Introduction

The main learning experience in field problem solving (FPS) comes from actual problem solving in the field. Nonetheless, there are many advantages to you becoming familiar with the application of the problem-solving methodology of this book on the basis of a number of paper cases and by doing some key exercises. In this way you can enter the field well prepared.

The key element in any FPS is the problem definition, in which the client organization, supported by your work, makes a deliberate choice out of the problem mess the organization faces. You can use the cases in this chapter to train the making of a sound and justified proposal for the problem definition for your project. In the event that an FPS project flounders, the reasons for this often can be traced back to a weak problem definition.

A more comprehensive training exercise is the drawing up of a project proposal, which should contain, among other things, the problem definition and the deliverables of the project. In your actual field project you will have to make your project proposal while you are not yet familiar with this type of fieldwork, nor with the organization and problem in question. Therefore, this is a difficult and risky part of your project. Accordingly, there are many reasons to train this crucial first activity before entering the field.

Section 14.2 gives a possible formulation for the assignment of making a project proposal with some hints for making a sound one, and Section 14.3 gives six cases.

The Assignment Itself

Make a draft project proposal for an FPS project for [name of the company]. This project proposal is the conclusion of the first step of the problem-solving cycle – the problem definition – and provides the directions for the next steps. Usually a project proposal is made on the basis of a number of interviews. For the present assignment, the material for making your proposal is, therefore, a series of summaries of interviews, made during the orientation phase of the project. These interviews were held with important stakeholders in the problem to be addressed.

Objectives and Target Audiences

Marc checks his PowerPoint presentation one last time. He is a bit nervous, and experiences some stage fright. At the same time, he is also quite excited. This afternoon he will get a full hour at the weekly marketing management meeting to present and defend his design for a new medium-term sales planning system.

It was several months ago that Marc, a graduate MBA student, started his internship at the marketing department of a small business unit in industrial measurement equipment, part of a multinational company. At the intake the assignment had looked quite straightforward, but during the orientation stage in the first weeks it proved to be quite a complex one. This was partly due to political tension between corporate headquarters and the struggling business unit and partly to the fact that market research by the marketing department proved to be underdeveloped. After the orientation phase, therefore, the assignment was broadened somewhat. It was not always easy; some people supported his assignment, giving him much time and many ideas, but others were somewhat sceptical, and were reluctant to interrupt their busy schedules to talk with him (especially at headquarters). However, with the strong support of the marketing manager, his principal for the assignment, his company mentor and his academic supervisor, and, furthermore, with the methodological support of the book Problem Solving in Organizations, he had been able to overcome these obstacles. He had carried out a systematic review of the literature on the various aspects of his assignment and had used this as a major input for improvement proposals for market research and for the design of his sales planning system; his design surely is an example of the ‘state of the art’.

Now he is confident that the meeting will be successful and that his design of a solution will be formally adopted. The key participants of the meeting have been briefed by him beforehand on his design, and most seem to support it, including the marketing manager. The only people whose positions he is not sure of are the two market researchers, who keep asking awkward questions. Never mind, though; the die has been cast.

Introduction

In Chapter 11 we discussed corporate governance in the US, the UK, New Zealand, Canada, South Africa and India. They are some of the major traditional Anglo-American corporate governance jurisdictions. There are among them some fundamental differences in approach. In this chapter the focus is on corporate governance developments in countries where the two-tier board system is used. The number of EU member states with different corporate law systems makes corporate governance harmonisation quite difficult, but also leads to very interesting and dynamic discussion within the EU. The OECD Principles cover board structures. Germany has a two-tier board structure with employee representatives forming part of the supervisory board. Elements of the German corporate governance model influenced the original Japanese corporate governance model, but Anglo-American influence emerged after World War II. China has a unique corporate governance model because Chinese corporations were traditionally state-owned and many major corporations are still either state-owned or statecontrolled. Nevertheless, elements of both the German model and the Anglo-American model, especially as far as independent, non-executive directors for listed companies are concerned, have influenced the Chinese corporate governance model. Indonesia also has a two-tier board model, originally based on the Dutch model, but is now developing its own corporate governance principles based on international best practices. Indonesia is of course important for Australia, because of its close proximity and the potential for expanding economic and commercial ties between the countries, especially in light of the extensive ongoing negotiations regarding the Indonesia-Australia Comprehensive Economic Partnership (IA-CEPA).

European Union (EU)

Enhancing corporate governance

The European Commission (EC) represents the interests of the EU as a whole. It proposes new legislation to the European Parliament and the Council of the European Union, and it ensures that EU law is correctly applied by member countries.

Introduction: The audit role and where it fits into corporate governance

Overview of the audit role

Auditing is defined as an assurance service that objectively gathers evidence and communicates it to third parties. Companies that are required to prepare a financial report for a financial year must have their financial report audited and obtain an auditor's report. Thus all large proprietary companies and public companies must appoint an auditor. Small proprietary companies, and small companies limited by guarantee, are not required to prepare a financial report in normal circumstances and hence need not appoint an auditor. However, they must do so in a limited range of circumstances, namely where members holding at least 5 per cent of the votes in a general meeting require preparation of accounts and ask for an auditor.

Broadly, the function of an auditor is to conduct a review and verification of the financial affairs of the company and to ascertain whether the financial report provided by the company complies with relevant legal requirements and accounting principles, and gives a true and fair account in all material respects of the company's financial affairs. The audit role has several objectives. The main one is to provide reasonable assurance that the financial information reported by the company is free from material misstatement. In the process, auditors provide a barrier of protection against careless or dishonest company officers. In order to fulfil this role, the auditor must have suitable skills and expertise, and must be independent of the company.

