Corporate Governance Good Governance Practices

Question: Describe about the Corporate Governance for Good Governance Practices. Answer: Introduction: In this report, we discuss the corporate governance and effect of good governance practices on companies listed on ASX. We study in detail about the family firms which are listed on ASX and Governance practices followed by the family firms and their impact on the companys performance. We also discuss in brief about the composition of the board in the family firms. In last we conclude, the report by discussing the applicability of principles and recommendations on listed companies but controlled by the members of the family. Corporate Governance: Corporate governance is a very broad term and covers many components in its ambit. According to the ASX corporate governance set out the rules and processes by which the company can manage its authorities and day to day functions of its management. It is a framework through which company keep the check on its officers and management. It creates the mechanism in the company through which performance of the company and its members are held accountable. Good Corporate governance increases the confidence of the investor in the company. ASX establish a council in August 2002, for the development of Principles and Recommendations of corporate governance. Later on, this council issued a second edition in 2007 and in 2010 new principles related to remuneration committee was added. After the release of the second edition corporations from all over the world realize the importance of corporate governance. After the review in 2012-2013, members of the council decide to issue a third edition. For the development of principles and recommendations, many experts are brought together by the council such as many industry groups, shareholders of companies, etc. These principles and recommendations were introduced by the council in 2003. These principles are applied to the companies which are listed on ASX. Applicability of these principles depends on the listing status of the company, if the company is listed on ASX then these principles and recommendations applied to the company. Following are the principles and recommendations provided by the Council: Lay solid foundations for management and oversight Structure the board to add value Act ethically and responsibly Safeguard integrity in corporate reporting Make timely and balanced disclosure Respect the rights of security holders Recognize and manage risk Remunerate fairly and responsibly Note: Council gives 29 recommendations to give effect to the general principles and also provide comments regarding both principles and the recommendations[1]. ASX claim that principles and recommendations are provided to increase the accountability of company. In this study, we determine the applicability of principals and recommendations on listed companies. ASX require that listed entities compare their governance practices with the principles and recommendations issued by the council. If they are not performing as per recommendations issued by the council then they have to disclose the reason in the annual report of the company[2]. ASX principles do not increase the financial performance and earning capacity in case of small companies listed on ASX. Usually, large companies get the benefit in financial terms by performing good governance practices. In case of large companies, there is a relation between the earning capacity and governance practices. Good governance practice directly impacts the financial performance of the company[3]. Before discussing the impact of Corporate Governance Practices on family firms which are listed on ASX, it is necessary to understand the definition and meaning of family firms. In research, it was found that in every 300 listed companies, 47% of companies are controlled by the families. We can identify a listed company which is controlled by family members in two ways: A major part of the board is represented by the family members. At least 4-5% voting stock is in the hands of family members. There are less number of definitions are founded of family business, related to the capital market. A business can be considered as family business where member of family is working at senior management level of the company[4]. A listed company which is controlled by the members of the family requires a careful assessment of the working of directors. If the management of the listed company includes family members, and the company has nonfamily investors then in such case need of careful assessment of directors duties increased. There are number of family firms which are listed on ASX with nonfamily shareholders. Corporate governance practices of the family firms depend on the composition of its board. In firms which are not managed by family members, independent directors hold 61.2% share on the board of the company and in family firms 43.9%. In family firms, 20% share of the board is held by the family members. In case of family firms, if board consists higher number of independent directors then it would be considered good performance of the company in field of corporate Governance[5]. In some cases, the family members present on the board or their representatives affect the interest of minority shareholders. Major shareholders are capable to placing the directors on the board of the company. Therefore the role of independent directors in the company is very important. It is important for the public companies that there board consist a mix of both independent and non-independent directors, and directors of the company are held liable for their performance[6]. Conclusion: In last we can conclude that corporate governance principles are very important for the companies, no matter whether they are family firms or nonfamily firms. ASX requires that company follow the principles and recommendations issued by the Council and in the case of non performance, reason for non performance must be disclose in the annual report of the company. A listed company which is controlled by the members of the family requires a careful assessment of the working of directors. Corporate governance practices of the family firms depend on the composition of its board. In last we talk about the independent directors and their share in board of the company. References: ASX,chapter 4; periodic disclosure https://www.asx.com.au/documents/rules/Chapter04.pdf. ASX,Corporate Governance Principles and Recommendations https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf. Deborah A. DeMott, independent directors in family influenced public companies. Jacqueline Christensena, Pamela Kenta, James Routledgea, and Jenny Stewartb, Do corporate governance recommendations improve the Nicholas A. Mroczkowski and George Tanewski, Delineating Publicly Listed Family and Nonfamily Controlled Firms: An Approach for Capital Market Research in Australia*, (2007) 45(3)320-332 performance and accountability of small listed companies (2015) Accounting and Finance 55 133164. Robert S. Karmel, Is the Independent Director Model Broken. (2013) Brooklyn law school legal studies.