Corporate Governance and Business Ethics Report

Executive Summary

The purpose of the report is to study the notion of corporate governance and its connection with business ethics. The definitions of corporate governance and corporate governance principles are discussed; the role of business ethics in developing corporate governance principles is outlined. The Commonwealth Bank’s corporate governance principles are studied from the perspective of business ethics.

The study includes observation of sources devoted to corporate governance and business ethics, analysis of ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations, studying of The Commonwealth Bank’s Annual Report 2010. The Bank’s corporate governance principles are compared with the principles offered by the ASX Corporate Governance Council.

Corporate governance is a set of rules and relationships that provides a company with the guidelines on fair and effective decision-making and operation. The notion of corporate governance is connected with the notion of business ethics.

The statements of a company’s corporate governance are aimed at operating within the principles of business ethics. ASX Corporate Governance Council offers an approach to a company’s corporate governance that is oriented at making its operation ethical. The Commonwealth Bank’s corporate governance approach corresponds to the Principles and Recommendations offered by the ASX Corporate Governance Council.

Today paying attention to corporate governance becomes crucial for companies. A company should develop corporate governance principles that correspond to its objectives and peculiarities of its operation. The corporate governance principles should be based on the principles of business ethics. A company should not only develop corporate governance principles, but also bring them into life.

Introduction

Discussion of the notion of corporate governance is becoming more and more active; failures and successes of large companies demonstrate that this issue is today of big significance. The term is often associated with corporate ethics, which makes it reasonable to study the connection between these two notions.

The focus of this report is the essence of corporate governance and its relation to business ethics. We will outline the definition of corporate governance and discuss the role of business ethics in forming corporate governance principles. Then we will study the Commonwealth Bank’s corporate governance principles from the perspective of business ethics.

Defining Corporate Governance

There are different approaches to defining the notion of corporate governance. If we generalize these approaches, we may state that corporate governance is neither an objective nor an instrument a company uses in order to reach its objectives; it is a framework within which a company sets objectives and develops the ways to reach them. This framework includes rules and relationships that define how a company sets and achieves its objectives, manages risks and operates (Bonn & Fisher, 2005, p.731).

Corporate governance serves as a set of guidelines that directs a company’s decision making. Despite the notion of corporate governance has taken its concrete shape, corporate governance practices themselves tend to evolve depending on environment and circumstances.

Developing and Implementing Corporate Governance Principles

A company’s corporate government is defined through a set of corporate governance principles that reflect an approach a company has chosen in it. Corporate government principles reflect the essence of a company’s corporate government and the steps it plans to take in order to follow it (ASX Corporate Governance Council, 2010, p.5).

While developing effective corporate governance approach is a responsible and complicated task, actual implementation of its principles is also crucial and requires managers’ particular attention.

First of all, a company should outline the fields and cases where the corporate governance principles should be applied; it should also make sure the employees are aware and understand the corporate governance principles; finally, a company has to monitor and assess implementation of the corporate governance principles, and take actions in case it requires improvement.

Corporate Governance and Business Ethics

Developing corporate governance principles on the basis of business ethics principles provides a company with the guidelines of ethical behavior and gives it opportunity not only to have an ethics code, but to actually follow it. Business and ethics are the inseparable notions: while economy produces goods to satisfy customers’ needs, ethics helps it to take a right orientation in its operation (Sison, 2008, p.57), which is also consonant with the function of corporate governance.

Besides an owner’s or shareholders’ desires, corporate governance should be in accordance with the basic rules existing in the society, such as laws and local customs, as well as with the society’s interests (Bonn & Fisher, 2005, p.730). That is why corporate ethics principles should be developed according to the principles of business ethics.

While importance of ethics for a company’s activity is beyond any doubt, the actual implementation of its principles may be difficult. A company may have an ethic code, but its principles may be not brought into life: managers have no opportunity to implement specific “ethical programs” or see no need in it.

The Federal Sentencing Guidelines for Organizations (FSGO) that are devoted to companies’ ethics programs are also supplemented with the recommendations on their implementation, monitoring, assessment and improvement (Ostrosky et al, 2009, p.70-72).

Introduction of ethical principles into corporate governance principles brings business ethics to life and make it work: business ethics becomes not a set of “useless documents”, but a working mechanism that helps a company operate effectively and successfully. In turn, a company’s corporate governance principles get a correct, “ethical” direction.

ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations

The ASX Corporate Governance Council (2010, pp.10-12) offers eight corporate government principles that a company may follow. These principles are: “Lay solid foundations for management and oversight”; “Structure the board to add value”; “Promote ethical and responsible decision-making”; “Safeguard integrity in financial reporting”; “Make timely and balanced disclosure”; “Respect the rights of shareholders”; “Recognize and manage risk”; “Remunerate fairly and responsibly”. These principles outline the approach a company may follow in its corporate governance and are not the “prescriptions”, but rather the “guidelines” (ASX Corporate Governance Council, 2010, p.5).

The task of each company is to adapt the offered principles to its needs and specific. Together with the corporate government principles, the ASX Corporate Governance Council (ASX Corporate Governance Council, 2010, pp.13-39) provides the recommendations on their implementation and monitoring.

ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations and Business Ethics

The Corporate Governance Principles and Recommendations contain the elements of business ethics that define a company’s approach to its operation, its actions towards the society, clients, shareholders et al. The Principles are also aimed at clarifying the standards of behavior and decision making for CEO’s and managers (Bonn & Fisher, 2005, p.731). The Principles provide guidelines on such issues as conflicts of interests, compliance with laws and regulations, reporting on misuse of assets et al (Bonn & Fisher, 2005, p.732).

