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Index

Keyword
4E's - Entrepreneurship
Abuse of market power
Accountability

AccountAbility AA1000

Accounting roles
Agency theory
Allocating customers
Altruism
American Accounting
Association Model (AAA)
Anglo-American Corporation law

Anglo-American Model/Market
based systems
ASX Principles and
recommendations
ASX recommendations
Attributes of profession
Audit & related regulation
Bid rigging
Board appointment
Board remuneration
Bonding costs
Bribery
Capability considerations
Carbon Disclosure Project

Career guidance system


Cartel conduct
Caveat emptor
Charities and NFP sectors
Churning
Civil case
Clawback
Climate change
Committees of the board
Common threats to
independence
Competition policy

Compiled APES 110


Conceptual framework
Confidentiality
Consumer protection
Co-regulation
Corp governance components
Corporate social responsibility
(CSR)
Corporate stakeholders
Criminal case
CSR Reporting

Current reporting practice

Decision making models


Decoupling
Deontological theories
Departures
De-staggering
Disqualification
Diversity

Dow Jones SI

Economic sustainability
Egoism
Emissions reduction fund
Employee ethical obligations
Enlightened self-interest

Environmental management
accounting
Environmental reporting
Environmental sustainability
Equator Principles
Ethical conflict resolution
Ethical decision making
EU emissions trading scheme
Exclusive dealing
Expanding ethics
Externalities

Fair pay & working conditions


Family & leave entitlements
Family owned business, SME

Fundraising documents
GFC
GHG Protocol
Global Reporting Initiative

Governance
Governance failures, improv
Governance issues
Governance success factors

Ideals of accounting
Impact investment

Improving corporate governance

Indepencence of director
Information and the media
Insider trading

Institutional investors

Institutional theory
Integrated report
Integrated reporting
Integrated reporting
Integrated thinking
Integrity
International perspectives on
corporate governance
Justice theory
Laws leading to penalties

Legal compliance & governance

Legal system on the corp


Legitimacy theory
Levels of Emissions
Limitations
Linking to ethical theories
Managerial stakeholder theory

Market control view


Market manipulation
Market-based systems

Measurement
Mergers and acquisitions
Monitoring cost
Moral agency
National Pollutant Inventory
Natural capital
Natural capital accounting

NGER act
NOCLAR
Nomination committee
Normative stakeholder theory
Normative theories

Not for profit

Not-for-profit organisations
Objectivity
Occupational health & safety
OECD Guidelines for
Multinational Enterprises
OECD Principles of Corporate
Governance
Operational issues
Organisational legitimacy

Output restrictions
PAIB desc. Of activities
Part B of the code
Part C of the code
Phoenix companies

Ponzi scheme
Pools
Predatory pricing
Price-fixing
Primacy perspective
Principles-based approach
Private practice roles
Profession
Profession..key attributes
Professional behaviour
Professional competence & due
care
Professional Ethics
Professional judgment

Public interest
Public practice roles
Public sector
Public sector enterprises
Puffery
Quality control
Ratings agencies
Redress
Reduced credibility...issues
Regulators
Relationship-based systems
Removal
Remuneration
Resale price maintenance

Residual loss
Responsible investment

Restoring credibility
Rights theory
Rogue trading
Role of accounting
Role of markets
Role of the Board
Role of the CEO
Rules-based approach
Runs

Safe harbor rule


Safeguards
Self-regulation
Shareholder representations
Shareholder wealth

SME accountants
Social audit

Social contract
Social contract perspective
Social impact of acctg

Social procurement
Social sustainability

Social/environmental
performance
Socially responsible investments

Soft dollars
Stakeholder concept
Stewardship theory
Sustainability

Sustainability Accounting
Standards Board
Sustainable investment

Teleological theories
Thematic investment

Threats
Trade and labour unions
Traditional view
Tricker model
Trucost
Two strikes rule
Two-tier boards
Types of complaint
UK Companies act
UK Financial Reporting Council
Corporate Governance Code

UK Governance code
UN Global Compact
Unconscionable conduct
Utilitarianism
Meaning Page #
Objectivity is at most risk when focusing too much on entrepreneurship 22
s. 46 of the Competition and Consumer Act 2010 (Cwlth) Misuse of Market Power 315
the duty to provide a report, or an account, of the actions and decisions made about those 397
areas of activity for which an organisation is deemed to be responsible
promotes itself as a global organisation that provides solutions to the major challenges 438

key professional relationships, factors that influence...type of acctg work 39


views corporate governance through the relationship between agents and principals 175
Bid-rigging is where competitors who are asked to tender or bid for work collude 319
action that brings no benefit to an individual and may even be at their own expense; 19
primary stakeholders should be identified as well as the ethical conflict/impact on decision 138
made to each stakeholder
directors must act in the best interests of the corporation as a whole. This means corporations 206
are run according to corporate law duties in relation to shareholders
USA, UK, Australia, New Zealand; India (p.243) 234

There are eight broad principles, which are supported by 29 detailed recommendations 225

listed entity should disclose the names of directors 188


more detailed definition p. 27-33 27
role of the independent external auditor and the regulations that surround audit 306
competitors who are asked to tender or bid for work collude 319
law does not specify any qualifications or capabilities 285
remuneration paid in comparison with the pay of average wage and salary earners 293
by the agent to demonstrate to the principal that they are goal congruent 176
e.g. facilitation payments; see page 352 352
TSKE, SKE 54
seeks information on the business risks and opportunities presented by climate change 436

technical, business, personal effectiveness, leadership skills 56


involves the existence of a ‘cartel provision’ in a contract 318
let the buyer beware 331
governance problem of responding to a growing demand with limited funds 338
placing of buy/sell orders for shares; increase market turnover 349
balance of probabilities; lead to damages, injunctions, pecuniary penalties 309
getting back remuneration previously given to directors upon poor performance 293
carbon taxes and emission-trading schemes 399
risk management, nomination, remuneration, audit 200
See Table 2.5 117

competitive markets will have greater ability than other non- competitive options to efficiently 312
produce goods and services at prices that provide value to customers
Code of Ethics 92
identify, evaluate and respond to any identified threat 98
Accountants must also refrain from using confidential information 97
designed to work for consumers (and the economy as a whole) 331
E.g. AASB & AUASB reports to FRC 25
corporations, shareholders, the board, CEO, chair, directors 178
companies integrate social and environmental concerns in their business operations and in 398
their interaction with their stakeholders on a voluntary basis
(check interest & risk table) 207
beyond reasonable doubt; lead to fines, jail sentence 309
process whereby an organisation publicly discloses information about its interactions with, 391
and impact on, the various societies and environments in which it operates
the high rates of [CSR] reporting in all regions suggest it is now standard business practice 449

Philosophical model & AAA model 135


gaps develop between formalised policies and the actual behaviour of organisations 415
motive is far more important than the action itself or its consequences 88
shareholders must know the reason for resignation; director should make it known 287
stop the staggering sequence; do it all at once 286
legal wrongdoing; civil wrongs, financial market misconduct; multiple insolvencies 290
includes, but is not limited to, an individual’s race, ethnicity, gender, sexual orientation... 291

provides a global sustainability benchmark that tracks the share performance of the world’s 442
leading companies
long term viability of business, stability of economic system, transparency 394
it is right for a person to pursue an action in their own self interest 85
to provide incentives for businesses across the economy to reduce emissions 428
loyalty - regular attendance, confidentiality 303
persons who act to further the interests of others, ultimately serve their own self-interest. do 22
well by doing good
focus on both physical information on the flow of energy, water, materials, and wastes, as well 446
as monetary information on related costs, earnings and savings
accounts for how corporations draw from and affect the natural environment 418
climate change, waste, pollution, biodiversity 392
voluntary set of standards for determining managing social and environmental risk 439
the member must determine the appropriate course of action 105
reaching a responsible decision after considering the general ethical beliefs 128
key tool for reducing industrial greenhouse gas emissions cost effectively 430
to deal only with certain customers or geographic regions 321
Poor ethics, combined with unlawful behaviour, can damage corporations dramatically 362
an impact that an entity has on parties that are external to the organisation where such 408
external parties did not agree or take part in the actions causing, or the decisions leading to,
the cost or benefit
their pay and working conditions can be at the mercy of their employer 302
Australia and the United Kingdom, four weeks of leave is the standard legal minimum 303
SMEs are often family-owned; longer- term perspective with a focus on building the firm 245

if information in documents are misleading, omitted significant issues 350


Global financial crisis 400
represents a partnership between the World Resources Institute 440
The GRI also provides sector guidance in the form of industry-specific guidance documents 432

responsibilities of the board of directors towards investors and other stakeholders 171
poor strategic decision, greed, overexpansion, dominant CEO, internal control, boards 252
there are many pressures exerted on the public sector 337
the importance of appropriate capabilities, the role of ethics and the fundamental nature of 285
boards and directors
4E's Expertise Education Ethics Entrprenuership 22
placing capital to actively create a social or environmental benefit. This may require some 460
financial trade-off
Risk management should enable a company to maximise opportunities and minimise losses by 255
assessing the different types of risk and improving safety, quality and business

free from any influence, free from any connections 187


Information influences the way in which participants and the market itself behaves 343
1) information is not available to investors 2) person buys/sells using that information; Section 346
1042A of the Corporations Act 2001
large institutional investors pool their capabilities in order to develop ‘industry standards 359

looks not only at individual organisations, but at organisational fields 414


concise communication about an org strategy lead to creation of value 399
process founded on integrated thinking that results in a periodic integrated report 399
It is a response to the limitations of traditional financial reporting 434
alignment of the organisation’s strategic focus with its performance 399
element of character and is essential to the maintenance of public trust 95
Poor governance (e.g. GFC, Lehman Brothers) Globalisation (e.g. Australian companies 212
controlled by USA, China, foreign companies)
justice theory is concerned with issues of fairness and equality 89
Criminal sanctions can take many forms, but most commonly will be in the form of fines 309

system designed to assess and reduce an organisation’s risk of breaking the law 324

many laws originated through the court system and became legislation over time 308
an organisation will take action to manage community perceptions in order to survive 414
Scope 1 to 3 456
social, environmental & economic reporting 417
Enlightened self-interest & stakeholder theories 410
the underlying purpose of the interaction is self-interest 413

accountants are self-interested, less concerned w/ public, create monopoly 26


false impression of trading in securities to enhance the perceive value in shares 348
disclosure based, as the numerous investors depend on access to a reliable and adequate flow 234
of information to make informed investment decisions
collecting, analysing and assigning quantitative values to an issue 416
reduce the number of competitors in a market for goods and services 317
costs relating to annual reporting and external auditing 176
Accountants are moral agents who are aware of the implications of their actions 91
enables the public to find out, what businesses are discharging into the environment 428
It includes air, water, land, soil, geology and biodiversity 398
It provides us with the resources that make life possible, and underpins all social, economic 461
and financial activities
National Greenhouse and Energy Reporting act 426
‘Responding to Non-Compliance with Laws and Regulations’ (NOCLAR) p.92,108,123 92, 108
preferable to have executivee directors involved 200
all stakeholders for an organisation have inherent worth 412
principles that distinguish right from wrong by establishing a norm or standard of correct 84
behavior that should be followed at all times
ensure they are sustainable, demonstrate positive social impact and continue to meet their 47
objectives
effectiveness in achieving goals will be crucial for a not-for-profit organisation 246
impartial, honest and free from conflicts of interest 95
Workplaces often create situations that can cause significant risks to employees. 302
The OECD Guidelines for Multinational Enterprises are a comprehensive set of government- 436
backed recommendations on responsible business conduct
‘good practice guidelines’ and are not written for companies or directors 217

boards cannot simply leave all the responsibility to management 301


there is a social contract between the organisation and the society in which it operates 413

competitors ‘agree’ to apply restrictions on output that will cause shortages in markets 319
value, informaion, measurement, communication, costing, control, risk 44
provides members in public practice with guidance 105
A Member in Business may be a salaried employee, a partner, Director 119
deliberate misuse of the legal protections related to limited liability, meaning that the 356
corporation owes money and the shareholder
Like a pyramid scheme 355
organised groups, buy particular shares, sell as prices rise, single manager to trade 349
elimination of a competitor by implementing lower prices that can't be matched 312
Price-fixing is where competitors collude to create common prices 319
Investors, by way of their investment, are the group risking their own capital 406
broad principles or recommendations on corporate governance are specified 205
board member, finance director 42
prolonged training and a formal education 23
body of knowledge education process ideal of service... 24
comply with relevant laws and regulations and avoid any conduct that bring discredit 97
Professional competence and due care obligations 1) maintain professional knowledge and 96
skill 2) to act diligently in accordance with applicable and professional standards
application of ethical principles or frameworks by professionals 78
Examples: 1) judge values & make judgment re values 2) solve unstructured problems 3) 32
choose outcome that best meets the needs of society (rather than needs of client)
the sum of the benefits that citizens receive provided by the accountancy profession 93
assurance & audit... 41
boards should have authority to carry out their responsibilities 46
implement programs cost-effectively in accordance with government legislation 248
Extreme exaggeration 334
standard setting, practice reviews 35
Fitch, Standard and Poor’s, and Moody’s 344
the ways in which wrongdoers can be required to correct the harm they have caused 311
creative acccounting, poor audit quality, lack of auditor independence, distortion 50
the purpose of regulation is to support free and open markets 204
emphasise cooperative relationships and consensus 236
can only be done by a shareholders vote at a general meeting 287
the extent to which high executive earnings are linked to performance 253
when a supplier stipulates that the goods it provides must only be resold at or above a certain 322
minimum price
the agent will inevitably make decisions not consistent with the principal’s interest 176
negative screening—avoiding investment in industries that have a negative impact on society 460

Establishment of the FR, backed by law, code of ethics 53


Rights - a good or correct decision is one that respects the rights of others 88
an employee engages in unathorised trading 354
Accounting has emerged as a critical component of addressing this challenge 462
‘stock market’ and ‘securities market’ are used to describe them 342
avoid conflicts of interest, act in the corp best interest, proper purpose of power 190
ongoing operations of the organisation 186
a rules-based approach is more detailed and prescriptive 206
market participants work together...create rumors, buy shares, attract new buyers in the 349
market e.g internet discussion boards
business judgement rule 193
1) Institutional safeguards 2) safeguards particular to work situations 100
substantial degree of independence/autonomy 24
each shareholder has a guaranteed right to attend and vote at the general meeting 358
other incentives tied to maximising the value of the organisation and shareholder wealth 401

more detailed work, fewer staff, wider areas, business decision activities 43
representing the process an organisation undertakes to investigate whether it is perceived 442

implied agreement between an organisation and society 400


the duties owed by the organisation should not just be to shareholders 406
activities of accountants have a decisive impact on the social functioning of individuals, 48
groups and entities
requires public bodies to consider the social value created in procurement contracts 429
child labor, corruption, anti-competitive behavior, bribery, unfair use of power, supply chain 393
management
Corporate governance mechanisms aimed at improving social and environmental performance 444
- create and implement an environmental policy
explicitly acknowledges the relevance to the investor of environmental, social and governance 459
factors, and of the long-term health and stability of the market as a whole
benefits received from a 3rd party for sale/recommendation of certain products 112
an organisation may be viewed as being involved in contracts 206
‘stewards’ carefully look after the resources they have been trusted with 174
the needs of the current generations must be met without compromising the ability of future 398
generations to meet their needs
US not-for-profit organisation whose mission is to develop and disseminate sustainability 441
accounting standards that help US publicly listed companies
investments are selected both for their ability to generate economic returns and to perform 460
better on sustainability indicators compared with their peers in the same industry

based solely on the results or consequences 84


focuses on one issue or a cluster of issues where commercial growth opportunities are created 460
from social or environmental needs
a threat may affect compliance with more than one fundamental principl 99
commonly seek to achieve outcomes through collective bargaining with employers 305
focused on self serving society, acts for public interest 26
board's responsibilities: monitoring, provide accountability... 198
‘environmental impact across organisations, supply chains and investment portfolios 441
spill the board (more than 50%) after successful strikes 288
Germany, Japan, China, France (optional) 237
professional discipline 37
A director of a company must act, to promote the success of the company 407
The underlying rule in the Anglo-American approach to company law is that the key duty of 223
directors is to act for proper purposes and to act in good faith in the interests of the company
as a whole
guidelines on determining independence 187
principle-based framework for businesses, with a set of 10 principles 437
unfair or unfairly imposed or created contracts 335
the greatest benefit or pleasure for the greatest number of people 86
Objectives
After completing this module, you should be able to:
1 • describe the nature and attributes of a profession;
2 • explain the co-regulatory processes of the accounting profession;
3 • differentiate the roles, relationships and activities of accountants;
4 • evaluate the challenges faced by the accounting profession in the global context; and
5 • explain the importance of soft and technical skills required of accountants.

Page #Description/Explanation
19 Accounting profession will retain integrity by serving wider public interest, through disclosure of
accurate financial information, provide objective, accurate and appropriate financial and
accounting related advice
19 Altruism - action that brings no benefit to an individual and may even be at their own expense;
19 Rather than altruism, professional are motivated by self-interest/enlightened self-interest

20 Responsible decision making principles: Governance, Corporate accountability & Ethics

21 Westpac - how it improved governance & most statements


22 Enlightened self-interest - it is possible to be commited to the public interest and yet possess a
degree of self-interest; a careful balance must be maintained
22 Ideals of accounting (4 E's) by Carnegie & Napier: Expertise, Education, Ethics, Entrepreneurship
(too much can compromise objectivity & integrity)
22 The concept of self-interest described by Lee - accounting in return of monopoly position…
23 Profession - prolonged training and a formal education
24 Key attributes of a profession (chart #1) : 1) body of knowledge 2) education process 3) ideal of
service 4)autonomy & independence 5) code of ethics 6) unique ethos or culture 7)professional
judgment 8) governing body
24 Occupation vs profession - greater status & wealth; specialised skills, monopoly control, "service
ideal"; extensive educational programs (pursuit of excellence)
24 Self regulation - substantial degree of independence/autonomy. Professional bodies set the
education requirements, professional ethical stds and disciplinary process - "Internal"
25 Co-regulation due to corporate failures & poor conduct; involvement of FRC
26 Traditional view - focused on serving society, acts for public interest
26 Market control view- accountants are self-interested and less concerned w/ the broader public
interest; create monopoly, greater financial returns e.g. Enron, HIH
27 Public trust in a profession is vital; consequences can be severe
27 Discussed in a more detail way
27 Systematic body of knowledge - the entire range of skills and expertise should relate to, and be
supported by a well-founded body of knowledge
28 The Int'l Federation of Accountants (IFAC) provide a framework for professional bodies to assure
the quality of their education programmes

28 Extensive education process - accumulate & maintain knowledge & experience through
mentoring, professional devt and cpe

28 Ideal of service to the community - present info in a reliable, comparable form, monitoring past
performance, aid efficient decision making ....monopoly as they see fit as long as power is used in
the public interest - Willmott
28 APES 110 Code of ethics - 3 perspectives: well-being of society, pursuit of excellence & community
service
28 Well being of society - attesting info that ensures efficient and orderly functioning of business

28 Pursuit of excellence - maintaining and updating knowledge & skills

28 Community service - skills free of charge to the community, same level of responsibility

29 High degree of autonomy & independence - dependent on the consistent demonstration of


professional & ethical standards

30 Co-regulatory approach - AASB & AUASB reports to FRC; they no longer have complete regulatory
control
31 Regulatory structures of CPAA - system of accreditation, membership qualification, cpe, code of
ethics, disciplinary process
31 Code of ethics for members - APES 110 Code of Ethics, APES statements & Constitution of CPAA,
relevant legislation
31 Challenges - different cultures & nations, different behaviors are seen as acceptable or
unacceptable
32 ethos of a profession consists of: values, norms and symbols

32 CPAA members - our ethos has the word 'integrity' as its foundation

32 Professional judgment - single most important attribute that differentiates professionals from non-
professionals - Becker

32 Professional judgment - diagnose & solce complex, unstructures value-based problems,


awareness of uncertainty, complexity, instability

32 Key judgments auditors must make - identify those charged w/ governance, reasonable or limited
assurance, budget for audit, audit plan, evaluation of results

33 Accounting is a profession constantly involving exercise of judgment, w/o it accounting becomes


nothing more than a book of rules for compliance

33 Governing body - speak for the profession as a whole, ensure standard of education & cpe,
monitoring high standards of professional conduct, high standards of performance & conformance

34 Corporate Law Economic Reform Program (CLERP) - reconstituted AUASB as a body corporate;
auditors have a legal duty to comply with auditing standards issued by AUASB
34 APESB - an independent ethical standards board to review and set the code of ethics and
professional standards
35 APESB composition - techinical board (8 members, 2 CPAA, others public, corporate, audit) &
secretariat
35 Roles of APESB - review the professional & ethical standards on a yearly cycle, implementation of
new standards, matter to the secretariat for research, comment on exposure drafts, monitor
effectiveness of standards
35 Quality asssurance process - standard setting, conformity with standards, practice reviews,
accounting firm regulation
36 APES 320 Quality Control for Firms - leadership responsibilities, ethical requirements, acceptance
and continuance of client relationship, human resources, engagement performance, monitoring

37 Members often face personal financial pressures that threaten their integrity and test their
judgment. No profession is totally free of unscrupulous members, CPAA has a formal process for
complaints
37 Types of complaint - admission by improper means, breaching the constitution, dishonorable
practice, failing due care, competence, becoming insolvent, acted dishonestly in civil proceedings

38 The complainant should first attempt to resolve the matter directly with the CPAA member
39 Key professional relationships of accountants- employers, clients, employees, peers

39 Factors influence how an individual will behave in their workplace - personal moral devt, family
influence, organisation, laws & regulaton, professional aspects
40 Types of accounting work environment (please see chart)

41 Assurance & audit - financial stmt attestation, asses procedures & controls; financial management
- performance mgmt to corp governance, traditional financial controls; taxation - individual
taxation, FBT, GST, CGT; forensic accounting - legal issues including fraud, disputes & litigation;
insolvency; internal audit - enhancing risk mgmt, control & governance process; business advising
- achieve value, business re-engineering, restructuring, takeovers mergers

42 Board member, finance director - strategic direction, financial accountant - gen purpose FS,
supervise accountants, treasury accountant - cash flow, risk manager, strategic management
accountant - budgets & forecasts; internal auditor - internal controls; human resources -
remuneration; company secretary - regulatory compliance

43 SME accountants- more detailed work, fewer staff, wider areas, business decision activities

44 Value, information, measurement, communication, costing, control, risk (please see chart)

45 Financial adviser - significant risk beyond normal, must be fully aware of risk involved, have a
sense of objectivity
45 There is a real opportunity in giving out advice to SME for growth
46 Govt agencies require economic, finance, accounting and audit staff for their operations; more
power compared to private sector
47 Not for profit - ensure they are sustainable, demonstrate positive social impact and continue to
meet their objectives
48 Results of accounting information help stakeholders make decisions w/ significant social
consequences; support managers in decision making; if the reporting is right, then social impact
will be good
49 High levels of depreciation - lower profit & asset levels short term, high in long term, lead to
hesitant lenders, frustrated owners
49 Low levels of depreciation - short term high profit & assets; long term lower profit, increase
writeoff; lender & owner confidence
49 Conclusion: activities of accountants have a decisive impact on the social functioning of
individuals, groups and entities
50 Creative accounting, poor audit quality, lack of auditor independence, financial accounting
distortions
50 Creative accounting - information do not clearly represent reality. E.g. capitalisation of interest,
related party transactions, mining exploration expense
51 Poor audit quality - inability of auditors to identify a company in distress

51 Lack of auditor independence - their income depend on the survival of the audit target, lose
objectivity e.g. large audit fees received
51 Financial accounting distortion - interpretations, accounting rules can trigger distress, complex
financial instruments, unnecessary foreclosure, loopholes
53 Establishment of the FR, accounting standards are backed by law, auditors must apply the code of
ethics, FRC responsible for auditor independence, enhanced regulation, adoption of international
standards
54 Capability considerations - business leadership capabilities, technical skills knowledge and
experience, soft skills, knowledge and experience
55 TSKE - general accounting activities: financial reporting, taxation, finance & financial analysis,
management accounting, relevant IT, understanding of regulations
55 SKE - people & related issues - listen, understand complex issues, communicate effectively,
persuasive skills, interpersonal skills, time management, meet deadlines, build & improve
capabilities
56 CPAA has a career guidance system - assist members to evaluate their professional devt. Based on:
technical, business, personal effectiveness, leadership skills
Header

Accountants as members of a
profession
Public interest or self interest

Public interest or self interest

Responsible decision-making
Westpac governance e.g.

Enlightened self interest

Ideals of accounting
Ideals of accounting
What is a profession

Attrbutes of a profession

What is a profession

Self-regulation
Co-regulation
Traditional view

Market control view


Trusts and professions
Attrbutes of a profession

Attrbutes of a profession
Attrbutes of a profession
-Systematic body of
knowledge

Attrbutes of a profession -
extensive education process

Attrbutes of a profession -
Ideal of service
Attrbutes of a profession -
Ideal of service
Attrbutes of a profession -
Ideal of service
Attrbutes of a profession -
Ideal of service
Attrbutes of a profession -
Ideal of service

Attrbutes of a profession -
High degree of autonomy &
independence

Co-regulation

Co-regulation
Attrbutes of a profession -
Code of ethics for members
Attrbutes of a profession -
Code of ethics for members

Attrbutes of a profession -
distinctive ethos and culture

Attrbutes of a profession -
distinctive ethos and culture
Attrbutes of a profession -
application of professional
judgment
Attrbutes of a profession -
application of professional
judgment
Attrbutes of a profession -
application of professional
judgment
Attrbutes of a profession -
application of professional
judgment

Attrbutes of a profession -
existence of a governing body

Regulatory process

Regulatory process

Regulatory process
Regulatory process

Quality control

Quality control

Professional discipline

Professional discipline
Professional discipline
Accounting roles, activities
relationship
Accounting roles, activities
relationship
Accounting roles, activities
relationship

Public practice roles

Private practice roles

Accounting in SME

PAIB description of activities


Accountants as financial
advisers
Advisers to SME

Public Sector

Not for profits

Social impact of accounting

Impact of depreciation

Impact of depreciation
Social impact of accounting
Key issues causing reduced
credibility
Key issues causing reduced
credibility
Key issues causing reduced
credibility
Key issues causing reduced
credibility
Key issues causing reduced
credibility

Restoring credibility in
accounting

Capability considerations
technical skills, knowledge
and experience

soft skills, knowledge &


experience

Career guidance system


Objectives
After completing this module, you should be able to:
1 explain the concept of professional and business ethics;
2 • discuss the key philosophical approaches to ethics and how these impact on the
professional’s ethical decision-making;
3 • apply Compiled APES 110 Code of Ethics for Professional Accountants (APESB 2017);
4 • analyse and resolve ethical dilemmas in accounting;
5 • apply ethical decision-making models; and
6 • discuss the impact of decision-making and actions on society.