The main auditing requirement is to provide a report to the members, within the financial report, for a financial year. This is laid before the annual general meeting and lodged with the Australian Securities and Investments Commission (ASIC).

It is important to note that the auditor's role is essentially procedural, not substantive, in nature. More particularly, pursuant to sections 307 and 308 of the Corporations Act 2001 (Cth), the auditor's report to members must set out a number of matters in relation to the financial report for a financial year.

Higher community expectations of directors

Initially low standards of care, skill and diligence expected of directors

Directors’ statutory duties and liability are discussed in greater detail in Chapter 9. It is, however, important to first make a few observations regarding the higher community expectations of directors.

Based on antiquated English precedents, it has been accepted that directors are not liable for a breach in their duty of care, skill and diligence if they merely acted negligently. One of the first indications that more than ordinary negligence was required is found in an English case decided in 1872, where it was held that directors are liable only for a breach of their duty of care, skill and diligence if they acted with crassa negligentia (gross negligence). This rule was confirmed in a later case (1899) by Lord Lindley MR, one of the most famous English commercial Lords:

Introduction

The Australian Securities and Investments Commission (ASIC), as the primary corporate regulator, has had some spectacular successes, as well as failures, in enforcing the civil penalty provisions underpinning breach of directors’ duties under the Corporations Act 2001 (Cth) (Corporations Act). ASIC has played an active role in enforcing civil penalty provisions against directors and officers.

Introduction

One only has to scan the daily newspaper or follow a newsfeed to find plentiful examples of corporations being criticised for unethical conduct. It would take little more time to find businesses or business leaders who have suffered significant reputational damage, enforcement actions or damages claims. Since the 1970s, a considerable academic and practical literature has developed that considers and explores the field of business ethics, drawing on theory, practice and empirical data. Subjects that consider business ethics have become standard within university business courses. There can be no doubt that the conduct of corporations attracts considerable public interest. For a corporation, the consequences of perceived unethical activity can be profound: they include significant penalties for breaches that amount to regulatory infringements. It can also lead to calls for enhanced regulation and broader scrutiny of corporate activity. In this context the management of a corporation's ethical climate and conduct is increasingly seen as critical to its success, and a matter with which the senior management and the board should be deeply concerned. No book on corporate governance would, therefore, be complete without canvassing this topic.

The modern corporation knows few bounds – its widespread use in business and the corporatisation of essential services means that it permeates almost every aspect of our daily lives. It is companies, small and large, that drive economies and that can create economic prosperity for countries. However, all is not bright and shining; companies, especially large multinational public companies, have been the cause of considerable harm to the environment and society generally because of pollution, exploitation of employees and not providing safe working environments. There are too many examples in too many countries to name them all, but as this book originated in Australia, the James Hardie case, where many suffered tremendously because of exposure to asbestos, with little or no respect by the company for those who suffered, is a prime example of why it is of considerable importance that companies are governed properly. We discuss the James Hardie case in detail in Part 2.4.2, as well as in Part 14.2.3 from a business ethics perspective. Principles of corporate governance have a vital role to play in protecting consumers, shareholders, creditors, the environment and society, and in ensuring that companies act responsibly as well as legally.

Since the appearance of the first edition of Principles of Contemporary Corporate Governance in 2005, developments have gained velocity, and the volume of materials on corporate governance has grown exponentially. This made the appearance of a second edition in 2011 inevitable. The global financial crisis that emerged in about 2008 and global financial uncertainties in the European Union (since 2008) made us predict in 2011 (in the Preface to the second edition of this book) that the discipline of corporate governance would retain its prominence in future. That has indeed been the case, and it was a main motivation for us to bring out the third edition and now this fourth edition of Principles of Contemporary Corporate Governance.

Again we looked at the book in its entirely and asked how we could keep it relevant and contemporary. We decided not to simply add more materials to the book and make it a monstrous work. Rather, we decided to stick to our original approach of focusing on the fundamental and contemporary principles of corporate governance. However, we also wanted to include more of the corporate governance themes and issues that have become particularly prominent in recent years.

Introduction

This chapter highlights the roles of and relationship between the twin regulators, the Australian Securities and Investments Commission (ASIC) and the Australian Securities Exchange (ASX) in the Australian corporate governance regime. The exercise of ASIC's powers is reviewed and enforcement patterns are commented upon. The chapter sketches the role of the ASX in corporate governance and concludes with remarks addressing the broad philosophical debate on the role of the regulator in light of the carnage (the widespread corporate collapses or near collapses) arising from the Global Financial Crisis, and the pressure on ASIC to be more proactive and to perform to a higher standard. The reasons for the parliamentary inquiry into ASIC's performance are captured in the following passage:

Introduction

As touched upon in Chapter 1, contemporary commentary on corporate governance can, in general terms, be divided into two main camps: those who consider corporate governance as being about building effective mechanisms and measures to satisfy the expectations of the variety of individuals, groups and entities (collectively, ‘stakeholders’) that inevitably interact with the corporation, and those who focus on it in relation to the narrower expectations of shareholders (shareholder primacy).

This chapter focuses on the first of these objectives, with attention being given to the stakeholders of the company, how the law influences corporations to recognise and protect the interests of these stakeholders, and the relationship between these stakeholders and the underlying objective of companies of achieving and maintaining good corporate governance.

Steve Letza, Xiuping Sun and James Kirkbride explain the difference between the two corporate governance paradigms, ‘shareholding’ and ‘stakeholding’, as follows: