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                                             Business Ethics
                                          Corporate Governance

 U N I V E R S I T Y      O F   T E C H N O L O G Y ,      S Y D N E Y

                     ASSIGNMENT 3:

“With reference to both Theory and Practice, demonstrate how
 Corporate Governance may contribute to higher Standards of
            Accountability and Business Performance.”

          Individual Research Report
“Rules, rules, and more rules; you’re drowning me in all these damn rules, yet
                     all I want to do is to make money!!!”
                                                          Jaime Sotelo (2005)


          Jaime Sotelo                       Student No. 02120513
          Date submitted:                         7 November 2005
            Lecturer:                      Professor Thomas Clarke
                TABLE OF CONTENTS
Chapter No.                  Title           Page No.
    1.        INTRODUCTION                      3
    2.        AIM                               3
    3.        CORPORATE GOVERNANCE              3
    4.        EXAMPLES OF APPLIED              11
    6.        FAILED COMPANIES & THEIR          9
    7.        DISCUSSION &                     20
    8.        CONCLUSION                       21
    9.        REFERENCES                       22
              APPENDICES                       24

Throughout history, practices suspected of being unfavorable or inappropriate, whether
illegal or on the fringe, had resulted in some deterioration in companies’, organisations’,
or governments’ performance, viability, and quality.      Associated with these are the
lowering of morale among persons concerned and a likely increase in unethical or
retaliatory behavior on their part. What attempts to keep individuals, whether members
of Boards of Directors, Chief Executive Officers (CEOs), Managers or in fact, anyone in
an organization, from improper and unethical conduct towards each other and other
stakeholders is the issue of Corporate Governance.

Two different organisations are presented here, to illustrate the practical benefits of
applied Corporate Governance: Mondragon Cooperative Corporation (MCC) and Boral
Limited. A brief outline is also provided on companies that had failed dismally, largely
resulting from a lack of emphasis on their part, on Corporate Governance.

2.     AIM

This Report presents Corporate Governance Theory and how its application in each of
two organizations contributes to an increased standard of accountability and improved
business performance on their part.


“Corporate Governance” may be defined as “the system by which companies are directed
and controlled” [Cadbury Report, UK (1992)]. In this definition, “Directed” refers to
“the capture of leadership, strategic intent, operating principles, and values”; while
“Controlled” addresses “systems – processes – guidelines – policies – procedures”
[OECD (1999)].      Furthermore, and according to Sir Adrian Cadbury, “Corporate
Governance (in its broadest sense) is concerned with holding the balance between
economic and social goals and between individual and communal goals. The Governance
Framework is there to encourage the efficient use of resources (and hence, “improve
Business Performance”) and equally to require Accountability for the stewardship of
those resources. The aim is to align as nearly as possible the interests of individuals, of
corporations, and of society” [Cadbury (2004)].

                                       Page 3 of 39
According to the OECD [Principles of Corporate Governance (1999)], “Corporate
Governance involves a set of relationships between a company’s Management, its Board
[of Directors], its shareholders, and other stakeholders [including management,
employees, customers, suppliers, and ‘alliance partners’ (if any)]. It also provides the
structure through which a company’s Objectives are set, the means of attaining them, and
the determination of how performance is monitored”.

It is little wonder then, that whenever Principles of Corporate Governance are applied in
an organization (i.e., through a “Governance Framework”) and are adhered to by its
employees and directors, the following would very likely occur:

           •   The company would have a far greater chance of growing and enhancing
               its external reputation (e.g., with its customers, suppliers, and partners);

           •   Its products and services would be held in higher regard, have a higher
               level of reliability, and be more readily accepted by consumers with high
               expectations, in an increasingly–demanding and competitive environment;

           •   Its uppermost Senior Management would acquire the widespread respect
               of its Board of Directors, shareholders, employees, customers, and even

           •   Its Financial and Accounting Ratios (or Key Performance Indicators
               (KPIs)) would be characterized by steady, regular improvements;

           •   Through steady improvements in Financial and Accounting Ratios (or
               KPIs) referred to above, it would enhance its Shareholder Value;

           •   It would achieve increased protection from insolvency and/or bankruptcy;

           •   It would pave the way for profits gained to be re-channeled back into the
               company for internal redevelopment and for re-investment purposes;

           •   It would be significantly less, a target by governments for monitoring
               against improper, unethical, and/or illegal conduct, whether by individuals
               in the company, as individuals, or by the company itself, collectively-

                                        Page 4 of 39
           •   Its Directors would recognise that by adhering to Corporate Governance
               and Business Ethics, it would still more than likely, be able to make a
               profit, and that all sectors of the company (not just its shareholders) would
               be able to benefit from it; and

           •   It would assist in maintaining high, the morale of employees across the
               company, as a result of fair and just treatment they deserve and that they
               should receive, alongside others in the company.

The above are achievable when a company has Corporate Governance firmly entrenched
in its culture and daily activities, because of Principles underlying it, as follows [OECD

           •   Fairness – characterized by equitable treatment with protection against
               misappropriation of assets;

           •   Transparency – Timely and accurate disclosure on all material matters –
               finances, performance, ownership;

           •   Accountability – Effective monitoring of Management by the Board, and
               accountability of the Board to the company and shareholders; and

           •   Responsibility – To abide by national [and natural] Laws and Regulations,
               it is required to act ethically towards stakeholders (i.e., employees,
               customers, suppliers, managers at various tiers of the organization, and

       The effects as described, of Corporate Governance in a company, are clearly tied
       in with the “Principles” as listed above and as enshrined in a “Governance
       Framework”. Applications of the Principles (through a company’s “Governance
       Framework”) pave the way, therefore, for Corporate Governance to take effect
       throughout all levels of the company, including its stakeholders. These in turn
       have primary, positive effects in the company’s business performance and in the
       accountability of its key staff. The “Effects” then, answer the question “What are
       the benefits of …” while the “Principles” provide answers to “How are the
       benefits achieved …” It is noted, though, that some publications provide greater
       depth and details to the “Principles”.

