The responsiblities of board directors and senior managers

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Lay solid foundations for management and oversight

The main concept of this factor presents the distinction responsibilities between board of directors and senior managers. The segregation of duties between management and oversight will enhance good corporate governance by reducing the problem resulted from the separation of control and ownership. According to Australian Securities Exchange Corporate Governance Council's recommendations (ASX) (2007, pp.13-15), the basic function of the board is to approve strategic direction of the organization and monitor the manager team who response for making decision in normal operation of the company. In specific, the main duty of the board is to ensure that the management operate and conduct the company in the best interest of shareholders. Hence, the first measurement of this factor dedicate to the establishment of the formal charters that detail the functions and responsibilities of board and management in order to clarify understanding of the responsibilities and interdependent relationship between management and board. Secondly, the disclosure of the proper process to evaluate the performance of senior managers is another measurement illustrated that the board does realise its responsibility over the management complied with the formal charter of the company.

Structure the board to add value

The first factor mentioned above illustrates the importance of establishing the board of directors in the company. However, the quality of the board is also an important factor that should take into consideration in order to enhance good corporate governance. ASX (2007, p. 16) recommends that the board should have effective composition to adequately discharge its responsibility and duty. Typically, the independence between board and management is the major concerning because non-independent directors could be dominated by senior executives which may obstruct the efficiency of duty committed by the directors. Hence, the measurements developed to test this factor mainly involve with an independent issue such as independence of majority directors on the board, independence of chairperson and separation of person who is chairperson and chief executive which infer to the independence of the leader of oversight function from management function (ASX 2007, pp.16-17).

In order to examine the selection and appointment practices, companies should establish a nomination committee as well as set its roles and responsibilities by publishing a charter (ASX 2007, pp. 17-18). A majority of the committee should consist of independent directors and also its chairperson should be an independent director who is not the same as the chairperson of the board (ASX 2007, pp.18-19). The purpose is to ensure that the board has sufficient independence and is not subservient to management or others. In addition, the board should be regularly evaluated its performance to ensure that the directors can add value to companies (ASX 2007, p.19).

Promote ethical and responsible decision making

To actively enhance ethical and responsible decisions, companies should not only comply with legislative regulations but also consider rational expectations of stakeholders including the wider community (ASX 2007, p.21). According to ASX (2007, p.21), one of critical measurements is that companies should establish and disclose standards of ethical behavior as well as provide them to all employees. Another measurement is to establish a policy to ensure that their employees, particularly senior executives and directors, do not trade any securities by using insider information which is price sensitivity (ASX 2007, pp.10, 23). As a result, those practices can encourage and maintain public confidence in companies' integrity.

Safeguard integrity in financial reporting

According to the independent global survey of the participants in the financial reporting supply chain commissioned by The International Federation of Accountants, not all the respondents are confident that auditors are independent enough from the companies they audit, or that their objectivity, integrity and professional competence is guaranteed. (IFAC2008, pp.26) Bedard et al (2004) also stated that both income increasing and income decreasing earnings management are associated with the financial and governance expertise of audit committee members, with indicators of independence, and with the presence of a clear mandate defining the responsibilities of the committee.

As audit rotation in some form is seen as a good measure to maintain sufficient independence, objectivity and integrity, there should be continuous focus on the function of companies' auditing committee in respect of financial reporting and thus the corporate governance. The company should ensure clear roles and responsibilities as well as the directors' independence of its Audit Committee. In addition, there are also concerns about loss of valuable knowledge and experience of both the audit professions, financial and audit literacy or expertise is of paramount importance in measuring a company's integrity in financial respect.

Recognise and manage risk

As is stated by The Institute of Internal Auditors, 'Organisations are under pressure to identify all the business risks they face; social, ethical and environmental as well as financial and operational, and to explain how they manage them to an acceptable level.' Anderson et al (2010) encourages boards to take a more pro-active stance in overseeing the risk management framework as part of the development of the assurance framework. Therefore, it is of overriding importance that the company establishes and publishes policies for the oversight and management of business risks. Also according to The Institute of Internal Auditors, internal audit professionals play an important role in evaluating the risk management processes of an organization. However, to preserve its organizational independence and objective judgment, the function should not take any direct responsibility for making risk management decisions for the enterprise or managing the risk management function. Accordingly, whether the company established a separate internal audit function which is responsible for making recommendations concerning the internal risk and control as well as a Risk Management Committee constitutes sound measures of assessing the corporate governance quality.

Remunerate fairly and responsibly

The awarding remuneration is a key area of focus for investor. To attract more investments, the fair and responsible awarding remuneration is necessary. The Australian Institute of Company Directors (AICD) guide on remuneration matters recommends that 'each board should have a clear statement of remuneration policy and procedure, the general term of which are disclosed in the annual report or a separate report to shareholders' (ASX 2001, p.8).

