LAW7057 Corporate Governance

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LAW7057 Corporate Governance

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LAW7057 Corporate Governance

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Course Code: LAW7057
University: The University Of Adelaide

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Country: Australia

Question:

Discuss About The Corporate Governance Are Two Sides Of Corporate?

 
Answer:

Introduction
Executive remuneration and corporate governance are two sides of corporate management. One side belongs to the justification of the remuneration promised to the CEO and executives by the corporate and other side demands the justification of that remuneration to the stakeholders of the corporate. High level of remuneration always has the threat of reducing the distributable profit for the stakeholders and at the same time the executives and CEOs may have the tendency to project their performance by any means to justify their remuneration. The CEO and executive remunerations always comprise of long-term and short term benefits with distinctive division of heads which include profit sharing and regular cash salary. Profit sharing may be in the form of disbursement through share allocation or by cash[1]. It is always debatable if the area of corporate governance should get involved in this area to prove transparency and justification of the remuneration allocated to CEO and executives for the stakeholders[2]. This report will emphasize on this specific issue in perspective of Australia with the application of different legislative application implied by Corporation Act, 2001 and Australian Securities and Investment Commission with the guidance provided for the corporate to practice the same in order to ensure and save common interest of the stakeholders of the company and the future prospect of the corporate[3
 
Successful application of Executive remuneration plan by corporate
This issue is raised with the basic questions of the authority of employment of the CEO and executives and the need of their employment; the way the CEO and executives add value to the organization; and the role of corporate governance for structuring the remuneration of the management including CEO and executives.
The employment of CEO is done by the corporate management and other executives are also appointed by the management. These appointments are made in order to ensure business growth of the corporate with subsequent enhancement of profit. It is to be kept in mind that the owners of the corporate are the shareholders and they just need proper return on their investments.
The CEO and other executives are responsible for the policy making of the organization with subsequent execution of those policies through different corporate strategies which are based upon the objective, vision and mission of the corporate. These activities are marked with different time period- short and long term for the corporate. Through successful implications of the strategies, the top level management of the corporate consisting of CEO and other executives are held responsible for the business growth and profit enhancement which is beneficiary for the shareholders of the corporate[4].
Corporate governance is fixed by the board for ethical practices of the corporate. The corporate fixes governance procedure in order to make transparent and ethical approach to the business of the corporate. This governance procedure is applicable for the all levels of internal stakeholders of the company. When the CEO and other executives are held responsible for the performance of the corporate within the fixed line of demarcation clarified by the corporate governance, it is also ensured that the coveted output is expected by the management of the company for which the CEO and other executives are remunerated. Being the management of the corporate, the CEO and other executives have no such power to fix their own remuneration and this is to be fixed as per the corporate governance policy of the organization[5].
In cae of fixation of remuneration of CEO and other executives, different authorities are responsible to put the benchmark and the limitation, which are looking after the corporate affairs of the country. In case of Australia, Australian Securities and Investment Commission fixes the guideline of remuneration through their guideline Regulatory Guide 49 which is named as Employee Inventive Schemes published in November, 2015. This Guide emphasizes on the issues of different criteria of remuneration and incentive scheme which is endorsed by Corporation Act, 2001 of Australia. The main areas covered by this guide are:
 
The authority who can offer- Any ASX listed companies or approved foreign entity
The probable recipient of offers – Full time employees, including directors-both of executive non-executive cadre
Type of Financial products can be offered – Fully paid shares; certain depositary interests, fully paid stapled securities with the entitlement of trading.
 Specific structure to be used under the relief of the authority- Trusts, Contribution Plans, or certain type of loan arrangements.
The basic and general conditions of that relief allowed- Pre-conditions as fixed by ASIC related to the eligibility of the financial products offered[6].
This guide has provided the above conditions under section B to F for listed bodies which are corporate.
Salient features of RG 49 are as follows:
RG 49.1-Incentive scheme promotes the concept of ownership of the employee
RG 49.2-Financial instruments may be offered to the employees to create the situation of financial benefit to the employees for the objective based deliverance.
RG 49.4- The objective of this scheme is to promote the concept of interdependence between the employer and employee.
RG 49.5- Conditional relief is allowed by this policy when the clause of RG 49.4 is complied as per guideline.
RG 49.8- Disclosure of financial instruments is to be made under Ch 6D for securities and Ch 7 of Corporation Act in order to make the investors aware of the offering to the employees.
RG 49.13- Certain prohibitions are applied in s 734, 1018 and 1018B related to advertisement of financial offer and s736, 992A and 992AA generally known as hawking provisions related to sales of financial instruments created through unsolicited contract with investors, etc[7].
With the above guideline as per ASIC RG 49, it is clear to understand the basic criteria to offer the remuneration to the CEO and the executives in different forms which are endorsed by the Corporation Act 2001 of Australia.
The organizations which are following the above guideline can be considered as successful towards implementation of their compensation plans to the employees with the satisfaction of the investors or stakeholders.
Organizations have dual objectives- to have a satisfied group of investors and retention of able management through CEO and executives. In the global competitive situation, retention of employees is big challenge to the organizations and they have to manage this area with the prefixed guideline by the corporate authorities. The main objectives of the organizations are to mobilize wealth through their performance and none other than strong management can ensure this with their expertise for which they should be satisfactorily remunerated. The organization able to maintain such balance can make their investors happy and retain their deserved employees. In this aspect, corporate governance has to play a vital role to ensure proper and transparent fixation of management remuneration in different way so that internal and external stakeholders of the organization feel happy and satisfied for the interest of long-run success of the corporate.
Inefficient corporate governance for unsuccessful corporate
Corporate governance should be flexible which is to depend upon changing scenario. It is not expected that success is everlasting. Any reverse situation can generate unwanted repercussions from different level of stakeholders including the investors. As they are investing for the business of the company, they have all right to get their return on investment with reasonable rate and any adverse situation can raise question about the success of the company. There may be lesser profit or loss which can diminish the profit of the investors. They can feel unsecured during such situation and can raise the question of the ability of the management who are paid for their service. The general situation demands normal trend of business which may not prevail due to some internal or external factors. Out of them, ability of management to comply with the objective of the organization is big issue. Compliance of the objective of the organization is the basic duty of the management and the non-compliance may lead to lesser profit or loss. The remuneration plan of the executive may be raised as a big issue by the investors with subsequent dissatisfaction by them. As the management remuneration plan is the decision of the management, they have to own the responsibility of the non-performance of the organization. The annual report of the corporate consisting of the corporate governance should be treated as transparent and flexible in order to justify the actions initiated by the management in the field of executive remuneration plan[8].
 
