Introduction:
The purpose of this essay is to recognize the importance of structuring the board to add value as well as establishing an effective risk management and internal control in corporate governance area, and to provide reasons why this area is of most importance in protecting corporate failure. To support the recognition and the reasons, theoretical analysis would be presented in this essay such as agency theory. In addition, the actual corporate governance practices of Australia and New Zealand Banking Group Limited and Qantas Airways Limited, two of ASX top 100 companies, would be provided as examples.
Main body:
A few years ago, the word “corporate governance” was barely heard but today it is already an everyday business language (Mayne, 2007). One of the reasons that contribute to the prevailing of corporate governance is that a vast scale of corporate failure cases happened in the last decades, which therefore resulted in a severe global financial crisis (Rankin, 2012).
According to the ASX Corporate Governance Council, corporate governance is “the framework of rules, relationships systems and processes within and by which authority is exercised and controlled in corporations” (ASX, 2010). Therefore, the practice of corporate governance is related to various areas, including structuring the board to add value, establishing an effective risk management system, making timely and integrity financial disclosure and remunerating fairly to the management. Although all of these practices work as integrity, each corporate governance implement has its own focus.
In the perspective of guarding against the corporate failure, the practice of effective corporate governance is of vital importance as well. Among all the aspects of corporate governance practices, the structure of board to add value and the establishment of a valid risk management and effective internal control system within the company are most relevant to the deduction of corporate failure risk.
First and foremost, corporate failure is closely related to corporate governance practices. The potential vulnerability in the corporate governance could be main contributing factors to corporate failure. For example, ineffective boards and failure of risk management system are two of the main causes that resulted in corporate failure (Rankin, 2012). The board, which represents the interest of shareholders in company, is primarily in charge with the governance and responsible for the corporate failure. A sound risk management and internal control system is able to reduce the risk of corporate failure.
Moreover, in the aspect