When setting the level and structure of remuneration, a company needs balance its desire to attract and retain senior executives and its cost of excessive remuneration. To fulfill Remunerate fairly and responsibly, firstly, the company should establish a remuneration committee. Committee is in existence it is normally considered best practice that entities set out the committee's responsibilities, the names of the committee members and their position in relation to the entity. (ASX 2001, p.7) Secondly, the company should clearly distinguish the structure of non-executive directors' remuneration from that of executive directors and senior executives. The reason is executive directors might face conflicts of interest. Moreover, to avoid remuneration and nomination committee benefit themselves through a wider power, the majority directors of remuneration and nomination committee could not be the same. A number of guide to best practice suggest that it is appropriate to have a similar structure to that of a nomination committee - comprising a majority non-executive directors, including a chairperson who is independent. (ASX 2001, p.7)

Village Roadshow Limited (VRL) first commenced business in 1954 in Melbourne, and has been listed on the ASX since 1988. Still based in Melbourne, VRL is a leading international entrainment and media company with core businesses in Theme Parks and Attractions, Film Distribution, Cinema Exhibition, Radio and Film Production and Music. (VRL 2009) VRL's corporate governance statement 2009 demonstrated that full adoption of ASX Recommendation may not provide optimal result given the particular circumstance and structure of the company. To assess the quality of corporate governance (CG) of VRL, we will use the model above, which is designed to promote growth and encourage investment in disciplined and accountable way.

Firstly, VRL has cleared the role of the board is to provide leadership and direction to management and to agree with management the aims, strategies and policies of the company. Moreover, the board has adopted formal charters that detail their functions and responsibilities. In fulfilling this responsibility, the board is supported by a number of committees whose composition is reviewed periodically. (VRL 2009)

Secondly, the good aspect of the structure of the board is the chairperson and chief executive officer not exercised by the same individual. Besides, The VCL has established a nomination committee, which consists of a majority of independent directors, has a charter that sets out its roles and responsibilities. However, there are eight directors within the board which is comprised of half executive directors and half independent directors. Half executive directors within the board decrease the probability that bring an independent judgment to bear on board decision. The chairperson of the board is not an independent director and that the chairperson of nomination committee is not an independent director either. What is more, the chairperson of the nomination committee, John R Kirby, is the same person with the chairperson of the board. All these above enable the chairperson to benefit himself through this convenience and his power.

Moreover, Standards setting out VSL's Code of Conduct by which employees are expected to act are contained in the Employee Guide and formal contracts and letters of employment. In addition, all directors have a written contractual obligation to the company to immediately advise the company all changes to their interests in shares, option and debentures, if any, in the company and its associates for the timely reporting of ant changes to ASX.

Furthermore, In accordance with the charter of VSL's Audit Committee, all members are independent directors with appropriate skills. And that the charter sets out its roles and responsibilities. Besides, chairperson of the committee is not the chairperson of the board.

Though the board is responsible to review the risk management in accordance with its Group Management Policy, to implement the appropriate controls to those risks is the responsibility of management. This indicates that VSL does not have a separate risk management committee. To assist the board in discharging its responsibility related to risk management, the company established a separate internal audit function which is responsible for making recommendations concerning the internal risk and control.

According to ASX Corporate Governance council's recommendations, VSL has established an effective remuneration committee. Moreover, it clearly distinguished the structure of non-executive directors' remuneration from that of executive directors and senior executives. Therefore, we can draw a conclusion that SVL has fair and responsible remuneration.

Overall, to most extent, VSL' Corporate Governance can comply with our practice model. However, it is not hard to recognise the problem that VSL could not structure the board efficiently. It should improve the independence of the board and nomination committee. Moreover, in order to increase the effective of risk management, VSL can set up a risk management committee. Nonetheless, the effectiveness of our best corporate practice model is limited, due to various company cultures. According to our model merely, VSL has satisfy quality of Corporate Governance.

Prime Media Group Limited (PRT) is a broad media operator within Australia and New Zealand. The company provides several media as a free-to-air television, radio broadcasters, and outdoor cinemas as well as develops the new digital and online networks (PRT 2009, p.1). In aspect of corporate governance, the management of PRT has responsibility for the implementation and maintenance of corporate governance policies which are established by the board of directors (PRT 2009, pp.28-33). The board also instructs and monitors management's activities on behalf of shareholders (PRT 2009, p.28).