Page # Description/Explanation
78 Professional ethics is the application of ethical principles or frameworks by professionals who have an
obligation to act in the interests of those who rely on their services as well as in the best interests of the
public

78 accountants also affect the overall profession, which suffers reduced credibility and increased
restrictions on its ability to act autonomously and to self-regulate.
79 Ethics needs to have some kind of systematic process to create a coherent and consistent approach to
resolving issues
81 Ethical issues experienced by accountants
82 accountants work in an environment of high expectations and rewards, often associated with responsibility
and occasionally with extreme pressure; demands of a dynamic regulatory regime
84 Teleological theories determine right from wrong or good from bad, based solely on the results or
consequences of the decision or action
85 Egoism -it is right for a person to pursue an action in their own self interest, assuming that everyone else is
entitled to act in their own self-interest as well; maximises the net positive benefits to themselves
85 Restricted egoism can be seen as an ethically more acceptable form of egoism
86 Utilitarianism - determining good from bad, or right from wrong, is an act or decision that produces the
greatest benefit or pleasure for the greatest number of people
86 Utilitarianism 5 steps: 1) Identify the ethical problem 2) Identify all available courses of action 3) costs and
benefits each option 4) Compare and weigh the ratio of good and bad outcomes 5) Select the option that
will produce the greatest benefit

87 Limitations of utilitarianism 1) difficult and subjective 2) uncertain and difficult process 3) focuses on the
results of proposed action and not the motivation 4) ignore other factors
88 Deontological theories - it is the intention behind the act itself that is more important than the results of
the act; motive is far more important than the action itself or its consequences
88 Rights - a good or correct decision is one that respects the rights of others
89 justice theory is concerned with issues of fairness and equality
90 what people should be; Consistent ethical behaviour is more likely to be the result of values such as
integrity and good character
90 limitation of virtue ethics is that it does not always provide guidance when a person is faced with a genuine
ethical dilemma
91 moral agents are rational persons who are capable of understanding what it means to act ethically, and will
therefore tend to act in that way; Accountants are moral agents who are aware of the implications of their
actions

92 Under s. 1.2 of the APESB Code of Ethics, ‘all members in Australia shall comply with APES 110 including
when providing Professional Services in an honorary capacity
92 the new ‘Responding to Non-Compliance with Laws and Regulations’ (NOCLAR) requirements were added
in the APESB Code of Ethics in May 2017 and became effective on 1 January 2018
93 public interest - ‘the sum of the benefits that citizens receive from the services provided by the
accountancy profession, incorporating the effects of all regulatory measures designed
to ensure the quality and provision of such services’ (IFAC 2010)
94 3 parts: Part A: General application of the Code; Part B: Members in public practice; and Part C: Members
in business.
94 Part A outlines the fundamental principles of ethical behaviour in the accounting profession and provides a
conceptual framework : 1) Identiy threat 2) evaluate significance 3) implement safeguards or decline if
cannot reduce to acceptable level

94 The fundamental principles are: Section 110 Integrity; Section 120 Objectivity; Section 130 Professional
competence and due care; Section 140 Confidentiality; Section 150 Professional behaviour

95 integrity is an element of character and is essential to the maintenance of public trust’ (1990, p. 26) -
Windal; an obligation on accountants to be straightforward and honest in professional and business
relationships (s. 110.1)

95 Objectivity refers to the state or quality of being true, outside of any individual feelings or interpretations;
they should be impartial, honest and free from conflicts of interest
95 Related party transactions can compromise objectivity because of a lack of independence; awarding a
contract
to a supplier company in which the finance director has a significant shareholding; it is important to keep
the other party at a distance, or at arm’s length

96 Professional competence and due care obligations 1) maintain professional knowledge and skill 2) to act
diligently in accordance with applicable and professional standards
96 Having professional competence requires both acquiring and maintaining professional competence;
professional competence is normally maintained by keeping up to date with relevant technical, professional
and business developments (s. 130.3)

96 Due care encompasses the responsibility to ‘act in accordance with the requirements of an assignment,
carefully, thoroughly and on a timely basis’ (s. 130.4)
96 Accountants must also refrain from using confidential information ‘to their personal advantage or the
advantage of third parties’ (s. 140.1)
97 duty of confidentiality extends to all members, including those within employing firms or organisations (s.
140.4), as well as prospective clients or employers (s. 140.3)
97 A professional accountant must ‘comply with relevant laws and regulations and avoid any conduct that the
Member knows or should know may bring discredit to the profession’ (s. 150.1)

98 identify, evaluate and respond to any identified threat that may compromise compliance with the
fundamental principles. If the identified threats are not insignificant, members must apply safeguards to
eliminate such threats or reduce them to an acceptable level, so that compliance is no longer compromised

99 a threat may affect compliance with more than one fundamental principle (s. 100.12). The specific nature
of each threat will depend on the particular circumstances
100 Please see chart in p. 100 for examples: Self interest; self review, advocacy, familiarity, intimidation (p.102
& 103 lists down examples in real life and provide response)
104 1) Institutional safeguards are those created by the profession, legislation or regulation e.g. educational
training, cpd, corp governance regulations, professional standards, monitoring/disciplinary procedure

104 2) Safeguards particular to work situations e.g. recruitment of competent staff, corporate oversight
structures, employees encouraged to communicate ethical issues
105 the member must determine the appropriate course of action. It may be in the best interests of the
member to document the issue, as well as relevant discussions and decisions made (s. 100.22);

105 If it is not possible to resolve the issue, the accountant must determine whether it is appropriate to resign
from the specific engagement or employing organisation (s. 100.24)
105 provides members in public practice with guidance on how to apply the conceptual framework to the
fundamental principles of professional conduct

105 acceptance of client should not be granted automatically; consider ‘whether acceptance would create any
threats to compliance with the fundamental principles’ (s. 210.1) e.g. illegal activities

106 there may be a threat to professional competence and due care if an accountant accepts the engagement
before knowing all the facts regarding the client’s business (s. 210.8)
106 Communication provides the proposed successor accountant with the opportunity to identify whether
there are professional reasons why the appointment should not be accepted.
106 The established relationship between the referring accountant and the client is maintained; Knowing the
extent of one’s own skills and when the skills of a more qualified expert are required

107 identify and avoid circumstances ; not allow a conflict of interest to compromise professional and business
judgment (s. 220.1)
107 Conflicts between two or more clients(e.g. in a takeover bid, dissolution of a partnership or liquidation of
a company) the member must not provide services to both clients unless consent to do so is received from
both clients (s. 220.3), otherwise, resign

107 Conflicts between the member and the client (incompatible activities) , when a member competes directly
with a client or participates in joint ventures or similar arrangements with major competitors of that client
(s. 220.1)

108 NOCLAR deals with how accountants must respond when they encounter or are made aware of a client’s
non-compliance or suspected non-compliance with laws and regulations

108 NOCLAR is concerned with laws and regulations that (s. 225.5)have a direct and material effect on the
client’s financial statements; and are fundamental to the client’s business/operations or may lead to
material penalties.

109 NOCLAR Framework 1) obtain an understanding of the matter 2) address the matter 3) determine whether
further action is needed 4) determine whether to disclose the matter to an appropriate authority 5)
document details of the matter, judgments and decisions made, responses from management and those
charged with governance, etc. (ss. 225.37–225.38)

111 An accountant in public practice ‘may quote whatever fee is deemed appropriate’. Quoting a fee lower than
that provided by another accountant ‘is not of itself unethical’ (s. 240.1)
111 the amount of the fee depends on the outcome of a transaction or the result of the service, such as the
size of a tax refund (s. 290.221) - self interest threat
112 remuneration in the form of commissions and other financial benefits might threaten a member’s
objectivity (APS 12, para. 9.5) - adopt a fee for service approach
113 not false, misleading or deceptive, and does not in any other way reflect adversely on the profession

114 Accountants need to assess the size, style, type and value of the offering in order to determine whether it
is appropriate
114 accountants should not assume custody of client monies or other assets.

114 requires independence in mind and in appearance, which are both necessary in order to come to a
conclusion that is without bias, conflict of interest, or undue influence (s. 280.2)
115 independence is a fundamental component of complying with integrity and objectivity; adherence to the
Code does not automatically mean compliance with legislation
115 The concept of independence is so important and ingrained that it is often regarded as the cornerstone on
which much of the ethics particular to the audit profession is built.
115 independence is equated with an attitude of objectivity (no bias, impartiality) and integrity (honesty).

116 The independence checklist - used every year in audit


117 Common threats to independence and relevant safeguards— audit and review engagements (note: you can
use this as reco on governance threats)
117 often provides additional value; may also create real or perceived threats to independence (s. 290.154).
They can also create self-review, self-interest and advocacy threats e.g. Arthur Andersen

119 A Member in Business may be a salaried employee, a partner, Director (whether executive or non-
executive), an owner manager, a volunteer, or someone working for one or more employing organisations.

119 Managers may at times ask accountants to undertake tasks inconsistent with their professional duties,
resulting in a conflict of interest
120 often reflects a mistaken belief that their status as employees imposes a duty of loyalty to the employing
entity that takes a higher priority than any obligations to third parties ; Members in business have a duty to
conduct their work honestly and in accordance with professional standards

120 prepare or present such information fairly, honestly and in accordance with relevant professional standards
so that the information will be understood in its context’ (s. 320.1).
121 Potential threats include having insufficient time to properly perform or complete relevant duties, and
having insufficient experience, training and/or education (s. 330.2).
121 are similar to those addressed in Part B of the Code in relation to gifts and hospitality (s. 260).
123 NOCLAR provides a different and proportionate approach for senior members in business (ss. 360.13–
360.32) and members other than those in senior positions (ss. 360.33–360.37).

123 required to obtain an understanding of the matter, and apply knowledge, professional judgment and
expertise; inform their immediate superior about the non-compliance or suspected non-compliance, or
the next hierarchical level if the immediate superior seems to be involved in it

125 a guidance note to assist ‘accountants in business address a range of ethical issues, including potential
conflicts of interest arising from responsibilities to employers, preparation and reporting of information,
financial interests and whistleblowing’ (APESB 2012)

126 Sonya Denise Causer (August 2010) - manipulated the online banking records, general ledger and
management reporting (Integrity, Professional behaviour)
126 Trevor Neil Thomson (May 2010) conspired with others to evade paying approximately $27 million in tax
(Integrity, Objectivity, Professional behaviour)
127 Warren Sinnott (June 2014) was the lead auditor responsible for the audits of companies in the Banksia
group of companies (Banksia) for the accounting periods between 31 December 2008 and 30 June 2012.
Sinnott signed unqualified audit opinions in respect of Banksia. (Objectivity, Professional competence and
due care, Professional behaviour)

128 ethical decision-making is defined as reaching a responsible decision after taking into consideration the
general ethical beliefs of the individual, the ethical implications of a course of action, and the norms and
rules pertaining to the circumstances of the situation

129 Individual factors -on a person’s decision-making is their cognitive ability to judge the ethical rightness of a
situation; people at different levels of moral development have varying capacities to judge what is ethically
right and so may react differently to a similar situation.

130 Organisational factors- Corporate culture is defined as patterns and rules that govern the behaviour of an
organisation and its employees; A culture that lacks written policies and codes of ethics and accepts
dishonesty and unethical conduct may have a strong influence on a person’s ethical decision-making
133 Professional factors- The extent of the influence on decision-making is dependent on the effectiveness of
the Code.
134 Culture -Ethical relativism holds that ethical behaviour is relative to the norms of one’s culture. That is,
whether an action is right or wrong depends on the ethical norms of the society in which it is practised

135 A more systematic approach is to use structured methods of decision-making that help reduce the
potential for inappropriate and inconsistent decision-making processes and outcomes.
136 Philosophical model of ethical decision-making- the following questions should be established:1. Do the
benefits outweigh the harms to oneself? 2. Do the benefits outweigh the harms to others? 3. Are the rights
of individual stakeholders considered and respected? 4. Are the benefits and burdens justly distributed?

138 The seven steps of the model are as follows: 1. What are the facts of the case? 2. What are the ethical
issues in the case? 3. What are the norms, principles and values related to the case? 4. What are the
alternative courses of action? 5. What is the best course of action that is consistent with the norms,
principles and values identified in Step 3? 6. What are the consequences of each possible course of action?
7. What is the decision?
Header

Professional Ethics
Impact of ethical/unethical
decisions

Overview of ethics
Overview of ethics

Accounting work environment

Teleological theories

Teleological theories
Teleological theories

Teleological theories

Teleological theories

Teleological theories

Deontological theories
Deontological theories
Deontological theories

Virtue ethics

Virtue ethics

Moral agency
Compiled APES 110 - Code of
Ethics

NOCLAR

Public interest
Compiled APES 110 - Code of
Ethics

Part A - General application

Part A - General application

Integrity (s. 110)

Objectivity (s. 120)

Objectivity (s. 120)


Professional competence and
due care (s. 130)

Professional competence and


due care (s. 130)
Professional competence and
due care (s. 130)

Confidentiality (s. 140)

Confidentiality (s. 140)

Professional behaviour (s. 150)

The conceptual framework


approach (ss. 100.6–100.11)

Threats (s. 100.12)


Threats to fundamental
principles

Safeguards (ss. 100.13–100.16)

Safeguards (ss. 100.13–100.16)

Ethical conflict resolution (ss.


100.19–100.24)
Ethical conflict resolution (ss.
100.19–100.24)
Part B of the Code—members in
public practice

Professional appointment (s.


210)
Professional appointment (s.
210)
Professional appointment (s.
210)

Referrals

Conflicts of interest (s. 220)

Conflicts of interest (s. 220)

Conflicts of interest (s. 220)

Responding to non-compliance
with laws and regulations (s.
225)

NOCLAR Framework

NOCLAR Framework
Fees and other types of
remuneration (s. 240)
Contingent fees, referral fees
and commissions
Commissions and soft-dollar
benefits

Marketing professional services (s. 250)

Gifts and hospitality (s. 260)

Custody of client assets (s. 270)

Objectivity—all services (s. 280)

Independence (ss. 290–291)

Independence (ss. 290–291)


Independence (ss. 290–291)
Independence (ss. 290–291)

Independence (ss. 290–291)

Provision of non-assurance
services to an audit client (ss.
290.154–290.214)

Part C of the Code—members in


business

Conflicts of interest (s. 310)

Conflicts of interest (s. 310)


Preparation and reporting of
information (s. 320)
Acting with sufficient expertise
(s. 330)
Inducements (s. 350)

Responding to non-compliance
with laws and regulations (s.
360)

Members other than senior


members

APES GN 40 Ethical Conflicts in


the Workplace
Examples of ethical failures by
accountants
Examples of ethical failures by
accountants

Examples of ethical failures by


accountants

Part D: Ethical decision-making

Factors influencing decision-


making

Factors influencing decision-


making
Factors influencing decision-
making

Factors influencing decision-


making

Ethical decision-making models

Philosophical model

American Accounting
Association model
Objectives
After completing this module, you should be able to:
1 describe corporate governance and explain why it is important;
2 evaluate the importance of the key elements of the corporate governance framework;
3 describe the nature of corporations and the division of corporate powers;
4 discuss agency theory and how it is used to understand corporate behaviour;
5 discuss the key features of corporate structure;
6 examine the characteristics and duties of directors and other officers;
7 explain the various international approaches to corporate governance;
8 analyse how robust governance is relevant to public sector and non-corporate entities; and
9 interpret and apply codes and principles of corporate governance.

Page #Description/Explanation
171 Governance relates to the responsibilities of the board of directors towards investors and other
stakeholders, and involves setting the objectives and direction of the company and is distinguished
from management of the enterprise on a daily basis, which is the job of full-time executives

171 The need for governance arises when an individual, group or entity assumes responsibility to look
after the rights or interests of other individuals, groups or entities - agents & principals

171 Corporate governance is the system by which business corporations are directed and controlled
(CFACG 1992, para. 2.5); to ensure that directors role is performed in a systematic way

172 Governance = conformance + performance


173 Good governance aims to ensure that organisations are properly run in the best interests of their
stakeholders, including the optimal performance of national and international economies.

174 ‘If management is about running the business; governance is about seeing that it is run properly’
(Tricker 1984, p. 7)
174 Stewardship theory sees appointed directors as ‘stewards’ who carefully look after the resources
they have been trusted with. Executive self-interest is not expected to interrupt corporate goals and
genuine stakeholder outcomes

175 Agency theory views corporate governance through the relationship between agents and principals

175 Two key assumptions: 1) All individuals will act in their own self-interest 2) Agents are in a position
of power as they have better access to, and control of, information and the ability to make decisions

176 Agency theory identifies three types of agency costs: monitoring costs; bonding costs; and costs
relating to residual loss
176 Monitoring costs are incurred by principals because an agency relationship exists; such as costs
relating to annual reporting and external auditing
176 Bonding costs are costs incurred by the agent to demonstrate to the principal that they are goal
congruent; include voluntary restrictions on the agent’s behaviour or benefits to demonstrate goal
congruence
176 Residual loss arises because, no matter how good the monitoring and bonding efforts, the agent
will inevitably make decisions that are not consistent with the principal’s interests
176 Examples of residual loss: Excessive non-financial benefits, Empire building, Risk avoidance,
Differing time horizons

178 The components of governance considered in this section include: corporations; shareholders; the
board; directors; the role of the board; committees of the board; internal and external auditors;
regulators; stakeholders; and management. (see corporate governance framework in page 3.1)

179 Advantages of corporation: Separate legal entity distinct from its owners; Limited liability; Perpetual
succession

180 Types of corporations - private/proprietary; public (listed or unlisted) (chart on page)


181 Shareholders are the persons or entities who own a company and have an important part to play in
corporate governance; shareholders have delegated much authority to the directors

181 the powers of shareholders are often clearly defined in law and limited to certain decisions, such as:
changes in a company’s constitution; the appointment and removal of directors and auditors; and
the approval of directors’ remuneration.
182 Individual shareholders -want companies to be run efficiently and profitably, and for the companies
in which they invest to be adequately supervised by the board
182 Institutional shareholders -include insurance companies, pension funds, investment trusts and
professional investment fund managers; can possess great power to control corporations through
the voting power they exercise in respect of these shares
183 The California Public Employees’ Retirement System (CalPERS) is an extremely large institutional
investor that invests the pension funds for more than 1.6 million people in California.

183 UK Stewardship Code is a starting point for much stronger international attention to the
considerable and rapidly growing power of large institutions with global relevance
184 The board of directors (the board) is the body that oversees the activities of an organisation. It is
preferable that the roles and responsibilities of the board be explicitly set out in a written charter or
constitution
184 The board of a large public corporation cannot manage the corporation’s day-to-day business. That
function must by business necessity be left to the corporation’s executives - Rogers C J; directors are
entitled to rely on management to manage the daily operational activities of the corporation

184 The board must ensure appropriate procedures are in place for risk management and internal
controls, and it must also ensure that it is informed of anything untoward or inappropriate in the
operation of those procedures.
186 Boards of directors are composed of a chair, executive directors (usually including the CEO), and
non-executive directors
186 The role of the chair is to lead the board of directors, including determining the board’s agenda,
obtaining contributions from other board members as part of the board’s deliberations, and
monitoring and assessing the performance of the directors. In some countries, it is important that
the chair be independent

186 Role of the CEO - responsible for the ongoing operations of the organisation; must keep the board
informed on key issues relating to the management of the company—for example, through monthly
management reports to the board; in conjunction with the management team, is responsible for
constructing the strategies and the significant policies of the company

187 Independence of directors -There are two main types of director—executive directors, who also
work as employees within the organisation; and non-executive directors
187 three main categories of director: 1. executive directors who are never independent; 2. non-
executive directors who do not work in the organisation, but are not independent because of a
particular relationship; and 3.independent non-executive directors, who are free from influences
that cause bias, and exhibit the characteristics of independence.

187 Independence is where a person can make a judgment that is: free from any influence that would
bias the decision; and free from any connections that, if known, would cause a third party to
believe there could be bias.
187 A director would not be regarded as independent if they held: a major shareholding; the
directorship for a long time; or a significant trading relationship (such as a major customer or major
supplier, or being a previous auditor).
187 • has been an employee of the company or group within the last five years;
• has, or has had within the last three years, a material business relationship with the company
either directly, or as a partner, shareholder, director or senior employee of a body that has such a
relationship with the company;
• has received or receives additional remuneration from the company apart from a director’s fee,
participates in the company’s share option or a performance-related pay scheme, or is a member of
the company’s pension scheme;
• has close family ties with any of the company’s advisers, directors or senior employees;
• holds cross-directorships or has significant links with other directors through involvement in
other companies or bodies;
• represents a significant shareholder; or
• has served on the board for more than nine years from the date of their first election

188 Recommendation 2.3 of the ASX Corporate Governance Council Corporate Governance Principles
and Recommendations (ASX Principles) states that a listed entity should disclose the names of the
directors considered by the board to be independent directors (ASX CGC 2014, p. 16).

189 The ASX Listing Rule states: Condition 16: An entity, which will be included in the S&P/ASX 300 Index
on admission to the official list [i.e. a listed entity], must have a remuneration committee
comprised solely of non executive directors
190 • avoid conflicts of interest and where these exist, ensure they are appropriately declared and, as
required by law, otherwise managed correctly;
• act in the best interests of the corporation;
• exercise powers for proper purposes;
• retain discretionary powers and avoid delegating the director’s responsibility;
• act with care, skill and diligence;
• be informed about the corporation’s operations; and
• prevent insolvent trading.

190 it is not necessary that there be fraud, dishonesty or loss to the corporation; e.g when a contract is
awarded to a supplier that is owned by one of the directors. It may still provide a benefit to the
organisation in terms of the best price and appropriate quality, but this does not remove the
conflict of interest for the particular director involved

190 They can bypass this rule if they clearly advise the board of the conflict and also gain approval from
the remaining directors or from the shareholders or from corporate regulators

190 Actions should be made in good faith, honestly and without fraud or collusion. Directors who use
good business judgment and behave honestly in a way that a reasonable person in their position
would act will satisfy the duty
191 1.directors act within their power; and 2.directors do not abuse their powers.

191 action that is perceived to be in the best interests of the corporation is still unacceptable if it goes
beyond the authority given to a director; e.g making anti-competitive agreements that benefit the
corporation but are illegal (e.g. price-fixing)
191 situations can occur where a director delegates to another a power that the director should
themselves have exercised. If the delegate’s action, or inaction, subsequently causes the
corporation to suffer loss, the director may be liable. The board must not, without express authority
from the corporation’s constitution or from statute, delegate their discretion to act as directors to
others

192 Delegates (i.e. managers) need to be properly appointed by boards (of directors) using
professionally acceptable procedures (as to competence, qualifications, etc. of the manager)

192 the board must carry out correct and ongoing oversight. Note, however, that the board does not
undertake day-to-day operational management, so a balanced approach is required
193 • acting in good faith in the best interests of the corporation and also acting in such a way that
they are using their powers as a director for a proper purpose;
• not affected by a conflict of interest;
• appropriately informed regarding the subject matter of the decision; and
• making the decision in such a way that another reasonable person in the same position would
consider the decision to be appropriate and not irrational.

