Assignment 2 ACC30008 PDF

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ACC30008: ACCOUNTING THEORY Assessment 2: Research Assignment Executive Summary: The fourth edition of the ASX Corporate Governance principles and recommendations was released in 2019 and implemented on the 1st of January 2020. The structure of the fourth edition is similar to the third in which it focuses on encompassing the eight core principles and their recommendations. “The key changes that are reflected in the fourth edition of the ASX Corporate Governance principles and recommendations is a recognition of the importance of monitoring and taking responsibility for culture, conduct and behavior within the corporate group” (Lorenzi, 2019). The changes made in the fourth edition address issues of governance that originate from misconduct and culture. A literature review was undertaken with a focus on the impact of board characteristics with the performance of the company. The literature review indicates how board characteristics such as board gender, board size and board composition affect the performance of listed companies. The analysis was completed on a sample of 15 publicly listed companies within the ASX with a focus on the board gender, size and composition. The study found that there was a positive contribution between the board gender and the performance of the company but found that there was negative relation between the board size and board composition when associating the characteristic with the performance of the listed company. A recommendation was given to the CEO in agreeance with the fourth edition of the ASX Corporate Governance principles and recommendations as it would promote a unified culture and a good reputation for the business.

2 Introduction: This report will aim to understand the changes between the third and fourth edition of the ASX Corporate Governance principles and recommendations with regards to the roles and responsibilities of the board of directors. The report will also look at previous studies and literature reviews that focused on whether or not board characteristics had any effect on the performance of listed companies. A sample size was observed for this study and a regression analysis was performed to better grasp the impacts of board characteristics. The results of this study would be of significant interest to the shareholders, boards and regulators as it highlights the board characteristics that should be targeted if an improvement of corporate governance was what they wanted to achieve. A recommendation was also made for the CEO with regards to complying with the changes implemented in the fourth edition of the ASX Corporate Governance recommendations.

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Discussion and Analysis: Corporate Governance

Numerous changes were made to the ASX Corporate Governance principles and recommendations when the fourth edition was released in 2019. Changes can be seen as early as the first principle, noticeably in the sections 1.1, 1.2, 1.3 and 1.5. The board of directors should demonstrate leadership and align themselves with the purpose of the entity (ASX Corporate Governance Council, 2019). Also, the board of directors should update their recruitment practices by performing thorough background checks. Directors must have proper written agreements indicating the terms of appointment with their employees. The policy of diversity practices is included in the new recommendations, which places the requirement of setting measurable objectives as a separate requirement in the list. Hence, the recommendations made in the first principle indicate clear roles and responsibilities of the board to assist in strong oversight of the entities. Besides, there are new commentaries on the role of the Chair and the senior executive team. The second principle revealed changes in the indicators of directors’ independence in sections 2.2 and 2.3. The commentary offers clarification in reference to the ideology of independence. In this regard, material business relationships should be maintained with consultants and professional advisers. Additionally, close family ties have changed to personal connections that encompass all social relationships. Changes relating to boarding skills were also made, indicating that the board members should gauge the necessary skills required to handle emerging business issues. Noticeably, it relates to the commentary made under section 7.2 illustrating the role of the board of directors in monitoring the risk of an entity and the criteria to measure adequacy in line with the risk appetite. Particularly, the changes made on the principle provide clarity with respect to board tenure. In the fourth edition, the third principle was redrafted, emphasizing the need for upholding culture and value in sections 3.1, 3.3, and 3.4. In the third edition, the members are asked to act ethically and responsibly (ASX Corporate Governance Council, 2014). The fourth version adds the culture of acting lawfully and upholding values (ASX Corporate Governance Council, 2019). Furthermore, the principle is supported by several recommendations regarding the roles and responsibilities of the board of directors. The board of directors should demonstrate responsibility in demonstrating leadership, achieving strategic objectives, and underpin the desired culture in all activities. In the same line, the fourth edition indicates that the entities' remuneration policies should be in line with the purpose, values, and strategic appetite (ASX Corporate Governance Council, 2019). The new recommendations in the third principle articulate the need for upholding organisational values and avoid cases of bribery and corruption. Progressively, new recommendations were made in the fourth principle in section 4.3. The recommendations help in safeguarding integrity in the process of corporate reporting. In this light, the recommendation indicates that the board of directors should disclose the process they use when making their periodic corporate report. When making investment choices, investors prefer using corporate reports compared to the audited reports. Therefore, the recommendations in the fourth principle indicate the need for integrity and transparency in the processes of verifying the corporate reports. The fourth edition has made new recommendations in the fifth principle, specifically in sections 5.2 and 5.3. The board of directors should continuously review their disclosure practices through ensuring copies of market announcements are kept (ASX Corporate Governance Council, 2019). Also, copies of the presentation materials of new analysts or investors should be kept according to the disclosure compliance policy. Therefore, all the copies of the marketing materials should be provided promptly after the announcement and

