Corporate Governance and Value Creation

Question: Discuss about the Corporate Governance and Value Creation. Answer: Introduction: Nowadays, real estate business has gained global recognition and has attracted the international investors and developers to invest here. It is perceived that corporate governance can improve the reputation of real estate industry by making more professional. Corporate governance focuses on the participants of the market who expect faster reply to the perceptible failures. The report here deals with the organization The Rational Estate Institute of Australia (REIA). REIA operates in the real estate market of the country, which is considered the least ethical (Acharya 2013). The organization provides valuable advice to the government. An experienced team headed by an able CEO manages the governance in REIA (Allen and Carletti 2013). Six-member organizations from different territories constitute REIA. An analysis of the external environment of the organization is also given form an idea about the industry in which the organization operates. A board of directors each from the six-member organization is selected to form the board of directors. The CEO of REIA is Jock Kreitals. An overview about the corporate governance of the organization is also given followed by a critical review of it. Based on the critical review some recommendation is given. Recommendations are mainly guidelines and not prescription to be followed. Reforms in the corporate governance enhance the transparency and increase their score in ethical issue in the Australia economy. Background of REIA and the Real Estate Industry: The Rational Estate Institute of Australia (REIA) is professional organization for the real estate sector of Australia. REIA is not politically aligned and it researches on the matters relating to real estate sector and provides advice to the Federal Government, media, and other members of the real estate sector. It is established in 1924 and it gained reputation as one of the most acceptable source regarding the commercial and residential property markets (Reia.asn.au, 2016). An able CEO along with an experienced team with requisite knowledge and credentials guides the organization towards success. Six members from different territories and state together form the REIA membership. They are Real Estate Institute of ACT, NT, SA, Tas, WA and Vic. The Affiliates Council in NSW is also included among the members of REIA. Approximately 80% of the real estate firms collectively constituted REIA (Reia.asn.au, 2016). REIA operate in the real estate sector of Australia. A PESTLE analysis gives an idea about the macro environment of the industry. Changes in taxes and laws, barriers to trade, demographic changes all constitute the macro-environment of the real estate industry. The political situation of Australia has always been stable which benefits the companies in their business. A stable business environment with skilled and educated labors and a strategic time zone all contributed in the formation of the perfect environment to attract the MNCs. The economic environment is favorable as high property prices increases the demand for rental properties. The economic environments also offers encouraging situation for investment opportunity. The property prices increases by 36.6% and the commercial properties in Perth and Brisbane gives outstanding returns on investment (Allen and Carletti 2013). Pure investment strategies enable investors to purchase off-plan properties at best prices. The social structure in Australia is divided into three statures. They are upper class, working class and middle class. Every class has different purchasing power. The property market delivers according to the purchasing power of each class. Technology leading to innovation r educes cost and enhances quality. Government invested 55% of the funds in research and industry development. The prime minister has created a post to augment science and technology in the industry. The environmental protection act imposed by the government, which will meet the availability and quality of water supply. The legal situation should be stable in which the firm operates. Minimum wage, employment and ethical issues all comes under this legal factors (Barton and Wiseman 2014). Review of REIA governance: REIA governance is compromises of a board of directors who takes strategic decision, and frames policies for the organization. The CEO and the board of directors work together to achieve excellent outcomes for the organization. Jock Kreitals is the CEO of REIA (Reia.asn.au, 2016). The board consists of single representative from each state as nominated by the Real Estate Institute. The president in REIA is Neville Sanders. He has joined the Real Estate Institute of Victoria in 1971 and became a member of REIA board. At present, Neville is in the general manager post of Whittles Australia. Hyden Groves is the deputy president who holds the real estate business after working successfully as sales representatives in a firm for years. Diane Davis is the board director of REIA. She was the former president of Real Estate Institute of Northern territory. She has been serving as Real Estate agent for 22 years. At present, she is now in the position of Branch Operations Manager of Elder Real Estate. Joseph Walton is a professional in the property market. He has experience in sales, retails, commercial leasing, and sales of residential properties and uses his knowledge to attain exemplary standard in all fields of his work. He has served in the government sectors and in charitable institutions. Joseph is a licensed agent in the real estate sector and holds the director post in Allard Shelton Pty Ltd. in Melbourne. Moreover, he is serving as a director in the Real Estate Institute of Victoria. In 2014, Greg Moulton became the CEO in Harris Real Estate. He has played extensive training role in Real Estate Institute. He has earned reputation as an auctioneer and committed himself in the Real Estate Institute. Stan Platishas joined REIA Board Director in 2004 (Reia.asn.au, 2016). He has been in the real estate industry for 19 years and currently holds the position of Board Director of REIACT. He has also received Community Service Award for his outstanding performance in th e Real Estate sector. Christopher Mourd heads Real Estate for LJ Hooker group. The residential networks and the commercial networks of LJ Hooker growth and management is looked after by him. He also has extensive knowledge and experience in international property of Northern America and South Pacific region. Adrian Kelly has served in at the real estate industry of Tasmania. He is among the board of members of Real Estate Institute of Tasmania. At present, he is an Associate in REIA. John Cunningham is highly respected in his profession for his integrity. His philosophy is to build trust in the relationships of business. His innovative approach coupled with his expertise enabled him to set milestone in real estate business. At present, he is in the President position of REINSW (Reia.asn.au, 2016). REIA is mainly concerned about the finance to the agencies of real estate. To expand the span of SMEs in the real estate market in Australia REIA conducted a survey on the real estate agents, which will provide evidence on the impact on the decreasing competition in the financial services in the post global financial crisis period. The survey revealed that the financial sector is unable to understand the requirements of SMEs and grouped them under in a single basket. The main problem was to get access to finance as the official interest rates for SMEs are increased after the worldwide financial crisis (Battistini 2014). To distinguish the relationship that exist between the structure and the ownership pattern of REIA is shown through a figure below.In the figure, the major claimants of the value in REIA are the debt and the equity, holders. Debt