193 includes any aspect of operations that it is anticipated might impact upon the share price of the
company or the market perception of the company. This also involves matters such as governance,
performance, investment and other issues relating to the company.
194 The board needs to understand and take appropriate responsibility for the formal approval of all
significant delegations and their documentation. there are some non-delegable duties and these
apply to ‘business judgment’ decisions
198 This means that the directors must, at the time a debt is incurred, have reasonable grounds to
believe that the company will be able to pay its debts when they are due for payment.
198 1) Monitoring and supervising 2) Providing accountability 3) Strategy formulation 4) Policy making

200 committees enable the distribution of workload to allow a more detailed consideration to be given
to important matters, such as executive remuneration and external financial reporting

200 strategic planning and management decisions are made appropriately in the context of the risk
appetite of the corporation and its various stakeholders
201 recommending the succession procedures within an organisation. Succession is the concept of
identifying and selecting people who will replace senior staff when they leave
201 This committee deals with remuneration—especially for senior executives. The sensitivity of setting
a remuneration policy can be reduced if executives are not involved in the committees that decide
their remuneration

201 ensuring that the work of the external auditor maintains the utmost integrity and independence; it
is recommended that the audit committee comprise only non-executive members, with a majority
being independent

201 reviewing the adequacy of operational and internal controls (including the internal audit function)
and reviewing half-year and full-year financial statements prior to board approval
202 Full page showing benefits/limitations of audit committees; next page explaining the enron case

204 the internal auditor plays an important role in ensuring that internal financial controls, compliance
controls, operational controls and risk management systems are operating effectively

204 The external auditor, as an independent party with a detailed knowledge of the entity’s financial
affairs, is able to provide substantial advice to the audit committe; also assist the audit committee
by informing it of any developments such as legislative changes or new accounting standards

204 Effective regulation and enforcement is essential to ensure that companies can compete against
each other in a fair and reasonable manner; the purpose of regulation is to support free and open
markets
205 there is one and only one social responsibility of business—to use its resources and engage in
activities designed to increase its profits so long as it engages in open and free competition without
deception or fraud’
205 broad principles or recommendations on corporate governance are specified; corporations will
normally be expected to follow the principles or recommendations
206 approach provides more flexibility in implementing specific corporate governance practices in view
of the potential diversity of corporations; may decide not to follow the local principles or
recommendations, which may be allowed, but it must then disclose that it is not following them
and explain why

206 a rules-based approach is more detailed and prescriptive, as reflected in the approach adopted in
the US Sarbanes–Oxley Act (US Congress 2002), and in the Dodd-Frank Wall Street and Consumer
Protection Act (2010), which was introduced following the GFC. Specific and detailed regulations
are provided and must be complied with

206 directors must act in the best interests of the corporation as a whole. This means corporations are
run according to corporate law duties in relation to shareholders
206 an organisation may be viewed as being involved in contracts, some written, some not, and others
that are in the form of ‘social contracts’. Such contracts, although not recognised as contracts under
law, are important with respect to social and environmental relationships

207 Agents, owners, suppliers/lenders, consumers, competitors, auditors, employees, employees,


regulators, government, community, environment (check interest & risk table)
209 the knowledge and skill of the employees (including managers) that will be critical to the success of
the company; the employees become the greatest asset and without this asset the company cannot
compete
209 good relationships add value by avoiding disruptions, and reducing transaction costs and the cost
of borrowing (through lower interest rates if lenders better understand a borrower)
210 long term support from consumers for their outputs will be important for long-term value
generation and corporate performance
210 The CEO in most companies is also a director and a member of the board; , sometimes tensions do
emerge, for example, in the choice of strategy. Because of rapidly changing markets and technology,
boards often have to be continuously engaged in strategic decisions, unlike in the past

210 Often what boards interpret as arrogance of the CEO and the management team can be,
in reality, a lack of experience, strategic direction differences or deceit
211 Ensuring that there is the energetic commitment of managers to their task of realising the vision of
the board and making a success of the company is ultimately the role of the CEO
212 Global push for improved governance - Poor governance (e.g. GFC, Lehman Brothers) Globalisation
(e.g. Australian companies controlled by USA, China, foreign companies)

212 Key factors driving the need for better corporate governance: 1) more competition as a direct result
of globalisation 2) advances in technology and globalisation allowing rapid flows of debt and equity
capital 3) rapid growth of timely and easily accessible information 4) Shareholder activism due to a)
global aging population b) significant growth in small shareholder ownership of major corporations
internationally

213 early 1980s United States tax reductions under President Reagan, and similar extensive economic
reforms by the Thatcher government in the United Kingdom, resulted in a more liberal international
marketplace; bank restrictions were dramatically reduced, as were tax rates. All of this resulted in
an economic boom that came to an end with the economic crash of 1987

213 Asian financial crisis of the late 1990s created difficulties for some Asian companies, and the
‘dotcom’ boom and bust around 2000 demonstrated great corporate instability
213 2001–02 with the collapse of Enron, WorldCom, HIH Insurance and many other companies. The
most recent severe economic downturn was the GFC of 2007–08
213 1991 - Cadbury committee; cadbury report; The recommendations on governance had an important
feature that is still used today—the concept of ‘comply or explain’
214 The Greenbury Committee was formed, and in 1995 it made recommendations designed to
enhance transparency in relation to directors’ remuneration
214 The Hampel Report (CCG 1998) became known as the ‘supercode’ and was adopted into the listing
rules on the London Stock Exchange
214 Committee of Sponsoring Organizations of the Treadway Commission -Internal Control—Integrated
Framework (COSO 1994); it reported on fraudulent financial reporting; frequent involvement of the
CEO and CFO in frauds
214 Sarbanes–Oxley Act -to protect investors and provide guidelines for financial reporting: audit reform
& corporate accountability
214 the Business Roundtable, an association of chief executives of leading US companies, and The
International Corporate Governance Network (ICGN), a not-for-profit body founded in 1995

215 Ramsay Report -examined the adequacy of Australian legislative and professional requirements
regarding the independence of external auditors and made recommendations for changes

215 ASX corporate governance principles and recommendations -to develop a principles-based
framework for corporate governance that would be applicable to listed companies
216 Corporate Law Economic Reform Program Act 2004 (Cwlth) -in the aftermath of the collapses of,
among others, Enron in the United States and HIH Insurance in Australia; took into consideration
the initiatives introduced by the Sarbanes–Oxley Act: 1) Audit reform 2) Financial reporting

217 1) OECD Principles of Corporate Governance 2) UK Financial Reporting Council Corporate


Governance Code 3) ASX Pinciples and Recommendations
217 The OECD Principles are ‘good practice guidelines’ and are not written for companies or directors.
They are written so that governments writing detailed laws relevant to individual nations will have a
framework that provides sound guidance
217 1. Ensuring the basis for an effective corporate governance framework;
2. The rights and equitable treatment of shareholders and key ownership functions;
3. Institutional investors, stock markets, and other intermediaries;
4. The role of stakeholders in corporate governance;
5. Disclosure and transparency; and
6. The responsibilities of the board

217 Principle 1: Ensuring the basis for an effective corporate governance framework -The corporate
governance framework should promote transparent and fair markets, and the efficient allocation of
resources. It should be consistent with the rule of law and support effective supervision and
enforcement.

217 Factors to consider: a) should be developed with a view to its impact on overall economic
performance, market integrity and the incentives b) consistent with the rule of law c) division of
responsibilities among different authorities should be clearly articulated d) stock market regulation
should support effective corporate governance

218 Principle 2: The rights and equitable treatment of shareholders and key ownership functions -It lists
some basic rights including obtaining relevant information, sharing in residual profits, participating
in basic decisions, fair and transparent treatment during changes of control and the fair operation
of voting rights

219 Principle 3: Institutional investors, stock markets, and other intermediaries -that institutional
investors disclose their corporate governance policies

220 Principle 4: The role of stakeholders in corporate governance -The OECD sees duties to stakeholders
as an important and integral part of corporate governance. In some countries, stakeholders who are
not shareholders have significant influence (e.g. banks are involved in Japanese companies and
employees in German companies)

221 Principle 5: Disclosure and transparency -The corporate governance framework should ensure that
timely and accurate disclosure is made on all material matters regarding the corporation, including
the financial situation, performance, ownership, and governance of the company

222 Principle 6: The responsibilities of the board -The corporate governance framework should ensure
the strategic guidance of the company, the effective monitoring of management by the board, and
the board’s accountability to the company and the shareholders
223 The underlying rule in the Anglo-American approach to company law is that the key duty of
directors is to act for proper purposes and to act in good faith in the interests of the company as a
whole
225 There are eight broad principles, which are supported by 29 detailed recommendations
226 1.Lay solid foundations for management and oversight: A listed entity should establish and disclose
the respective roles and responsibilities of its board and management and how their performance
is monitored and evaluated.
2.Structure the board to add value: A listed entity should have a board of an appropriate size,
composition, skills and commitment to enable it to discharge its duties effectively.
3.Act ethically and responsibly: A listed entity should act ethically and responsibly.
4.Safeguard integrity in corporate reporting: A listed entity should have formal and rigorous
processes that independently verify and safeguard the integrity of its corporate reporting.
5.Make timely and balanced disclosure: A listed entity should make timely and balanced disclosure
of all matters concerning it that a reasonable person would expect to have a material effect on the
price or value of its securities.
6.Respect the rights of security holders: A listed entity should respect the rights of its security
holders by providing them with appropriate information and facilities to allow them to exercise
those rights effectively.
7.Recognise and manage risk: A listed entity should establish a sound risk management framework
and periodically review the effectiveness of that framework.
8.Remunerate fairly and responsibly: A listed entity should pay director remuneration sufficient to
attract and retain high quality directors and design its executive remuneration to attract, retain
and motivate high quality senior executives and to align their interests with the creation of value for
security holders

234 The market-based system of corporate governance has been characterised as disclosure based, as
the numerous investors depend on access to a reliable and adequate flow of information to make
informed investment decisions
236 emphasise cooperative relationships and consensus, whereas the Anglo-Saxon tradition emphasises
competition and market processes

236 Company law -Many European countries have a distinctive tradition of company law influenced by
prescriptive Roman law. In France, regulations on incorporation were inspired by the Napoleonic
code. In Germany, regulation insisted upon a board of supervision separate from the company’s
board of directors to represent and protect shareholders’ interests

236 Employee representation -Employee representation is embedded in law in Austria, Denmark,


Germany, Luxembourg and Sweden
237 Board structure, roles and responsibilities -Two main corporate board structures exist. First, the
unitary board (single tier) structure that is used in most common-law countries, and second, the
two-tier structure, which characterises the German governance system. In France, the legal system
allows firms to opt between a one-tier or two-tier board structure

238 The German business sector is typified by the following characteristics:


• a relatively strong concentration of ownership of individual enterprises;
• the importance of small and medium-sized unincorporated companies;
• a close correspondence between owners and managers; and
• the limited role played by the stock market.

238 France and Italy are the European countries with the smallest ownership of company shares by
financial institutions. The majority of shares have traditionally been owned by non-financial
enterprises
238 In France, half the firms are controlled by one single investor who owns the absolute majority of
capital.
239 essentially based on close relationships (usually involving family control) and further ongoing
close relationships with creditors, suppliers and major customers

239 certain Asian countries (such as China), there are still many government-controlled organisations
carrying out roles that are typically performed by the private sector in Western countries

239 In Singapore, many of the largest listed companies have the state as the largest shareholder,
although in terms of number, there are more listed companies that have either families or founder-
managers as the largest shareholders
239 Most companies in Asia either have a majority shareholder or a cohesive group of minority
shareholders who act together to control the company

240 Corporate law in Japan was modelled, starting in 1899, on the German system, with the
establishment of limited liability corporations, typically with a two-tier board structure
241 the main board of directors plays a more strategic and decision-making role, and is more fully
drawn from the ranks of management who are employed by the company
241 keiretsus, which are essentially sets of companies with interlocking business relationships and
shareholdings
242 The state-owned enterprise model dominated from the 1950s through to the 1980s in a
negotiated system of central planning; Joint ventures with Chinese partner companies have been
the traditional means by which overseas companies entered China
243 there is a tendency to establish interlocking networks of subsidiaries and sister companies that
include partially owned listed companies

244 ensuring that a dominant shareholder does not abuse their power, and protecting minority
shareholders
245 • family-owned businesses and small and medium-sized enterprises (SMEs);
• not-for-profit organisations; and
• the public sector

245 SMEs are often family-owned; longer- term perspective with a focus on building the firm to be
passed onto future generations, often combined with a culture based on the unique values of a
founder
245 a family council be used to structure family engagement and that a board of directors should be
established. The inclusion of outside directors would benefit the company through the introduction
of new ideas and a broad range of experience
246 Good corporate governance is equally essential for entities that do not have a profit motive as their
main objective. From a performance perspective, effectiveness in achieving goals will be crucial for
a not-for-profit organisation
246 Not-for-profit organisations may be organised in a number of different forms, including foundations,
trusts, associations and special types of companies
246 not-for-profit organisations are accountable principally to stakeholders rather than shareholders; As
a result, a key objective of not-for-profit organisations is to improve trust and relationships with
their stakeholders
247 Dilemmas: 1) board members are invariably volunteers, and few may possess professional
experience 2) The loss or misallocation of the funds of not-for-profits is a serious issue that can
damage the work and reputation of the organisation 3) that if a paid manager is employed, they are
rarely given much freedom to manage since they are surrounded by committed volunteers who feel
they have a right to be involved in decision-making
248 the public sector’s role is to implement programs cost-effectively in accordance with government
legislation and policies. There are also review processes normally imposed by governments and
their committees; their different statutory and managerial frameworks and their wider and more
complex accountabilities

252 Common Failure Factors: 1. Poor strategic decisions. Management fails to understand the
relevant business drivers when they expand into new products or markets, leading to poor strategic
decisions.
2. Greed and the desire for power. High-achieving executives can be ambitious, eager for more
power and may attempt to grow the company in a way that is not sustainable.
3. Overexpansion and ill-judged acquisitions. Integration costs often far exceed anticipated
benefits. Cultural differences and lack of management capacity can also be problems.
4. Dominant CEOs. Boards can sometimes become complacent and not adequately scrutinise the
CEO.
5. Failure of internal controls. Internal control deficiencies may relate to complex and unclear
organisational structures and failure to identify and manage operational risks. This can lead to gaps
in information flow, control and risk management systems.
6. Ineffective boards. While directors are expected to provide an independent view, occasionally
they can become financially obligated to management, which can impede their judgment (Hamilton
& Micklethwait 2006).

253 the extent to which high executive earnings are linked to performance. Remuneration methods may
fail to achieve alignment or congruency between the agent and principal
253 there is frequently shareholder concern regarding the total amount that executives receive, which is
often regarded as excessive and involves a residual loss agency cost
254 situations where individuals seek to avoid their legal liability for a wrongful act by deliberately
putting themselves in a position where they are unaware of facts that will make them liable

254 A major implication in relation to the GFC is a lack of expertise of some boards of directors in
understanding and effectively managing the risks involved with trading in complex financial
instruments
255 Risk management should enable a company to maximise opportunities and minimise losses (of all
types) by assessing the different types of risk and improving safety, quality and business
performance; Identifying, evaluating and addressing risk are essential features of modern
management techniques

256 Internal control and risk management -Note that effectiveness and efficiency are both performance-
related matters. Auditors must obtain an understanding of the internal control structure and gather
related evidence to support that assessment
257 Independence of the chair of the board-that the separation of CEO and Chair of the board is a good
practice but not one that should be mandated
Header
Governance

Governance

Governance

Governance
Importance of governance

Governance and
performance
Stewardship theory

Agency theory

Agency theory

Agency issues and costs

Monitoring cost

Bonding costs

Residual loss
Residual loss

Components of corporate
governance

Corporations

Corporations
Shareholders

Shareholders

Shareholders

Shareholders

Shareholders

Shareholders

The board

The board

The board

The board

Board chair

Role of the CEO

Independence of directors
Independence of directors

Independence of directors

Independence of directors

UK Governance code -
determination of
independence

ASX Recommendations

ASX Recommendations -
remuneration committee

The role of the board

Conflict of interest

Conflict of interest

Act in the corporation’s


best interests
Exercise powers for proper
purpose
Exercise powers for proper
purpose

Duty to retain discretion

Duty to retain discretion

Duty to retain discretion

Safe harbor/business
judgment rule

Continuous disclosure
regimes

Delegation

Duty to prevent insolvent


trading
board’s responsibilities and
functions - Tricker model

Committees of the board

Risk management
committee
Nomination committee

Remuneration committee

Audit committee

Audit committee
Audit committee

Internal and external


auditors

Internal and external


auditors

Regulators

Milton Friedman

principles-based approach

principles-based approach

rules-based approach

Anglo-American
Corporation law
Stakeholder concept

Corporate stakeholders

Employees

Suppliers and lenders

Consumers (customers)

Management

Management

Operational management
Part B: International
perspectives on corporate
governance
Part B: International
perspectives on corporate
governance

Thirty years of corporate


governance

Thirty years of corporate


governance
Thirty years of corporate
governance
United Kingdom

United Kingdom

United Kingdom

United States

United States

Other international
approaches

Australia

Australia

Australia

Part C: Codes and guidance

OECD Principles of
Corporate Governance
OECD Principles of
Corporate Governance -
Principles

OECD Principles of
Corporate Governance -
Principles

OECD Principles of
Corporate Governance -
Principles

OECD Principles of
Corporate Governance -
Principles

OECD Principles of
Corporate Governance -
Principles
OECD Principles of
Corporate Governance -
Principles

OECD Principles of
Corporate Governance -
Principles

OECD Principles of
Corporate Governance -
Principles
UK Financial Reporting
Council Corporate
Governance Code
ASX Principles and
recommendations
ASX Principles and
recommendations

Market-based systems

Relationship-based systems
—European approaches

Different political, legal and


regulatory structures

Different political, legal and


regulatory structures
Different political, legal and
regulatory structures

Germany

France

France
Relationship-based systems
—Asian approaches

Relationship-based systems
—Asian approaches

Relationship-based systems
—Asian approaches

Relationship-based systems
—Asian approaches

Japan

Japan

Japan

China

Family-controlled
companies and business
networks
India

Part D: Non-corporates and


governance

Family-owned business and


small and medium-sized
enterprises
Family-owned business and
small and medium-sized
enterprises
Not-for-profit organisations

Not-for-profit organisations

Not-for-profit organisations

Not-for-profit organisations
Public sector enterprises

Part E: Governance failures


and improvements

Remuneration

Remuneration

Wilful blindness

Complex financial
instruments

Improving corporate
governance

Improving corporate
governance

Improving corporate
governance
Objectives
After completing this module, you should be able to:
evaluate the implications of board diversity and executive remuneration in relation to corporate
1 governance including corporate performance;
identify a range of operational responsibilities which affect some significant stakeholders and that are
2 important for good
identify aspects governance;
of corporate governance that arise in relation to audit responsibilities and regulatory
3 compliance;
evaluate the importance of good corporate governance as a factor in mitigating the risks of financial
4 failures;
understand and apply policy laws and regulations that exist for the protection of markets and services and
5 relevant stakeholders
identify some including
important consumers;
rules that andprotection of financial markets and the value of
exist for the
6 corporations.

Page #Description/Explanation
285 the importance of appropriate capabilities, the role of ethics and the fundamental nature of
boards and directors; for modern complex corporations to succeed, they must bring all these
understandings together or run the risk of governance failure and reputational damage

285 only a natural person of at least 18 years of age can be formally appointed as a director. A person
currently disqualified
‘from managing a corporation’ cannot be appointed a director
285 the law does not specify that directors must hold any particular qualifications or capabilities.. the
majority of executives who are also directors...required to have qualifications relevant to their
appointed executive position

285 appointment of directors is traditionally strongly influenced by the board, even though the
shareholders legally appoint them. In most jurisdictions, the annual general meeting of
shareholders will vote in favour of candidates recommended by the board
286 The standard period of director appointment has tended to be around the three-year mark in
most countries—with just a few directors being re-elected by shareholders each year under ;
every year you only get to vote on three directors, and the vote for these directors is ‘staggered’
over a three-year period

286 De-staggering’ means to stop engaging in the staggering sequence over time and do it all at once

286 weary or tired directors are unlikely to bring any new ideas to the boardroom and may often be
resistant to change; the relationships that arise within boards mean that independent directors
will gradually lose their independence
287 an appropriate degree of board continuity (i.e. all directors not being replaced at the same time)
is also important to ensure the orderly oversight of corporations by directors with ‘corporate
knowledge’
287 Directors may resign... during the current term.. choose not to stand for re-election...will result in
a board vacancy... make a temporary appointment subject to later shareholder vote

287 it is important for shareholders to be informed of the reasons behind any particular resignation;
real reasons for resignation are not usually known; directors should make their concerns known
either to shareholders or to the relevant regulator
287 Removal of a director of a public company in Australia before their term has expired can only be
by a shareholders’ vote at a general meeting
287 any individual or group of shareholders holding 5 per cent of the issued capital—or at least 100
small shareholders acting together—can call an extraordinary general meeting and seek to
remove individual directors by way of an ordinary resolution requiring support of 50 per cent of
the votes cast; will usually require an explanation of such changes
288 The two-strikes rule provides that the entire board can be removed after a shareholder vote ‘to
spill the board’; can only occur after the eligible shareholders have voted twice against the
remuneration report
288 first strike -where 25 per cent or more of the eligible shareholders vote ‘No’ on the mandatory
resolution by the board that shareholders accept the corporation’s remuneration report

288 Following the second strike, and at the same annual general meeting at which it occurs, a
resolution to ‘spill’ (i.e. remove the whole board) must be put to shareholders. Spill successful
-50% or more
288 The shareholders’ meeting to elect a new board must take place within 90 days; at least two of
the old directors (other than the managing director) are required to continue in order to ensure
continuity of the board
290 legally defined commercially unacceptable behaviour or relevant defined legal wrongdoing:
responsibility for defined civil wrongs as directors or other officers; financial market misconduct;
responsibility for multiple insolvencies;
significant dishonest actions and corporate crimes; and civil and criminal wrongs in relation to
anti-competitive conduct in markets for goods and services.

290 criminal offences involving breaches of laws governing corporations will typically involve
automatic disqualification
290 various legislatively defined ‘civil wrongs’ including legislatively defined breaches that lead to civil
penalties
290 where directors and other senior officers have been involved in multiple insolvencies or have
breached relevant probity provisions
290 Automatic disqualification aims to act as a deterrent to would-be offenders and helps protect the
public from exposure to persons who may reoffend. It also gives reassurance to markets and
individual investor
290 a person who has exercised poor judgment on a number of occasions, leading to the insolvent
failure of the corporation of which they are a director, may be disqualified because of that poor
judgment.to remove that person from the commercial arena and, therefore, prevent further harm

291 Diversity includes, but is not limited to, an individual’s race, ethnicity, gender, sexual orientation,
age, physical abilities, educational background, socioeconomic status, and religious, political or
other beliefs
291 Equal Opportunity for Women in the Workplace Act 1999 (Cwlth) requiring organisations with 100
or more employees to establish a workplace program to remove the barriers to women entering
and advancing in their organisation

291 a considerable effort has been made to increase the participation of women in leadership by the
ASX, the Australian Institute of Company Directors (AICD) and other bodies, with a marked
improvement to 20 per cent
291 in European countries that have adopted mandatory quotas, 40 per cent of board members of
large corporations are now women
291 Australia is similar to that of the United Kingdom, where the FRC Code, a recommendation that
companies apply a formal, rigorous and transparent procedure when appointing new directors to
the board, with due regard to the benefits of diversity, including gender

291 the Malaysian Code on Corporate Governance (Securities Commission Malaysia 2012) suggests
that boards should disclose their gender diversity policies and targets in their annual reports
291 countries such as Norway, France and Spain have gone further and have introduced mandatory
quotas to increase gender diversity on boards. These quotas have proven successful in addressing
the gender imbalance on boards
291 Malaysian Prime Minister announced in June 2011 that public and limited liability companies with
over 250 employees must have at least 30 per cent women on their boards or in senior
management positions by 2016
292 many criticise mandatory percentages or quotas because they may create token directors; too
early’ placement of women may possibly create a group of women who are directors to the
exclusion of other women
292 widening the pool of potential candidates they look at and thereby increasing the number of
women candidates put forward. Boards themselves can have a fundamental impact by advocating
and supporting appropriate mentoring schemes for women in their organisations.

293 policies are actually ‘set’ by boards working in conjunction with managers. Good policies are
always crucial for good corporate governance
293 Debate inevitably focuses on the absolute levels of remuneration paid in comparison with the pay
of average wage and salary earners, and the extent to which payments are made regardless of
past performance success
293 recommendations for boards to institute ‘clawback’ policies to recoup excessive performance-
based remuneration have featured in best-practice guidance
294 the debate on executive remuneration is complex; e.g almost 500 pages in the Productivity
Commission’s 2009 report on executive remuneration in Australia,influenced legislative changes
in Australia
295 An important factor in the debate about executive remuneration (even before we consider the
relationship between remuneration and performance) is that ‘excessive remuneration’ is an issue
of international concern
295 Swiss Federal Council (the executive branch of the Swiss federal government) submitted for public
consultation a draft ordinance on ‘say-on-pay’ and excessive executive remuneration

295 French corporations agreed to a new code that includes a vote on executive remuneration for
shareholders at annual general meetings, similar to current practice in the United Kingdom and
United States
295 non-executive directors should not be remunerated according to performance achieved or to be
achieved, except
to the extent that they hold shares in the company and benefit from a rising share price; should
be based primarily on a reasonable return for time dedicated to the corporation’s business;
should not receive incentive-based payments and should receive only basic additional payments

295 performance-based remuneration is not consistent with an independent approach to decision-


making and it is necessary that all non-executive directors (even those otherwise not
independent) are not subject to remuneration types that lessen or deny independence

295 Modern corporate governance approaches assume that the remuneration of executive directors
(and some senior executives who are not directors) is the key focus of those directors who
comprise the remuneration committee
296 Remuneration of executives is often referred to as packaged (which can be very complex, partly
for tax reasons). The performance-related components of these packages can be especially
complicated and may consist of bonuses, shares and share options, other financial benefits,
296 This motivation needs careful consideration because, recognising the nature of agency theory, it is
vital that the remuneration structure appropriately build on the self-interest of the manager

297 Boards need to take great care to ensure that payments made when executive directors and other
senior executives retire or resign are in fact relevant to performance and that the concerns of
shareholders and society generally are understood and addressed

298 Best practice corporate governance requires that there should be transparency in setting
directors’ remuneration; no individual should be involved in setting or determining their own
remuneration levels
298 in Germany, public limited corporations must provide a breakdown of total earnings of each
member of the management board
298 In the United States, (SEC).. required that executive remuneration be accompanied by a detailed
explanation of the rationale for that remuneration
298 In the United Kingdom too, investors are better informed about how much directors have been
and will be paid, along with how pay relates to corporate performance
298 an increase in remuneration disclosure has led to higher and, excessive levels of remuneration
being paid to executives and some directors. The argument is based on the premise that
remuneration committees do not wish to be seen to be paying less-than-average market
remuneration

299 One legislative response to excessive remuneration that has proved successful is the noticeably
reduced size of so-called ‘golden handshakes’. In 2009, the law was changed so that any
termination payment exceeding more than 100 per cent of the executive’s 12-month fixed pay
would need shareholder approval

299 Complex financial products that were not well understood appeared to create very large positive
financial outcomes (profits)
299 These reward mechanisms encouraged executives to take higher risks to gain higher bonuse...
risks associated with the complex financial products not understood, but in the long term, non-
existent
299 Reward structures should be designed so that self-seeking executives cannot damage
corporations by seeking early reward with high-risk deals that have dubious long-term
consequences
301 boards cannot simply leave all the responsibility to management. Boards have a duty to be aware
of the issues and to be sure that these issues are being appropriately addressed within the
organisation
301 laws recognising the importance of employees as stakeholders (e.g. in the EU and Australia) make
it even more important for corporations advertising employment positions to get it right;
protections effectively apply to the whole community, as they apply not only to existing
employees but to every potential employee

302 Workplaces often create situations that can cause significant risks to employees. Laws in this area
are diverse, and even within countries there are significant differences between regions e.g.
workplace injuries
302 Employees are not always in a strong bargaining position, so their pay and working conditions can
be at the mercy of their employer; many countries have laws and regulations covering minimum
wages and working conditions.
303 Different jurisdictions prescribe different amounts of leave. In the United States, two weeks of
annual leave is common; Australia and the United Kingdom, four weeks of leave is the standard
legal minimum. In Singapore, leave entitlement is on a sliding scale, with the maximum 14 days’
leave applying only after eight years’ service
303 Employees have the obligation of loyalty that carries with it such concepts as regular attendance,
confidentiality of employers’ secrets and intangible property, care of employers’ tangible
property, and respect of fellow workers and their rights

303 corporate policy that gives full and proper attention to employees, is an important corporate
governance component. It should state the rights of employees and what is expected of
employees.