                                        Page 5 of 39
   Essentially, they are the same; they can cross-correlate with each other. For
   example, page 11 of the “MBA 2005 ‘Corporate Governance and Business Ethics’
   (21012), Readings”, by T. Clarke (published by UTS Printing Services), lists ten
   “Essential Corporate Governance Principles”. These are presented in Appendix A.

   Three main Theories of Corporate Governance are considered here. These are:
   Agency Theory, Stewardship Theory, and Stakeholder Theory. Brief contrasting
   factors among them are provided in Figure 1.

                                    Theoretical Perspectives

 Dimensions          Shareholder Theories – comprise
                  Agency Theory        Stewardship Theory           Theory
                Ensure Match          Ensure the               Inclusive Pursuits
Board Roles
                between Managers      Stewardship of           of Stakeholder
and Effects
                & Shareholders        corporate Assets         Interests
Theoretical     Economics &                                    Politics, Law, &
                                      Organization Theory
Origins         Finance                                        Management
               Fama & Jensen
Authors of                            Donaldson & Davis
               (1978), Jensen                                  RSA (1995), &
Representative                        (1991), Donaldson &
               Mackling (1978), &                              Blair (1995)
Studies                               Davis (1994)
               Kosnik (1987)
        Figure 1: Theoretical Perspectives on Corporate Governance

[Reference: Notes for Subject No. 21012, “MBA 2005 – Corporate Governance &
             Business Ethics”, by Professor Thomas Clarke (2005)]

              Agency Theory

   “Agency Theory” is a type of Shareholder Theory that refers to a contract under
   which a person or party (principal or owner) engages another person (the agent,
   “caretaker”, or custodian) to perform services on his/her behalf, which involves
   delegating some decision–making authority to the agent [p. 5, McColgan, Patrick,
   “Agency Theory and Corporate Governance: A Review of the Literature from a
   UK Perspective”, Department of Accounting & Finance, University of Strathclyde,
   Scotland (22 May 2001)].

                                 Page 6 of 39
Characteristic features of “Agency Theory” are:

   •   The fixed, structured roles of the principals or owners of the business,
       compared with those of the appointed agents; and

   •   The separation of the agent from any title of ownership or right of the
       company, other than what may be received as a salary or commission.

It is a known fact that an appointed agent or manager will not always have the
best interest in mind of the principal. This arises from the assumption that the
individual would always seek his/her own self-interest; and results in principals
adjusting a manager’s remuneration according to his/her propensity to not behave
in a self-serving way. “Agency Theory” was therefore developed to explain the
behavior arising out of the agency relationship in the corporation, in which the
agent concerned has no ownership or title. This results from the separation of
ownership and management. Through “Agency Theory”, principals may limit
these divergences by:

   •   The establishment of appropriate incentives for the agent or manager, and

   •   Incurring costs designed to limit any aberrant activities of and by the agent.

Further actions that principals take to discourage the agent or manager from self-
seeking interests are usually addressed in the manager’s remuneration package.
Such “adjustments” to the package therefore, may include:

   •   Perquisites (or “perks”), e.g., a company car, low interest loans, and/or a
       laptop computer that may be taken home and used for personal reasons;

   •   Bonus Plans, e.g., for when profit targets are achieved or contracts are won;

   •   Free time given on company time, to pursue further studies, including the
       payment of fees for Courses taken up; and

   •   Shares Options that may be redeemed for cash at any time.

                               Page 7 of 39
Each of the above may be adjusted depending on the performance of the manager,
his/her ethical behavior and attitude towards others, level of accountability and
transparency he/she shows in his/her work, on the profit achieved for the period
concerned, and especially, on the direct level of input that he/she had with respect
to profits achieved.      Through encouragements such as the above examples,
provided    by     principals   and   owners,    managers    would    increase   their
commitment/dedication, and therefore improve the quality of their work, their
levels of output, and their own standards of accountability and business
performance, towards their employers.

           Stewardship Theory

Stewardship Theory (a type of Shareholder Theory) differs from Agency Theory
in that it assumes no conflict of interest prevails between principals and managers.
It expects a symbiotic relationship to automatically occur between the
shareholders or owners of a company and the appointed managers or agents. This
situation is in reality possible provided the integrity, dedication, and a tempered
absence of self-interest exist on the part of the manager(s); and provided these are
recognized as evident, by the organization’s owners or principals. In fact, this is
the ideal situation that principals aim to achieve within their organisations.

“Stewardship Theory” is based upon the premise that “man” is a steward and is
therefore automatically expected to be pro-organizational and fully motivated
towards the Common Good. Associated with this is a focus by the steward or
manager, towards “collective-thinking”, to constantly fulfill the Objectives of the
organization. This Theory assumes that a strong relationship exists between the
success of the organization and the principals’ or owners’ satisfaction. In addition
to benefiting themselves, this will be extra–advantageous towards the owners as
well as all stakeholders.       An ambience of trust and confidence will prevail
throughout the organization, because all the stakeholders (including the principals
or owners) will note that there is a manager “at the helm” who is beyond reproach,
is highly ethical, is a expert at his job, and has no self-fulfilling interest evident
towards himself.

