Corporate Governance in Australia

Abstract

Corporate Governance in AustraliaGrant Fleming he state of corporate governance in Australia has received media and policy attention in the last eighteen months as the social and financial implications of major corporate collapses come to light.Most prominent in the local financial press have been the investigations of governance irregularities (and allegations of illegal management behaviour) in HIH and OneTel, with supporting roles from companies such as Harris Scarfe and AMP.Overseas players in the unfolding governance drama have included the US corporations Tyco, Enron and Global Crossing.Economists have not been active participants in framing the agenda of Australian debate on corporate governance.Indeed, what has been lacking in the debate thus far is analysis of the state of corporate governance using the tools and concepts familiar to students of economics.Financial economists, in particular, have a rich set of empirical findings that allow us to judge the necessity for and likelihood of success of reform options.This paper presents a standard principal-agent framework to place the current corporate governance debate and policy reforms in context.This framework is used to describe the changes in the Australian corporate governance system over the last forty years, and to determine if there are lessons from this experience for current reforms.An examination of how principal-agent relationships between shareholders (and other stakeholders) and managers will be affected by the recently formulated Australian Stock Exchange (ASX) Corporate Governance Council 'Principles of Good Corporate Governance and Best Practice Recommendations' is provided.Some speculations on their likely impact on firm value and stock market behaviour are offered. A Framework for Understanding Corporate GovernanceThe level of transaction costs associated with various organisational structures provides the conditions under which the owners of the firm choose how to organise in such a way as to maximise profit.Firms as organisational forms (the co-location of individuals to produce goods and services) solve coordination and information problems associated with contracting over long time periods (Williamson, 1971;Alchian and Demsetz, 1972).As the firm increases in size, the benefits of specialisation lead owners to delegate day-to-day control to managers, and oversight of management to the appointed board of directors.The corporate governance of the firm, therefore, entails a set of mechanisms by which

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