According to the model adopted from ASX recommendations, PRT (2009, p.28) outlines formal charters concerning about the roles and responsibilities of the board and its management. The board regularly examines senior executives' performance at each meeting (PRT 2009, p.28). Besides, the company has established a remuneration committee to ensure that the remuneration and employment conditions of senior executives and executive directors are structured properly but two of three members of the remuneration committee are likely to be grey directors (PRT 2009, pp.19, 33). As a result, this appears to be instrumental in a lack of independence within the committee.

Even though a majority of PRT's board fails to be independent directors and its chairperson is not an independent director, the structure of the board still encourages company value (PRT 2009, pp.29-30). The board members consist of a variety of skills, qualifications and experience (PRT 2009, pp.14-15). For example, Mr.Ramsey is the chairperson of the board and a substantial shareholder (i.e. he is not an independent director) however the company can gain benefits from his knowledge and experience in television and media industry as well as leadership. Owing to the absence of a nomination committee, each appointment procedure has been recommended from the chairperson and approved by the board (PRT 2009, p.29). It can be argued that its chairperson has an overbearing influence on board and tends to nominate his intimate person on the board. In addition, PRT (2009, p.30) addresses that it is not necessary to establish a formal process to evaluate the performance of the board because of the close and frequent interaction among directors. The board is self-evaluating its performance at general meeting (PRT 2009, p.30). Finding like these, it may take into considerable issues about the independence as well as effectiveness of the board.

Moreover, PRT (2009, pp.30-31) argues that its policies and practices, which are available to all employees on the company intranet, are effective enough in promoting ethical and responsible making decisions. The company also requires its employees regularly training about those topics (PRT 2009, p.31). Thus, PRT has not established and disclosed a separate code of conduct. Although the audit committee comprises independent and non-independent directors equally and its chairperson is not an independent director, its members have been selected to be appropriate persons to enhance financial reporting integrity (PRT 2009, p.31). To illustrate, Mr.Evans is appointed to be the chairperson of the audit committee because of his financial experience and expertise. He is also a member of many subsidiaries' board enabling him a comprehensive monitor.

Furthermore, PRT has no a risk management committee and a separate internal audit function because the company points out that the risk assessment and internal control can be effectively delegated to management (PRT 2009, p.33). Besides, those functions can be undertaken by an external auditor or the audit committee as well as its sub-committee instead (PRT 2009, pp.17-18, 33). However, its external auditor also provides non-audit services (PRT 2009, p.26) which may result in insufficient independence of the auditor. It can be seen that PRT has inadequate risk management as well as internal control systems. Overall, it is probably concluded that the corporate governance quality of the company need to be improved, particularly in term of an independent issue.

David Jones Limited (DJS) is an Australia-based retailer whose primary business is a chain of over 30 premium department stores in most Australian states and territories. It was founded by David Jones--a Welsh merchant in 1838 with its original store opened at George Street Sydney. As a traditional and upscale department store, it stocks some 120 high-end fashion brands as well as other products such as cosmetics, home furnishing and electronics. The company also took steps to reposition its online retail venture, David Jones Online, which offers retail sales of perfume, jewelry, and other gifts from the beginning of 2000s.

In compliance with ASX Corporate Governance Principles and Recommendations, David Jones recognizes the responsibilities of the Board, CEO and the Company Secretary as well as their powers in the company's Board Charter 2008, part 2-'Role and Purpose'. The full Board currently holds not less than eight scheduled meetings per year, which incorporates standing items including the CEO's report, financial reports, strategic matters, governance and compliance. Therefore, the performance of senior executives can be reviewed regularly by comparing the operating results with the previous years' and the planning and assessing their compliance with relevant company policies.

The Company's Board currently comprises seven independent Non-Executive Directors (including the Chairman Robert Savage AO) and two Executive Directors being the CEO and Finance Director. The Board also established Remuneration and Nominations Committee, roles and responsibilities of which are documented in its charter. The Committee is comprised of three independent directors and chaired by a Non-Executive Director other than the Board Chairman. Furthermore, the Board has in place a process to review its performance annually, with core elements summarized as self assessment and interviews from stakeholders, management and independent adviser.

As is stated in the company's CG Statement2008, David Jones has a Code of Ethics and Conduct, which has been provided to all employees as part of their formal orientation process. David Jones' share trading policy prohibits all Directors, officers, senior management, other employees and consultants from dealing in David Jones shares, options or other securities while in possession of unpublished price sensitive information about David Jones.

To assist in the Safeguard integrity in financial reporting, the Board has in place an Audit committee, which comprises five independent Non- Executive Directors including the Chairman and the Board's Chairman sits on the Audit Committee in an ex offcio capacity. The Committee has appropriate financial expertise and all members have a sound knowledge of the industry in which David Jones operates. The specific roles and responsibilities of the Audit Committee are set out in the Committee charter.

