Introduction
For the purpose of analyzing the governance structure of a business in New Zealand, Mighty River Power has been chosen. Mighty River Power is a New-Zealand headquartered electricity generation company, which was formed in the year 1999 after splitting from the Electricity Corporation of New Zealand. On May 2013, the firm was partially privatized by the government, with the government retaining 51.78% stake and the remaining 48.22% of the stake held by private investors. They generate electricity in a number of ways; which also includes hydroelectric power and geothermal plants located in various parts of the country. They are a major source of electricity in New Zealand, with providing almost 16% of the total country’s electricity needs in the 2008.
With increased globalization which increases the number of stakeholders for business entities, it is necessary for a business to ensure good corporate governance in order to increase and maintain a favorable position in the market. However, the modern day business arena is rife with organization’s need to make profits without regard to the purpose and effect on the society. In that respect Mighty River Power which is a New Zealand’s largest electricity provider and whose business is based on low-cost and reliable electricity generation and sale to businesses and homes is identified as a model organization for analysis on corporate governance and ethics. The analysis begins with an evaluation of the organization’s governance structure and then provides an evaluation of the internal governance issues and concerns. Finally, the analysis provides an evaluation of the external factors’ relevance and impact on the organization’s corporate governance. (Mighty River, 2013a)
- Governance structure
Mighty River Power's business model has a basis on partnership on both international and local markets creating sustainable and long-term value through its intergenerational resources management. The model seeks to deliver value to shareholders, customers as well as communities and its results and performance illustrates its genuine commitment and focus on profits as well as a purpose by engaging with communities to enhance sustainability in use of resources, innovation, customer care and product delivery. (Mighty River, 2013b)
- Shareholding Structure
- Board structure
The organization has a board comprising of experienced directors with a depth of governance and commercial experience appointed by shareholders for period of service. The board has two committees including the Audit & Risk Assurance Committee as well as Human Resource committee that assist it in carrying out its duties. There are currently 9 directors in the board. All the directors are responsible for ensuring that the financial statements comply with the generally accepted accounting principles and that it represents the fair picture of the business. (Mighty River, 2013b)
- Board style
The board has a chairperson who is appointed from the board members with a mandate to chair the board meetings as well as provide leadership for an effective and informed board. The chair also ensures that the board through its decisions provides a clear guide to the Chief Executive on the expected results. The chairperson also represents the board to the organization’s shareholders as well as ensuring effectiveness and integrity of the organization’s governance process. Further, the board is a group of skilled, knowledgeable, experienced members reflecting perspective and diversity in fulfilling its responsibilities and purpose. The organization’s number of Directors is determined by its constitution and elected by the shareholders for a three years term.
The board’s responsibilities include:
- Strategic goals setting and planning
- Planning for and ensuring availability of adequate resources
- Performance and strategy implementation monitoring
- Chief executive Selection, appointment and performance monitoring.
- Reporting integrity and financial performance monitoring.
- Approving acquisition transactions
- Ensuring that there is in place effective risk management, audit as well as compliance systems.
- Establishing the delegated levels of authorities for executive management.
- Approving management team’s appointments as well as reviewing their remuneration and performance.
- Chief executive development and succession plans review
- Ensuring timely and effective communication and reporting to shareholders
- Reviewing of board’s remuneration and providing recommendations to shareholders. (Mighty River, 2013b)
Communication
Through the chairperson, the board communicates to the organization’s Chief Executive and Management in order to ensure effectiveness and integrity of its operations. This is done through the chairperson’s prompt consultation with the board directors over crucial matters that they should be aware of. Further, the organization’s communication with the public is done by the authorized representatives in line with the organization’s market disclosure policy unless directed by the Chief Executive or the board chairperson. (Mighty River, 2013b)
- Board Sub-committees
For the purpose of assisting the board 2 prime sub-committees are present and they are; risk assurance and audit committee and the human resource committee. The main job of the risk assurance committee is to ensure and to provide assurance to the board that all the risks are well managed by them. The human resource committee on the other hand, oversees the internal organizational matters as well as the remuneration to be given to the employees.
The members of the risk assurance and audit committee are:
- Keith Smith
- Trevor Janes
- Michael Allen
- Prue Flacks
- Joan Withers
The members of the Human Resource Committee are:
- Tania Simpson
- Jon Hartley
- Parekawhia Mclean
- Joan Withers
- Culture
The organization has a culture of a partnership, collaborative approach which seeks to ensure commitment from its people. (Mighty River, 2013b)
- Executive/non-executive membership
The organization has both executive and non executive directors with executive directors being involved with direct running of the organization’s operations unlike the non executive board members. (Mighty River, 2013)
- Management
The organization has an extensive team that constitutes its management including
Chief Executive who is the head of the organizational management with overall supervisory authority and providing leadership to the organization in liaison with the organization’s board
Chief Financial Officer who heads the treasury, finance, information services and investors’ relations.
