BUSN603 Corporate Governance and Risk Mitigation

What do the terms ‘governance’ and ‘risk management’ mean to you?

Answer     

The aim of this paper is to examine the concept of corporate governance and risk management. The role of managers and directors is t create a socially responsible organization. Further, this essay analyses and explains the role played by corporate governance and risk management based on different needs of the stakeholders. The essay analyses the multiple contextual, ethical and conceptual issues that affects corporate decision making with respect to corporate governance and risk management (Chew 2012).

It is difficult to capture the meaning of governance in a simple definition.  According to Brink (2014), governance can be defined as processes and continuous monitoring of policies as established by the governing bodies of the organization. It is also a method of determining who has power and makes decisions to have their voices heard (Calomiris and Carlson 2016). From the learning and experiences, I have learned that good governance requires fair legal frameworks which are enforced by a regulatory body (Tricker 2015). According to Psaros (2009), it also involves transparency of information where it is freely and directly available to the ones who are directly affected by governance. In my opinion, good governance requires responsiveness of an organization to serve the best interests of stakeholders. Risk management can be defined as the process of identification, analysis and controlling risk. It refers to all the methods that is used to minimize financial losses. It relates to the external threats to a corporation that affects financial assets of an organization (Crane, Matten and Moon 2008). I have learned that risk is a daily part of our lives. Therefore, the risk professions need to undertake measures to manage risk. According to the modules and learning in the classes, I have learned that every organization needs to follow agency theory. This may be done to resolve the problem that can exist between the agents and principal of the business. The agency theory can be used when the agent and principal are in conflict. There is a risk of moral hazard. In my understanding, the agency theory can be used to design incentives appropriately, better corporate policy must be developed (Tricker 2015).

Considering the example of BHP Billiton, multinational petroleum, mining and metal company headquartered in Melbourne, Australia. As stated by the Chairman of the organization, Jac Nasser, good governance is the responsibility of executive management that is found across the organization. The governance at BHP Billiton goes beyond the self-interest. They believe in long-term value creation by high-quality governance (McPhail and Adams 2016). I have come to an understanding that the directors of the organization are responsible for the operations and action with the shareholders. Good corporate governance promotes ethical climate that reflects desirable results in commercial aspects (Phillips 2015). I strongly support ethical values and integrity practices that make me question if BHP Billiton, an Australian multinational follows corporate governance and risk management effectively.

According to my learning of stakeholder theory in the previous modules, every business stands to create value for its shareholders. Every stakeholder needs to be managed or engaged even to run small tactical projects (Du Plessis et al. 2015). I learned a crucial lesson from the Samarco disaster. It was the worst environmental disaster in Brazil that was reported as a cause of poor corporate governance. The disaster killed 19 people and significant aquatic life (Phillips 2015). The joint venture between BHP Billiton and Vale was just a strategy to cover the loss and reopen the mine. The prosecutors called the hazard as negligence as it was found that Vale was storing waste in the tailings dams. The three key features of corporate governance such as transparency, accountability and disclosure were recognized as a failure. In my opinion, these three features are the fundamentals of maintaining commitment and reputation to ethical business conduct. BHP Billiton stated in their defence that they were not aware of the Samarco joint. The approach to operation oversight and risk mitigation fell short of expectations to good corporate governance (Phillips 2015). I do not expect the organizations to excel and deliver outstanding  results, but such a negligent act by the organization leading to loss of human and animal life makes me question the risk management practices of the firm.

I have some lessons in risk management that I have learned in the previous studies and experiences. According to Browning and Sparks (2015), risk management cannot be effective unless the top management of organizations fully support the staff and meaningful change. I have also come to an understanding that if the organization’s culture is heavily invested in the status quo, then no disclosure or oversight can prevent from mishap. According to Mallin (2016), the organization structure plays a critical role in the risk management. While everyone agrees that personal accountability is absolutely essential to a healthy and successful corporate culture, rare is the individual who will publicly admit their shortcomings (Blowfield and Murray 2014).

According to the learning of financial theory, I can evaluate that financial theories are the building blocks of the corporate world. Every organization needs to manage their finances as they cannot create value for investors unless there is sound financial practice (Tricker 2015). BHP Billiton believes that risk management is the corporate objective to deliver long-term value to the shareholders. The risk profile of the entire business is reviewed by the Board. Both strategic and operational risks are analysed by the Board (Tao and Hutchinson 2013). The CEO at BHP implements a system of control for identification and management of risk. In my opinion, a manager can misinterpret profitability as a false sense of security (Bair and Palpaucer 2015). The managers may be missing out on risks that lead to losses and keeps the organization from earning more profit (Phillips 2015).

Therefore, I wish to work as a risk consultant and identify gaps in the planning as well as implementation processes that strives closer through stakeholders. The organizations need to follow good corporate governance and efficient risk management practices for maximum profitability and social accounting.

References

Bair, J. and Palpaucer, F., 2015. CSR beyond the corporation: contested governance in global value chains. Global Networks, 15(s1), pp.S1-S19.

Baxt, R 2015. Duties and responsibilities of directors and officers, 21st edn, Australian Institute of Company Directors, Sydney.

Blowfield, M and Murray, A 2014. Corporate responsibility, 3rd edn, Oxford University Press, Oxford.

Brink, A 2014. Corporate governance and business ethics, Springer, New York.

Browning, PC and Sparks, WL 2015. The director’s manual: a framework for board governance, John Wiley and Sons, Hoboken, NJ.

Calomiris, C. and Carlson, M., 2016. Corporate governance and risk management at unprotected banks: National banks in the 1890s. Journal of Financial Economics, 119(3), pp.512-532.

Chew, DH (ed) 2012. Corporate risk management, Columbia University Press, New York.

Crane, A, Matten, D and Moon, J 2008. Corporations and citizenship, Cambridge University Press, Cambridge.

Du Plessis, JJ and Hargovan, A, Bagaric, M and Harris, J 2015. Principles of contemporary corporate governance, 3rd edn, Cambridge University Press, Melbourne.

Mallin, C 2016. Corporate governance, 5th edn, Oxford University Press, Oxford, UK.

McPhail, K. and Adams, C., 2016. Corporate respect for human rights: meaning, scope, and the shifting order of discourse. Accounting, Auditing & Accountability Journal, 29(4), pp.650-678.

Phillips, D., 2015. Samarco dam collapse: one year on from Brazil's worst environmental disaster. [online] the Guardian. Available at: <https://www.theguardian.com/sustainable-business/2016/oct/15/samarco-dam-collapse-brazil-worst-environmental-disaster-bhp-billiton-vale-mining> [Accessed 15 Mar. 2017].

Psaros, 2009. Australian corporate governance, Pearson Education Australia, Sydney.

Tao, N. and Hutchinson, M., 2013. Corporate governance and risk management: The role of risk management and compensation committees. Journal of Contemporary Accounting & Economics, 9(1), pp.83-99.

Tricker, B 2015. Corporate governance: principles, policies and practices, 3rd edn, Oxford University Press, Oxford.