303 The OECD Principles of Corporate Governance (OECD 2004) state that governments should make
laws that protect stakeholders (including employees). They also state that business and other
organisations should be aware of the rights of stakeholders and act accordingly

305 Unions are typically large and powerful and commonly seek to achieve outcomes through
collective bargaining with employers. If the collective bargaining process fails, then industrial
action may occur
305 Good corporate governance demands that unions are understood by both boards and
management, and are dealt with appropriately for ethical reasons and also out of self-interest

306 It is essential that boards understand the role of the independent external auditor and the
regulations that surround audit, including the role of International Standards on Auditing and
International Financial Reporting Standards

306 The auditor’s report is most importantly addressed to the ‘intended users’—among whom will be
the shareholders and other users that, in the auditor’s professional judgment, objectively are
relevant
306 The auditor then checks the systems and the information that results to ensure that the
accounting standards compliance required has in fact been achieved
306 Beyond this, the board must understand the importance of auditor independence. For example,
when the Enron failure occurred, one of the biggest issues related to the fact that the
corporation’s auditor, Arthur Andersen
307 The auditing standards require that auditors identify ‘those charged with governance’ within the
organisation. This group should comprise those with whom the auditor communicates on matters
relating to the audit and reporting
307 Since the auditor is auditing executives, such as the chief financial officer and the CEO, the auditor
should not report to these people. To do so would be contrary to the required independence

308 many laws originated through the court system and became legislation over time; Governments
often initiate laws, especially where creation of complex innovative legal forms such as
corporations are the goal
308 the courts review these precise legislative forms and, where appropriate, make interpretive
decisions that give additional, and sometimes new, meaning to the legislation; if legislation does
not cover a matter, the courts may also make appropriate law relevant to the circumstances of the
particular matter being litigated

308 The economy as a whole is heavily dependent on corporate activity; . If economies are not
nurtured, then corporations cannot succeed
308 a number of laws that are designed to protect the economy and important aspects of the
economy, such as fair competition, open financial markets and the rights of individuals including
consumers
309 a strong and reliable court system is a vital part of the overall corporate governance framework;
Corporations must respect the law, understand it and ‘play within the rules’
309 no court in countries using the common law system would normally contemplate conducting a
trial that involves both civil and criminal matters at the same time
309 Crimes such as murder and theft have always carried common law crime status. Criminal cases
are always carried out by agencies of the state and never by individuals or corporations.

309 Anglo-American company law traditions), crimes require the person charged to be subject to a
court trial in which the ‘prosecutor’ has the duty to establish facts proving ‘beyond reasonable
doubt’ that the crime was committed
310 Criminal sanctions can take many forms, but most commonly will be in the form of fines and/ or
jail sentences
310 In the United States, competition laws are usually described as anti-trust laws, and breaches of
these laws may be punished by jail sentences of up to 10 years along with fines. Similarly, in
Australia, there are now criminal penalties for ‘cartel conduct’; provides penalties of up to 10
years’ jail for individuals maximum penalties for corporations of up to AUD 10 million or as much
as 10 per cent of group turnover

310 where a criminal prosecution would be hard to start (e.g. if ‘proof beyond reasonable doubt’
would be very hard to establish) or, once started, it fails. In these instances, it is possible either to
bring a civil action instead, or to do so after the criminal action has failed; A civil action cannot be
commenced after a successful criminal action

310 In a civil case, the court requires each party to argue its case as strongly as possible and the
person with the probably stronger case (i.e. better facts in relation to the relevant law) will win.
The standard applied is ‘proof based on the balance of probabilities’ rather than ‘proof beyond
reasonable doubt’ as in criminal cases; laws that deal with civil issues will provide for
compensation and redress for victims of civil wrongs

311 ‘redress’ - the ways in which wrongdoers can be required to correct the harm they have caused;
not as a penalty but rather as part of the process of putting corporate governance matters right

312 Damages’ or ‘compensation’ involves having the offender make payments (i.e. pay damages) to
the injured party to compensate for the harm or loss caused. Injunctions are hearings where
courts try to act quickly to prevent wrongs from continuing
312 Penalties are different from remedies as they are meant to punish a wrongdoer; specifically
designed to stop breaches (as a deterrent) and courts may decide to compensate those who have
been harmed by the breaches
312 The Australian cartel provisions and other related provisions (the cartel provisions being criminal
as well as civil) have maximum penalties for individuals as high as AUD 500 000; corporations can
be heavily penalised for criminal and civil breaches—including fines/pecuniary penalties that for
any corporation can be as high as AUD 10 million dollars

312 to the measures that governments take to suppress or deter anti-competitive practices, promote
the efficient and competitive operation of markets and bring about economic growth

313 competitive markets will have greater ability than other non- competitive options to efficiently
produce goods and services at prices that provide value to customers
313 • There should be a sufficient number of buyers and suppliers so that there are real
alternatives.
• No individual trader should have the power to dictate to its rivals or be free of competitive
pressure.
• New traders should be able to enter the market without facing artificial barriers.
• There should be no collusion on prices, customers or trading policy.
• Customers should be able to choose their supplier.
• No trader should have an advantage because of legal or political considerations

313 The logical purpose of seeking competitive advantage is to develop an overwhelming competitive
advantage and eventually achieve a monopoly; a lack of competition and the innovative pressures
that competition creates may make the monopolist lazy, inefficient and an easy target for new
entrants to the market

314 Consumers are generally hurt by lack of competition because prices are not competitive, outdated
technologies and inefficiencies can prevail and the product range and availability are directed by
the monopolist
314 Competition pushes corporations to improve, adapt and respond to the changing environment.
This usually leads to better prices and choices for consumers. The broader economy will also
benefit due to greater efficiency, economic growth and more employment opportunities.

314 laws and regulations is a crucial part of corporate governance framework. It is necessary to define
and understand unacceptable anti-competitive behaviour so that this can be avoided on all
occasions
315 See table 4.2 Australia-Competition and Consumer Act 2010, Australian Competition and
Consumer Commission (ACCC); Canada Competition Act (R. S. 1985)Consumer Packaging and
Labelling Act (R. S. 1985) Competition Bureau Canada; United Kingdom-Competition Act 1998
Competition Commission Office of Fair Trading European UnionCompetition rules of the
Community Treaties including Articles 101 and 102 of the Treaty on the functioning of the EU
European Commission—Directorate General for Competition;Indonesia Law No. 5/1999 (Anti-
Monopoly Practice and Unfair Business Competition) Commission for the Supervision of
Business Competition

315 • abuse of market power;


• mergers and acquisitions;
• agreements between competitors (cartel conduct);
• unilateral restrictions on supply (exclusive dealing); and
• resale price maintenance (vertical price controls).

315 s. 46 of the Competition and Consumer Act 2010 (Cwlth) Misuse of Market Power - (1) A
corporation that has a substantial degree of power in a market shall not take advantage of that
power in that or any other market for the purpose of: (a) eliminating or substantially damaging a
competitor of the corporation or of a body corporate that is related to the corporation in that or
any other market; (b) preventing the entry of a person into that or any other market; or (c)
deterring or preventing a person from engaging in competitive conduct in that or any other
market.

316 Article 102 (formerly Article 82) of the ‘Treaty on the functioning of the European Union’ (EUR-Lex
2012), prohibits anti-competitive business practices that threaten the internal market of the EU

316 Predatory pricing is the supply of goods or services below cost price over a period of time. While
this looks beneficial to consumers, it is an example of misuse of market power and is covered by
specific provisions in many jurisdictions
316 the principal regulator in this area is the Australian Competition and Consumer Commission
(ACCC). The ACCC, even more broadly than similar bodies such as the Hong Kong Competition
Commission, undertakes a number of functions involving regulation, legislation development,
competition law education, prosecution and administrative decision-making

317 A significant underlying reason for many mergers and acquisitions is to reduce the number of
competitors in a market for goods and services. Therefore, in many jurisdictions, regulations are in
place that prohibit or limit mergers and acquisitions unless they are formally approved

318 Cartel conduct involves the existence of a ‘cartel provision’ in a contract, arrangement or
understanding between competitors. Such collusion is effectively a form of conspiracy

318 Collusive behaviour is generally defined as any horizontal agreement or even a mere
‘understanding’ between competitors in a market that affects competition; agreement between
competitors who should be actively competing rather than conspiring that makes collusion highly
inappropriate

318 Cartel behaviour -1. output restrictions; 2. allocating customers, suppliers or territories; 3.
bid-rigging; and 4. price-fixing.

318 The main questions or tests we can ask to assess whether these prohibited behaviours have
occurred are as follows:
1. Has there been a contract, agreement or understanding (i.e. an arrangement)?
2. Has this occurred between competitors?
3. Is the outcome of a type that is simply prohibited or alternatively is the outcome one that has
a significant impact on competition in the market?

319 Output restrictions refer to conduct where competitors ‘agree’ to apply restrictions on output
that will cause shortages in markets and thus result in price rises. E.g Organization of the
Petroleum Exporting Countries (OPEC) cartel (oil)

319 Dividing up markets, customers or regions between competitors is another way of limiting
competition. Also known as market sharing, this activity creates artificial monopolies in respect of
segments of the market
319 Bid-rigging is where competitors who are asked to tender or bid for work collude. To ensure that
prices are maintained, all competitors may agree to submit similar pricing, or allow one of the
competitors to win the work by having the rest of the cartel artificially inflate prices

319 Price-fixing is where competitors collude to create common prices. An example of price- fixing
could be two competitors agreeing to supply goods to customers at the same price

320 determining if price-fixing has taken place, we need to focus on identifying an agreement
between suppliers. This is important because there is one price-setting activity that may look
unlawful, but is actually permitted. This is so-called parallel conduct and price-following

321 Exclusive dealing is when a single corporation decides, in the absence of agreements or
understandings with competitors (which would amount to collusion and therefore cartel conduct),
to deal only with certain customers or geographic regions
321 This type of conduct is generally permitted, but prohibitions may exist if it is shown to lessen
competition substantially. This type of potentially anti-competitive conduct is civil only in most
jurisdictions
321 There are three core characteristics that apply to regulating exclusive dealing:
1. It is not cartel conduct. This means that the organisation in question decides to do something
unilaterally (i.e. by itself), rather than in collusion with other competitors. 2. The unilateral
refusal to deal will be unlawful if, on the balance of probabilities, there is found to be a
‘substantial lessening of competition in a market’.3. ‘Third-line forcing’, which is a specific type
of exclusive dealing, is perceived to be anti- competitive and harmful to competition

322 Resale price maintenance occurs when a supplier stipulates that the goods it provides must only
be resold at or above a certain minimum price. As this leads to maintaining prices, it is regarded
as anti-competitive.
322 While ‘recommended retail/resale prices’ may be provided for products and/or services, crucially
such prices must be termed ‘recommended’ and no attempts can be made to cause any reseller
to adhere to those prices
322 Two questions may be asked to determine if resale price maintenance has occurred:
1. Has the supplier specified a minimum price?
2. Has the supplier taken action or attempted to enforce this minimum price?

323 A case in this area requires the complainant—who may be an affected party or the regulator (in
Australia, the ACCC)—to prove on the balance of probabilities that the behaviour ha occurred.
There is no need to prove that there was an effect on competition as the behaviour, because
resale price maintenance is typically ‘per se illegal’

323 One exception in this area relates to the concept of loss leading. A ‘loss-leader’ is a product that is
sold below cost price to entice resellers/customers into a selling outlet;Loss leaders are intended
by the retailer to lead customers into the store not only to buy that product but also, or instead,
to buy other products

323 A genuine sale where loss leading is permitted would include activities such as short term
discounts to sell excess stock or other genuine discount sales campaigns such as ‘end of year
sales’.

323 An example of where ‘per se illegal’ horizontal price-fixing between competitors might be useful
for consumers is setting the price for taxi fares. Instead of having to negotiate a fare each time you
enter a taxi, there is an established pricing structure in place

324 Costs of legal wrongdoings: • the human resource costs of finding and producing relevant
information for regulators, trials, etc.; • the cost of legal advice and briefing advisers; • the
impact of negative publicity on employee morale, share prices and profits • the diversion of
resources and management effort away from core value-building activities; • managers and
other employees undergoing considerable stress, leading them to take time off work, or even
resigning; and • knowledge gaps and the replacement costs if employees leave.

325 a compliance program is a system designed to assess and reduce an organisation’s risk of breaking
the law. It also promotes a culture of compliance and encourages ‘good corporate citizenship’

326 Possible significant benefits for compliance programs include: • improved safety and quality of
products and services; • improved innovation; • fostering customer goodwill; • problems are
identified systematically and may be minimised or avoided; • encouraging identification and
mitigation of risks; • improved communication and reporting; • increased ethical behaviour;
and • enhanced saleability of the business.
326 Whistleblowing can be defined as the ‘disclosure by organisation members (former or current) of
illegal, immoral or illegitimate practices under the control of their employers, to persons or
organisations that may be able to effect action’
326 The whistleblower, however, must take great care to act only within the legal protections provided
by detailed laws. The whistleblower is still at great risk of retribution or ‘payback’

327 The protection provided to whistleblowers is against being discharged, demoted, suspended,
threatened, harassed or in any manner discriminated against by the corporation or any ‘officer,
employee, contractor, subcontractor, or agent’ of the corporation. In addition, the Sarbanes–
Oxley Act requires audit committees to establish procedures for hearing complaints

327 The Corporations Act whistleblower regime (Part 9.4AAA of the Act) identifies who may be a
whistleblower and in what circumstances they may ‘blow the whistle’ and be protected

328 The legislation prescribes that a person is protected as a whistleblower only if they are:
• an officer of the corporation (this includes senior managers and directors and the corporation
secretary);
• an employee of a corporation; and/or
• a contractor or their employee who has a contract to supply goods or services to the
corporation.

328 e.g husband/wife cannot be a whistleblower. Furthermore, to gain protection the whistleblower
must not be anonymous. The Act requires that they ‘give their name before making the
disclosure’
328 a whistleblower does not need proof. It is enough that they have reasonable grounds to suspect
the corporation or an officer or employee has, or may have, contravened the Corporations Act.
Additionally, they must act in good faith—that is, the whistleblower must not act maliciously

328 Whistleblowers are permitted by law to inform any of the following, but nobody else, or
protection is lost:
• ASIC; • the company’s external auditor or a member of the external auditing team; • a
director of the company, the company secretary, any senior manager of the company; and • a
person specifically authorised by the company to receive whistleblower revelations, such as the
Corporate Counsel or the internal auditor.

330 many managers and corporations succumb to the temptation to seek quick profits without care
for consumers and their long-term needs. Sometimes, there are even deliberate attempts to
target vulnerable customers and consumers by deception and dishonesty

331 Consumer protection is designed to work for consumers (and the economy as a whole) even
where there is no direct contractual relationship with suppliers and manufacturers. E.g safety
standards
331 Caveat emptor is a Latin term that means ‘let the buyer beware’; If customers purchased (or
consumers used), an item that was not fit for use or was dangerous, they often had little chance
of redress
331 not just focused on consumer protection—it is also an attempt by governments to ensure good
business practices that will lead to business success and order in society
332 Table 4.3 being Some important common approaches to consumer protection and, in particular,
the issue of ‘misleading conduct’
332 • Has a truthful impression been conveyed?
• Would a group of less-informed people be misled or deceived?
• Is the approach I am taking one that is fair or would some people find it deceitful?

332 For example, to advertise, or otherwise represent, that a product has been laboratory tested
would not be false if such a test has been conducted. However, the advertisement would mislead
consumers if it omitted to say that the product had failed the test
334 Puffery -Extreme exaggeration; not ‘misleading’ in advertising, esp. where the exaggeration does
not relate to objective facts. Puffery is acceptable because, if statements or representations really
are puffery, the courts assume that consumers could not possibly treat the exaggerations as
serious, let alone be misled. However, the line between obvious exaggeration and deceitful
communication is not always clear

334 Superlatives and comparatives that are self-evident exaggeration or puffing are unlikely to mislead
anyone … However, representations and claims that take on a factual character, particularly in
quality and price terms, may amount to a breach unless they are capable of substantiation (Trade
Practices Commission 1991, p. 16)

335 unfair or unfairly imposed or created contracts. These contracts and the obligations arising from
them will not be allowed where the circumstances make the contracts or the consequences harsh
or unfair and involve a more powerful party taking advantage of another weaker party

336 It can also occur in business-to-business transactions e.g •commercial tenancy arrangements; •
relationships between building contractors and sub-contractors; • franchising; and • financial
services contracts, including loan guarantees, small business loans and financial institutions
dealing with small business.

336 The tests for unconscionable conduct in the case of an ordinary domestic agreement include the
following:
• What was the relative strength of the bargaining power of the corporation and the consumer?
• Were the conditions imposed on the consumer reasonably necessary to protect the
legitimate interests of the corporation?
• Was the consumer able to understand any of the documents used?
• Was any undue influence or pressure exerted on, or were any unfair tactics used against, the
consumer?
• Was the amount paid for the goods or services higher, or were the circumstances under
which they could be acquired more onerous, when compared to the terms offered by other
suppliers?

336 it is important that the other party has a proper understanding of the transaction and that
appropriate ‘balances’ exist within the overall contract
336 additional parts of the expected fair conduct where a business consumer has
a complaint:
• whether the supplier’s conduct towards the business consumer was similar to that of other
suppliers;
• applicable industry codes;
• any intended conduct of the supplier;
• the extent to which the supplier was willing to negotiate terms and conditions;
• the conduct of the supplier and business consumer in complying with the terms and
conditions;
• whether the supplier had the right to unilaterally vary the contract; and
• whether the supplier and business consumer acted in good faith.
337 there are many pressures exerted on the public sector, with changes in policy and practice
occurring with changes in government. Also, encountering almost unlimited demand for services
(e.g. in health care), the resourcing of the public sector is often stretched to the limits

337 PwC reports: • a higher incidence of fraud; (37%) of respondents from government...said they
experienced economic crime in the previous 12 months.; 69% of the fraud ...misappropriation of
assets; staff members perpetrated more than half (57%) of fraud; Senior staff are more likely to
commit fraud in government; (39%) of New South Wales government agencies told the state
Auditor- General their fraud risk assessments were not effective; Government appears to be
lenient on perpetrators of fraud, with only 51% of internal fraudsters at government and state-
owned enterprises being dismissed from their jobs. This compares to 60% across all industries.

338 the charities and not-for-profits working in health, education, social and public welfare commonly
face the governance problem of responding to a growing demand with limited funds

338 In Australia there are 67 000 charities registered, generating an estimated AUD 107 billion in
revenue, with assets of AUD 176 billion and employing almost one million people in 2014

339 In 2015 the Australian Charities and Not-for-profits Commission (ACNC) issued a notice to the
effect that 4000 charities listed on the register had failed to lodge financial reports, and a further
5500 had their charity status revoked after failing to complete their reporting for two consecutive
years

340 The ACNC offers a further detailed breakdown of these governance, fraud and private benefit
concerns: 1) governance 2) fraud/criminal activity 3) private benefit 4) others e.g. insolvency, etc

342 those who manage and direct corporations have a duty to make sure that they attend carefully to
the corporation and its information insofar as these are important parts of any financial market

342 Financial markets are most clearly identified as the places where ownership (and other) rights in
corporations are traded. Terms such as ‘stock market’ and ‘securities market’ are used to describe
them
342 Two basic corporate governance observations 1) Shareholders require a satisfactory return on
their investment 2) Managers need to ensure that corporations perform well
342 ‘the market’ is susceptible to rumour, manipulation, fake information, secret information, misuse
of secret information, self-serving motivations, fraud, theft and unethical conduct of almost
limitless potential
343 Information, properly or improperly used, influences the way in which participants and, therefore,
the market itself behaves
343 There is a wide range of information-creating intermediaries in financial markets, such as
investment banks, analysts, rating agencies, consultants, advisers and auditors. All can be seen as
influencing the market
343 the media (print and electronic, including the internet) is a powerful force in relation to financial
markets. The media transmits information from other intermediaries and also creates information
(and even rumours) itself on occasion

344 media publicity can have profound effects on markets and prices. It can impose pressure on
corporations to improve their corporate governance. Boards and managements of corporations
are often fearful of criticism in the press
344 key market-rating agencies (Fitch, Standard and Poor’s, and Moody’s) as well as other significant
consultants and advisers (especially those dealing with risk assessment

345 There is one focus regarding laws that are specifically designed to protect financial markets.
Unlike, for example, laws that apply to directors (only) or to directors and other officers (only)
unless otherwise stated, the rules designed to protect financial markets apply to everyone.

346 Directors and other officers (especially senior managers) of corporations have legal
responsibilities under the rules that apply to those positions and capacities. For example, a
director or other officer must act in good faith in the best interests of the corporation

346 Through the corporation, you may be more closely involved with the market or have more
market-sensitive information. It is important that managers and directors understand their duties
in full, including those that require understanding of the market.
346 People with inside knowledge may include: share brokers; underwriters; managers; directors;
bankers; advisers from law or accounting partnerships; and anybody who gains inside knowledge
by any means, including by communications with any of the above people.

347 The key tests in determining insider trading are based on the following criteria:
• identifying the information (which can be very broad—e.g. rumours about events or likely
events);
• identifying whether the information has been disclosed in such a way that it is available to
investors in relevant markets (i.e. it has become public knowledge—with enough time for the
information to become known to the market); and
• identifying whether a person who understands markets would buy or sell a security were
they to know that information—in which case the secret information is considered to have a
material impact on the price of a security.

347 Examples of insider trading include:


• purchasing or selling securities based on inside information;
• having a related party purchase or sell securities on behalf of the person, based on the inside
information; and
• communicating the inside information to any person (often called tipping) when the discloser
knows or ought to know that such disclosure is not permitted.

347 financial markets operate under two governing theories: efficiency of markets and investor
confidence. ‘Efficiency’ is measured by the speed with which information provided to market
participants is reflected in the share price. ‘Investor confidence’ revolves around the concept of a
‘level playing field’

348 Market manipulation, like insider trading, may take place from inside a corporation or by those
outside the corporation. Either way, it is generally unlawful and, as it can have a major impact on
any corporation, boards must understand it fully as another key corporate governance
responsibility

348 Market manipulation needs to be controlled in order to achieve reasonably appropriate and fair
distribution of benefits and the correct and orderly conduct of markets. Failure to do so will result
in many withdrawing from any market that does not provide appropriate rewards

348 e.g create a false impression of trading in securities in the corporation to enhance the perceived
value of the shares in the market; a depression of the price of shares may be in the interests of a
director who is seeking to set the bar low at the start of a performance measurement period.
348 • artificial prices or perceptions of artificial prices;
• artificial trading volumes or perceptions of these volumes;
• the provision of false or misleading information including through disclosure that is
incomplete; or
• false transactions including through persuading others to buy or sell as a result of
misinformation.