General Manager Retail whose responsibility includes metering and retailing businesses.
General Manager Business Strategy and Solutions is responsible for delivery of the organizations strategy and development facilitation. In addition, the manager is responsible for legal functions as well as communications and information services.
General Manager Human resource whose responsibility is to deliver the organization’s human resources strategy.
General Manager Development whose responsibility is the organization’s growth strategy in the local and international market.
General Manager Operations who is responsible for performance optimization of the organization’s domestic operations, industrial and portfolio sales. (Mighty River, 2013d)
- Organization structure
The organization structure comprise of a Chairperson, the board, a board secretary and Board committees as discussed below.
Board
The Board which comprise of skilled, experienced and knowledgeable professionals appointed by the shareholders as their representatives and as the overseers of the organization’s operations.
Chairperson
The Chairperson who is responsible for leading the board and acts as the interface between the management and the board communicating the board decisions to the management and taking managements views to the board for considerations.
Board Secretary
The board appoints a secretary who is responsible for coordination of its operations including market disclosures, communication with external authorities like regulatory bodies and stock exchange, meeting scheduling, statutory filing and distribution of board papers.
Committees
The organization’s board comprise of committees that helps in discharge of duties. The committees include the nominations committee, Human resource committee and Risk Assurance & Audit Committee. In addition, the board can establish ad hock committees to settle relevant matters. Further, the committees’ creation and operations are guided by a charter that is reviewed on an annual basis while the membership is determined by experience, workload and skills and appointments done by the board members. (Mighty River, 2013b)
- Capital and shareholding structure
The Mighty River power is a publicly owned company listed in the stocks exchange in New Zealand. (Mighty River, 2013a)
- Governance implications on the structure
With the significance of the organization’s role in the Capital and energy sector, the need to have the shareholders as well as the stakeholders views being taken in consideration requires an establishment of an organization structure that will enhance the board’s ability to monitor the legal, social, political, economic as well as other crucial matters. With good corporate governance structure in place, an organization easily adopts to the suitable ethics and high standards in consideration of the different approaches needed for different entities as they reflect the difference in the stakeholders interests, ownership structure and the organization’s nature. (Securities, 2011)
- Internal governance issues and concerns
Corporate Governance
In a bid to create long-term value for shareholders, Mighty River Power has a board that provides strategic guidance as well as has an oversight of the management. The organization’s board’s emphasis is on the innovative as well as strategic which is coupled with business and financial expertise in addition to the industry knowledge. The organization has capabilities with its directors being experienced in commercial and professional capacities. The organization applies the board charter to guide the directors towards promotion of high corporate governance standards. The organization also has a market disclosure policy that acts as a guide towards a commitment of providing information to the key stakeholders. The business also has strength in its diversity as it works together to deliver through the best practice of corporate governance. In addition, being a listed company makes the business an organization whose performance is measured on a like for like basis. (Mighty River, 2013b)
- Organizational goals, performance and policies
In its bid to enhance corporate governance, Mighty River Power’s board has adopted some objectives and set goals in which it has had a good performance guided by a Corporate Governance charter, Social responsibility policy as well as an ethics code. Among those objectives are:
- Promotion of responsible and ethical decision making as
- Restructuring the board to add value
- Financial reporting integrity safeguard
- Identify and guide management in risks management
- Ensure that stakeholders’ rights are protected. (Mighty River, 2013c)
- Diversity, Gender and Boardroom expectation
The organization promotes diversity as well as a suitable corporate culture while strategies also meant to ensure fairness in terms of fair and responsible remuneration. (Mighty River, 2013d)
- Director and management remuneration
For Mighty River Power, the directors are usually paid in terms of the Directors fees and additional fee paid to the chairperson, committee members as well as committee chairpersons reflecting respective responsibilities with the total fee payable to the board being subject for approval by the shareholders. (Mighty River, 2013b) There is a need to ensure adequate remuneration in order to attract, motivate and retain highly qualified directors. According to the corporate governance principles, the directors’ remuneration can be a way of sharing the organizations rewards as well as risks of both the poor and good performance. This keeps the board committed to the organizations performance improvement. The board’s remuneration should also be fair, transparent and reasonable. To achieve this, an organization is required by the Securities Commission guidelines and principles to have a policy that clearly sets out executives and non executive directors’ remunerations that are commensurate of their skills, experience and knowledge. For executive directors, there should be an element of dependency on performance on their remuneration in order to enhance their commitment to the organization’s performance. (Securities, 2011)
- Directors’ appraisal, succession planning, developing board committees’ roles and improving board management interface.