                                  Page 8 of 39
A company can have an in-built system of “controls”, so that its managers and
principals may ensure accountability at all times; i.e., such that no manager can
take advantage of the system, should he/she develop an innate, self-satisfying
interest. “Controls” established through Corporate Governance include Policy
Statements, Codes of Conduct/Ethics, Legislation, Regulations, and Standards
(e.g., behavioral ones and “House Rules”). Results of implementation will be
evident in transparency and in such KPIs for the company, as increased profits,
improved share prices, increased sales of products the company offers, and such
Financial Ratios as Returns on Investment (ROI), Earnings per Share (EPS), and
Returns on Assets (ROA).

         Stakeholder Theory

Stakeholder Theory totally differs from Shareholder Theory.           According to
“Stakeholder Theory”, organizations comprise “Multilateral Agreements between
the enterprise and its multiple stakeholders” [p. 173, Clarke, T., “Theories of
Corporate Governance”, published by Routledge (2004)]. The relationship and
interaction of the company with its internal stakeholders occur through formal and
informal rules and practices that had evolved and developed since the
interrelationships had first occurred.

An undeniable fact is that organisations are fully dependent on their stakeholders
for their successes and their failures.         This is irrespective of whether the
organization is run according to Shareholder Theory or Stakeholder Theory. The
performance and behavior of employees can and will affect the financial health,
well-being, and viability of the company they are employed by, regardless of their
relationships with the company’s owners or shareholders.          As a result, it is
imperative that owners or shareholders recognize this and allow their employees a
share in the benefits that they themselves are expected to bring about.         The
application of Stakeholder Theory allows this to occur. Shareholders and owners
of companies reap significant long – term benefits if rightful aspirations of
employees are not neglected. If they are given due consideration, the strategic
management of corporations could become much more effective and efficient.

                                 Page 9 of 39
Significant differences between Stakeholder Theory and Shareholder Theory can
be addressed by comparing KPIs targeted by each of the two theories. These are
summarized in Table 1. From the Table, it is noted that, unlike the situation with
Shareholder Theory, Stakeholder Theory is focused towards non-financial
Performance Indicators. Appendix B summarizes expectations of Stakeholders, if
a concerted effort is made to transform an organization to operate in accordance
with Stakeholder Theory.

Real benefits demonstrated by Stakeholder Theory may be noted by the long
period of time companies characterized by it are around for, by the generally
superior quality of their products, and by the relatively high morale of their
employees.     Companies that have such a culture in place enjoy far superior
performance from among their employee/stakeholders, and that are subsequently
noted in services and products they directly relate to. Through the mutually-
exclusive, symbiotic relationship occurring at all times, the organization enjoys all
of the other characteristics just noted above, in addition to enhanced business
performance.     A paradox that should be noted, in the matter of business
performance, is that “companies driven by financial indices to satisfy shareholders
[and that make little or no reference to Corporate Governance issues] often appear
capable of doing so for limited periods of time. ‘Companies that set profits as
their number one goal are actually less profitable in the long run than people-
centered companies’ [Waterman (1994)]. Of the 11 companies named as Britain’s
most profitable by ‘Management Today’, between 1979 and 1989, four
subsequently collapsed and two were acquired [Doyle (1994)]” [p. 198, Clarke, T.,
“Theories of Corporate Governance”, published by Routledge (2004)].

                                Page 10 of 39
                  Shareholder                        Stakeholder Theory –
      (Agency or Stewardship) Theory –
     Financial–type Performance Indicators: Non-financial–type Performance Indicators:
        Short–Term                                  Long–Term
        Shareholder Value                           Stakeholder Theory
        Tangible Assets                             Intangible Assets
        Anglo-Saxon in Origin & in Culture          European/Asian in Origin & in Culture

        Property                                    Knowledge
        Transactions                                Relationships
        Exclusive                                   Inclusive
        Corporate Image                             Corporate Citizenship

      Table 1: KPI Characteristics of Shareholder Theory & of Stakeholder Theory

      [Reference: Notes for Subject No. 21012, “MBA 2005 – Corporate Governance &
                   Business Ethics”, by Professor Thomas Clarke (2005)]


              Mondragon Corporación Cooperatίva (MCC)

     The way in which a company is set up or the type of structure it has, affects how
     Corporate Governance provides controls over it, and what this Governance
     comprises. In the case of organizations that form a cooperative in a symbiotic
     relationship (e.g., the Mondragon Corporación Cooperatίva) among fellow
     members, there exist ten “Cooperative Principles” that guide it. These are:

        •   Open Admission – Membership of the [Mondragon] Cooperative is open
            to all who agree with the basic Cooperative’s Principles;

        •   Democratic Organization – All owner-workers (‘socio-trabajadores’) are
            equal members of the cooperative, with each having one vote in the
            democratically–controlled general assembly of the enterprise and in the
            election of members to other governing structures;

                                    Page 11 of 39
•   Sovereignty of Labor – Control of the cooperatives is in the hands of the
    owner–workers, who have a primary role in the distribution of surpluses,
    with no distinction made between so-called ‘productive’ workers (direct
    producers of surplus) and ‘unproductive’ workers (staff who do not
    produce surplus but who enable its realization and are paid out of
    distributed surplus);

•   Instrumental & Subordinate Character of Capital (People over
    Capital) – In all instances, people are valued over capital, which is seen as
    ‘basically accumulated labor and a necessary factor in business savings &
    development’, and which ensures capital does not have an independent
    existence, imperative or logic [unlike the real situation with people];