349 ‘Churning’ involves the placing of buy and/or sell orders for shares with the object of artificially
increasing the market turnover. This increased activity will stimulate market interest and often will
be successful in creating an activity-driven price surges e.g who uses strategies of selling and then
repurchasing the same securities in a similar quantity, with the intention of creating a false and
misleading appearance of active trading

349 ‘Pools’ are organised groups of investors who agree to buy the shares of particular corporations
and, as prices rise due to growing market interest, to sell at a time before the market price
collapses. Given that the prices were ‘induced up’ by the pool, large profits may be derived at the
expense of the other buyers in the market; To make the pool effective, it is common for the pool
to appoint a single manager to trade

349 Runs’ involve groups of market participants who work together (which can increase returns
and/or reduce risks) with the intention of creating market effects (often price rises) in a share by
either buying shares, or disseminating rumours in order to attract new buyers into the market

350 Internet discussion boards are often used to generate interest in a stock. As people watch the
rapid rise, they move quickly to buy the shares, only to discover later that they have been
deceived
350 A prospectus is a document issued by a corporation to establish the terms of an equity issue (or a
debt raising). It provides background to the company, the finance requirements and the financial
and management status of the company so that investors can make an informed decision about
whether to invest

350 false or misleading information in such documents, including the omission of significant issues
and matters that become incorrect during the life of the prospectus, are treated harshly by
regulators, with possible criminal outcomes

352 it involves the payment of money or the provision of benefits, undertaken with a degree of
secrecy, and intended to obtain benefits of some kind; , the person(s) receiving the benefit uses
their position or knowledge to make a personal gain, by acting in the interests of the person
making the payment instead of acting according to their duty

352 it has become an unfortunate common feature of business and commercial relationships across
the whole society. It can then extend internationally—eventually leading to the situation where
corrupt business transactions are almost expected.
353 ‘facilitation payments’. These payments occur where a person charged with the duty to carry out a
function (often, but not always, a government official) will agree to do so more efficiently, or in a
more suitable way, or simply faster after receiving a personal payment (or bribe)

353 The OECD Working Group on Bribery in International Business Transactions and the UN
Convention Against Corruption both demonstrate increased global awareness of the enforcement
and investigation of bribery.
354 Boards need to understand the issues involved in establishing and ensuring sound corporate
governance, including corruption compliance, otherwise the impact on reputation and
performance can be very high
354 A rogue trader is normally an employee (or other authorised person) who engages in
unauthorised trading. The motivation may be personal gain or simply hubris—that is, excessive
pride
354 the assumption that ‘rogue traders’ have acted alone, without the knowledge or acquiescence of
senior executives, is sometimes misleading. When failures occur, both financial institutions and
the courts often attach fault to particular individuals rather than the systems and culture of the
institution itself

355 Ponzi schemes are named after Charles Ponzi who was involved in a very high-profile and
widespread fraud (using a mechanism that had earlier origins). At their simplest, Ponzi schemes
involve earlier investors being given a return by simply diverting the capital contributions of later
investors to the earlier investors

356 phoenix companies involve the deliberate misuse of the legal protections related to limited
liability, meaning that the corporation owes money and the shareholders (usually also being the
directors) have ‘limited liability’
356 they escape the debts of the first corporation only to start again with renewed limited liability in
the new corporation that trades again in the same way—perhaps only to fail again in the same
way and to be replaced yet again

357 in a large corporation, small shareholders have remarkably little influence on the direction of the
corporation and no real control, as individuals, over the decisions made by the board and
management. So significant is this fact that there is a model called the ‘outsider model’, which
recognises that large numbers of small shareholders are owners, but still ‘outside’ in terms of any
real control, since they have little representation in real term

358 General meetings - Each shareholder has a guaranteed right to attend and vote at the general
meeting of shareholders—including, commonly internationally, rights to vote in respect of
executive remuneration.
358 Nominee director -A director appointed to represent the interests of a large shareholder or a
particular group of shareholders. Such a person is unlikely to satisfy ‘independence’ criteria. They
will also be faced with conflicts of interest, as their duty must be to the office of director and not
to the person who arranged their place on the board; Nominee directors commonly face difficult
conflicts of interest as they in fact represent a single large interest and the law requires them to
act for all shareholders.

358 Investor advocate Shareholder associations and committees made up of particular classes of
shareholder. Some associations become investors in their own right, giving them the opportunity
to attend and vote at general meetings. These can be considered an element of so-called
‘shareholder activism’. E.g. ASA, NZSA, IFSA

358 Research and advisory firms -These firms typically conduct independent research and analysis on
the corporate governance and financial position of a corporation, as well as surveys of
shareholders, customers and suppliers. Publication of the results in mainstream media provides a
form of shareholder representation

359 Institutional investor -Some investors actively seek corporate governance, personnel, strategic or
capital management changes to improve the performance of their investments. While such
investors are undoubtedly acting in their own best interests, their reTheir real role is open to very
strong questioningpresentations are made on behalf of all shareholders in the quest to add long-
term, sustainable value.
359 Institutional Shareholders’ Committee (ISC) produced The Responsibilities of Institutional
Shareholders in the UK (ISC 1991). The ISC (renamed the Institutional Investor Committee (IIC) in
2011) is a member association in the UK that brings together large institutional investors to
exchange views and coordinate activities

359 An interesting question arises in relation to some institutional investors, such as CalPERS. Where
such organisations, who primarily exist in order to manage the wealth owned by others, also act
as ‘pseudo-market regulators’ and self-appointed arbiters of good corporate governance
standards, the power and activities of such institutional investors become complex

360 where a group or groups of large institutional investors pool their capabilities in order to develop
‘industry standards’, the likelihood of valuable generic outcomes surely must be greater. An
example of this is the Financial Services Council’s ‘Blue Book’—Corporate Governance: A Guide
for Fund Managers and Corporations (IFSA 2009)—which sets out important guidance for
investment managers (i.e. institutional investors)

362 many purchasers now insist that suppliers must display at least minimum ethical standards. A
powerful example occurred more than 10 years ago when the Finnish company, Nokia, began
sourcing large volumes of inputs from factories in developing economies; employees who worked
in overseas factories to make goods that would be bought and used by Nokia must work in good,
safe working conditions and be paid appropriately

363 HSBC’s ‘Ethical and environmental code of conduct for suppliers of goods and services’ (HSBC
2012). Included in this code, for example, is a set of employment conditions that suppliers need
to comply with.

363 Poor ethics, combined with unlawful behaviour, can damage corporations dramatically. For
example, recent public statements about Olympus Corporation have focused on impropriety
within the corporation and subsequent shareholder losses
Header
Corporate governance
success factors

Board appointment and


cessation - appointment
Board appointment and
cessation - appointment

Board appointment and


cessation - appointment

De-staggering

De-staggering

De-staggering

De-staggering

Departures

Departures

Removal

Removal
Two-strikes rule—
shareholders spill the whole
board
Two-strikes rule—
shareholders spill the whole
board
Two-strikes rule—
shareholders spill the whole
board
Two-strikes rule—
shareholders spill the whole
board
Disqualification

Automatic disqualification -5
years
Disq... by order of court
-20yrs
Disq... Prescribed by
regulatory agencies
Ethics of disqualification

Ethics of disqualification

Board diversity

Board diversity

Board diversity

Board diversity

Board diversity

Board diversity
Board diversity

Board diversity

Board diversity

Board diversity

Adopting diversity

Remuneration and
performance

Remuneration and
performance
Remuneration and
performance

International debates about


remuneration levels and
fairness
International debates about
remuneration levels and
fairness
International debates about
remuneration levels and
fairness
Non-executive directors

Non-executive directors

Executive directors and other


senior executives

Performance-based
remuneration
Performance-based
remuneration

Performance-based
remuneration

Disclosure, transparency and


remuneration

Disclosure, transparency and


remuneration
Disclosure, transparency and
remuneration
Disclosure, transparency and
remuneration
Disclosure, transparency and
remuneration

Disclosure, transparency and


remuneration

Remuneration, risk and the


GFC
Remuneration, risk and the
GFC

Remuneration, risk and the


GFC

Operational issues
-Employees generally

Operational issues
-Employees generally

Occupational health and


safety

Fair pay and working


conditions

Family and leave


entitlements
Ethical obligations—
employee governance

Ethical obligations—
employee governance

Satisfying the objectives of


the OECD Principles

Trade and labour unions

Trade and labour unions

Audit and related regulation

Audit and related regulation

Audit and related regulation

Audit and related regulation

Audit and related regulation

Audit and related regulation

Impact of the legal system on


the corporation

Impact of the legal system on


the corporation

The economy and the legal


system
The economy and the legal
system

The economy and the legal


system
Laws leading to criminal
penalties
Laws leading to criminal
penalties

Laws leading to criminal


penalties

Laws leading to criminal


penalties
Laws leading to criminal
penalties

Laws leading to criminal


penalties

Laws with civil outcomes and


civil penalties

Redress compared with


penalties

Redress compared with


penalties

Redress compared with


penalties

Redress compared with


penalties

Competition policy

Competition policy
Workable competition

Competition and
stakeholders

Competition and
stakeholders

Competition and
stakeholders

Competition and
stakeholders

International competition
legislation and regulators

Regulating anti-competitive
conduct

Abuse of market power

Abuse of market power

Abuse of market power


Abuse of market power

Mergers and acquisitions

Agreements between
competitors—cartel conduct

Agreements between
competitors—cartel conduct

Agreements between
competitors—cartel conduct

Agreements between
competitors—cartel conduct

Output restrictions

Allocating customers,
suppliers or territories

Bid-rigging

Price-fixing

Price-fixing

Unilateral restrictions on
supply (exclusive dealing)
Unilateral restrictions on
supply (exclusive dealing)

Unilateral restrictions on
supply (exclusive dealing)

Resale price maintenance

Resale price maintenance

Resale price maintenance

Resale price maintenance

Resale price maintenance

Resale price maintenance

Approvals procedures

Legal compliance and


governance

Legal compliance and


governance

The positive business case


for compliance
Whistleblower protection

Whistleblower protection

Whistleblower protection

Australian Corporations Act


whistleblowers’ protection

Australian Corporations Act


whistleblowers’ protection

Australian Corporations Act


whistleblowers’ protection

Australian Corporations Act


whistleblowers’ protection

Australian Corporations Act


whistleblowers’ protection

Consumers and customers

Consumers and customers

Caveat emptor to consumer


protection

Regulation and consumer


protection
Regulation and consumer
protection
Misleading conduct and
representations

Misleading conduct and


representations

Puffery

Puffery

Unconscionable conduct

Unconscionable conduct

Unconscionable conduct

Unconscionable conduct

Unconscionable conduct
Governance issues in the
non-corporate sector -
Government bodies

Governance issues in the


non-corporate sector -
Government bodies

Charities and not-for-profits


sector

Charities and not-for-profits


sector

Charities and not-for-profits


sector

Charities and not-for-profits


sector

The corporation and financial


markets

Role of markets

Role of markets

Role of markets

Information and the media

Information and the media

Information and the media

Information and the media


Ratings agencies

Protecting financial markets

Protecting financial markets

Protecting financial markets

Insider trading

Insider trading

Insider trading

Insider trading

Market manipulation

Market manipulation

Market manipulation
Market manipulation

Churning

Pools

Runs

Runs

Fundraising documents

Fundraising documents

Bribery

Bribery

International experience of
bribery and corruption

International experience of
bribery and corruption

International experience of
bribery and corruption
Rogue trading

Rogue trading

Ponzi schemes

Phoenix companies

Phoenix companies

Representation

Shareholder representations
-table 4.4

Shareholder representations
-table 4.4

Shareholder representations
-table 4.4

Shareholder representations
-table 4.4

Shareholder representations
-table 4.4
The representational role of
institutional investors

The representational role of


institutional investors

The representational role of


institutional investors

Expanding ethics

Expanding ethics

Expanding ethics
Objectives
After completing this module, you should be able to:
1 explain the concept of social and environmental responsibility and its relevance to governance;
2 describe the obligations of corporations in relation to their social and environmental behaviours;
discuss the different theoretical perspectives about what motivates organisations to present social and environm
3 information;
4 identify the components of corporate social responsibility or sustainability reports;
identify the limitations of conventional financial accounting in relation to the recognition of social and environm
5 benefits;
6 describe the mandatory reporting requirements for social and environmental performance reporting;
7 describe the elements and frameworks of non-mandatory reporting for social and environmental performance
8 discuss the reasons why an entity would use non-mandatory reporting;
9 explain the relevance of climate change to corporate accountability, and identify some related measurement issu
10 evaluate the role of corporate governance mechanisms in enhancing an organisation's social and environmental

Page #Description/Explanation
390 The term ‘corporate social responsibility’ does not have a precise or fixed meaning. Some
descriptions focus on corporate compliance with the spirit as well as the letter of applicable laws
regulating corporate conduct. Other definitions refer to a business approach by which an enterprise
takes into account the impacts of its activities on interest groups

390 corporations have a social and environmental impact in addition to their economic impact and these
can enhance or diminish the collective good or wider societal progress
390 Corporate accountability is evidenced by CSR or sustainability reporting. This involves measuring and
reporting on economic, environmental, social and governance aspects and the processes
of an organisation

391 CSR reporting is a process whereby an organisation publicly discloses information about its
interactions with, and impact on, the various societies and environments in which it operates.

391 the practice of CSR reporting became more widespread in the early 1990s. At that time, many mining
companies, some water and energy utility organisations and some organisations in other industries
began releasing stand-alone reports (often referred to as environmental reports) that documented
various aspects of their environmental performance

391 In the mid-1990s, various organisations started producing more information about their social
performance. More recently, most leading companies are producing reports—often referred to as
‘Sustainability reports’ or ‘Corporate social responsibility reports’
391 the three main pillars of sustainability: environmental, social and economic sustainability.
392 Environmental sustainability involves making responsible decisions and taking action that are in
the interests of protecting the natural world, with particular emphasis on preserving the capability
of the environment to support human life.
392 humanistic perspective, environmental sustainability is critical because humans rely on the natural
environment for survival and therefore have a responsibility to address the problems they cause

392 The intergenerational argument contends that not being sustainable is an unfair burden to place on
future generations, who ultimately will have to live with the consequences of our current
behaviour
392 naturalistic argument claims that nature has an intrinsic value, and deserves preservation for its own
sake
392 We are increasingly aware of the resource constraints and limitations of the world we live in. For
example, fresh water is a finite resource that is critical to life, but also underpins the productivity of
industrial, mining, agricultural and urban development.

392 Climate change: The change in global and regional climate patterns is associated with more intensive
emission of atmospheric carbon dioxide and other greenhouse gases resulting from the use of fossil
fuels
392 Waste is the by-product of production that cannot be reprocessed, recovered or purified. As global
commercial activity escalates, more waste is produced and discarded or released into the
environment in a manner that can cause harmful change
393 Pollution: Businesses create pollution when production processes lead to the introduction of
substances or contaminants into the natural environment that can cause harmful effects
393 Biodiversity: This refers to ‘the variety of life on Earth. It is the variety within and between all species
of plants, animals and micro-organisms and the ecosystems within which they live
and interact.’ (WWF 2014)

393 Social sustainability can be understood as the ability of a system to continue to function at a
reasonable level of social well-being
393 an organisation is socially sustainable when its activities not only meet the needs of its current
stakeholders but also support the ability of future generations to maintain healthy communities.

393 there are many examples of when companies have not demonstrated their commitment to social
sustainability. One prominent example of this is the 2013 collapse of the Rana Plaza building in
Bangladesh, where 1138 people died, many of whom were poorly paid garment makers who worked
extremely long hours in very unsafe conditions

393 Child labour: places children at risk of harm and interrupts their education. World Vision argues child
labour ‘deprives children of their childhood, their potential and their dignity’
393 Ethical trading: This includes operating in markets with integrity and legality. Unethical trading
practices may include corruption, anti-competitive behaviour, bribery, aggressive or predatory
pricing, unethical marketing or unfair uses of power in markets
393 Supply chain management: Many corporations, particularly multinationals have extensive, complex
supply chains for the products they manufacture. There are increasing demands for corporations to
be more accountable, not only for their own activities, but also for those of the companies that
supply them, as was the case in the Rana Plaza disaster.

394 Western Australia Council of Social Services (WACOSS) developed a Social Sustainability Assessment
Framework in September 2008...intended to be an educational tool that enables organisations to
understand how services and programs contribute to social sustainability by facilitating discussion
and enhancing the understanding and awareness of a project

394 The WACOSS Social Sustainability Assessment Framework has informed the development of WA State
Budget recommendations and is based on five principles: equity; diversity; quality of life; inter-
connectedness; democracy and governance.
394 means using available resources to their best advantage (both efficiently and responsibly) so the
organisation can continue to function over a number of years at a given level of activity. The idea is to
promote the use of those resources in a way that does, and is likely to continue to, provide long-term
benefits

394 The GFC of 2007–08 originated in financial markets and led to a global recession from which we are
still recovering.
The impacts of the GFC were widespread and extended across financial markets, banking systems
and national economies, and ultimately had huge social consequences
394 Long-term viability of businesses: Our reporting and financial systems are geared more towards the
short term. Some argue that this leads to myopic decision-making and an institutionalised failure to
manage businesses for the longer term
394 Stability of the economic system: The GFC, like other economic crises before it, showed how
complex and interconnected our economic systems are. Further, economic systems are an integral
part of human communities, and breakdowns can have widespread consequences. Corporate
behaviour can play a large role in creating a stable economic system

394 Transparency: Transparency refers to openness and authenticity about a corporation’s operations
and strategy. Economic sustainability can be affected by many different factors; transparency allows
external stakeholders to appreciate the exposure of corporations to risks.

395 It is important to jointly consider the three aspects of sustainability. A common way to think of the
three aspects—environmental, social and economic—is as three pillars necessary to achieve
sustainable development
395 weakness in one pillar can have consequences for the other pillars. As a result of the GFC, many
nations and states cut back or postponed stricter environmental laws or investment, since their
budgets were running deficits. Many environmental non governmental organisations (NGOs) saw
their income fall, and income spent on social programs also declined

396 leaders of organisations have ethical responsibilities to create a sustainable society, and that there is
a business case for operating in an environmentally and socially sustainable manner; There is growing
demand from a broad range of stakeholders for organisations to better manage the entity’s
consumption of natural resources, and formally incorporate environmental, social and governance
factors in risk assessment processes.

396 Australian Stock Exchange Corporate Governance Council included a new best practice requirement
that an entity disclose any material exposures to economic, environmental and social sustainability
risks and that if this is the case then the entity needs to provide explanations for how it manages
these risks

396 large businesses that exceed relevant thresholds are required to report to the government their
greenhouse gas emissions, greenhouse gas projects, energy use and production under the National
Greenhouse and Energy Reporting Act 2007 (the NGER Act)

396 There is evidence of a positive relationship between a business’s credibility on sustainability issues
and its ability to win and retain customers, as in Hopwood, Unerman and Fries (2010).
396 The business is also likely to manage risk better if it has a conscious focus on sustainability risks, and
to reap the rewards of direct cost reductions through operational efficiencies and avoiding waste,
travel and regulatory costs
396 The increase in business profitability and ability to manage risks will benefit
the business’s reputation and brand, including its licence to operate and its ability to raise external
funds.
396 There is a growing sense that traditional financial reporting is not sufficient; Governments are making
policy changes and the consequential procedural changes impose new reporting requirements on
companies
397 social enterprises are organisations that exist to fulfil a mission consistent with public or community
benefit, trade to fulfil that mission, and reinvest a substantial proportion of their profit or surplus in
the fulfilment of that mission
397 social enterprises, which are organisations that exist to fulfil a mission consistent with public or
community benefit, trade to fulfil that mission, and reinvest a substantial proportion of their profit or
surplus in the fulfilment of that mission (Barraket et al. 2010); BCorporation are able to distinguish
themselves from other companies by offering a positive vision of a better way to do business

397 the duty to provide a report, or an account, of the actions and decisions made about those areas of
activity for which an organisation is deemed to be responsible; usually focus on the use of resources
that have been entrusted to an organisation’s care

398 a central aspect of corporate accountability and the role of corporate reporting is to inform relevant
stakeholders about the extent to which actions for which an organisation is deemed to be
responsible have been fulfilled

398 A concept whereby companies integrate social and environmental concerns in their business
operations and in their interaction with their stakeholders on a voluntary basis
398 the continuing commitment by business to behave ethically and contribute to economic
development while improving the quality of life of the workforce and their families as well as of the
community and society at large
398 To be sustainable, the needs of the current generations must be met without compromising the
ability of future generations to meet their needs.
398 Sustainability reporting is the process of producing a sustainability report (published by an
organisation) about the economic, environmental and social impacts caused by the organisation’s
everyday activities
398 Natural capital can be understood as the world’s stocks of natural assets. It includes air, water, land,
soil, geology and biodiversity
398 The process of calculating the total stocks and flows of natural capital available to and used by an
organisation, or other possible reporting units, such as an ecosystem or region, is known as natural
capital accounting
399 Integrated reporting is a process founded on integrated thinking (see below) that results in a periodic
integrated report by an organisation about aspects of its value-creation process.
399 the International Integrated Reporting Council (IIRC) has produced a conceptual framework for the
preparation of a concise, user oriented corporate report entitled an ‘integrated report’, which
captures an organisation’s resources and relationships using a ‘six capitals concept’ and requires a
description of a company’s business model, allowing a better communication of its value creation
proposition over the short, medium and longer term

399 the active consideration by a company of the relationships between its various operating and
functional units and the capitals that the organisation uses and affects
399 it advances the alignment of the organisation’s strategic focus with both its financial and non
financial performance. With greater comprehension of how a company creates value and of the
social and environmental impact of its activities, it is more likely that management will recognise
399 companies have treated the atmosphere as a ‘free good’ and have released emissions into the
atmosphere with no direct cost implications; Had organisations been charged an expense for their
emissions in their pursuit of profits in a market-based economic system, this might have encouraged
them to develop ways to reduce their emissions

399 The introduction of carbon taxes and emission-trading schemes in some parts of the world has
meant that many organisations will now have to internalise aspects of the environmental impact of
their business that would previously have been treated as an externality and ignored

400 The impact of the GFC extended across financial and national economies and ultimately had huge
social consequences. It showed how complex and interconnected our economic markets are, and
how vulnerable many parts of our society are to economic conditions
400 major contributing factors to the GFC:(1)High leverage (2) Inadequate governance, accountability and
remuneration practices within financial institutions. (3) Uncontrolled liquidity creation (4) Growth of
a largely unregulated ‘shadow banking’ sector and the construction of complex financial instruments
and techniques (5) A lack of public information about the level and distribution of risk in the
financial system (Davis 2011, p. 4).

400 This means that society will increasingly come to expect greater disclosure of environmental and
social impact, as well as governance information; A social contract is an implied agreement between
an organisation and society, and the terms of the social contract are the ways in which society
expects the organisation to operate

401 impact on a company’s profitability example:


• revenue effects associated with market growth or decline due to changes in customer
preferences for environmentally sustainable products and production methods;
• clean-up costs or fines for non-compliance with environmental regulations;
• insurance cover incorporating environmental risk; and
• research and development programs to stay ahead of environmental regulation.

401 The statement of financial position can also be affected through, for example:
• impairments in the value of land as a result of contamination;
• plant write-offs as a result of changes to clean production capacity;
• changes in the net realisable value of stock related to consumer preferences for environmentally
harmless products;
• liabilities (through remediation requirements).

401 In 2009, members of WBCSD produced a report entitled Vision 2050, which shows how it is
possible for nine billion people to live well without exhausting the natural capitals of the world; An
organisation’s reputation can be essential to economic survival, as it affects relationships with key
stakeholders that help an organisation not only survive but also prosper

401 More investors are now seeking to invest on an ethical basis in companies that demonstrate social
and environmental responsibility in their activities. In Australia, socially responsible investing (SRI)
has continued to grow since the late 1990s
402 Social and environmental performance can affect an organisation’s future reputation, brands and its
ability to attract talented staff, and maintain consumer and public support e.g. Nike, H&M, GAP
Reebok child labor; Apple, Walmart
402 Some risks are insurable, while the more intangible ones, such as community outrage, require
management awareness as well as mitigating controls. Such non-financial information helps
management to better understand the nature and likelihood of these risks
402 Insurance coverage of environmental risks can represent a major cost to companies. Thus,
reducing information risks, and showing how these risks are being identified and managed by
reporting on non-financial performance, may result in economic benefit by reducing financing
expenses.

403 Various stakeholders, including investors, will increasingly consider risks associated with climate
change when making investment decisions; There will be a demand for company-specific information
on how climate change has affected, and will affect, the organisation in question

403 The external benefits claimed to be associated with CSR are many, as corporations are enabled to
demonstrate how they create value, consider sustainability matters and coordinate their non-
financial efficacy in the short, medium and long term

403 a consequence of the enhanced disclosures is that investors’ trust and confidence are increased, and
an increased inflow of financial capital will occur, which has the potential to lower the capital cost:
the cost that a company has to pay to its providers of financial capital, both shareholders and
debtholders

403 CSR reporting can contribute to lowering the cost of capital through at least three channels:
1. Signalling the quality of the company. CSR reporting requires a clear vision and commitment to
social and environmental value creation activities and helps to identify risks and opportunities within
the business;
2. Expanding a company’s relevant disclosures to support stakeholder decision-making; and
3. Reducing the uncertainty in assessing the company’s performance.

403 They observe that the reporting of such information is associated with an increase in analyst
coverage and improved prediction of a company’s future financial performance
404 It becomes an effective tool in shaping the public perception that a company is seriously attempting
to account for their sustainability matters and is committed to delivering positive impacts for society

404 Organisations need to explicitly consider to whom they believe they owe a responsibility, and for
what aspects of their performance, before they decide what information they will report, and how
and to whom they report
404 There is one and only one social responsibility of business and this is to use its resources and engage
in activities designed to increase its profits as long as it stays within the rules of the game, which is to
say, engages in open and free competition, without deception or fraud

404 many corporate managers are directly remunerated on the basis of profits (e.g. it is very common for
managers to be rewarded by being given a specified percentage of profits as part of their bonus
structure)
405 An alternative view to that of Friedman is that organisations, public or private, earn their right to
operate within the community. This right is provided by the society in which they exist, and not solely
by those parties with a direct financial interest
405 the privilege of incorporation, which may provide limited liability and the ability to raise capital
from the public, is not guaranteed but granted by the state. The state, in turn, can dictate the terms
and controls on operating the business; organisations do not have an inherent right to resources and
must not just focus on maximising the welfare of one stakeholder group (e.g. shareholders) to the
possible detriment of others

405 for the community to continue to allow such organisations to exist, the benefits generated by an
organisation must be perceived to exceed their costs to society as a whole.
406 Investors, by way of their investment, are the group risking their own capital. Therefore, it is only fair
that the directors answer to them and to them only (see table .1)
406 Due to the protections and privileges provided by the act of incorporation (e.g. limited liability and
perpetual succession), the duties owed by the organisation should not just be to shareholders. There
is also a duty to the broader community, and it is fair to say that society should expect the
corporation to behave in the general public interest, rather than in a purely self-interested, profit-
focused manner

406 There are environmental reporting requirements in s. 299(1)(f) and, arguably, in s. 299A Corporations
Act 2001 (Cwlth). Also, in March 2014, the ASX Corporate Governance Council included a new
recommendation, 7.4, which requires that an entity disclose any material exposures to economic,
environmental and social sustainability risks and, if it does, how it manages these risks

407 (1) A director of a company must act, in good faith, would be most likely to promote the success of
the company for the benefit of its members as a whole, and in doing so have regard (amongst other
matters) to—
(a) the likely consequences of any decision in the long term,
(b) the interests of the company’s employees,
(c) the need to foster the company’s business relationships with suppliers, customers and others,
(d) the impact of the company’s operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct,
and
(f) the need to act fairly as between members of the company (UK Companies Act (2006), s. 172).