Each of the Corporate Governance Principles emphasizes ethical aspects: for example, according to the Principles 1 and 2 (ASX Corporate Governance Council, 2010, p.10), companies are recommended to “disclose the process of evaluating the performance” of the board and senior executives.

The Principle 3 (ASX Corporate Governance Council, 2010, p.10) implies that ethical and responsible approach to decision-making should be promoted in a company. The Principle 5 (ASX Corporate Governance Council, 2010, p.11) states that companies should disclose the material matters timely and fairly. The Principle 6 (ASX Corporate Governance Council, 2010, p.11) advances respect to a company’s shareholders, their rights and interests.

Besides, according to the Principle 7 (ASX Corporate Governance Council, 2010, p.12), a company’s policy in recognising and managing risks should be disclosed. The Principle 8 (ASX Corporate Governance Council, 2010, p.12) emphasizes the importance of fair and responsible remuneration.

Commonwealth Bank’s Corporate Governance Statement

Considering the Commonwealth Bank’s motto, which is “Determined to be better than we’ve ever been” (Commonwealth Bank. Annual Report, 2010, p.1), we see that the Bank takes effort to improve its operation and performance in all fields including corporate governance.

In its annual report (Commonwealth Bank. Annual Report, 2010, pp.58-62), the Bank outlines the corporate governance principles that it follows and advances. The Report touches upon such issues as selection of directors, education, policy, ethical standards, remuneration, audit, disclosure et al.

Commonwealth Bank’s Corporate Governance and ASX Corporate Governance Council’s Corporate Governance Principles

There is the evident correspondence between the Bank’s corporate governance approach and ASX Corporate Governance Council’s Corporate Governance Principles: firstly, the questions embraced by the Annual Report correspond to the issues discussed in the Principles; secondly, the Bank’s approach to great extent coincides with that offered by the ASX Corporate Governance Council.

For example, according to the Bank’s Constitution, the Chief Executive Officer is not eligible to the position of the Chairman (Commonwealth Bank. Annual Report, 2010, p.58), which corresponds to the Recommendation 2.1 (ASX Corporate Governance Council, 2010, p.10).

The Bank’s Directors are to disclose any information that relates to the conflict of interests between the Directors and the Board (Commonwealth Bank. Annual Report, 2010, p.59), which corresponds to the disclosure policies outlined in (ASX Corporate Governance Council, 2010).

Besides, according to the Recommendations 4.1 and 4.2 (ASX Corporate Governance Council, 2010, p.11), the Bank establishes the audit committee that will help to control accounting policies, accounting requirements et al and review the effectiveness of financial reporting (Commonwealth Bank. Annual Report, 2010, p.59).

The responsibilities of the Board and the Directors (Commonwealth Bank. Annual Report, 2010, p.60) are distributed according to the Principle 7 (ASX Corporate Governance Council, 2010, p.12); the Risk Committee is established (Commonwealth Bank. Annual Report, 2010, p.60) to implement the statements of the Principles.

Moreover, the Banks Continuous Disclosure Policy (Commonwealth Bank. Annual Report, 2010, p.61) is aimed at implementation of the principles of disclosure promoted by the ASX Corporate Governance Council. The Bank’s approach to communication with shareholders (Commonwealth Bank. Annual Report, 2010, p.61) also contributes to it.

Finally, the Bank has developed the Code of Conduct and a set of ethical policies (Commonwealth Bank. Annual Report, 2010, p.62) to maintain ethical decision-making in the company as recommended by the Principle 3 (ASX Corporate Governance Council, 2010, pp.10-11).

Thus, having taken the ASX Corporate Governance Council’s Principles and Recommendations as the basis, the Bank has developed the detailed corporate governance policy that corresponds to its objectives and operation and helps to maintain high standards in ethics of operation and decision-making.

Conclusion

Corporate governance is the framework that helps a company define and follow correct direction in its decision-making and different fields of its operation. The notion of corporate governance is closely connected with that of business ethics; the corporate governance principles of a company should be based on the ethics principles.

An example of approach to building the corporate governance is provided in ASX Corporate Governance Council’s Principles and Recommendations. Based on this Principles and Recommendations, the Commonwealth Bank has developed its own approach to corporate governance, which is reflected in its Annual Report 2010.

Recommendations

Paying attention to corporate governance is crucial for any company that operates nowadays. A company should develop its own approach to corporate governance based on the existing recommendations and adapt it to the realm of its operation.

A company’s corporate governance approach should correspond to its interests, as well as to the interests of its owners, shareholders and the whole society; it should correspond to the principles of business ethics. Besides development of a corporate governance approach, a company should take actions to bring its principles into life.

References

ASX Corporate Governance Council. 2010, ‘Corporate Governance Principles and Recommendations with 2010 Amendments’, 2nd ed, ASX.Net.Au. Web.

Bonn, I. & Fisher, J. 2005, ‘Corporate Governance and Business Ethics: Insights form the Strategic Planning Experience’, Corporate Governance: An International Review, vol. 13, no. 6, pp.730-738.

Commonwealth Bank. 2010, ‘Annual Report 2010’, Commbank.Com. Web.

Ostrosky, J. A. et al. 2009, ‘Assessing Elements of Corporate Governance: A Suggested Approach’, The CPA Journal, February 2009, pp.70-72.