•   Self-Management – The collective enterprise is managed through
    democratic participation of all members, based on free-flow of information,
    access to training, internal promotion for management, and consultation
    and negotiation about all decisions that affect owner-workers;

•   Pay Solidarity – With wages set according to principles of solidarity
    among workers within each member–company and among other
    companies, and with workers in conventional capitalist enterprises in the
    surrounding region, collective decisions about what proportion of the
    workers’ labor is to be considered ‘necessary’ are particularly informed by
    the ethics of ‘equilibrio’ – a commitment to seeking balance between
    conflicting interests and forces;

•   Group Cooperation – Cooperation is fostered among individual
    cooperatives within the same group, among cooperative groups, and
    among other cooperative movements throughout the world;

•   Social Transformation – The ever–greater economic and social
    reconstruction of a society has become more free, just, and expressive of
    solidarity through, e.g., expansion of employment in a cooperative system;

                            Page 12 of 39
   •   Universality – Promoting solidarity with all those working for economic
       democracy in the sphere of the ‘Social Economy’, championing the
       objectives of Peace, Justice, Harmony, and Development, which are the
       essential features of International Cooperativism; and

   •   Education – Commitment to education about cooperative principles and
       their dissemination to members, especially among those elected to office
       in the social and management bodies of the organization, and crucially to
       young people, the cooperators of the future.”

The above “Principles” form the “Governance Framework” for the Mondragon
Cooperative. As “Principles”, the resemblance with the brief “Principles” listed
earlier (obtained from the OECD (1999)), is clearly evident; as is their similarity
to the “Principles” given in Appendix A.

In 2003, the MCC won a high number of external awards in the management field.
The awards and Certificates attained were generally given to the responsible
member–company or organization, rather than to the Cooperative as a whole. The
reason for this is because often enough, the subject of the award given had to be
the same as the main specialization of the company. Otherwise, no real benefits
from the granting of the awards could be reaped by the member–companies that
put in the extra effort that eventually brought about their winnings.

The Mondragon model fits very much the Stakeholder Theory of Corporate
Governance. From the above, Mondragon’s Compliance aspects as a stipulated
requirement of Corporate Governance, were consistently achieved throughout all
Standards the Cooperative was audited against, along with items of applicable
Legislation. No evidence of “cutting back” of Standards, Business Excellence
applications, or of Legislation was found on the part of any Mondragon member.
The very fact that the member–organizations had applied for and subsequently
achieved a myriad of Certifications and awards demonstrate their highly ethical
stance coupled with recurring social and community works focusing towards the
Common Good.

                                Page 13 of 39
         Boral Limited

A Company considered further with respect to applied Corporate Governance and
its favorable effects is Boral Limited. It differs from Mondragon in that it is not a
cooperative of various organizations. It is instead a publicly-listed Company
whose main purpose or Objective is the “Enhancement or Improvement or
Shareholder Value”. Boral Limited is Australia's largest building and construction
materials supplier and has significant operations in the USA and in Asia. With
some A$4 billion worth of sales, Boral has over 15,100 employees working across
650 operating sites [Boral Limited website (2005)].

On detailed examination of Boral Limited, it is noted that it has a very strong
focus and commitment to Corporate Governance and Business Ethics. It has a set
program or method to implement and maintain Corporate Governance across the
entire Company, through its “Boral Governance Framework”, as shown in
Appendix C. It recognizes the importance of Corporate Governance as a means of
showing Accountability to its Shareholders and of improving its Business

According to Appendix C, Boral’s approach to Governance is disclosed in the
“Corporate Governance” Section of its 2005 Annual Report, and which is also
provided, as Appendix D.

Boral Limited fits very much along the lines of Shareholder Theory. In fact,
because of its huge size, and spread throughout many countries and cultures, it is
difficult to further classify it into specifically “Agency Theory” or into
“Stewardship Theory”. In some of its business areas, the Theory applicable may
be more along the lines of “Agency Theory”, while in others, the applicable
Theory is more reflective on the “Stewardship Theory”. Much would depend on
the interrelationships and attitudes of Boral’s Shareholders with their Senior and
Middle Managers, and the country in which they are located. Each Business Area
headed by any of these Managers would have to be examined and evaluated
further according to its own merits and depending on the country it operates in.

                                Page 14 of 39
     Boral is fully committed to transparency in its processes and procedures, and aims
     to be fully compliant with the Australian Stock Exchange (ASE) Corporate
     Governance Guidelines and CLERP 9 reforms.             Although Boral does not
     specifically state that it has any “Principles of Corporate Governance”, it has a
     Code of Corporate Conduct, which states: “The Board’s Policy is that Boral
     Companies and employees must observe both the letter and spirit of the Law and
     adhere to high Standards of business conduct and strive for Best Practice” [Boral
     Limited Annual Report (2005)].       Boral also has (as shown in Appendix D),
     “Functions and Responsibilities of the Board”, which, on examination and
     evaluation, demonstrate that a concerted effort exists to ensure that Accountability
     and improvement in Business Performance are addressed at all times.             The
     “Functions” stipulated reflect the brief Principles listed earlier, that comprise
     “Fairness”, “Accountability”, “Transparency”, and “Responsibility”.


              Accountability as demonstrated by Mondragon

     “Accountability” is defined as “the quality or state of being accountable; an
     obligation or willingness to accept responsibility or to account for one's actions”
     [Ref.: “Merriam-Webster On-line Dictionary”]. Accountability is very much a
     part of the way of life and of the culture within the Mondragon Cooperative.