407 The counter view is that s. 181(1) actually discourages companies from considering the needs of
stakeholders (other than shareholders) and of the environment. That is, companies are legally bound
to maximise profits to shareholders. This view would suggest that, by publicly embracing CSR,
companies can publicly promote their social ‘values’, while in reality keeping their value in focus—
this being the company’s share price.

408 An externality can be defined as an impact that an entity has on parties that are external to the
organisation where such external parties did not agree or take part in the actions causing, or the
decisions leading to, the cost or benefit; Externalities can be viewed as positive (benefits) or negative
(costs)

408 In a freely operating market that does not place a cost on pollution, there is the obvious implication
that production will increase, profits will rise and, at the same time, the environment will become
degraded; Government intervention can be employed as a means of placing costs on the use of
resources that might otherwise go unrecorded. For example, we can consider the potential
introduction of carbon-related taxes, where organisations are taxed on the basis of the amount of
carbon dioxide released into the atmosphere

409 an organisation has to identify the:


• objectives of the reporting process (why report?);
• the stakeholders to be addressed by the reporting process (for whom is the report intended?);
and
• the information requirements of the stakeholders (what issues is the entity held responsible and
accountable for by its stakeholders—or what issues should the report cover?).

410 Enlightened self-interest is linked to the shareholder primacy perspective about the role of
corporations in society, but explains the circumstances under which CSR-related activities may be
considered.
410 this perspective argues that the best outcomes for society come about when individual firms are
allowed the freedom to pursue their own interests and maximise their utility in free markets. These
arguments tend to reflect the teleological positions of utilitarianism and ethical egoism

410 CSR could and should be undertaken if there is a business case for that activity or if it is in the
interests of the shareholders; Some of these include: •improved employee recruitment, motivation
and retention; • greater learning and innovation; • better customer confidence and reputation; •
improved risk and governance profile and risk management; • enhanced competitiveness and
market positioning; • avoiding costs and risks of regulation;
• greater operational efficiency; • increased analyst interest and accuracy, affecting valuation; •
attracting investors and other capital providers, and achieving lower costs of capital; and •
preserving a licence to operate in communities.

411 a stakeholder of an organisation can be broadly defined as ‘a party that is affected by, or has an effect
upon, the organisation in question’ ; Stakeholders often include diverse groups such as employees,
management, shareholders, communities, society, government and the state, and even the
environment and future generations

412 A normative, or ethical, perspective on stakeholder theory is deeply rooted in deontological ethical
theory, which emphasises duties and values; This perspective argues that all stakeholders for an
organisation have inherent worth, and therefore, all stakeholders have the right to be treated fairly
by any organisation

412 All stakeholders have a right to information about how this accountability is being discharged. CSR,
from this perspective, is a responsibility of organisations rather than being demand-driven; This is not
how organisations actually act—but rather an ideal of behaviour
413 managerial action is based on advancing the interests of the organisation. Therefore, it does not
reject positive interaction with all stakeholders; however, the underlying purpose of the interaction is
self-interest ; stakeholders who are regarded as more important or powerful in their ability to
influence shareholder value will attract additional effort and attention from managers

413 Corporate social disclosures are, therefore, viewed as a mechanism to improve reputation and
relationships with shareholders, creditors and other interested parties; it tends to see stakeholders as
the means to an end, rather than an end in themselves. In reality, organisations will often show both
types of justification for their reporting.

413 Legitimacy theory is based on the notion that there is a social contract between the organisation and
the society in which it operates. The social contract is not easy to define, but the concept is used to
represent the multitude of implicit and explicit expectations that society has about how the
organisation should conduct its operations

413 This means that corporations do not necessarily have a clean slate to do whatever maximises
shareholder value, but must instead keep within the bounds of reasonable or expected behaviour
and activities in a community.

414 The main premise of legitimacy theory is that an organisation will take action to manage community
perceptions in order to survive. Corporations need to at least appear to be operating within the
established rules of society, that is, within the bounds of the social contract
414 courses of action that organisations can take to obtain, maintain or repair legitimacy:
• Change and inform—perform activities in a manner that is appropriate, given the expectations of
society, and then inform the relevant stakeholders about these actual behaviour changes, as well as
the performance results;
• Change perceptions without actual change—convince those who are evaluating the organisation
that change has occurred without actually changing performance, activities or behaviour;
• Deflect attention and manipulate perceptions—switch the focus away from areas of concern to
other issues where the organisation is performing well, and use emotional symbols and rhetoric to
influence expectations; or
• Change criteria for evaluation—try and influence the levels of performance expected, and
attempt to highlight that certain criteria used by society are unreasonable (Lindblom 1994)

414 Institutional theory looks not only at individual organisations, but at organisational fields (e.g.
industries). Compared with those theories, institutional theory is less normative and not so grounded
in ethical theory, focusing more on explaining real-world behaviour.
415 Institutionalisation is a process of homogenisation (usually referred to as isomorphism) in
organisational practices over time. Institutionalisation results in the widespread adoption of
innovation or new practices in a field to the point of stability or even inertia
415 three main isomorphic processes:
• coercive: when powerful stakeholders pressure a number of organisations in a field to adopt a
practice leading to conformity with that practice;
• mimetic: when organisations imitate the behaviour of their peers and competitors to gain
competitive advantage and reduce uncertainty; and
• normative: when group norms are established that pressure organisations to change practices

415 explains how gaps develop between formalised policies and the actual behaviour of organisations

415 Summary of the theories are in table 5.2

416 Measurement refers to collecting, analysing and assigning quantitative values to an issue. Measuring
sustainability issues is important in corporations as it allows these issues to be integrated into
established business decision-making processes.
416 • quantification: expressing an issue or change in numerical terms (e.g. 75% of staff feel they have
adequate training and development opportunities);
• monetisation: converting a quantified value into currency as a standard unit of measurement
(e.g. ‘we invested $1 million in staff development and training’); and
• narrative reporting: expressing an issue in qualitative form (e.g. what is the management
approach or strategy to staff development?).

417 • labour practices and workplace—including diversity and equal opportunity, employment
standards and turnover, training and development;
• human rights—including compliance with human rights Acts, policies and management of issues
such as freedom of association, collective bargaining, child labour and forced labour;
• society—including investments in local communities, anti-corruption and anti-competitive
behaviour; and
• product responsibilities—including customer health and safety, product labelling and ethical
marketing.

417 1) Social issues involve quality and subjectivity that can be hard to capture in quantitative or
monetised approaches. 2) In CSR reporting, the concept of entity is relaxed. 3) Time is an important
measure for social issues.
418 Environmental reporting accounts for how corporations draw from and affect the natural
environment; include:
• materials usage and product resource consumption;
• resource usage—including energy and water;
• emissions, effluents and waste;
• transport usage; and
• compliance with and breaches of mandatory and voluntary environmental regulations.

418 1) Reporting on biodiversity (flora, fauna and ecosystems) is very challenging, 2) Similar to social
reporting, environmental reporting includes measures of impact beyond the control of the
organisation. 3)Many environmental estimates include discount rates for future impact (similar to
discounting for the time value of money). 4) Environmental impact measurement is often confined to
and ‘siloed’ in particular areas (e.g. water use and greenhouse gas emissions) and there is a need
to determine how these different measures fit together to provide an overall assessment of
environmental impact

419 The final element of CSR refers to the sustainability of an organisation’s economic performance. This
includes financial performance measured by generally accepted accounting principles, but this by
itself may be too limited
419 • market share: referring to the percentage or size of market share for the company, division, unit
or particular products;
• quality rankings: such as prizes or performance against particular benchmarks;
• customer satisfaction: including describing customer service initiatives, loyalty, awards or
campaigns;
• employee satisfaction: comparison of loyalty and awards and comparison to competitors;
• turnover rates: employee turnover compared with competitors and industry averages; and
• innovation: describing innovations introduced across the organisation’s value chain. Innovation is
sometimes measured in monetary terms, such as the amount spent on research and development,
or it can be quantified, such as the number of patents awarded

419 scope of reporting, elements of financial reporting, the practice of discounting future cash flows,
reliable measurement and probability, focus on short-term results and the entity assumption.

420 shareholders, along with debt capital providers, are the main audience for financial reporting, and
they are named the primary users; By emphasising the financial information relevant to capital
providers, the Conceptual Framework reflects a shareholder primacy perspective (discussed earlier in
this module). This implies a very narrow interpretation of accountability, restricting reporting only to
those aspects associated with financial performance

420 financial reporting alone cannot answer important questions about social and environmental
performance:
• How high is employee morale and turnover?
• Are customers being supplied with appropriate products and services?
• Is the supply chain operating ethically?
• Are the rights of Indigenous people being respected?
• How is the organisation contributing to climate change?

420 Control is a central attribute of the asset definition. If a resource is not controlled by an organisation,
it cannot be considered as that organisation’s asset ). However, many important social and
environmental assets that are of interest to stakeholders are public goods and are not exchanged in
market transactions, including clean air, water, native forests, flora and fauna, and community
wellbeing
421 definition of expenses is contingent on the recognition of an asset or liability. Therefore, the
depletion of or contribution to these shared public goods (externalities, as discussed earlier in this
module) by the corporation does not meet this definition
421 When the concept of discounting is applied to social and environmental issues, ethical problems
arise. Many social and environmental issues involve very long time frames (consider climate change,
as one example). Discounting the cost of something that will occur in the future maybe seen as
shifting the problems of one generation on to future generations

422 For all the five elements of financial accounting, both probability and measurability are key
considerations. This has significant ramifications for many similar sustainability issues; measurement
of sustainability issues is complex and often difficult, and questions are raised over the reliability of
many of the measures that are currently used compared with the standards of measurement we use
in financial accounting

422 Current reporting practices tend to emphasise relatively short-term performance reporting—often at
quarterly or half-yearly intervals. As accountants, we tend to emphasise short-term (annual)
performance through our practices of dividing the life of the asset up into somewhat artificial
periods of time. This can have the effect of discouraging us from making long-term investments in
new technologies, including those that will provide longer-term social and environmental benefits.

422 A central assumption of financial accounting is the entity assumption, which requires an organisation
to be treated as an entity distinct from its owners, other organisations and other stakeholders;
Anything the entity does that does not affect its own financial position or performance (in that
period or future periods) is ignored. This is despite any negative (or positive) impact that might be
imposed on others

423 • There are 134 mandatory policies and a further 53 voluntary policies covering different aspects
of CSR reporting.
• Many of the compulsory policies are on a comply (apply) or explain basis.
• CSR reporting has become a listing requirement on several stock exchanges in non-OECD
countries, including Brazil, China, Malaysia and South Africa.

424 Figure 5.2 outlines the sections of an annual report where current mandatory reporting
requirements of a social and environmental nature embodied in the Corporations Act and accounting
standards are normally reflected.
425 This section requires that in the directors’ report, which must be included in the annual report,
directors must give details of the entity’s performance in relation to environmental regulations ‘if the
entity’s operations are subject to any particular and significant environmental regulation under a law
of the Commonwealth or of a State

425 listed companies are required to include in the directors’ report any information that shareholders
would reasonably require to make an informed assessment of the company’s: • operations; •
financial position; and • business strategies and prospects for future financial years

425 Corporations in Australia must comply with accounting standards by virtue of s. 296 of the
Corporations Act, which requires company directors to ensure that the company’s financial
statements for a financial year comply with accounting standards. Two accounting standards of direct
relevance to our discussion are IAS 37 and IAS 16

426 The third edition includes a new recommendation, 7.4, which states that ‘a listed entity should
disclose whether it has any material exposure to economic, environmental and social sustainability
risks and, if it does, how it manages or intends to manage those risks’ (ASX CGC 2014, p. 30)
426 This disclosure is on a comply or explain basis (or an ‘if not, why not’ basis) in the directors’ report
section of an annual report. The inclusion of this recommendation reflects growing recognition of the
importance of sustainability risks to investors’ medium- to long-term decisions

426 The National Greenhouse and Energy Reporting Act 2007 (Cwlth) (NGER Act) introduced a national
framework for the reporting and dissemination of information about greenhouse gas emissions,
greenhouse gas projects, and energy use and production of corporations
426 The objectives of the NGER Act are to:
• inform government policy;
• inform the Australian public;
• help meet Australia’s international reporting obligations;
• assist Commonwealth, state and territory government programs and activities; and
• avoid duplication of similar reporting requirements in the states and territories (CER 2015b).

427 The NGER Act requires the ultimate Australian holding company of a corporate group to apply for
registration if its corporate group exceeds any one or more of the following thresholds for a financial
year as provided in Table 5.3
427 Corporate groups that meet an NGER threshold must report their:
• greenhouse gas emissions;
• energy production;
• energy consumption; and
• other information specified under NGER legislation.

427 Reporting under the NGER Act was expected to lead to a carbon tax that was established under the
Clean Energy Act 2011 (Cwlth) (CE Act). However, following the 2013 federal election, the Australian
Government announced that it would implement a Direct Action Plan to ‘efficiently and effectively
source low cost emissions reductions’

428 A failure to report in accordance with the NGER Act exposes the reporting entity to fines of up to
$340 000 (2000 penalty units) for failure to apply for registration, and daily fines of up to $17 000
(100 penalty units) for each day of non-compliance. It also exposes the executive officers of the
corporation to be liable for a civil penalty, at least where the officer knew the failure would occur

428 to provide incentives for businesses across the economy to reduce emissions (Australian
Government 2015). Its aim is to reduce emissions at lowest cost and contribute towards Australia’s
2020 emissions reduction target of 5 per cent below 2000 levels by 2020
428 Participants submit a bid—specifying a price per tonne of emissions reductions—with the lowest-
cost projects being selected. Participants will not be able to see what other companies are bidding as
bids will be ‘sealed’, or secret. Successful participants will be paid the price that they bid (commonly
called a ‘pay-as-bid’ auction

428 The National Pollutant Inventory (NPI) was the first national environment protection measure to be
established by the National Environment Protection Council (NEPC). The NEPC operates under the
National Environment Protection Council Act 1994 (Cwlth) and enables the public to find out, via the
internet, what businesses are discharging into the environment, as well as showing what actions an
organisation may be taking to reduce its emissions; The NPI requires industrial facilities operating in
Australia to estimate emissions of 93 substances exceeding a specified threshold amount

429 While the disclosures required by the various regulatory regimes other than the Corporations Act
and accounting standards discussed earlier (e.g. NGER Act, NPI) are mandatory for certain
organisations, the organisations are not compelled to disclose the information in their own annual
reports, sustainability reports or on their websites
429 Social procurement requires public bodies to consider the social value created in procurement
contracts, which may help social enterprises and charities to compete with larger, established
providers.
430 The European Union (EU) emissions trading system is a key tool for reducing industrial greenhouse
gas emissions cost effectively; Central to the EU ETS cap-and-trade scheme is the creation of emission
allowances. One allowance represents the right to emit one tonne of CO2. The limit or ‘cap’ on the
number of allowances allocated creates the scarcity needed for a trading market to emerge.

431 In Figure 5.3 we outline how these guidelines and schemes relate to economic, environmental or
social sustainability. Although we have separated out the three main pillars, they are slowly
becoming more intertwined, as shown by the GRI and the integrated reporting approaches.

432 The GRI is an international, multi stakeholder effort to create a common but credible framework for
voluntary reporting of the economic, environmental and social impact of organisational-level activity

432 The GRI also provides sector guidance in the form of industry-specific guidance documents. For
example, the guidance for the mining and metals industry includes issues such as site rehabilitation
(GRI 2013b), while for the banking industry the social and environmental impact of lending practices
is examined (GRI 2013c)

432 • main sustainability interests and indicators raised by stakeholders;


• main topics and future challenges for the sector reported by peers and competitors;
• relevant laws, regulations, international agreements or voluntary agreements with strategic
significance to the organisation and its stakeholders; and
• reasonably estimable sustainability risks or opportunities (e.g. global warming, HIV/AIDS,
poverty).

432 • key organisational values, policies, strategies;


• interests of stakeholders specifically vested in the success of the organisation (employees,
shareholders and suppliers);
• significant risks to the organisation;
• critical facts for enabling organisational success; and
• core competencies of organisations and how they can be applied to contribute to sustainability.
432 The guidelines show the required standard disclosures (GRI 2013a). The general standard disclosures
are as follows:
• Strategy and analysis—description of the organisation’s strategic relationship and report context.
• Organisational profile—overview of the reporting organisation’s structure, activities and
countries of operation.
• Identified material aspects and boundaries—details of the reporting period, experience and
scope. This is to include details of GRI usage and assurance processes if used.
• Stakeholder engagement—description of the process for including stakeholders during the
reporting period.
• Report profile—overview of the basic information about the report, the GRI content index, and
the approach to seeking external assistance.
• Governance—description of governance structures and details of accountability for sustainability
matters, and commitments to external initiatives.
• Ethics and integrity—overview of the organisation’s values, principles and norms, and its policies
and process for managing ethical and lawful behaviour (GRI 2013a, p. 12).; The specific standard
disclosures are as follows:
• Disclosures on management approach—measures of the effect of the reporting organisation
divided into integrated, economic, environmental and social performance indicators.
• Indicators—50 core indicators for an organisation to report against, with an additional 30
indicators that may be relevant for different organisations (GRI 2013a, p. 12).

434 • Australian Minerals Industry, in a document titled Enduring Value: The Australian Minerals
Industry Framework for Sustainable Development (MCA n.d.);
• Energy Supply Association of Australia, in a document titled Sustainable Practice Framework
(ESAA 2009); and
• Property Council of Australia, in a document titled A Guide to Corporate Responsibility Reporting
in the Property Sector (PCA 2009).

434 Integrated reporting is consistent with numerous developments that are taking place in corporate
reporting around the world. It is a response to the limitations of traditional financial reporting

435 It is believed that a lot of the benefits of the integrated reporting initiative are due to the
improvement to internal decision-making from adopting integrated thinking. Integrated thinking in
an organisation leads to integrated decision-making and encourages management to undertake
actions that affect the ability of an organisation to create value over time

436 The OECD Guidelines for Multinational Enterprises (OECD 2011) (OECD Guidelines) are a
comprehensive set of government-backed recommendations on responsible business conduct

436 Within the OECD Guidelines, it is stated that enterprises should take into account the established
policies of the countries in which they operate and consider the views of other
stakeholders.Enterprises should contribute to economic, environmental and social progress with a
view to achieving sustainable development
436 the CDP focuses on the implications of climate change for shareholder value and commercial
operations. The CDP seeks information on the business risks and opportunities presented by climate
change and greenhouse gas emissions from the world’s largest companies. It publishes emissions
data for approximately 4000 of the world’s largest corporations ; CDP holds the view that
information about greenhouse gas emissions is useful to investors, corporations and regulators in
making informed decisions that take into account

437 The United Nations Global Compact is a principle-based framework for businesses, with a set of 10
principles. It is the world’s largest corporate citizenship initiative and, as a voluntary initiative, it exists
to assist the private sector in the management of risks and opportunities in the environmental, social
and governance realms

438 Human rights


Principle 1: Businesses should support and respect the protection of internationally proclaimed
human rights; and
Principle 2: make sure that they are not complicit in human rights abuses.
Labour
Principle 3: Businesses should uphold the freedom of association and the effective recognition of the
right to collective bargaining;
Principle 4: the elimination of all forms of forced and compulsory labour;
Principle 5: the effective abolition of child labour; and
Principle 6: the elimination of discrimination in respect of employment and occupation.
Environment
Principle 7: Businesses should support a precautionary approach to environmental challenges;
Principle 8: undertake initiatives to promote greater environmental responsibility; and
Principle 9: encourage the development and diffusion of environmentally friendly technologies.
Anti-Corruption
Principle 10: Businesses should work against corruption in all its forms, including extortion and
bribery (UNGC 2011, p. 6).

438 AccountAbility, founded in 1995, promotes itself as a global organisation that provides solutions to
the major challenges in corporate responsibility and sustainable development, is based on the
following principles:
• Inclusivity—people should have a say in the decisions that impact on them.
• Materiality—decision-makers should identify and be clear about the issues that matter.
• Responsiveness—organisations should be transparent about their actions

439 Currently, the AA1000 series consists of:


• The AA1000 AccountAbility Principles Standard 2008 (AA1000APS), which provides a better
‘framework for an organisation to use in order to better identify, understand, prioritise and respond
to its sustainability challenges’ (AccountAbility 2008).
• The AA1000 Assurance Standard 2008 (AA1000AS), which is a leading international standard,
used to provide assurance on publicly available sustainability information, particularly CSR or
sustainability reports (AccountAbility 2008).
• The AA1000 Stakeholder Engagement Standard 2015 (AA1000SES) (currently under revision for
public comment), which provides the basis for building robust and responsive stakeholder
engagement processes (AccountAbility 2015).
439 The Equator Principles are a voluntary set of standards for determining, assessing and managing
social and environmental risk in project financing. Equator Principles Financial Institutions (EPFIs)
commit to not providing loans to projects where the borrower will not or is unable to comply with
the respective social and environmental policies and procedures that are incorporated into the
Equator Principles

439 while the Equator Principles are not intended to be applied retrospectively, EPFIs will apply them
to all project financings covering expansion or upgrade of an existing facility where changes in
scale or scope may create significant environmental and/or social impact, or significantly change
the nature or degree of an existing impact.

440 The GHG Protocol represents a partnership between the World Resources Institute (an
environmental ‘think tank’ in Washington DC. that receives funding from a large number of corporate
donors) and the
World Business Council for Sustainable Development (a coalition of 200 international companies).
The GHG Protocol is used by many greenhouse gas (GHG) standards and programs throughout the
world

440 • To help companies prepare a GHG inventory that represents a true and fair account of their
emissions, through the use of standardised approaches and principles.
• To simplify and reduce the costs of compiling a GHG inventory.
• To provide business with information that can be used to build an effective strategy to manage
and reduce GHG emissions.
• To increase consistency and transparency in GHG accounting and reporting among various
companies and GHG programs

440 six greenhouse gases covered by the Kyoto Protocol: • CO2 (carbon dioxide• CH4 (methane)• N2O
(nitrous oxide)• HFCs (hydrofluorocarbons)• PFCs (perfluorocarbons)• SF6 (sulphur
hexafluoride).nitrogen trifluoride (NF3 )
440 Corporate Accounting and Reporting Standard (Corporate Standard) provides methodologies for
businesses and other organisations to report all of their GHG emissions; The second, the Project
Accounting Protocol and Guidelines (Project Protocol), is designed to calculate reductions in GHG
emissions from specific GHG-reduction projects; The third is the Corporate Value Chain (Scope 3)
Accounting and Reporting Standard, which allows companies to assess their entire value-chain
emissions impact and identify the most effective ways to reduce emissions; The fourth is the Product
Life Cycle Accounting and Reporting Standard, which can be used to evaluate the full life cycle
emissions of a product.

441 Trucost has developed a model to calculate quantitative ‘environmental impact across organisations,
supply chains and investment portfolios’ (Trucost n.d.). This model is built on an analysis of 464
industries worldwide and tracks over 100 environmental impacts; Trucost draws on a range of
sources in its analysis, including financial information from sources such as Dun & Bradstreet, to
establish the business activities of an organisation and then apportion the organisation’s revenues to
those activities

441 The Sustainability Accounting Standards Board is a US not-for-profit organisation whose mission is
to develop and disseminate sustainability accounting standards that help US publicly listed
companies meet their Securities and Exchange Commission (SEC) sustainability disclosure
requirements

442 The Dow Jones Sustainability World Index was launched in 1999 and provides a global sustainability
benchmark that tracks the share performance of the world’s leading companies in terms of
economic, environmental and social sustainability
442 A social audit can be seen as representing the process an organisation undertakes to investigate
whether it is perceived, by particular stakeholder groups, to be complying with the social contract.
This definition of a social audit is consistent with Elkington (1997), who states that the purpose of
social auditing is for an organisation to assess its performance in relation to society’s requirements
and expectations

444 If an organisation believes it is accountable to particular stakeholder groups for certain aspects of its
performance, it would seem sensible to engage the stakeholders to find out whether they are
satisfied with the organisation’s performance, and the results of this engagement would form part of
the organisation’s account of its social performance.

444 Sustainability policies, strategies and performance risk indicators need to be developed as an integral
part of the overall corporate strategy to reflect the requirements of sustainable development as well
as the priorities of stakeholders. Strategies should clarify corporate responsibility positioning
decisions in light of benchmarking information. Business strategy alignment should also be
periodically validated.

445 a sound corporate management system should also link executive rewards to key social and
environmental performance indicators. That is, rather than focusing on reward structures that are
tied to measures of financial performance only (paying senior executives a bonus tied to profit, sales,
return on assets, and so forth), management’s bonuses could also be tied to social and
environmental performance indicators, for example, a reduction in emission levels or workplace
injuries

445 Climate change poses many risks and opportunities to current and future generations. To reduce the
risks associated with climate change, an entity should put in place corporate governance mechanisms
specifically aimed at reducing their emissions of greenhouse gases. Please see table 5.3

446 The management of environmental and economic performance via management accounting systems
and practices that focus on both physical information on the flow of energy, water, materials, and
wastes, as well as monetary information on related costs, earnings and savings

446 One of the first steps required when implementing an environmental management accounting
system is to define which environmental costs will be accounted for (or managed). These costs can
be restricted to those currently recognised by an organisation pursuant to ‘conventional’ accounting
practices or they could be extended to include externalities

446 It is possible for potentially important environmental costs to be hidden in the accounting records,
where a manager cannot find them easily. One particularly common way to hide environmental costs
is to assign them to overhead accounts rather than directly to the processes or products that
created the costs.