Conclusion
The area of executive remuneration plan attracts eyes of the investors as they feel that they are running the organization by their money. The organization is mainly run by the corporate objective which is fixed by the management and the board. CEO and other executives are instrumental in fixing those objectives and held responsible for implementation of successful strategies to accomplish the objectives. For these activities, they are paid with remuneration consisting of different fixed and variable modes of benefits. The annual report of the corporate is consisting of one part named corporate governance which ensures ethical and transparent operation of the corporate. Moreover, corporate authorities like ASIC and Corporation Act, 2001 of Australia is the watch dogs to look after the compliance of different corporate activities out of which executive remuneration is major part. As they are liable to answer to the investors, the compliance of their rules and regulations are their area of observations with necessary actions. Hence corporate governance and its applications are the prime issues on which these bodies are working to safeguard the interest of the investors and their ultimate queries on any feature raised on the issue of executive remuneration is to be answered by the management.
 
Recommendations
The recommendations in this domain are:

Logical fixation of executive remuneration plan
Divide the remuneration in fixed and variable
Variable component should be passed on through financial products as per guideline fixed by ASIC through RG 49
Profit sharing should be made to the executives in such manner that it would not raise any question of integrity on the part of the management
Strict adherence of Corporation Act 2001 as per Australian Accounting Standard Board is to be ensured
Corporate governance should play major role in remuneration scheme of executives with the clear guidelines fixed by the authorities
At the end, the interest of the investors is to be safeguarded through corporate governance which should comply with proper, transparent and legitimate remuneration plan for the CEO and executives to ensure no scope of ambiguity for the investors with resultant dissatisfaction.

 
References
Asic. (2016, May 26). Corporate governance – Executive remuneration. Retrieved August 13, 2017, from Asic: https://asic.gov.au/regulatory-resources/corporate-governance/executive-remuneration/
Asic. (2013, November 14). CP 218 Employee incentive schemes. Retrieved August 13, 2017, from Asic: https://asic.gov.au/regulatory-resources/find-a-document/consultation-papers/cp-218-employee-incentive-schemes/
Asic. (2015, November). Employee incentive schemes. Retrieved August 13, 2017, from Asic: https://download.asic.gov.au/media/3450984/rg49-published-11-november-2015.pdf
Asx. (2007). Corporate Governance Principles and Recommendations with 2010 Amendments. Retrieved August 13, 2017, from Asx: https://www.asx.com.au/documents/asx-compliance/cg_principles_recommendations_with_2010_amendments.pdf
Austlii. (2002). Corporate governance and executive remuneration: Rediscovering managerial positional conflict. Retrieved August 13, 2017, from Austlii: https://www.austlii.edu.au/au/journals/UNSWLawJl/2002/23.html
Lester, T., Yoon, J., & Lovells, H. (2017, January 01). Corporate governance and directors’ duties in Australia: overview. Retrieved August 13, 2017, from Thomsonreuters: https://uk.practicallaw.thomsonreuters.com/1-502-9743?transitionType=Default&contextData=(sc.Default)&firstPage=true&bhcp=1
Rampling, P. (2015). CEO and executive director remuneration practice and corporate financial performance: a comparison of practices in the USA, UK and Australia. Retrieved August 13, 2017, from Scu: https://epubs.scu.edu.au/cgi/viewcontent.cgi?article=1475&context=theses
Schoenemann, A. (2004, September 04). Executive remuneration in New Zealand and Australia. Retrieved August 13, 2017, from Victoria: https://www.victoria.ac.nz/law/research/publications/vuwlr/prev-issues/vol-37-1/executive-schoenemann.pdf
Sheehy, T. (2009, May 29). Regulation of director and executive remuneration in Australia . Retrieved August 13, 2017, from Governanceinstitute: https://www.governanceinstitute.com.au/media/…/Final_submission_PC_issues_paper
[1] Asic, Corporate governance – Executive remuneration, 2016
[2] Asx, Corporate Governance Principles and Recommendations with 2010 Amendments, 2007
[3] Peter Rampling, CEO and executive director remuneration practice and corporate financial performance: a comparison of practices in the USA, UK and Australia, 2015
[4] Tim Lester, Joanna Yoon, Hogan Lovells, Corporate governance and directors’ duties in Australia: overview, 2017
[5] Andreas Schoenemann, Executive remuneration in New Zealand and Australia, 2004
[6] Tim Sheehy, Regulation of director and executive remuneration in Australia, 2009
[7] Asic, CP 218 Employee incentive schemes, 2013
[8] Austlii, Corporate governance and executive remuneration: Rediscovering managerial positional conflict, 2004

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