     The Mondragon Cooperative plays an absolutely crucial role at constantly
     promoting and living out accountability.       For example, its ten Principles as
     explained earlier, demonstrate a pro-active approach that leads towards
     accountability.   To live out “accountability”, the “Principles” demonstrate a
     commitment towards “Openness” or “Transparency” as well as “Responsibility”,
     “Justice”, and “Fairness” in all of Mondragon’s decision-making processes and in
     actual results achieved. Steps to facilitate this are already in place, when one
     considers the “managerial make-up” of Mondragon.               The Cooperative’s
     organizations are characterized by common ownership and collective control by
     owner–workers. As a result, they have a say in the distribution of any surpluses or

                                    Page 15 of 39
wealth generated by the organizations.            The resulting accountability of
Mondragon’s set-up ensures that fair, ethical decisions are made as to the disposal
of any such surpluses including any wealth generated. To assist in achieving this,
the democratic participation of all members is ensured, and which is also based on
free–flow of information that is available to be viewed at all times, by all staff.

A very memorable and highly significant event that occurred in 2003 was the
Mondragon Cooperative’s achievement of Certification to the SA 8000
International Standard on Social Accountability. This was based on an Audit
carried out by Bureau Veritas Quality International (BVQI). The Mondragon
Cooperative became the first Spanish retailer and the second in Europe to obtain
this Certification, which verifies Mondragon commitment to social responsibility
and respect for human rights in relation to consumers, workers, suppliers, and
society in general.

A further demonstration of accountability, and the responsibility that accompanies
it, to which all members of Mondragon are subjected to, is in the matter of justice
sought when any Laws are breached or when any evidence of fraud or deception
arises. Should any cause for grievances arise and that can be traced to a person or
group of persons who happen to be members of the Cooperative, they may be
dealt with by Mondragon’s Social Council. This Council has direct access to both
the Board of Directors and the Chief Executive, and to whom it states its findings,
recommendations, and requirements, in seeking redress for any breaches of Laws.

         Accountability as demonstrated by Boral Limited

Boral Limited’s Directors consider its Governance Framework and the adherence
to that Framework as fundamental in demonstrating accountability to their
Shareholders. Boral’s Directors consider that by adherence to its Governance
Framework, they are appropriately overseeing the future direction of the Company.
Boral’s Board of Directors also regards its on-going commitment of
accountability to its Shareholders, as a means of enhancing Shareholder Value.

                                Page 16 of 39
Boral’s Directors achieve their own share of “accountability” to the Company’s
Shareholders therefore, by fulfilling their Functions as stipulated in Appendix D,
the Boral Corporate Governance.

Boral’s Management Guidelines contain a Code of Corporate Conduct as well as
Guidelines and Policies that set out legal and ethical Standards for employees. As
part of Performance Management, employees are assessed against Boral’s Values
of leadership, respect, focus, performance, and persistence. This Policy and Code
guide the Directors, the CEO, the Chief Financial Executive, the Company
Secretary, and other key executives as to the practices necessary to maintain
confidence in the Company’s integrity and as to the responsibility and
accountability of individuals for reporting and investigating reports of unethical
practices.   The Code also guides compliance with legal issues and other
obligations to legitimate stakeholders, and therefore stipulates accountability
issues relevant to the Company as a whole.

From the Boral Limited Annual Report (2005) and in particular, its Section on
Corporate Governance, it is noted that Boral has a very significant structure in
place to achieve accountability. This structure or method comprises a plethora of
Codes of Conduct, Policy Statements, and of course, the list of Functions of its
Board of Directors as outlined in its “Governance Framework”. Furthermore, the
Company expects all staff to be taken through this process as part of on-going
Performance Reviews, to ensure that accountability exists throughout all its levels.

         Enhanced        Business      Performance         on    the    part     of

The resulting “Business Performance” of the Mondragon Companies is best
demonstrated through financial summaries and trends that they exhibit, and have
in fact been doing so, consistently over a number of years. One should firstly
recall the undeniability that the Mondragon companies are heavily focused on
ethical practices and Corporate Governance. On examination of Mondragon’s
financial summaries (as shown in Appendices E to K), it is noted that the
Mondragon Cooperative has:

                               Page 17 of 39
       •   Experienced steady, consistent increases in sales, added value, and annual

       •   Enjoyed a high rate of employment and that continues to grow
           significantly each and every year;

       •   Consistently increased its already very–varied and diversified customer
           base; and

       •   Embarked on a very rapid global expansion well beyond the Spanish
           borders, within which it was first conceptualized in the late 1930’s.

             Enhanced Business Performance on the part of Boral

Boral Limited’s commitment towards Corporate Governance has already been
discussed in detail, and various proofs have been presented that demonstrate this drive
as occurring throughout every level of the Company. The effects on the Business
Performance of the Company may now be considered further.

Boral Limited’s Corporate Governance (as presented in Appendix D) addresses four
in number, financial obligations among the twelve–point Functions of its Board of
Directors. Appendix L provides the Financial History of Boral Limited, as obtained
from its Annual Report (2005). On the whole, the steady improvement in financial
KPIs is noted. In fact, for the financial year ending 2005, all results have shown
significant improvements over the previous year.

From the Financial History (2005) shown in Appendix L, The Total Group Revenue
for the years 2001 to 2005 has shown a steady and consistent increase, which, for
2005, had reached A$4.346 billion. A similar increase was also evident in Boral’s
Earnings Before Interest and Tax (EBIT), that in 2005, amounted to A$604 million.
The resulting Operating Profit was in 2005, the highest it had ever been, after steady
increases over the previous years. This was for A$377 million.