should include all the new information. Furthermore, new recommendations were made on principle 8 in the commentary section 8.1 and 8.2. Each listed entity must ensure director remuneration is fair to attract and motivate the senior executives (ASX Corporate Governance Council, 2019). It comes out that remuneration is a key driver of culture; thus, entities should focus on offering incentives to directors and other executives. The growth and success of the entities will be realized when the entities align with the value and risk appetite. Moreover, the executives should receive a performance-based remuneration that focuses on their performance objectives. Under the commentary section, it is stated that discretion should be maintained to match the risk appetite and entities' values. Thus, the changes made on principle promotes performance and encourages upholding the entity's values.

Literature Review This section of the analysis will use the literature of previous studies as an attempt to illustrate the importance of the relationship between board characteristics and the performance of the firm. The board of directors plays a vital role in the governance of companies, thus an understanding of how characteristics and effectiveness of the board impact the governance of a company is extremely important. The board has a responsibility to monitor, discipline and remove ineffective management teamstoensurethatmangersactintheinterestsofshareholders. TheAgencytheorysuggests that the number of board members, or board size, positively affects performance. A study was undertaken in India in 2016 by Kalsie & Shrivastav in which they measured firm performance using Tobin’s Q and the market-to-book value ratio as market-based measures and ROA and ROCE as accounting based measured. The study focused on 145 non-financial listed companies in India, belonging to 16 different industries, throughout the years 2008 - 2012. Shrivastav et al. (2016, p.169) found that board size is an important corporate governance mechanism which positively impacts the company’s performance. Board diversity, with an emphasis on gender, has become an emerging topic of interest worldwide after recent movements by many countries to enforce legal requirements for a greater participation of women involvement in board positions. There have been many studies as to whether gender has any effect on financial performance. A study was completed by Reguera- Alvardo, Fuentes and Laffarga in which they examined the relation between board gender diversity and the economic results in Spain between 2005-2009. The study looked at 125 non- financial firms that were listed on the Madrid Stock Exchange and found that between that time frame there was an increase of women in board positions of over 98%. Reguera-Alvardo et al. (2015, p.2) study results showed that there was still an underrepresentation of women within board memberships but was still able to conclude that there was a positive relationship between board gender diversity and positive economic results. A study was completed during 2005 - 2009 where De Zoysa, Lodh, Rashid and Rudkin examined the influence of independent directors and board composition in relation to firm performance. De Zoysa et al. (2010, p. 77) observed whether the company had an executive director or a non-executive director and how that affected the performance of the company. The sample size was of 274 Bangladeshi firms and revealed that there is no potential economic value to the firm from the composition of the board.

Safari, M (2017) conducted a study in which an examination of the aggregate effect of the board of directors on earnings management practices was observed. The results of the empirical research indicate that good corporate governance supports efficacy through enhancing the firm's reporting practices. The study shows how recommendations made by the ASX Corporate Governance Council promote the performance of the entities. Therefore, good corporate governance serves as an internal control mechanism that is critical of the performance.

Regression Analysis: overall firm

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Variable

Coefficients

P-Value p < 0.05

Direction

Board Size

-0.02

0.09

Yes

0.33 Board Gender (Female)

0.26

No

(-)

(+)

Board Composition

-0.79

0.06

Yes

(-)

0.00 Total Assets

0.10

Yes

(+)

0.00 Leverage

-0.10

Yes

(-)

Price/Book Value

0.01

0.14

No

(+)