The organization’s board has the responsibility of reviewing the succession plan for its members as well as for the management team. (Mighty River, 2013a) One of the key guides on the management and board directors development as well as succession planning is provided for by the Financial markets Authority which stipulates the essentials of being a director including the necessary legal requirements. (FMA, 2013) In respect to enhancing the board and management interface, the Securities commission guideline which is applied in Mighty River Power requires use of board committees as a means of helping the directors address the managements concerns in well considered decisions that addresses specific issues as necessary. (Securities, 2004)
- Communication issues
The securities commission principles and guidelines on corporate governance requires organizations to ensure integrity for their financial reporting as well as timeliness and disclosure balance for the organization’s affairs. (Securities, 2011)
- Risk management reforms
In addressing prevalent risks in the market in compliance with corporate governance principles, the organization seeks to ensure that its operations meets high standards of safety, health, environmental practices, social responsibility, corporate behavior as well as ethics in line with the bid to protect its reputation. (Mighty River, 2013a)
- Internal control mechanisms and ethics codes
The organization has in place effective risks management and audit as well as compliance system meant to protect its assets as well as a mitigation measure against its operation beyond its regulatory and legal requirement or beyond the risk that is acceptable to the stakeholders. (Mighty River, 2013c)
- Increased awareness
The organization also needs to address the increasing awareness on the stakeholders needs by providing more relevant information that is suitable in guiding their decision making. In that respect, the organization seeks to enhance its disclosure as well as guard the integrity of its reporting. The company also places stress on the corporate social responsibility and how their activities might be affecting the overall image of the company. (Securities Commission, 2011)
- Government Initiated Partial Float
In the year 2011, the government had reduced its stake in the company from a staggering 100% to around 51% for Mighty River Power Company as well as 3 other energy companies which it held. It later sold of the remaining 49% under a mixed ownership plan. The partial float of Mighty River Power took place before all the other energy companies, on September 2012. Prior to the issue on April 2013, it was announced that the fees of directors would be increased from, although it is still paid by the tax payers. This move was seen to be quite controversial by the experts.
- External factors relevance and impact
- Legislative compliance framework
Corporate governance structure in a an organization is usually subject to various external factors. The most significant external legal frameworks for corporate governance is the companies Act that has several stipulations for what a good corporate governance framework should entail. Some of the most instrumental requirements include
- The need for the board to hold annual meetings
- Solvency requirements for organizations
- Requirements to provide financial statements on an annual basis
- The need for organizations’ boards to comply with directors duties.
- The need for organizations to present special resolutions to shareholders especially with the increased number of major transactions in the modern day business. (Ministry, 2013)
In addition, an organization’s board is required to be guided by a charter that helps the directors in carrying out their responsibilities effectively in line with professional standards. (Securities, 2004)
- Best governance practices for Sector and business
In respect to Mighty River power, the most relevant and best governance practices include those that address safety and quality of service delivery due to the great risk that comes with its operations as well as the crucial role that its product plays in the economy. Therefore, being an electricity generator requires high safety standards as well as sustainability in electricity supply for both the firm and the sector as a whole. (Mighty River, 2013d)
- Governance guidelines
- FMA/NZ Securities commission governance principles
The New Zealand Securities Commission developed principles and guidelines for corporate governance in 2004 in consultation with various sectors as well as with acknowledgment of the different approaches required for different entities for the purpose of good governance. However, the principles do not have legal obligations on organizations but their boards charters are expected to be guided by the principles. (Ministry, 2013)
- NZX and ASX governance principles and recommendations
The ASX and NZX governance principles recommend an adoption of approved governance practices by organizations’ boards. In this respect, Mighty River seeks to achieve highest governance standards with an establishment of a charter that promotes a culture of commitment to essential governance principle’s compliance. This has been crucial to the organization’s business practices where the charter spells the responsibilities, roles, structure, composition as well as the approach of the organization’s board. Further, the board is responsible for the organization’s activities and affairs and is guided by a charter which stipulates the affairs on behalf of the employees, shareholders as well as other key stakeholders. The charter is read and applied in conjunction with the organizations constitution. (Mighty River, 2013b)
- Sustainability and Corporate social responsibility perspectives
Being in the energy sector requires the organization to be able to have sustainable operations while at the same time addressing the corporate social responsibility by engaging with and considering the effects of its operations on the communities within which it operates. (Ministry, 2013)
- Local and international developments in reporting
With increased number of stakeholders for organizations amidst the globalization as well as the complex modern day organization systems, frameworks as well as structures, there is an increasing need for organizations to enhance their reporting in line with good corporate governance practices. Some of the guidelines that are a great source of the new developments in the international arena include:
- Need for board to have rigorous systems and processes in order to ensure that the financial reports integrity and quality in terms of comparability, reliability, timeliness and relevance are assured.