Dividends paid by Boral Limited had, in 2005, been substantially higher than in
previous years. They had also been in an increasing trend, with a total of A$197

                                   Page 18 of 39
     million paid out. This demonstrates that Boral Limited looks after its shareholders
     very well, in the generous way that the Dividends are paid to them. The Dividends
     paid out per Share were also steadily increasing, from 18 cents in 2001 to 34 cents per
     Share in 2005. The Earnings per Ordinary Share (EPS) have also shown a steady
     increase occurring over the previous four years.

     The healthy financial results as shown in Boral’s Financial History are clearly
     attributed to the strong commitment it has towards Corporate Governance. It is a
     vehicle for ensuring that all Company practices are “above Board” at all times,
     through, accountability, transparency, and responsibility expected at all levels.


        Over the last several years, many companies incorporated in the United States and
        in Australia have suffered a fate that ultimately brought about, not only their total
        collapse, but also the imprisonment of many of their Directors and Senior
        Managers. Examples of such companies are Enron and WorldCom in the United
        States and HIH and OneTel in Australia. A common characteristic that occurred
        with them was an almost complete neglect of Corporate Governance initiatives,
        including and especially accountability, transparency, compliance with legislation,
        applicable standards, and codes of ethics and of conduct among their internal

        It was no surprise therefore, that eventually the demise that occurred made itself
        evident in these companies’ Financial and Accounting Ratios; which are
        traditionally used to gauge a company’s business performance. In fact, just before
        their final collapse, the Financial Ratios of these companies were already
        exhibiting extremely poor results.       Associated with these were attempts by
        Financial and Accounting Directors to “cook the books”, and for Directors to
        embezzle and plunder what they could of the companies. All these fly into the
        face of acceptability in Governance.

        So, there already was widespread evidence that “the end was just around the
        corner” and that nothing much could be further accomplished. A common trait

                                         Page 19 of 39
       among these companies is their lack of consideration to setting up within their
       structures or their culture any “Principles of Corporate Governance” (or a
       “Governance Framework”) tailored to the business they were to engage in.
       Throughout their brief existence, on further investigation of how they were
       founded and what “legwork” was carried out to establish them, their “founding
       fathers” had little or no motivation to firstly examine and set up what would have
       been, relevant areas of Legislation, Regulations, and Standards they were to
       comply with, and especially that would have guided them well into the future.


From the Theory presented and the favorable Effects noted in organizations that apply
Corporate Governance, the following recommendations are made, to assist companies to
incorporate Corporate Governance and achieve satisfactory results:

           •   To align as nearly as possible, the interests of individuals, of corporations,
               and of society, e.g., through surveys conducted among stakeholders, to
               determine their wants and needs;

           •   To establish a Governance Framework based on at least, a tailored version
               of any one of the many “Principles of Corporate Governance” that exist;

           •   If operating according to Shareholder Theory, to remunerate generously
               with incentives and “perks”, based on the manager’s level of responsibility;

           •   To establish an in-built system of “Controls” so that managers and
               principals ensure on-going accountability and transparency of their work;

           •   For principals/owners of companies to develop for and on behalf of their
               staff, a Share and/or Bonus Plan for benefits gained by the company, as a
               result of dedication and good performance they themselves contributed to;

           •   To monitor financial and non-financial KPIs, with management’s ability to
               readily intervene should any suddenly become unfavorable;

           •   To promote from within the company, to encourage all staff to perform at
               their very best at all times, and base promotions on merit, knowledge,

                                       Page 20 of 39
                qualifications, skills level, experience, record of achievements, high
                aspirations, and conscientiousness (rather than image/political correctness);

            •   To readily consult from among internal stakeholders, decisions to be made
                that affect the company’s long term future and viability, and even be
                prepared to do so, from non-management staff who nevertheless, have a
                certain amount of expertise about the issues considered;

            •   To go for Certification against standards the company’s products and
                services are largely concerned with, and “groom” it for internationally–
                recognized Business Excellence awards to enhance its Governance; and

            •   To be transparent, honest, and open at all times, in the reporting of the
                company’s financial status and non-financial KPIs, as well as their trends.

8.        CONCLUSION

Effective, well–recognized Corporate Governance assists in developing, maintaining,
monitoring, and improving a company’s infrastructure, employee – management
relationships, and financial health so that, in the process of fulfilling customers’
requirements, transparency, accountability, fairness, justice, and responsibility occur.
Hence, the method of achieving and delivering the end–product or service, and that
therefore keeps a company in business, is just as important as when the final product or
service is delivered to the customer and for which the company is paid.

Corporate Governance processes, standards, legislation, and tools ensure that the method
applied    addresses   accountability,   transparency,   responsibility,   traceability,   and
compliance, before the end product or service is delivered to the customer. Furthermore,
as demonstrated by the examples presented, companies that proactively apply Corporate
Governance (regardless of whether they operate under Shareholder Theory or Stakeholder
Theory) in their “modus operandi” do in fact perform much better financially, and
continuously so “in the long haul”; compared to those that do not. The test, therefore, of
the effectiveness of Governance is the degree to which the company is able to achieve its
prime purpose, whether it be enhancing its Shareholder Value (if it operates according to
Shareholder Theory) or “Internal Stakeholder” Value (if it operates according to
Stakeholder Theory); and at the same time repeatedly keeps its customers satisfied.

