Corporate Governance Australian Securities Exchange

Question: Discuss about the Corporate Governance for Australian Securities Exchange. Answer: Introduction The present report aims to demonstrate the case study analysis of James Hardie, involved in unethical business practices related to asbestos production. James Hardie became an iconic company in Australia for mining, importing and manufacturing asbestos-based products. However, the business practices of the company was thoroughly investigated by Australian Securities and Investments Commission (ASIC) who commenced civil penalty proceedings against James Hardie due to breaching the Corporations Act based on large number of allegations against it (James Hardie: Restructuring, removing and reviewing the social contract). In this context, the report has analysed the actions of James Hardie against the Australian Securities Exchange (ASX) principles. Stakeholders of James Hardie and their Corporate Governance Responsibilities James Hardies Stakeholder groups Allocated Corporate Governance Responsibilities Shareholders Shareholders of the company are the group of people who have financial investment in the company (Slide 8, How do we recognise these stakeholders and interests in company law?). The board of directors and senior management of James Hardie hold the corporate social responsibility towards its shareholders of maximizing their resources by implementing and adopting ethical and responsible corporate governance practices that ensures maximum wealth generation for each of its shareholder. Thus, senior management and board of directors of the company have the obligation of maximizing social and financial performance for ensuring long-tern economic prosperity (Module 1, Topic 2). Employees James Hardie holds the corporate governance responsibility towards its employees of implementing and complying all the legislation and regulations in its workplace ensuring employees protection such as whistle-blower protection, employee participation and occupation health and safety obligations. The company is mainly involved in the production of asbestos-based products that have adverse health impacts on the employees. As such, senior management and board of directors of the company are entitled to implement such business practices and procures that ensures employees protection in the first place (Module 1, Topic 2). Consumers The consumers of James Hardie are mainly the contractors who acquire asbestos related products from the company that acts as an alternative to bricks (James Hardie: Restructuring, removing and reviewing the social contract). As such, the corporate governance responsibility of the senior management and board of directors towards consumers includes providing them proper knowledge about the social, environmental and ethical aspects of the corporate behaviour in manufacturing the specific product. It is their responsibility to abide with the legal laws related to consumers welfare such as Trades Practices Act and Competition and Consumer Customer Act. They should integrate best practices of corporate governance for maximizing consumers welfare (Module 1, Topic 2). NSW State Government The government is regarded as one of the largest consumer of James Hardie as it provides funds to the business for carrying out its business activity. The governmental policies regulate its long-term growth and profitability. As such, the board of directors and senior management holds the corporate governance responsibility towards the government includes obeying the legal laws and rules of the government for ensuring its sustainability. The manufacturing activities of the company include developing asbestos products that can have degrading impact on the quality of environment and thus the company has to comply with all the environmental laws and regulations implemented by the NSW state government (Module 1, Topic 2). Community The senior management of James Hardie holds the responsibility of adopting such business practices and procedures that maximises the welfare of the community or society in which it conducts its business. It should implement and adopt proper code of conduct and ethics in the workplace that ensures protection of community from any of the adverse impact of the business operations (Module 1, Topic 2). Key Corporate Governance Issues in the James Hardie Case, by referring to the Asx Corporate Governance Principles and Recommendations ASX Principle Key corporate governance issue corresponding to that ASX Principle Organisations should fairly recognise the respective roles and responsibilities of board and the management (Module 1, Topic 1). The key corporate governance issue in James Hardie in response to this ASX principle is continuation of unethical practices in its workplace despite having prior knowledge regarding the negative health impacts of manufacturing asbestos-based products to the employees. It is the responsibility of the board of the company to discontinue the manufacture of asbestos product after receiving health warnings and potential impact of liabilities imposed by the government after the occurrence of issues related to worker safety in the workplace (Module 2, Topic 1). The board of an organisation should be structured properly with uniform composition for carrying out its duties and responsibilities (Module 1, Topic 1). The company has strived to mislead the situation by establishment of MRCF in order to compensate sufferers of asbestos related claims. However, after re-structuring of the board for establishing its offshore unit James Hardie Industries NV it was unable to meet the liability claims due to underfunding of MRCF (James Hardie: Restructuring, removing and reviewing the social contract). Organisations should implement and adopt responsible and ethical decision-making practices (Module 1, Topic 1). The directors decisions of James Hardie to re-structure the organisation have led to the occurrence of chaotic situation in the company. The company has decided to establish its off-shore unit and as a result restructured its business model. However, the off-shore unit of the company was discovered as breaching the law by not incorporating the use of reliable actuarial estimates. Thus, it was found to be intentionally avoiding its moral obligations towards the society (James Hardie: Restructuring, removing and reviewing the social contract). The restricting of the company was found to breach the Corporations Act 2001 (Slide 9, Corporations Act 2001). Organisations should adopt proper structure for safeguarding the integrity in their financial reporting (Module 1, Topic 1). The company after restructuring was found to be guilty of misleading the public statements. The allegation made against the James Hardie under the Corporations Act is failure of care and diligence by not disclosing its financial information to ASX (Module 3, Topic 1). The company also does not undertake