- The need for organizations annual reports to have sufficient and meaningful information in addition to the legally required information. This is in line with the growing need for investors and other stakeholders to be well informed on the organization’s affairs.
- There is a growing need for effective internal controls for financial reporting in order to guarantee reliability.
- The need for a robust internal control process as for every listed organization in order to ensure that it complies with the needed continuous disclosure.
- There is a growing need for organizations to establish committee charters, codes of ethics as well as make other crucial corporate governance information available to stakeholders and investors. (Securities, 2004)
- Stakeholders engagement models
As a means of dealing with stakeholders, the organization’s board has committees that specifically address different matters and issues pertaining to different stakeholders and providing relevant information as needed. This helps in creating a consultative relation between the organization and the stakeholders hence a great ability to address their needs in the most suitable manner. (Mighty River, 2013c)
- Governance issues arising from the global financial meltdown
With the global financial meltdown, there is an emerging trend with entities creating ethics committees to help in assessing organizations’ directors’ performance against the set code of ethics. This has resulted to some organizations seeking for verification from independent parties for the purpose of ensuring implementation of ethics code and compliance with corporate governance principles. This has been a growing trend taking in consideration that organizations boards are the key parties responsible for ethical conduct and corporate governance. (Securities, 2011)
- Social media and reputation issues
Communication is a key determiner of an organization’s reputation as well as integrity hence a need to be handled with care. However, the modern day businesses are faced with increased need to engage with the stakeholders through new platforms like the social media which has little or no control on the content and manner of information dissemination. Therefore, it is a sole responsibility for an organization to protect its reputation in use of the new platforms that technological advance avails in the market. (Ministry, 2013)
- Initiatives recommendations
In response to the external factors affecting corporate governance and ethics, the organization can take initiatives to enhance its practices in line with the changes as follows
- Increase monitoring and control on communication to the public especially through the less controlled social media avenue. This will be suitable inn ensuring that the organization’s reputation is protected.
- Engage independent parties in auditing the organization’s corporate governance structures as well as the board operations in order to address any issues like is the current trend with several businesses after the financial meltdown.
- Seek to incorporate all the relevant principles and recommendations provided by regulatory bodies like the securities commission and FMA in order to establish more informed corporate governance structures.
- Create more effective avenues and models of engaging stakeholders in order to ensure that their views and interests are taken into consideration in the decision making. (Securities, 2004)
Conclusion
The analysis has demonstrated the importance of good corporate governance in an organization and the effort by the Mighty River Power’s commitment to achieve goods corporate governance through its organization structure as well as board of directors. Further, the organization has been demonstrated as having been able to adapt to the changing market needs in respect to corporate governance and ethics.
References
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http://www.fma.govt.nz/keep-updated/newsroom/afa-updates/financial-markets-authority-afa-update-issue-10/
- FMA. (2013a). New Directors’ guide aimed at sharpening up corporate governance. Retrieved from, http://www.fma.govt.nz/keep-updated/newsroom/media-releases/2013/new-directors%E2%80%99-guide-aimed-at-sharpening-up-corporate-governance/
- FMA. (2013b). FMA Completes a review of Mighty River power offer document. Retrieved from, http://www.fma.govt.nz/keep-updated/newsroom/media-releases/2013/fma-completes-review-of-mighty-river-power-offer-document/
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- Mighty River Power. (2013a). Our Approach. Retrieved from, http://www.mightyriver.co.nz/About-Us/Community.aspx
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http://www.mightyriver.co.nz/PDFs/Governance/Board-Charter-1.aspx
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http://www.mightyriver.co.nz/PDFs/Governance/Code-of-Ethics.aspx
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http://www.mightyriver.co.nz/About-Us/Governance.aspx
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