                                         Page 21 of 39

Fagothey, Fr. Austin, SJ, “Right and Reason – Ethics in Theory and Practice”, 4th Ed.,
published by The C. V. Mosby Company (1967)

Gibson-Graham, J. K., “Enabling Ethical Economies: Cooperativism and Class”,
published by the Australian National University (ANU), Canberra, ACT, Australia (April

O’Keefe, T., “Mondragon Translates new Twist on Capitalism”, Atlanta Business

“Corporate Boards should represent a broader Community of Interest, Public Policy and
Management”, Wharton, September 11, 2002

“MCC presents its Results 2004, News about Mondragón Corporacίon Cooperatίva” (12
May 2005),

Turnball, S., “Innovations in Corporate Governance: The Mondragon Experience”,
published in Corporate Governance: An International Review, 3:3, pp.167-180 (July 1995)

Davidmann, M., “Co-operatives and Co-operation: Causes of Failure, Guidelines for

Mondragón Corporacίon Cooperatίva, Spain

“Mondragon Annual Report – 2003”, Mondragón Corporacίon Cooperatίva, Spain

Cadbury Report, UK (1992 and 2004)

OECD Report – “Principles of Corporate Governance” (1999)

Notes for Subject No. 21012, “MBA 2005 – Corporate Governance & Business Ethics”,
by Professor Thomas Clarke (2005)

McColgan, Patrick, “Agency Theory and Corporate Governance: A Review of the
Literature from a UK Perspective”, Department of Accounting & Finance, University of
Strathclyde, Scotland (22 May 2001)

Boral Limited Annual Report (2005)

Boral Limited website (2005)

Clarke, T., “Theories of Corporate Governance”, published by Routledge (2004)

Merriam – Webster On-line Dictionary

                                      Page 22 of 39

  Page 23 of 39
                 APPENDIX A
1.       Lay solid foundations for management and oversight.
Recognize and publish the respective rules and responsibilities of Board and Management.
2.       Structure the Board to add Value.
Have a Board that is of an effective composition, size, and commitment, to adequately
discharge responsible decision-making processes.
3.       Promote ethical and responsible decision–making.
Actively promote ethical and responsible decision–making.
4.       Safeguard integrity in financial reporting.
Have a structure to independently verify and safeguard the integrity of the company’s
financial reporting process.
5.       Make timely and balanced disclosure.
Promote timely and balanced disclosure of all material matters concerning the company.
6.       Respect the rights of Shareholders.
Respect the rights of Shareholders and facilitate the effective exercise of these rights.
7.       Recognise and manage Risk.
Establish a sound system of Risk oversight and Management and internal control.
8.       Encourage enhanced performance.
Fairly review and actively encourage enhanced Board and Management effectiveness.
9.       Remunerate fairly and responsibly.
Ensure that the level and composition of remuneration is sufficient and reasonable, and
that its relationship to corporate and individual performance is defined.
10.      Recognize the legitimate interests of stakeholders.
Recognize legal and other obligations to all legitimate Stakeholders.
      [p.11, Clarke, T., “MBA 2005 – CORPORATE GOVERNANCE & BUSINESS
                   ETHICS” published by UTS Printing Services (2005)]

                                        Page 24 of 39
                     APPENDIX B
                                                  “What do stakeholders want?”
 Stakeholders               Expectations of Stakeholder from Company                  Nature of Accountability to the Company

Employees        Remuneration, employment security, conditions, training.             Company reports, employment news,
                                                                                      bargaining information.

Owners           Dividends and share price appreciation.                              Annual Report and accounts, merger, and
                                                                                      takeover information.

Customers        Quality, service, safety, value for money.                           Sales literature, advertising, servicing.

Bankers          Liquidity and solvency of company, value of security, cash           Cover ratios, collateral, cash forecasts.

Suppliers        Stable and enduring relationships.                                   Payment according to terms.

Government       Compliance with law, jobs, competitiveness, accurate data.           Reports to official bodies; press releases.

General Public Safety of operations, contribution to the community.                   Safety Reports, Press Reports.

Environment      Benign operations, substitutions of non-renewable resources.         Environmental Reports, Compliance Reports

                     [p. 195, Clarke, T., “Theories of Corporate Governance”, published by Routledge (2004)]

                                                              Page 25 of 39
                             APPENDIX C

Boral is committed to ensuring its policies and practices reflect good Governance
and compliance with all requirements applying to Australian – listed companies.

The Directors consider that its Governance Framework and adherence to that
Framework are fundamental in demonstrating that they are accountable to
shareholders and are appropriately overseeing the Management of Risk and the
future direction of the Company.

The Directors place high importance on working with respect and maintaining
high ethical standards at the Board and Senior management levels. The Board
believes it is extremely important for senior executives to demonstrate the
behaviors that are broadly expected to be reflected throughout the organization.

The Board embraces transparent Governance processes and procedures in line
with the ASX Corporate Governance Guidelines and CLERP 9 reforms.

Details of Boral’s approach to governance are disclosed on this website as well as
the in the: Corporate Governance section of its 2005 Annual Report.

Should you require further information about Boral’s Corporate Governance
policies, please contact

                                   Page 26 of 39
                                  APPENDIX D

This section of the Annual Review discloses the key details of Boral’s Governance
Framework.     Boral is committed to ensuring its policies and practices reflect good
governance and compliance with all requirements applicable to Australian listed companies.
The Directors consider that its Governance Framework and adherence to that Framework are
fundamental in demonstrating that they are accountable to shareholders and are appropriately
overseeing the management of risk and the future direction of the Company.