447 opportunities relating to reducing such things as waste can also be enhanced if we classify particular
costs differently. What should be understood at this point is that relatively inexpensive changes to an
entity’s accounting system can be made that might lead to real changes in the ability to control
resource usage

447 Another potential problem with environmental management accounting is that accounting records
do not usually contain information on future environmental costs, even though they may be quite
significant
448 • More informed decision making;• Uncovering opportunities: an analysis of environmental
costs might reveal opportunities,• Improved pricing of products;• Assist with internal and
external reporting: • Increased competitive advantage• Improved reputation• Staff retention
and attraction• Generation of societal benefits
448 ‘the high rates of [CSR] reporting in all regions suggest it is now standard business practice
worldwide’
448 • Ninety-three per cent of the 250 largest companies in the world (G250 companies) reported on
their CR activities • Australia was one of the 41 countries surveyed that saw the highest growth in
CSR reporting since 2011, with a growth rate of 25 per cent. The other countries that saw significant
growth were India (+53%), Chile (+46%), Singapore (+37%), Taiwan (+19%) and China (+16%) (KPMG
2013, p. 11). These growth rates emphasised the increase in CSR reporting in the Asia−Pacific region.

449 Given the predominantly voluntary nature of CSR reporting in many countries, some organisations
might only elect to report typically favourable information about their economic, social and
environmental performance
449 The KPMG report (2013) also raised a number of issues that remain to be addressed adequately,
including the lack of comparability between organisations in respect of the information they are
producing, and uncertainties about the most appropriate mode of reporting

450 See westpac report

452 The international community has become increasingly concerned with the adverse effects of climate
change. In Rio de Janeiro, in June 1992, many countries joined an international treaty, the United
Nations Framework Convention on Climate Change;The UNFCCC established an institutional
framework at the international level within which countries were to begin reducing emissions
(known as ‘mitigation’) and adapting to the effects of climate change (known as ‘adaptation’). It also
required, for the first time, countries to measure, account for and report their aggregate emissions of
a range of greenhouse gases

454 that tackling issues such as climate change requires the community to also embrace the need for
change and not simply rely upon (or blame) organisations for the necessary improvements.
Organisations are key contributors to various environmental issues but, within the capitalist system
that dominates world economies, organisations typically respond to the demands of individuals

454 The concept of an emissions trading market is based on giving carbon a price per tonne so that
products can be more fully costed and the costs of emissions internalised. As emissions become an
internal cost, they also highlight the need for more specific and consistent reporting, while providing
significant incentives for firms to improve operations

455 Under a cap-and-trade system, ‘allowances’ or ‘credits’ are used to provide incentives for companies
to reduce emissions by assigning a monetary value to pollution
455 Asia is being described as ‘the new hot spot for emissions trading’ given that nine new ETSs have
been launched in that region in the past three years. Specifically, China’s national carbon program
will start in 2016, based on seven sub-national pilot programs, which together represent the world’s
second largest carbon market after the EU ETS

455 By region, current ETSs exist as follows (ICAP 2015):


• Europe: EU ETS (2005), UK (2010), Kazakhstan (2013), Switzerland (in force 2008/ mandatory
2013);
• North America: Regional Greenhouse Gas Initiative comprising nine mid-Atlantic and north-
eastern states (2009), California (2013), Quebec (2013); and
• Asia−Oceania: Tokyo (2010), Saitama (2011), Republic of Korea (2015), Beijing (2013), Chongqing
(2014), Shanghai (2013), Shenzhen (2013), Tianjin (2013), Guangdong Province (2013), Hubei
Province (2014), New Zealand (2008).
456 Scope 1—emissions directly occurring from sources that are owned or controlled by an institution,
including:
• combustion of fossil fuels;
• mobile combustion of fossil fuels in vehicles owned or controlled by the organisation; and
• fugitive emissions.e.g. the leakage of hydro-fluorocarbons from refrigeration and air conditioning
equipment

456 Scope 2—emissions generated in the production of electricity consumed by the organisation where
that electricity is generated outside the organisation’s measurement boundary (i.e. the electricity is
generated by a different entity, namely an electricity generator).
456 Scope 3—all other indirect emissions that are a consequence of the activities of the organisation, but
occur from sources not owned or controlled by the organisation, such as:
• commuting;
• air travel for work-related activities;
• waste disposal;
• embodied emissions from extraction, production and transportation of purchased goods;
• outsourced activities;
• contractor-owned vehicles; and
• line loss from electricity transmission and distribution.

457 Table 5.5: Major emissions trading/reporting schemes

459 an approach to investment that explicitly acknowledges the relevance to the investor of
environmental, social and governance factors, and of the long-term health and stability of the market
as a whole
460 responsible investment considers a wide range of sustainability factors. This can involve negative
screening—avoiding investment in industries that have a negative impact on society and the
environment
460 the AMP Capital responsible investment leaders’ funds demonstrate negative screening by avoiding
any investment in companies within sectors recognised to have high negative social impact. This
includes companies with a material exposure (i.e. 10% of their total revenue) to: • tobacco; •
nuclear power (including uranium); • armaments;
• gambling; • alcohol; • pornography; or • intensive fossil fuel usage (AMP Capital 2014).

460 This may involve ‘best-in-class investment’ where investments are selected both for their ability to
generate economic returns and to perform better on sustainability indicators compared with their
peers in the same industry. It may also involve shareholder activism—where investors use an equity
stake in a company to change behaviour and decisions made in a company.

460 Thematic investment is investment that focuses on one issue or a cluster of issues where commercial
growth opportunities are created from social or environmental needs. E.g. Leap Frog considers itself
a ‘profit with purpose investor’ that targets investments in financial products for underserved
consumers

460 Impact investment focuses on placing capital to actively create a social or environmental benefit. This
may require some financial trade-off. A recent example of an Australian impact investment comes
from the 2013 pilot Social Benefit Bond in NSW
461 Natural capital can be understood as the world’s stocks of natural assets, including air, water, land,
soil, geology and biodiversity. It provides us with the resources that make life possible, and underpins
all social, economic and financial activities
461 the depletion and degradation of natural capital can represent enormous potential costs for business.
It has been estimated that 50 per cent of all existing corporate profits are at risk if the costs
associated with natural capital were to be internalised through market mechanisms, regulation or
taxation

461 Natural capital therefore represents a risk to companies, but also an opportunity for innovation,
building stakeholder relationships and growing new markets
462 Accounting has emerged as a critical component of addressing this challenge. As previously
mentioned, it is often argued in business that ‘we can’t manage what we can’t measure’ and most
companies do not understand the complexities of natural capital, nor do they have the approaches or
tools for accounting for the natural capital that their business draws upon.

462 Initiatives such as the Natural Capital Coalition are also developing standardised methodologies for
quantifying or pricing natural capital in ways that can be easily integrated into existing organisational
practices and decision-making.
al and environmental

l and environmental costs and

rting;
performance reporting;

easurement issues; and


environmental performance.

Header
The evolution of corporate
accountability

The evolution of corporate


accountability
The evolution of corporate
accountability

CSR Reporting

History of CSR reporting

History of CSR reporting

History of CSR reporting


Environmental
sustainability

compelling arguments for


environmental
sustainability
compelling arguments for
environmental
sustainability
compelling arguments for
environmental
sustainability
Environmental disasters

Key environmental
sustainability issues

Key environmental
sustainability issues

Key environmental
sustainability issues
Key environmental
sustainability issues

Social sustainability

Social sustainability

Social sustainability

Social sustainability -
issues
Social sustainability -
issues

Social sustainability -
issues

WACOSS Social
Sustainability Assessment
Framework

WACOSS Social
Sustainability Assessment
Framework
Economic sustainability

Economic sustainability
Economic sustainability -
issues

Economic sustainability -
issues

Economic sustainability -
issues

Linking environmental,
economic and social
sustainability
Linking environmental,
economic and social
sustainability

The board’s responsibility


for sustainability of the
organisation and
organisational initiatives

The board’s responsibility


for sustainability of the
organisation and
organisational initiatives

The board’s responsibility


for sustainability of the
organisation and
organisational initiatives

Business case for


sustainability
Business case for
sustainability

Business case for


sustainability
Business case for
sustainability

social enterprises and B-


Corporations

social enterprises and B-


Corporations

Accountability

Accountability

Corporate social
responsibility (CSR)
Corporate social
responsibility (CSR)

Sustainability

Sustainability reporting

Natural capital

Natural capital accounting

Integrated reporting

Integrated reporting

Integrated thinking

Integrated thinking
The importance of climate
change and its relevance
to CSR reporting

The importance of climate


change and its relevance
to CSR reporting

GFC: market & ethical


failures

GFC: market & ethical


failures

Social contract

Other incentives tied to


maximising the value of
the organisation and
shareholder wealth

Other incentives tied to


maximising the value of
the organisation and
shareholder wealth

Other incentives tied to


maximising the value of
the organisation and
shareholder wealth

Preferential capital flow

Brand and reputation

Risk management
incentives
Risk management
incentives

Risk management
incentives

External benefits to
companies from (CSR)
reporting: corporate cost
of capital

Cost of capital benefits

Cost of capital benefits

Improved analysts’
forecasts
Improved general
perception of the
company
Corporate identity and
accountability

The views of Friedman

The views of Friedman

Alternate view

Alternate view

Alternate view

The shareholder primacy


perspective
Social contract
perspective

Social contract
perspective

s. 172 of the UK
Companies Act (2006)

s.181 (1)

Externalities and potential


government intervention

Externalities and potential


government intervention

Externalities and potential


government intervention

Linking to ethical theories


- Enlightened self-interest
Linking to ethical theories
- Enlightened self-interest

Linking to ethical theories


- Enlightened self-interest

Stakeholder theory -Who


are stakeholders?

Normative stakeholder
theory

Normative stakeholder
theory

Managerial stakeholder
theory

Managerial stakeholder
theory

Organisational legitimacy

Organisational legitimacy

Legitimacy theory
Legitimacy theory

Institutional theory

Institutional theory

Institutional theory

decoupling

Linking to ethical theories


- summary
What can be measured
and reported?

What can be measured


and reported?

What is measurable -
Social reporting

Limitations - social
reporting
Environmental reporting

Limitations -
Environmental reporting

Economic reporting

Economic reporting

Limitations of traditional
financial reporting

Scope of reporting

Scope of reporting

Elements of financial
reporting
Elements of financial
reporting

The practice of
discounting future cash
flows

Reliable measurement and


probability

Focus on short-term
results

The entity assumption

Reporting and guidelines


-What is required?
(Mandatory reporting)

Requirements embodied
within the Corporations
Act
s. 299(1)(f) of the
Corporations Act

Section 299A of the


Corporations Act

s. 296 of the Corporations


Act

CSR-related corporate
governance disclosures
CSR-related corporate
governance disclosures

National Greenhouse and


Energy Reporting Act

National Greenhouse and


Energy Reporting Act

National Greenhouse and


Energy Reporting Act

National Greenhouse and


Energy Reporting Act

National Greenhouse and


Energy Reporting Act

National Greenhouse and


Energy Reporting Act

Emissions Reduction Fund

Emissions Reduction Fund

National Pollutant
Inventory

Issues of disclosure for


Australian mandatory
reporting requirements
Social procurement

European Union emissions


trading scheme

Guidelines and non-


mandatory reporting

The Global Reporting


Initiative

The Global Reporting


Initiative

External factors

Internal factors
The Global Reporting
Initiative

Other Australian industry


bodies have also released
their own CSR reporting
guidance

Integrated reporting

Integrated reporting

OECD Guidelines for


Multinational Enterprises

OECD Guidelines for


Multinational Enterprises
Carbon Disclosure Project

United Nations Global


Compact

United Nations Global


Compact - Principles

AccountAbility AA1000
series

AccountAbility AA1000
series
Equator Principles

Equator Principles

The GHG Protocol

The GHG Protocol

The GHG Protocol

The GHG Protocol

Trucost

Sustainability Accounting
Standards Board

Dow Jones SI
Other initiatives - social
audit

Other initiatives - social


audit

Corporate governance
mechanisms aimed at
improving social and
environmental
performance

Corporate governance
mechanisms aimed at
improving social and
environmental
performance

Corporate governance
mechanisms to specifically
address climate change

Environmental
management accounting

Environmental
management accounting

Environmental
management accounting

Environmental
management accounting

Environmental
management accounting

Environmental
management accounting -
benefits
Current reporting practice

Current reporting practice

Current reporting practice

Current reporting practice

Examples of best reporting

International initiatives on
climate change

International initiatives on
climate change

Climate change accounting


techniques

Climate change accounting


techniques
Climate change accounting
techniques

Climate change accounting


techniques
Accounting for the levels
of emissions

Accounting for the levels


of emissions

Accounting for the levels


of emissions

Accounting for the levels


of emissions
Socially responsible
investments

Responsible investment

Responsible investment

Sustainable investment

Thematic investment

Impact investment

Natural capital accounting


Natural capital and
business

Natural capital and


business
The role of accounting

The role of accounting


UK FRC Corporate Governance Code

A Leadership
B Effectiveness
C Accountability
D Remuneration
E Relations with Shareholders

Index Description/Explanation
A Main Principle: Every company should be headed by an effective board which is collectively
responsible for the long-term success of the company
A.1 Supporting principle -1) provide entrepreneurial leadership of the company within a framework of
effective controls...risk managed. 2) set the company’s strategic aims, necessary financial and human
resources are in place... meet its objectives and review management performance. 3) values and
standards... obligations to its shareholders...understood and met. 4) act in the best interests of the
company consistent with their statutory duties.

A.1.1 1) meet sufficiently regularly to discharge its duties effectively 2) a formal schedule of matters
specifically reserved for its decision 3) annual report should include a statement of how the board
operates...high level statement of which types of decisions are to be taken by the board and which
are to be delegated to management.

A.1.2 The annual report should identify the chairman, the deputy chairman, the chief executive, the senior
independent director and the chairmen and members of the board committees; set out the number
of meetings of the board and those committees and individual attendance by directors.

A.1.3 The company should arrange appropriate insurance cover in respect of legal action against its
directors
A.2 There should be a clear division of responsibilities at the head of the company between the running
of the board and the executive responsibility for the running of the company’s business. No one
individual should have unfettered powers of decision
A.2.1 The roles of chairman and chief executive should not be exercised by the same individual. The
division of responsibilities between the chairman and chief executive should be clearly established,
set out in writing and agreed by the board.

A.3.1 The chairman should on appointment meet the independence criteria set out in B.1.1. A chief
executive should not go on to be chairman of the same company. If exceptionally a board decides
that a chief executive should become chairman, the board should consult major shareholders in
advance and should set out its reasons to shareholders at the time of the appointment and in the
next annual report.
B.1 B.1.1. The board should identify in the annual report each non-executive director it considers to be
independent. The board should determine whether the director is independent in character and
judgement and whether there are relationships or circumstances which are likely to affect, or could
appear to affect, the director’s judgement. The board should state its reasons if it determines that a
director is independent notwithstanding the existence of relationships or circumstances which may
appear relevant to its determination, including if the director:
• has been an employee of the company or group within the last five years;
• has, or has had within the last three years, a material business relationship with the company
either directly, or as a partner, shareholder, director or senior employee of a body that has such a
relationship with the company;
• has received or receives additional remuneration from the company apart from a director’s fee,
participates in the company’s share option or a performance-related pay scheme, or is a member of
the company’s pension scheme;
• has close family ties with any of the company’s advisers, directors or senior employees;
• holds cross-directorships or has significant links with other directors through involvement in
other companies or bodies;
• represents a significant shareholder; or
• has served on the board for more than nine years from the date of their first election.

B.1.2 Except for smaller companies, at least half the board, excluding the chairman, should comprise non-
executive directors determined by the board to be independent. A smaller company should have at
least two independent non-executive directors.
B.7.1 B.7.1. All directors of FTSE 350 companies should be subject to annual election by shareholders.
All other directors should be subject to election by shareholders at the first annual general meeting
after their appointment, and to re-election thereafter at intervals of no more than three years.
Non executive directors who have served longer than nine years should be subject to annual re
election. The names of directors submitted for election or re-election should be accompanied by
sufficient biographical details and any other relevant information to enable shareholders to take an
informed decision on their election.

B.7.2 The board should set out to shareholders in the papers accompanying a resolution to elect a non-
executive director why they believe an individual should be elected. The chairman should confirm to
shareholders when proposing re-election that, following formal performance evaluation, the
individual’s performance continues to be effective and to demonstrate commitment to the role.

C.2 The board is responsible for determining the nature and extent of the significant risks it is willing to
take in achieving its strategic objectives. The board should maintain sound risk management and
internal control systems.
C.2.1 The directors.. confirm in the annual report...carried out a robust assessment of the principal risks
facing the company, ...those that would threaten its business model, future performance, solvency or
liquidity...describe those risks and explain how they are being managed or mitigated.

C.2.2 how they have assessed the prospects of the company, over what period they have done so and why
they consider that period to be appropriate. The directors should state whether they have a
reasonable expectation that the company will be able to continue in operation and meet its liabilities
as they fall due over the period of their assessment, drawing attention to any qualifications or
assumptions as necessary
C.2.3 The board should monitor the company’s risk management and internal control systems and, at least
annually, carry out a review...in the annual report. ..should cover all material controls, including
financial, operational and compliance controls.
C.3 an audit committee of at least three,(smaller companies two), independent non-executive directors.
In smaller companies the company chairman may be a member of, but not chair, the committee in
addition to the independent non-executive directors, provided he or she was considered
independent on appointment as chairman. The board should satisfy itself that at least one member
of the audit committee has recent and relevant financial experience.

C3.2 • to monitor the integrity of the financial statements of the company and any formal
announcements
• to review the company’s internal financial controls and,to review the company’s internal control
and risk management systems;
• effectiveness of the company’s internal audit function;
• to make recommendations to the board, for it to put to the shareholders for their approval in
general meeting, in relation to the appointment, re-appointment and removal of the external auditor
and to approve the remuneration and terms of engagement of the external auditor;
• to review and monitor the external auditor’s independence and objectivity and the effectiveness
of the audit process, taking into consideration relevant UK professional and regulatory requirements;
• to develop and implement policy on the engagement of the external auditor to supply non-audit
services, taking into account relevant ethical guidance regarding the provision of non-audit services
by the external audit firm, and to report to the board, identifying any matters in respect of which it
considers that action or improvement is needed and making recommendations as to the steps to be
taken; and
• to report to the board on how it has discharged its responsibilities.

C3.7 The audit committee should have primary responsibility for making a recommendation on the
appointment, re-appointment and removal of the external auditors. FTSE 350 companies should
put the external audit contract out to tender at least every ten years. If the board does not accept
the audit committee’s recommendation, it should include in the annual report, and in any papers
recommending appointment or re-appointment, a statement from the audit committee explaining
the recommendation and should set out reasons why the board has taken a different position.

D.2.1 remuneration committee of at least three, or in the case of smaller companies two, independent
non-executive directors. In addition the company chairman may also be a member of, but not chair,
the committee if he or she was considered independent on appointment as chairman. The
remuneration committee should make available its terms of reference, explaining its role and the
authority delegated to it by the board. Where remuneration consultants are appointed, they should
be identified in the annual report and a statement made as to whether they have any other
connection with the company.

E.2.1 At any general meeting, the company should propose a separate resolution on each substantially
separate issue, and should in particular propose a resolution at the AGM relating to the report and
accounts. For each resolution, proxy appointment forms should provide shareholders with the option
to direct their proxy to vote either for or against the resolution or to withhold their vote. The proxy
form and any announcement of the results of a vote should make it clear that a ’vote withheld’ is
not a vote in law and will not be counted in the calculation of the proportion of the votes for and
against the resolution.
Keywords

leadership

role of the board/directors

regular meetings, matters


for decision, w/c can be
delegated to management

identify members of the


board, meeting times &
attendance
insurance against legal
actions

division of responsibilities

chairman & CEO not same


person; clear division of
responsibilities in writing

The chairman
Composition of the Board

Composition of the Board

Re-election

Re-election
Risk Management and
Internal Control Main
Principle

if they carried out


assessment of risk,
identify/describe risk &
mitigation

how, period/appropriate,
expect to continue,
qualifications in risk
assessment
monitor & review risk
management system

Audit committee and


auditors

Roles and responsibilities


of the audit committee

Audit committee and


auditors

Remuneration

Constructive use of general


meetings
OECD Principle of Corporate Governance

1 Principle 1: Ensuring the basis for an effective corporate governance framework


2 Principle 2: The rights and equitable treatment of shareholders and key ownership functions
3 Principle 3: Institutional investors, stock markets, and other intermediaries
4 Principle 4: The role of stakeholders in corporate governance
5 Principle 5: Disclosure and transparency
6 Principle 6: The responsibilities of the board

Index Description/Explanation
1 Corporate governance framework 1) should promote transparent and fair markets, and the efficient
allocation of resources; 2) consistent with the rule of law; 3) support effective supervision and
enforcement

1.A should be developed with a view to its impact on overall economic performance, market integrity
and the incentives; promotion of transparent and well-functioning markets

1.B legal and regulatory requirements that affect corporate governance practices should be consistent
with the rule of law, transparent and enforceable

1.C division of responsibilities among different authorities should be clearly articulated and designed to
serve the public interest
1.D stock market regulation should support effective corporate governance
1.E enforcement authorities should have the authority, integrity and resources to fulfil their duties in a
professional and objective manner; their rulings should be timely, transparent and fully explained

1.F Cross-border co-operation should be enhanced, including through bilateral and multilateral
arrangements for exchange of information
2 protect and facilitate the exercise of shareholders’ rights and ensure the equitable treatment of all
shareholders, including minority and foreign shareholders; opportunity to obtain effective redress
for violation of their rights
2.A A. Basic shareholder rights should include the right to: 1) secure methods of ownership
registration; 2) convey or transfer shares; 3) obtain relevant and material information on the
corporation on a timely and regular basis; 4) participate and vote in general shareholder meetings;
5) elect and remove members of the board; and 6) share in the profits of the corporation

2.B sufficiently informed about, and have the right to approve or participate in, decisions concerning
fundamental corporate changes such as: 1) amendments to the statutes, or articles of incorporation
or similar governing documents of the company; 2) the authorisation of additional shares; and 3)
extraordinary transactions, including the transfer of all or substantially all assets, that in effect
result in the sale of the company

2.C opportunity to participate effectively and vote in general shareholder meetings and should be
informed of the rules, including voting procedures, that govern general shareholder meetings. 1)
info on date & location 2) not unduly difficult to cast votes 3)oppoortunity to ask board questions 4)
nomination/election of members 5) vote in person/in absentia 6) no impediments to cross voter
voting

2.D should be allowed to consult with each other on issues concerning their basic shareholder rights;
provided no abuse
2.E all shares should carry the same rights. All investors should be able to obtain information about the
rights attached to all series and classes of shares before they purchase; changes in economic or
voting rights should be subject to approval by those classes of shares which are negatively affected;
disclosure of capital structures and control arrangements should be required

2.F Related-party transactions should be approved and conducted in a manner that ensures proper
management of conflict of interest 1) Conflicts of interest inherent in related-party transactions
should be addressed 2) required to disclose to the board whether theys, have a material interest

2.G Minority shareholders should be protected from abusive actions by controlling shareholders;
should have effective means of redress. Abusive self-dealing should be prohibited

3 The corporate governance framework should provide sound incentives throughout the investment
chain and provide for stock markets to function in a way that contributes to good corporate
governance
3.A Institutional investors acting in a fiduciary capacity should disclose their corporate governance and
voting policies with respect to their investments, including the procedures that they have in place
for deciding on the use of their voting rights

3.B Votes should be cast by custodians or nominees in line with the directions of the beneficial owner
of the shares
3.C should disclose how they manage material conflicts of interest that may affect the exercise of key
ownership rights regarding their investments
3.D should require that proxy advisors, analysts, brokers, rating agencies and others that provide
analysis or advice relevant to decisions by investors, disclose and minimise conflicts of interest that
might compromise the integrity of their analysis or advice
3.E Insider trading and market manipulation should be prohibited and the applicable rules enforced

3.F companies who are listed in a jurisdiction other than their jurisdiction of incorporation, the
applicable corporate governance laws and regulations should be clearly disclosed. In the case of
cross listings, the criteria and procedure for recognising the listing requirements of the primary
listing should be transparent and documented

3.G Stock markets should provide fair and efficient price discovery as a means to help promote effective
corporate governance
4 The corporate governance framework should recognise the rights of stakeholders established
by law or through mutual agreements and encourage active co-operation between corporations
and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises

4.A rights of stakeholders that are established by law or through mutual agreements are to be
respected
4.B stakeholders should have the opportunity to obtain effective redress for violation of their rights

4.C Mechanisms for employee participation should be permitted to develop


4.D they should have access to relevant, sufficient and reliable information on a timely and regular basis

4.E should be able to freely communicate their concerns about illegal or unethical practices to the
board and to the competent public authorities and their rights should not be compromised for
doing this
4.F complemented by an effective, efficient insolvency framework and by effective enforcement of
creditor rights
5 should ensure that timely and accurate disclosure is made on all material matters regarding the
corporation, including the financial situation, performance, ownership, and governance of the
company
5.A material info 1) financial/operating results 2) company objectives 3) major share ownership 4)
remuneration of members 5) qualification/info/selection process/independence of board members
6) RPT 7) foreseeable risk factors 8) issues re employees/stakeholders 9) governance structures &
policies

5.B Information should be prepared and disclosed in accordance with high quality standards of
accounting and financial and non-financial reporting
5.C annual audit should be conducted by an independent auditor in accordance with auditing standards
in order to provide an external and objective assurance to the board and shareholders that the
financial statements fairly represent the financial position and performance of the company in all
material respects

5.D External auditors should be accountable to the shareholders and owe a duty to the company to
exercise due professional care in the conduct of the audit

5.E Channels for disseminating information should provide for equal, timely and cost-efficient access to
relevant information by users