Moreover, David Jones designed its risk management program and had the framework in place to identify, assess, monitor and manage risk. The Board established "Risk Manage and Internal Compliance and Controls Systems" with copies available on the company's website. The Audit Committee monitors and reports to the Board on Management's responsiveness to internal Risk Review reports, findings and any recommendations. However, the company has not established a separate risk management committee.

David Jones has established The Remuneration and Nominations Committee which is constituted of three independent Non-Executive directors including the Chairman other the Board Chairman. The Committee also has its charter that sets out the roles and responsibilities and clearly distinguished the structure of non-executive directors' remuneration from that of executive directors and senior executives. Nonetheless, David Jones does not separate the remuneration and nomination with these two functions being implemented by the same Committee.

Harvey Norman Holdings Limited (HVN) is an integrated retail and property company with operations in Australia, New Zealand, Singapore, Malaysia, Ireland and Slovenia. It used to be a single electrical appliance store in Sydney opened by company's chairman Gerry Harvey with retailer Ian Norman in 1961. It went public in October 1987. HVN grants franchises to independent business operators under three leading brand names which are Harvey Norman, Domayne and Joyce Mayne. HVN has also stepped into overseas markets such as New Zealand and Slovenia. Now, the main activities of the company are integrated franchises, retail and property entity (HVN 2009).

According to the history of the company mentioned above, HVN was come from a family business before it went to public. It was found by Harvey and Norman families who have significant influence to the company. In term of good corporate governance, the main issue that should take into consideration is that board of directors, committees and chairpersons should maintain their independence which lead to many measurements in model concerning about independent issue. HVN fails to meet good corporate governance measurements in term of independence of the majority of the board, chairperson of the board, chairperson of nomination and remuneration committees. In addition, the same group members in nomination and remuneration committees may grant these directors too much power which can lead to conflict of interest in term of incentive problem.

However, except the independent issue, HVN complies with all of measurements in the model which can imply that HVN does recognise the importance of good corporate governance. According to company's corporate governance statement, HVN seriously concern about the integrity of financial statements and the effectiveness of risk management and internal control system. Moreover, the formal charters that have separate details in functions and responsibilities between board and management may release the problem of independence in HVN as well as reviewing performance of board and senior executive against proper measurements. These crucial factors could represent that HVN conduct its business in somewhat level of integrity and fairness which eventually lead to the reputation and welcoming from communities.

COMPARE AND CONTRAST

As can be seen from the company analysis above, there are some similarities and differences among four companies [1] . On the one hand, all companies have well-structured a formal charter by clarifying the roles and responsibilities of the board and management. To evaluate management performance, the process is implemented and disclosed properly. Moreover, except PRT, other three companies perform well in promoting making decisions ethically and rationally as well as safeguarding financial reporting's integrity. The first issue of PRT is that though the company has not established a formal code of conduct, it has ethical practices included in the company's policies which are provided to all employees. The second issue is that PRT's board has a number of independent and non-independent directors equally and its chairperson is not an independent director. However, as a mixed of financial and industrial experts, the companies can still safe the integrity in financial reporting.

On the other hand,

IMPROVEMENTS

To encourage good corporate governance structure of each company, the improvements should be implemented or established as follows:

VRL's board and its nomination committee structure seem to be a substantial issue. The company should enhance their independence by adding more independent directors to be a majority and possibly appointing independent directors to be the chair. Although the company has not established a risk management committee, its internal control and risk management processes are effective enough to recognise and manage risks. Except those issues, the company has a desirable corporate governance structure.

PRT has several corporate governance issues. To begin with, a significant issue concerns about independence among the board. The company therefore should increase numbers of independent directors sitting on the board and the audit and remuneration committees. However, the independence of members can be traded off for their experience and expertise As long as major members on the board and its committee are independent, these structures can create company value as well as enhance integrity in financial reporting. In addition, the company should have a nomination committee, which consists of independent directors as a majority and possibly its chairperson should be an independent director, to reduce the power of the board's chairperson and to guarantee the appearance of the board's independence. The formal process to evaluate the board and its committees' performance should be established as well. Another issue is to encourage risk recognition and management procedures, PRT should establish a separate internal audit (a sub-committee for risk management may be enough to manage risks as long as the company has a separate internal audit function).

DJS appears to be a well corporate governance structure because it complies with numerous ASX recommendations. Even if without a risk management committee, the company still has sufficient internal control and risk management processes. Therefore, only one thing that the company should improve is a majority of remuneration committee and nomination committee should be different person in order not to give the directors too much power by sitting on board in both remuneration and nomination committee.

HV

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