external audits for ensuring the factual presentation of its financial position to the public in a fair manner. Organisations should timely disclose all the relevant material matters (Module 1, Topic 1). James Hardie was alleged of breaching the Corporations Act by not ensuring its compliance with ASX listing rule requirement after res-structuring. The company acts in accordance with the ASX listing rules prior to establishment of its off-shore unit (Slide 17, ASX Corporate Governance Principles and Recommendations). However, after the company went restructuring since establishing its offshore unit it was found to be guilty of non-disclosing its materialistic information. Organisations should promote and respect the rights of shareholders (Module 1, Topic 1). The company was alleged of breaching the Corporation Act through misrepresentation of information to the shareholders in its executive presentations. The company mislead the information by presenting the adequacy of the MRCF in meeting its obligations in relation to asbestos liabilities at its meeting with institutional investors (James Hardie: Restructuring, removing and reviewing the social contract). Organisations should develop an effective internal system for managing and mitigating the risks in advance (Module 1, Topic 1). The company has not implemented a risk-management system after its restructuring after gaining sufficient information of its health hazards to the employees (James Hardie: Restructuring, removing and reviewing the social contract). Organisations should adopt responsible practices for providing fair remuneration to the investors (Module 1, Topic 1). The company was non-consistent in publishing its financial information on ASX and thus has not inculcated transparency in its business operations for the investors (James Hardie: Restructuring, removing and reviewing the social contract). Actions to be undertaken by James Hardie in order to comply with the ASX guidelines ASX Principle Actions company should have taken to comply with the ASX guideline Organisations should fairly recognise the respective roles and responsibilities of board and the management (Module 1, Topic 1). James Hardie should identify the key roles of responsibilities of board and management after its re-structuring in order to comply with ASX principle. The necessary action that can be taken by the company in this regard is to stop the manufacturing of asbestos products for ensuring the protection of its employees. Also, it should ensure proper funding of MRCF for meeting the liability claims of asbestos. The directors rules and responsibilities should be continually monitored by the ASIC (Module 2, Topic 2). Proper structuring and uniformity of board in an organisation for carrying out effectively its duties and responsibilities (Slide 14. King Report (2002) v King Report (2009). The company should re-elect its board of directors for effective discharge of duties in the current circumstances. The board of directors selected should be competent enough to deal appropriately with the current issues and enhance the company value. The company can hire external experts who possess the relevant skills of developing effective business practices for meeting its current challenges (Module 2, Topic 2). Organisations should implement and adopt responsible and ethical decision-making practices (Module 1, Topic 1). James Hardie needs to implement and develop its Code of Conduct that provides guidelines to the company for acting in an ethical way by ensuring protection of all its stakeholders. The company after restructuring was believed to intentionally adopt morally wrong and unethical practices with the main motive of profit maximisation. Development of proper Code of Conduct would ensure the company to monitor and review continually its workplace practices and identify the unethical practices (James Hardie: Restructuring, removing and reviewing the social contract). Organisations should adopt proper structure for safeguarding the integrity in their financial reporting (Module 1, Topic 1). The company should develop and publish its annual report for representing its financial position to all its stakeholders (Module 2, Topic 2). This would maintain transparency in its business operations and maintains integrity in its financial reporting. Organisations should timely disclose all the relevant material matters (Module 1, Topic 1). The company need to comply with ASX listing rules and provide all the materialistic information to the ASX. This would enable James Hardie to enhance its brand reputation by gaining the trust of the government (Slide 9, Corporations Act 2001). Organisations should promote and respect the rights of shareholders (Module 1, Topic 1). The company should develop an external reporting system for disclosing all the information related to its operational activities to the shareholders for protecting their rights. They should publish and broadcast their financial and social performance for achieving the trust of the shareholders. Organisations should develop an effective internal system for managing and mitigating the risks in advance (Module 1, Topic 1). The company need to develop and implement a risk-management system internally so that the directors can easily recognise the risks in advance and take preventive action towards them (Module 2, Topic 2). This would help the company to restrain the occurrence of any emergency condition such as that occurred in asbestos related claims in its workplace by employees mainly due to absence of risk control system. Organisations should adopt responsible practices for providing fair remuneration to the investors (Module 1, Topic 1). The company need to develop and implement adequate compensation policy that incorporates the guidelines related to remuneration offered to its investors and all its employees. This would prove to be beneficial in achieving the employees satisfaction and maintaining the trust of its institutional investors (James Hardie: Restructuring, removing and reviewing the social contract).. Impact of James Hardie directors decision to continue to manufacture the asbestos based product on the long term interests of stakeholder groups from mid-1960s until 1987 Stakeholder Group of James Hardie How long term interests of stakeholder groups were affected or exacerbated Shareholders Directors decision to continue the production of asbestos-based products alleged breach the corporate acts and rules followed by Australian corporations. The identification of unethical practice negatively impacted its brand image resulting in decline of its profitability with ultimately reduction in revenue generation for shareholders (James Hardie: Restructuring, removing and reviewing the social contract). Employees The continuation of manufacturing of asbestos-related products resulted in large scale increase in workers compensation cases from mid-1960s until 