6 should ensure the strategic guidance of the company, the effective monitoring of management by
the board, and the board’s accountability to the company and the shareholders

6.A Board members should act on a fully informed basis, in good faith, with due diligence and care, and
in the best interest of the company and the shareholders

6.B Where board decisions may affect different shareholder groups differently, the board should treat
all shareholders fairly
6.C The board should apply high ethical standards. It should take into account the interests of
stakeholders
6.D key functions: 1) corporate strategy, major plans of action, risk management policies and
procedures, annual budgets and business plans; setting performance objectives; monitoring
implementation and corporate performance; and overseeing major capital expenditures,
acquisitions and divestitures 2) Monitoring the effectiveness of the company’s governance practices
3) replacing key executives and overseeing succession planning 4) key executive and board
remuneration with the longer term interests of the company 5)formal and transparent board
nomination and election process 6) managing potential conflicts of interest of management
including misuse of corporate assets and abuse in related party transactions 7) corporation’s
accounting and financial reporting systems, including the independent audit, and that appropriate
systems of control are in place 8) process of disclosure and communications
6.E exercise objective independent judgement on corporate affairs: 1) assigning a sufficient number of
nonexecutive board members capable of exercising independent judgement to tasks where there is
a potential for conflict of interest 2) specialised committees to support the full board in
performing its functions, particularly in respect to audit, risk management & remuneration 3)
commit themselves effectively to their responsibilities 4) carry out evaluations to appraise their
performance and assess whether they possess the right mix of background and competences

6.F board members should have access to accurate, relevant and timely information

6.G mechanisms should be developed to facilitate access to information and training for employee
representatives, so that this representation is exercised effectively and best contributes to the
enhancement of board skills, information and independence
Keywords

transparent fair market,


efficient resources,
consistent rule of law,
effective enforcement

impact overall performance,


market integrity, tranparent
market

legal consistent rule of law,


transparent enforceable
responsibilities clear, public
interest
stock market, support

enforcement objective,
rulings timely
cross-border cooperation,
exchange of info

shareholder equal right,


redress for violation

basic rights: ownersip,


transfer, info, vote, elect
board, profits

should inform: statutes,


articles; addtl shares;
extraordinary transactions

participate vote, rules voting


procedures; inform date,
location, not difficult

consult issues, no abuse


same shares same rights,
info before purchase,
changes be approved;
disclose capital stuctures,
require control

RPT approved no conflict of


interest; address conflict;
disclose material interest

minority protect abuse;


means of redress
incentives investment chain;
contributes to good
governance

insti investor disclose corp


governance, policy &
procedures in voting rights

votes beneficial to owners


disclose material conflict of
interest management
advisor, analyst, brokers
disclose/minimise conflict of
interest

no insider trading

disclose other jurisdictions,


cross listings transparent &
documented

fair/efficient price discovery

rights of stakeholders,
cooperation between
stakeholders
respect rights of
stakeholders
redress for violation of
rights
employee participation
sccess to relevant info,
timely regular
communicate illegal
practice, rights not
compromised
insolvency framework

accurate disclosure on
material matters

material information to be
disclosed
in accordance w/ accounting
standards

should have annual audit by


external auditors

external auditors
accountable to
shareholders, exercise due
care

equal, timely, cost effective


access to relevant info
strategic guidance,
monitoring, accountability
of the board

fully informed, good faith,


due diligence, best interest
fair treatment of all
shareholders
high ethical standards,
stakeholders

functions: 1. corp strategy,


2. governance practice, 3.
succession, 4. remuneration,
5. election/nomination, 6.
conflict of interest 7.
reporting systems 8.
disclosure/communications
judgment on: 1) number of
independent members 2)
committees 3) commit to
responsibility 4) evaluate
performance, mix of
background/competency
access to
accurate/relevant/timely
info

employee representation
access to information
ASX Principles and Recommendations

1 Lay solid foundations for management and oversight


2 Structure the board to add value
3 Act ethically and responsibly
4 Safeguard integrity in corporate reporting
5 Make timely and balanced disclosure
6 Respect the rights of security holders
7 Recognise and manage risk
8 Remunerate fairly and responsibly

Index Description/Explanation
1 A listed entity should establish and disclose the respective roles and responsibilities of its board
and management and how their performance is monitored and evaluated

1.1 A listed entity should disclose (a) the respective roles and responsibilities of its board and
management; (b) those matters expressly reserved to the board and those delegated to
management
1.2 A listed entity should (a) undertake appropriate checks before appointing a person, or putting
forward to security holders a candidate for election, as a director; and (b) provide security
holders with all material information in its possession relevant to a decision on whether or not to
elect or re-elect a director

1.3 A listed entity should have a written agreement with each director and senior executive setting out
the terms of their appointment
1.4 The company secretary of a listed entity should be accountable directly to the board, through the
chair, on all matters to do with the proper functioning of the board

1.5 A listed entity should (a) have a diversity policy which includes requirements for the board...set
measurable objectives for achieving gender diversity...annual assessment of objectives, progress in
achieving them (b) disclose that policy/summary of it (c) disclose ... measurable objectives for
achieving gender diversity on 1) the respective proportions of men and women on the board 2)
most recent “Gender Equality Indicators"

1.6 A listed entity should (a) have and disclose a process for periodically evaluating the performance of
the board, its committees and individual directors; and (b) disclose, in relation to each reporting
period, whether a performance evaluation was undertaken in the reporting period in accordance
with that process.

1.7 A listed entity should: (a) have and disclose a process for periodically evaluating the performance of
its senior executives; and (b) disclose, in relation to each reporting period, whether a performance
evaluation was undertaken in the reporting period in accordance with that process

2 A listed entity should have a board of an appropriate size, composition, skills and commitment to
enable it to discharge its duties effectively
2.1 The board of a listed entity should:
(a) have a nomination committee which:
(1) has at least three members, a majority of whom are independent directors; and
(2) is chaired by an independent director, and disclose:
(3) the charter of the committee;
(4) the members of the committee; and
(5) as at the end of each reporting period, the number of times the committee met throughout
the period and the individual attendances of the members at those meetings; or (b) if it does not
have a nomination committee, disclose that fact and the processes it employs to address board
succession issues and to ensure that the board has the appropriate balance of skills, knowledge,
experience, independence and diversity to enable it to discharge its duties and responsibilities
effectively

2.2 A listed entity should have and disclose a board skills matrix setting out the mix of skills and
diversity that the board currently has or is looking to achieve in its membership
2.3 A listed entity should disclose:
(a) the names of the directors considered by the board to be independent directors;
(b) if a director has an interest, position, association or relationship of the type described in Box
2.3 but the board is of the opinion that it does not compromise the independence of the director,
the nature of the interest, position, association or relationship in question and an explanation of
why the board is of that opinion; and
(c) the length of service of each director

2.4 A majority of the board of a listed entity should be independent directors


2.5 The chair of the board of a listed entity should be an independent director and, in particular, should
not be the same person as the CEO of the entity.
2.6 A listed entity should have a program for inducting new directors and provide appropriate
professional development opportunities for directors to develop and maintain the skills and
knowledge needed to perform their role as directors effectively
Box 2. Examples ...that might cause doubts about the independence of a director include if the director:
• employed in an executive capacity... and there has not been a period of at least three years
between ceasing such employment and serving on the board;
• within the last three years been, a partner, director or senior employee of a provider of
material professional services to the entity or any of its child entities;
• within the last three years, in a material business relationship (e.g. as a supplier or customer)
with the entity or any of its child entities, or an officer of, or otherwise associated with,
• is a substantial security holder of the entity or an officer of, or otherwise associated with
• has a material contractual relationship with the entity or its child entities other than as a
director;
• has close family ties with any person who falls within any of the categories described above; or
• has been a director of the entity for such a period that his or her independence may have been
compromised

3 Act ethically and responsibly

3.1 A listed entity should: (a) have a code of conduct for its directors, senior executives and employees;
and
(b) disclose that code or a summary of it
4 A listed entity should have formal and rigorous processes that independently verify and safeguard
the integrity of its corporate reporting
4.1 The board of a listed entity should:
(a) have an audit committee which:
(1) has at least three members, ALL of whom are non-executive directors and a majority of
whom are independent directors; and
(2) is chaired by an independent director, who is not the chair of the board, and disclose:
(3) the charter of the committee;
(4) the relevant qualifications and experience of the members of the committee; and
(5) in relation to each reporting period, the number of times the committee met throughout the
period and the individual attendances of the members at those meetings; or
(b) if it does not have an audit committee, disclose that fact and the processes it employs that
independently verify and safeguard the integrity of its corporate reporting, including the processes
for the appointment and removal of the external auditor and the rotation of the audit engagement
partner.

4.3 The board of a listed entity should, before it approves the entity’s financial statements, receive
from its CEO and CFO a declaration that, in their opinion, the financial records of the entity have
been properly maintained and that the financial statements comply with the appropriate
accounting standards and give a true and fair view of the financial position and performance of the
entity and that the opinion has been formed on the basis of a sound system of risk management
and internal control which is operating effectively
4.4 A listed entity that has an AGM should ensure that its external auditor attends its AGM and is
available to answer questions from security holders relevant to the audit.
4 audit committees are compulsory for all companies listed in the top 500 (Standard & Poor’s listing
of the ASX) according to market capitalisation
4 ASX does not include requirement of at least one financial person on the board; but this is good
practice
4 all members of the audit committee must be independent at all times according to strict criteria.
Furthermore, Sarbanes–Oxley mandates that the primary external auditor relationship must be
with the audit committee -not implemented in AU, UK, HK, Singapore or India

5 A listed entity should make timely and balanced disclosure of all matters concerning it that a
reasonable person would expect to have a material effect on the price or value of its securities

5.1 A listed entity should: (a) have a written policy for complying with its continuous disclosure
obligations under the Listing Rules; and (b)disclose that policy or a summary of it

6 A listed entity should respect the rights of its security holders by providing them with appropriate
information and facilities to allow them to exercise those rights effectively
6.1 A listed entity should provide information about itself and its governance to investors via its
website
6.2 A listed entity should design and implement an investor relations program to facilitate effective
two-way communication with investors.
6.3 A listed entity should disclose the policies and processes it has in place to facilitate and encourage
participation at meetings of security holders.

6.4 A listed entity should give security holders the option to receive communications from, and send
communications to, the entity and its security registry electronically.
7 A listed entity should establish a sound risk management framework and periodically review the
effectiveness of that framework
7.1 The board of a listed entity should:
(a) have a committee or committees to oversee risk, each of which:
(1) has at least three members, a majority of whom are independent directors; and
(2) is chaired by an independent director, and disclose:
(3) the charter of the committee;
(4) the members of the committee; and
(5) as at the end of each reporting period, the number of times the committee met throughout
the period and the individual attendances of the members at those meetings; or
(b) if it does not have a risk committee or committees that satisfy (a) above, disclose that fact and
the processes it employs for overseeing the entity’s risk management framework.

7.2 The board or a committee of the board should: (a) review the entity’s risk management framework
at least annually to satisfy itself that it continues to be sound; and (b) disclose, in relation to each
reporting period, whether such a review has taken place.
7.3 A listed entity should disclose: (a) if it has an internal audit function, how the function is structured
and what role it performs; or (b) if it does not have an internal audit function, that fact and the
processes it employs for evaluating and continually improving the effectiveness of its risk
management and internal control processes.
7.4 A listed entity should disclose whether it has any material exposure to economic, environmental
and social sustainability risks and, if it does, how it manages or intends to manage those risks.

8 A listed entity should pay director remuneration sufficient to attract and retain high quality
directors and design its executive remuneration to attract, retain and motivate high quality senior
executives and to align their interests with the creation of value for security holders.

8.1 The board of a listed entity should:


(a) have a remuneration committee which:
(1) has at least three members, a majority of whom are independent directors; and
(2) is chaired by an independent director, and disclose:
(3) the charter of the committee; (4) the members of the committee; and
(5) as at the end of each reporting period, the number of times the committee met throughout
the period and the individual attendances of the members at those meetings; or
(b) if it does not have a remuneration committee, disclose that fact and the processes it employs
for setting the level and composition of remuneration for directors and senior executives and
ensuring that such remuneration is appropriate and not excessive.

8.2 A listed entity should separately disclose its policies and practices regarding the remuneration of
non-executive directors and the remuneration of executive directors and other senior executives.

8.3 A listed entity which has an equity-based remuneration scheme should:


(a) have a policy on whether participants are permitted to enter into transactions (whether
through the use of derivatives or otherwise) which limit the economic risk of participating in the
scheme; and
(b) disclose that policy or a summary of it.
Keywords
disclose roles, reponsibility
of board, performance
evaluation
disclose roles, responsibility,
delegated tasks to
management

check before appoint,


material info on decision on
elect/re -elect of director
written, terms of
appointment
company secretary directly
accountable to board
through the chair

diversity policy progress;


dislose policy, measurable
objectives, proportions,
gender equality indicators

disclose if there is process


for periodical review of
board and if it was
undertaken

evaluation of senior
executives 1) process 2)
undertaken
size, composition, skills &
comittment of the board
nomination committee 1) at
least 3 members, majority
are independent directors,
2) chaired by independent
director 3) disclose charter,
members, number of times
the committee met; if not
disclose that fact and
process it employs
board skills matrix and
diversity

1) identify independent
directors 2) if has interest,
nature and why they
consider independent 3)
length of service of each
director
majority = independent
chair should be
independent and not CEO

program for induction,


maintain skills

3 yrs - employee, material


professional service,
director, partner, material
business relationship;
security holder, close family
ties, length of service

act ethically and responsibly

code of conduct - must have


and disclose it
formal, rigorous process to
safeguard integrity

audit committee 1) at least


3 members, all non-
executive directors; majority
independent 2) chaired by
independent director who is
not chair of the board.
Disclose: 1) charter, 2)
qualifications/experience 3)
meeting times 4) if no audit
committte, alternative
process

declaration of CEO and CFO


on financial reports
AGM - external auditor
should attend
all listed companies require
audit committee
does ASX require financial
person?

Sarbanes-Oxley difference

timely, balanced disclosure


policy for complying
dislosure obligations - have
& disclose

rights of security holders

info on the website

investor relations program

policy/process for
participation in meetings

electronic eommunications
risk management
framework
risk committee 1) at least 3
members, majority
independent 2) chair
independent; Disclose 1)
charter 2) members 3)
meeting times 4) alternative
process
review risk management
framework; disclose if it
took place
Disclose: 1) presence &
structure , role of internal
audit 2) alternative process

material exposure &


management of risks

sufficient director
remuneration to
retain/attract directors

remuneration committee 1)
at least 3 members,
majority independent 2)
chair independent; Disclose
1) charter 2) members 3)
meeting times 4) alternative
process
remuneration of senior
executives, non-exec & exec
directors

equity based remuneration


scheme
Extended Response Guide

Scenario 1: CEO asked You to ......misappropriate accounts


Scenario 2: CEO involves in ....(illegal activities) without telling the board (and you became aware)

Using the AAA Approach

Step 1: Determine the facts


Step 2: The ethical issues

Step 3: Identify major principles, norms and values

Step 4: Specify the alternatives

Step 5: Comparison of norms (choose the best course of action)


Step 6: Assess the consequences

Step 7: Make your decision


You to ......misappropriate accounts
s in ....(illegal activities) without telling the board (and you became aware)

Scene 1
The CEO (or someone higher) asked ....something not ethical; You discover something
illegal by higher power
1) The primary stakeholders are
a) You, having knowledge of the report and has a liability on this information
b) CEO's is ultimately responsible for the fair presentation of the report

c) board of directors - will ultimately be responsible and may affect strategic decisions
based on ....

e) shareholders/investors - changes that affect the share price, balance sheet and
income figures will affect their investment decisions, decrease their investment

other: investor (if they are basing a decision on this report) auditors (if they sign off
the report), employees/third party (who are basing the report for negotiation)

2) What are the ethical issues


Your integrity vs job security
Your integrity vs loyalty to the firm
The CEO's integrity vs his self interest
The CEO's self interest vs acting in the best interest of the company
the company's financial health vs the rights of shareholders/investors to information

rinciples, norms and values


x....should have integrity
Job security (Self interest)
loyalty
Duty to avoid conflicts of interest
Fairness in reporting to the board
Fairness in dealing with investors
Doing no harm to shareholders

You can do nothing/comply with false report


you can explain to....that you are ethically bound to prepare accurate report...you
cannot be involved with false report
You can resign
Report the matter to the board? Whistleblower?

norms (choose the best course of action)


Explain....will probably lose job but also directors can assess CEO; keep integrity

Do nothing/comply - job security, but ruin integrity, liable to report, conscience will
suffer
Resign, but keep integrity; he needs the job

You should....chose the best course of action


Ethical Issues experienced by accountants Fundamental Principles Breached
Client proposals for tax evasion Integrity, Professional behavior
Client proposals to manipulate financial state Integrity, objectivity, professional behavior
Presenting information properly to avoid dece Professional competence and due care
Conflict of interest Objectivity, Integrity
Instructions by superior to carry out unethical Integrity, Professional behavior
Failure to maintain technical competence Professional competence and due care
Using inside information for personal gain Integrity, Professional behavior
Maintaining confidentiality Confidentiality
Integrity in admitting mistakes Objectivity, Integrity

Receiving unreasonable favours, gifts and ent Professional competence and due care

APES 110 - Fundamental Principles How it can be Breached

s.110 Integrity - obligation of acccountants to


be straightforward and honest anything that involves dishonesty
s.120 Objectivity - state of being true outside
individual feeling/interpretations biased reports;
s. 130 Professional competence and due care
- maintain professional kowledge; act
diligently doing something you dont have expertise
s. 140 Confidentiality - refrain from using
confidential information to personal
advantage divulging client information
s. 150 Professional behavior - comply with
relevant laws and regulation not complying with rules/regulations
Threats to Fundamental Principles How it can be breached
misreporting in return for a bonus; anything that
Self Interest would benefit you; financial interest in client
Self review you review something you prepare
recommending investing something you have
Advocacy interest in
a member of the family involved; being a client for
Familiarity long time
Intimidation being pressured and enacting on pressure

Duty of the Board How it can be Breached

if the director acted on… that would benefit him (no


matter what the intention is); or related party
Avoid conflicts of interest transactions

if the director acted on a contract that would hurt


the company and benefit him (no matter what the
Act in the best interest of the corporation intention is)
if the board is not properly notified with any
Exercise powers for proper purposes decision that would affect the company
if he assigned to the CEO/management something
Retain discretionary powers and avoid that he should be responsible for e.g governance,
delegating the director's responsibility major decisions
Act w/ care, skill and Diligence board should
Be informed about the corporation's
operations not being up to date with disclosure regimes
Prevent insolvent Trading being involved in phoenix companies
Anti-competitive Conduct

Abuse of market power anti-competitive business practices e.g. monopoly


Mergers and acquisitions unless with permission with the ACCC
should have agreement w/ competitors whether
Cartel Conduct implied or written
1) no collusion with competitors 2) unilateral refusal
to deal is unlawful 3) 3rd line forcing,
Unilateral Restrictions (exclusive dealing) uncompetitive, harmful

Resale Price Maintenance (vertical price 1) supplier stipulates a minimum price 2) supplier
controls) takes action to enforce the minimum price

Cartel conduct
competitors agree to apply restrictions on output
Output restrictions that will cause shortages

Allocating customers, suppliers and territories dividing up markets, customers or regions


competitors who are asked to tender bid collude,
submitting similar prices, and inflate prices; there
Bid rigging should be auction/bid
Price fixing competitors collude to create common prices
Consumer Law

1) has a truthful impression been conveyed? 2)


would a group of less informed people be misled?
3) is the approach fair? E.g. use of professionals,
Misleading Conduct and representations studies

Extreme exaggeration, when could not properly


treat as serious; but if in quality/price terms, may
Puffery be liable

there should be a contract/agreement; it should be


Unconscionable conduct harsh/unfair

1) information is not available to investors 2) person


Insider trading buys/sells using that information
false impression of trading in securities to enhance
Market manipulation the perceive value in shares

placing of buy/sell orders for shares; increase


Churning market turnover
organised groups, buy particular shares, sell as
Pools prices rise, single manager to trade

market participants work together...create rumors,


buy shares, attract new buyers in the market e.g
Runs internet discussion boards

if information in documents are misleading, omitted


Fundraising documents significant issues
Bribery e.g. facilitation payments; see page 352
Ponzi scheme Like a pyramid scheme
Rogue trading an employee engages in unathorised trading
long term viability of business, stability of economic
Economic sustainability system, transparency
Environmental sustainability climate change, waste, pollution, biodiversity
child labor, corruption, anti-competitive behavior,
bribery, unfair use of power, supply chain
Social sustainability management
Recommendation
Decline the engagement
Implement safeguards; decline
Have a policy on what to disclose; compliance department/policy
Remove the conflict; have a compliance policy ; decline
Discuss consequences with superior; Consider whistleblower policy
CPD requirements; compliance policy
Compliance policy
Non-disclosure agreements
Compliance policy
Accountants can accept up to a reasonable degree only, and will depend on the motive; Provide
safeguards or policies regarding receiving gifts

Recommendation

Whistleblower policy; ASX 4.1

Whistleblower policy; ASX 4.1

ASX 2.1 - 2.6

Confidentiality policy

Compliance policy
implement safeguards or decline the engagement

1) Institutional safeguards are those created by the profession, legislation or regulation e.g.
educational training, cpd, corp governance regulations, professional standards,
monitoring/disciplinary procedure 2) Safeguards particular to work situations e.g. recruitment of
competent staff, corporate oversight structures, employees encouraged to communicate ethical
issues. You can check Table 2.5 on page 117 for the safeguards of the ff: Financial interest in client;
loans and guarantees to and from a client; close business interest w/ client; a personal/family
relationship between a member of the audit team and an officer of the client; employment with
audit clients

Recommendation

1) enforce a policy on declaring potential conflicts of interest to the


board; require obtaining majority approval and excluding any director experiencing the conflict
from the decisionmaking process before proceeding with the proposed transaction. 2) provided
training to the directors to inform them on how a conflict of interest is identified and what steps
should be undertaken when such a conflict arises.

1) put in place a policy on directors receiving bribes or gifts and benefits above a certain value. 2)
require directors to always submit operational equipment sales made at a discount to market
value to a board decision in a formal meeting. 3) compliance program that included training
directors on identifying legal issues and avoiding legal risks to the company
provided governance training and mentoring to the directors to educate them on the scope and
limits of their powers under LLE’s constitution. ASX 3.1

ASX Principle 1.1 establish & disclose roles & responsibilities of the board & matters specifically
reseved to the board and those reserved for management & 1.2 appropriate checks
ASX Principle 1.6, 1.7, 2.1, 3.1; 2.6

ASX Principle 5.1; routine inspections,


ASX Principle 2.1 -2.6
All ASX 2.1 - 6; 4.1
Competition and Consumer Act 2010; regulated by Australian Competition and Consumer
Commission (ACCC); Section 45 of the Competition and Consumer Act prohibits contracts,
arrangements, understandings or concerted practices that have the purpose, effect or likely effect
of substantially lessening competition in a market, even if that conduct does not meet the stricter
definitions of other anti-competitive conduct such as cartels; section 50 of the Act.

(Merger)The ACCC may not grant authorisation unless it is satisfied that either:

the proposed acquisition would not be likely to substantially lessen competition or


the likely public benefit from the proposed acquisition outweighs the likely public detriment,
including any lessening of competition.
For a law based question, a useful structure to make sure you don’t miss out on any marks is as
follows: First, you need to identify the issue, then explain the relevant law. You must then link the
case facts to the law by answering any relevant questions, and come to a clear and specific
conclusion. For example:
Issue:
Fashion Centre’s new advertising campaign makes several claims which may constitute misleading
representations.
Law:
Section 18 of the Australian Consumer Law found in Schedule 2 of the Competition and Consumer
Act 2010 provides that a person must not, in trade or commerce, engage in conduct that is
misleading or deceptive or is likely to mislead or deceive.
Note that puffery is permitted, and this involves extreme and subjective exaggeration.
Apply to the case facts:
You need to answer each question here based on the case. After applying these tests, you would
then determine if puffery was relevant, and come to a final conclusion about whether it was a
breach of the law or not. In answering these questions we can look at the claims made in the
advertisement. Puffery is extreme subjective exaggeration, which means it refers to claims that
cannot be objectively measured. It can be argued that some of the claims in the advertisement are
of a subjective nature and are certainly extreme. For example: We are the greatest – is a broad,
subjective claim and is usually acceptable. They are likely to constitute puffery as they are
superlatives and comparatives that are self-evident exaggeration and unlikely to mislead. Other
parts of the advertisement can be objectively measured. Saying we have the greatest range is a
specific statement that can actually be measured by comparison to other retail stores. So, it is
likely it will fail this ‘objective’ test and this part may not be puffery. So, the final decision here will
depend on whether the overall impression is deceptive.
Conclusion:
advertisement. Puffery is extreme subjective exaggeration, which means it refers to claims that
cannot be objectively measured. It can be argued that some of the claims in the advertisement are
of a subjective nature and are certainly extreme. For example: We are the greatest – is a broad,
subjective claim and is usually acceptable. They are likely to constitute puffery as they are
superlatives and comparatives that are self-evident exaggeration and unlikely to mislead. Other
parts of the advertisement can be objectively measured. Saying we have the greatest range is a
specific statement that can actually be measured by comparison to other retail stores. So, it is
likely it will fail this ‘objective’ test and this part may not be puffery. So, the final decision here will
depend on whether the overall impression is deceptive.
Conclusion:
Make a clear statement about whether you think it is a breach or not. This will depend on your
analysis and evaluation of the questions above including puffery.
procedures for the regular inspection of the factory, which would also include
interviews with the staff. The factory inspector would then report directly to the sustainability
committee that the board has established.

HS needs to establish a social sustainability policy for the production of goods. The board could
refer to ISO 26000 for guidance on setting up their social responsibility policies