Using a sample of 150 observations, the results above suggest that the Board Size is negatively associated with firm performance, board gender is positively associated with firm performance and board composition is negatively and significantly associated with firm performance. The results that were gathered from the regression analysis show that a more inclusive board of directors, in terms of gender, seems to have a positive impact on the performance of a company with the end result showing a positive coefficient slope of 0.26. Ergo, it would seem that the findings from the study undertaken in Spain by Reguera-Alvardo, Fuentes and Laffarga are correct in the sense that an increase of women on the board of directors would is positively related to a higher economic result. The results show that board size is slightly negatively associated with a coefficient slope of -0.02 with firm performance which somewhat contradicts the study undertaken by Kalsie and Shrivastav in which they found that there was a positive influence between the board size and the company performance. The sample showed that there was a negative association between board composition and performance. With a coefficients slope of -0.79 it can be viewed as having a significant negative influence. These results correspond with the results that were attained in the study in Bangladesh by De Zoysa, Lodh, Rashid and Rudkin.

Recommendation: The changes in the roles and responsibilities of the board of directors are aimed at promoting good corporate governance which is essential for a business to thrive. The board characteristics should demonstrate good corporate governance that align with the organisational values. Corporate governance is imperative in achieving the business strategy and curbing the agency problem in the entities. Ideally, the principles and recommendations of corporate governance are used to monitor and control activities in the listed entities.

Compliance with the revisions made in the 4th edition can promote a greater sense of leadership for the board selection, can create a culture at the organisation that values ethical behavior, integrity and respect and aids in driving the core values of the company through to all levels of the organisation. The recommendation of the acting lawfully and upholding values can be incorporated into the responsibilities of the board of directors. Striving to uphold these values, and inclusion of incentives and attractive renumeration packages for executives and board members allows the culture to drive forward and flourish. These renumeration packages should be driven on a performance-based system, and this will allow for further vertical growth for the organisation.

Conclusion: The changes made in the fourth edition of the ASX Corporate Governance with respect to the role and responsibilities of the board of directors listed a number of new responsibilities for board members which was created as an aid to companies to support strong culture and corporate governance. Good corporate governance within an organisation is essential as it creates a culture of integrity and reliability all the while leading to a positive performance from board members which in turn has a positive impact on the financial performance of the organisation. Good corporate governance can benefit an organisation by giving the company a good reputation and financial stability. Based on the findings from the sample regression data analysis, it can be concluded that having a gender diverse board had a positive impact on the financial performance of an organisation whereas the having a large or small board size and the board composition; executive/non-executive director, appeared to have a slightly negative impact when looking as to whether these board characteristics affected the performance of the listed companies sample that we observed. From literature research completed and the regression analysis it can be observed that good corporate governance alongside and equal and diverse board of directors can have a positive impact on the performance of an organisation. A further study would need to be completed with a bigger sample size to completely grasp whether or not board size would have any impact on the performance of an organisation as the results we gathered from our sample size only gave a slightly negative result which would prompt further research.

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References: ASX Corporate Governance Council, 2014. Corporate Governance Principles and Recommendations, Sydney, Australian Securities Exchange. ASX Corporate Governance Council, 2019. Corporate Governance Principles and Recommendations, Sydney, Australian Securities Exchange. Bhagast, S & Black, B 1999, ‘The Uncertain Relationship Between Board Composition and Firm Performance’, The Business Lawyer, vol. 54, no. 3, pp. 921-963. De Villiers Vic Naiker, C & J. Van Staden, C 2011, ‘The Effect of Board Characteristics on Firm Environmental Performance’, Journal of Management, vol. 37, no. 6, pp. 1-28.

De Zoysa, A, Lodh, S, Rashid, A & Rudkin, K 2010, ‘Board Composition and Firm Performance: Evidence from Bangladesh’, Australasian Accounting, Business and Finance, vol. 4, no. 1, pp. 76-95. Kalsie, A & Shrivastav, S 2016, ‘Analysis of Board Size and Firm Performance: Evidence from NSE Companies Using Panel Data Approach’, Indian Journal of Corporate Governance, vol. 9, no. 2, pp. 148-172. Reguera-Alvarado, N, de Fuentes, P & Laffarga, J 2017, ‘Does Board Gender Diversity Influence Financial Performance? Evidence from Spain’, Journal of Business Ethics, pp. 337–350. Safari, M 2017, ‘Board and audit committee effectiveness in the post-ASX Corporate Governance Principles and Recommendations era’, Managerial Finance, viewed 12 September 2020,

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