1987 in the company relating to health hazards suffered by the employees (James Hardie: Restructuring, removing and reviewing the social contract). Consumers The consumers of the company were mainly contractors who purchase asbestos products for replacement of bricks. However, the prevalence of unethical manufacturing practices in the company resulted in their lower productivity and causing huge losses for the contractors (Module 1, Topic 2). NSW Government The company by not complying with essential governmental laws and regulations have resulted in lower revenue generation for the government Module 1, Topic 2). Community The continuation of manufacturing of asbestos products negatively impacted the health of its employees and thus affecting the welfare of their families as well. The dust produced from asbestos production degraded the quality of environment Module 1, Topic 2) Ethical Analysis of the Decision Made by the Board of Director in mid-1960s The directors of James Hardie continued the production of asbestos after knowing its medical implications from late 1930S to mid-1960s. The health hazard caused by asbestos was highlighted in late 1930s and the company has a clear knowledge regarding it due their own employees claims in the 60s but they made a commercial decision to continue with its production. The decision made by the directors was illegal and is regarded as unethical decision-making practice adopted by the company at that time as it meant to jeopardize the lives of its employees. The examination of the decision made by the directors in mid-1960s can be done through its proper evaluation and examination by implementing theories of ethical behaviour (James Hardie: Restructuring, removing and reviewing the social contract). The theory of ethical behaviour provides a framework for the organizations to adopt and implement good governance practices. These theories help in establishing an ethical framework in an organisa tion incorporating all the economic, social and environmental operational activities (Module 1, Topic 2). The development of an ethical framework facilitates the moral development by providing clear knowledge to an individual regarding what is right and what is wrong. Business ethics refers to rules and regulations such as Code of Conduct implemented by the organisations while more ethics refers to an individual personal beliefs regarding right and wrong. The ethical theories such as teleological and deontological include all the stages of moral development of an individual. Teleological ethical theory emphasizes on moral obligation of an individual to achieve what is good or desirable as an ultimate end. On the other hand, deontological theory emphasises on the adherence to specific rules and obligations for enhancing the moral development of an individual. In the light of above two theories, it can said that the decision made by the company in mid-1960s was unethical as directors does not abide by the organisational Code of Conduct and also their actions are not directed towards achieving an morally right outcome. The main motive of the company was only profit maximisation and thus is ethically and morally wrong (Module 1, Topic 2). Impact of Actions of Various Stakeholders on James Hardie's ability to achieve Corporate Sustainability Specific Stakeholder Group How did actions threaten James Hardies corporate sustainability Board of Directors The board of directors of James Hardie action of continuing the production of asbestos related products at its workplace lead to the occurrence of large negative impact on the health of its employees. The lack of sustainable business practices by the board of directors negatively impacted its corporate sustainability. The absence of a proper Code of Conduct to be followed by both the employers and employees also potentially threatens the corporate sustainability of the company. This will eventually lead to decline in the employees performance and profitability threatening its sustainability (James Hardie: Restructuring, removing and reviewing the social contract). NSW Government The medical implication of asbestos production on an individual health was recognised in 1930s only. However, James Hardie continued its production successfully and this indicates that government has also supported the business operations of the company. This has led to the rise in the compensation claims of employees negatively impacting its future sustainability and growth (James Hardie: Restructuring, removing and reviewing the social contract). Conclusion Thus, it can be stated after the discussion held in the overall report that implementation and adoption of effective corporate governance practices are essential for an organisation to ensure its corporate sustainability. The organisation should develop and establish a proper Code of Conduct for ethics so that its business practices and procedures are in accordance with the legal laws and regulations. The case of James Hardie has very well illustrated the consequence of adopting unethical and illegal business practices for maximising the revenue generation. References Module 1: The concepts, essential principles and stockholders of corporate governance, ethical and moral obligations and social responsibility. Topic 1: The concept of corporate governance and the essential principles of corporate governance. Module 2: Corporate governance in Australia impact on board and committee functions and struc tures and company officers training, induction and behaviour to protect the interests of diverse stakeholders in the corporation. Topic 2 week 4: Directors duties and liability and enforcement of directors duties Module 2: Corporate governance in Australia impact on board and committee functions and struc tures and company officers training, induction and behaviour to protect the interests of diverse stakeholders in the corporation. Topic 1: Board functions and structures and types of company directors and officers Module 1: The concepts, essential principles and stockholders of corporate governance, ethical and moral obligations and social responsibility. Topic 2: Stakeholders in corporate governance and corporate social responsibility and ethics theory. Module 3: Principles of good corporate governance and corporate disclosure requirements and corporate governance disclosure in practice. Topic 1 week 5: Regulation of corporate governance and the role of the regulators: ASIC and ASX in the process. Slide 8. How do we recognise these stakeholders and interests in company law? Slide 14. King Report (2002) v King Report (2009). Slide 17. ASX Corporate Governance Principles and Recommendations (2014 version). Slide 9. Corporations Act 2001. Slide 13. Towards an effective corporate governance framework in Australia analysis and reform proposal 2: Division of responsibilities between ASX and ASIC. James Hardie: Restructuring, removing and reviewing the social contract.