debt free only because of their well developed and well known assets
namely De Grussa project. Secondly with the motive of having the high investment
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opportunities, they have started acquiring the companies which are junior in the mining
and exploration fields like White rocks minerals Limited. Thus, as per this theory, the
board is oriented by the way of the Chairman Message and Balance Sheet.
3. Stakeholder – Managerial Branch theory – As per this theory board will focus on the
services which will satisfy the needs of the most powerful stakeholders. The most
powerful stakeholders is the wider term and in general it includes those stakeholders the
decision of whom will affect the operations and the functioning of the company. For
instance the shareholders who have majority of the shares in hands, government
authorities and regulatory which can impose the penalty and other levies for any non
compliance of the statutory provisions which are applicable to the companies and the
other investors who have invested the huge amount in the company which includes the
banks and the financial institutions Deegan, Rankin and Tobin, 2002). In the given
company the most powerful stakeholder is the HSBC Custodies Nominees Australia
Limited which holds 47.08 % of shares in the company.
The board of directors, being majority independent, will consider the needs of the most
powerful stakeholders of the company. For these stakeholders the company has made the
necessary voluntary disclosures. The snap shot of the working of the company for the
current year has been given with respect not only the financial figures but also the
strategies that the company will adopt to satisfy the powerful stakeholders.
4. Stakeholder – Ethical Branch theory – This theory is does not bounds the board to
consider the needs of the particular group of stakeholders rather focus on all the
stakeholders of the company and states that the board shall make the decisions which
satisfies the requirements of all the stakeholders. Ethics is referred to as the code of
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conduct which every person involved is required to comply with. In the given case, as the
company is engaged in the mining and exploration sector, it’s the duty of the company
and the board to consider the social and environmental ethics while conducting the
business and for that the board has specifically mentioned the fact about the compliance
with the environmental laws and has included the section of Environmental Social
Governance (ESG) in the report of Corporate Governance and it details the following
- Information about the workplace of the employees and the safety measures taken
- Information about the management of land and climate change including the water
and energy management.
- Addresses the issues of the concerned stakeholders like environmental regulations.
- Management of the crisis if happened.
Apart from the corporate governance statement, the company also issues the
sustainability statement.
5. Resource Dependency Theory – This theory states that the board shall strive to make the
availability of those resources possible which are vital for the functioning of the
company. It does not require the majority of independent directors in the composition of
board rather it requires the possible skills so as to retain the necessary resources in the
company only. This theory mandates the capital flow management and resource
management for the board. The same has been followed by the board as it has been
exhibited by the Cash Flow Statement of the company detailing the net increase in the
cash and cash equivalents amounting to $116574 thousands in the year of 2018 from
$60644 thousands in the year of 2017.
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In this manner, the board is oriented towards the stakeholders and shareholders.
The theory which applies to our company is Agency theory. It is because of the fact that the
board of directors and the executives of the company are more concerned with the interest of the
shareholders of the company. They have included the policy which is directly related to the
shareholders return and maximization of profits which in turn will increase the dividend. One
such policy is the remuneration policy of the board of directors and executives. In this manner,
the theory of agency is more applicable and suitable to the company.
INTERPRETATION OF COMPANY COMMUNICATIONS USING LEGITIMACY
THEORY
Legitimacy theory is the theory which states that company shall ensure that it operates within the
limits and according to the norms as prescribed by the societies. If this is the case then it is said
to be legitimate. This theory simultaneously runs with the social contract. This is the contract
which every company enters into with the societies in general. This contract is not entered in
formal document rather it entered with the faith and belief which the society will have in the
company. More transparency the company will have in their working and operations and the
necessary disclosures including the voluntary disclosures, more faith will be developed by the
society and which will help the company in turn to operate in the industry (Deegan, 2002).
Legitimacy theory entails that the company shall open its windows and doors so as to bring the
transparency in the overall functioning of the company.
On the official website of the company, it has been mentioned that the company has the
environmental management system which ensures that the company is committed to the
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