holders accept the risk on debt-obligation whereas the equity holders receive the value of the firm and assign the corporate decision to the managers and to the board of directors. Agency association exists within REIA between the management and the employees, depending on the complexities of the company. REIA also have a connection with its stakeholders during the normal course of its operation. These connections are illustrated in the lower half of the organization (Berger, Imbierowicz and Rauch 2016). The management has the power to alter the norms of the business and its relationship with the customers and the suppliers. The ability to make changes depends upon the characteristics of the commodities or services that are being traded. External audit are performed to provide a new viewpoint of the mechanism, which is framed to minimize the agency cost (Neubauer and Lank 2016). Finally, the figure depicts that REIA has a relationship with the social agency that encompasses the responsibilities in terms of good corporate citizen. Recently like other Australian firms, REIA has given recognition to the relationship between corporate governance and the level of performance in a company. The important part of the mechanism of the corporate governance can influence the level of cost of agency. These costs are the ability of the directors to foresee the nature of the management, review and audit the process, the role of large shareholders to incur and monitor cost and the threat to take over the market from corporate control (Boyd 2014). However, the connection between good corporate governance and the level of performance in REIA has received diverse support. The mechanism of corporate governance was designed to form deliver and develop industry-wide framework that could guide REIA and its investors in the real estate market in Australia. Some of the principles, which can be organized in three types are structural, behavioral and disclosure, are given below: To formalize the functions reserved to the board of directors and the management. A majority of the board of directors is independent with a chairperson and the role of the CEO and the chairperson should not be the same person. The organization should have an established set of code to promote responsible and ethical decision in the real estate market. The CEO and the board of directors are required to safeguard the integrity of the company. The organization should have an established written procedures and processes to ensure compliance with the rule of ASX. Disclosure of the requirements is necessary to make certain its accountability to the senior management. The organization should design communication strategies to enhance effective communication and participation at the meetings. To disclose the evaluation of the performance of the board, committees and individual directors and key executives. The organization should give recognition to the legitimate stakeholders. The structural principles assumed that the corporate governance is a matter of performance of the firms goal. The behavioral principles consist of the majority of the recommendations from the ASX council. The disclosure principle outlines REIAs ways of communication with corporate governance to collect information about the stock market (McConnell and Qi 2016). Important policy implication is not expected to change the management and governance of the company all together (Dermine 2013). The key elements of the corporate governance in REIA are: To protect the interest of the investors and which is achieved through a set of provisions. They are clearance of the funding obligations, information on the financial obligation of the company and decision-making process Investors give more importance to the Advisory Committee in terms of reference. Critical Review: The real estate sector played a crucial role in the present economic crisis. The recent crisis, to an extent, is attributed to the governance crisis. In Australia, the real estate sector is considered the least ethical. The real estate is of great importance to the institutional investors. Though theoretically it has been said that organization level of governance is important for investment in equity but evidence reveals that in REIA governance has least influence on its performance (Kohl and Schaefers 2012). The organizational structure of REIA requires fundamental changes in the principal traditional setting. In this constricted setting in which the managers of REIA operate, gives us an interesting way to experiment with the connection between governance and level of performance. Moreover, according to Harrad, Davis and Grissom (2013), corporate governance played a crucial role in the global economic crisis as returns on investment declined. However, according to, investors have s hunned the Asian markets during the beginning of the financial crisis in Asia. To investigate the impact of corporate governance on performance of the company, an analysis on the flow of capital from both residential and institutional investors is analyzed. Results showed that corporate governance affect REIAs performance both during the boom and recession periods. According to Harford (2012), the returns on stock are related directly to the corporate governance structure. Designing an investment strategy needs more time in an organization with high corporate governance compared to an organization with low corporate governance. Investors might not be able to identify the difference between a well-performed and poorly performed governance company but eventually they will be able to do so by paying a premium to the company with good governance (Joseph, Ocasio and McDonnell 2014). Recommendations: Recommendations are like guidelines that are framed to produce positive and effective outcome. Some of the suggestions are: The available information is better accessible. More detail information about the affiliations, independence, policies, share trading and composition of committees. Clarification of the concerned information In the case of foreign investment in Australia, foreigners are required to apply for investment approval prior to the purchase of any residential estate. An established set of information and functions should be reserved to the board of directors. The recommendations are framed to promote several principles, they are: An established entity has a board of directors to manage and evaluate the performance. The board of appropriate size and committed to discharge its duty efficiently. The entity should have a rigorous process to verify and and maintain the integrity of corporate reporting. The entity should have a remuneration structure to attract and retain the directors and executives. The entity should also have an effective risk management framework. Conclusion: In order to improve reputation and increase transparency, REIA uses corporate governance as its main tool. Transparency and professionalism are the main element to control and increase the confidence of the investors. Real estate has been in the foreground during the global financial crisis. In this report, the influence of the structure of corporate governance on the stock returns has been seen. The Rational Estate Institute of Australia (REIA) operates in the real estate market of the country, which is considered the least ethical. The organization provides valuable advice to the government regarding investment related issues. Six-member organizations from different territories form REIA. A PESTLE analysis gives a view on the external environment of the organization and hence, about the industry in which the organization operates. A board of directors each from the six member organizations headed by CEO of REIA, Jock Kreitals forms the board of directors. A view on the corporate go vernance of the organization is given. A critical analysis o the governance of REIA is then given. 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