The Board of Directors is responsible for setting the strategic direction of the Company and
for overseeing and monitoring its businesses and affairs. Directors are accountable to the
shareholders for the Company’s performance.          The Board reviews and approves the
Company’s strategic and business plans and guiding policies. Day to day management of the
Company’s affairs and implementation of its strategy and policy initiatives are delegated to
the chief executive officer and senior executives.

The Functions of the Board of Directors include:

           •   Oversight of the Company including its conduct and accountability systems.

           •   Reviewing and approving overall financial goals for the Company.

           •   Approving strategies and plans for Boral’s businesses to achieve these goals.

           •   Approving financial plans and annual budgets.

           •   Monitoring implementation of strategy, business performance, results, and
               ensuring appropriate resources are available.

                                             Page 27 of 39

                                         Page 3 of 39
           •   Approving key management recommendations (such as major capital
               expenditure, acquisitions, divestments, restructuring, and funding).

           •   Appointing, rewarding, and determining the duration of appointment of the
               Chief Executive Officer and ratifying the appointments of senior executives,
               e.g., the Chief Financial Officer (CFO) and the Company Secretary.

           •   Reviewing the performance of the CEO and Senior Management.

           •   Reviewing and verifying Risk Management Systems, internal compliance and
               control, codes of conduct, and legal compliance.

           •   Reviewing sustainability performance and overseeing Occupational Health &
               Safety and Environmental Management.

           •   Approving and monitoring Financial Reporting, and reporting to Shareholders
               on the Company’s direction and performance.

           •   Meeting legal requirements and ensuring that the Company acts responsibly
               and ethically, and prudently manages business risks and Boral’s assets.

In fulfilling these functions, Directors seek to enhance Shareholder value.

The Board of Directors comprises six Non-executive Directors (NEDs), including the
Chairman, and one Executive Director – the Managing Director and the Chief Executive
Officer (CEO). The roles of Chairman and CEO are separate. The skills, experience, and
expertise of each Director are set out on page 31 of the Annual Review (2005). The Board
has assessed the independence of NEDs in light of their interests and relationships, and
considers all of them to be independent. It is considered that none of the interests of
Directors with other firms or companies having a business relationship with Boral could
materially interfere with the ability of those Directors to act in Boral’s best interests. The
criteria considered in assessing the independence of Non-executive Directors include:

           •   The Director is not a member of Management.

                                            Page 28 of 39

                                         Page 4 of 39
           •   The Director is not a substantial shareholder of the Company or otherwise
               associated with a substantial shareholder.

           •   Within the last 3 years, the Director had not been employed in an executive
               capacity by a Boral company or had been a Director after ceasing to hold any
               such employment.

           •   Within the last 3 years, the Director has not been a principal of a professional
               adviser or consultant to a Boral company or an employee of an adviser or
               consultant materially associated with any service provided by it.

           •   The Director is not a significant supplier or customer of Boral or otherwise
               associated with a significant supplier or customer.

           •   The Director has no significant contractual relationship with Boral other than
               as a Director.

           •   The Director is free from any interest and any business or other relationship
               which could, or could reasonably be perceived to materially interfere with the
               Director’s ability to act in the best interests of the Company.

           •   The Board periodically undertakes an evaluation of its own performance, and
               which encompasses a review of the Structure and Operation of the Board, the
               skills and characteristics required by the Board to maximize its effectiveness,
               and whether the blending of skills, experience, and expertise, and the Board’s
               practices and procedures are appropriate for the present and future needs of
               the Company.

The Board has considered establishing a Nomination Committee and decided in view of the
relatively small number of Directors, that such a Committee would not be a more efficient
mechanism than the full Board, for detailed selection and appointment practices.

                                         Page 29 of 39

                                          Page 5 of 39
                   APPENDIX E

Balance Sheet of Mondragón Corporacίon Cooperatίva
                   (2002 – 2003)
         (Reference: Mondragon Annual Report – 2003)

                        Page 30 of 39

                         Page 6 of 39
                       APPENDIX F

Value Added generated by Mondragón Corporacίon Cooperatίva
             (Reference: Mondragon Annual Report – 2003)

                            Page 31 of 39

                             Page 7 of 39
                      APPENDIX G

Distribution of Mondragón Corporacίon Cooperatίva Surplus
            (Reference: Mondragon Annual Report – 2003)

                           Page 32 of 39

                            Page 8 of 39
                                     APPENDIX H



Employment Level






                       1940   1950   1960      1970          1980   1990   2000   2010

Mondragon Cooperatives – Employment Growth (1956 – 2005)
(Reference: LKS Consultores, “El Cooperativίsmo de Mondragón ante los Retos de la
 Mondragón Unibertsitatea, Facultad de Ciencias Empresariales, 1 de Julio de 2005)

                                            Page 33 of 39

                                            Page 9 of 39
                  APPENDIX I

Mondragon Cooperatives – Employment Distribution
 Throughout Spain and around the World (2003)
        (Reference: Mondragon Annual Report – 2003)

                       Page 34 of 39

                       Page 10 of 39
                        APPENDIX J

Mondragon Cooperatives – Distribution and Customer Base
    Throughout Spain and around the World (2003)
      (Reference: Mondragon Annual Report – 2003)   Page 35 of 39

                             Page 11 of 39
                       APPENDIX K

Mondragon Cooperatives – Key Highlights of its Growth (2003)
             (Reference: Mondragon Annual Report – 2003)
                                Page 36 of 39

                            Page 12 of 39
                          APPENDIX L
                                                                                                               Proforma*     Proforma*
                                                 2005         2004         2003         2002         2001         2000          1999
As at 30 June
                                            $ millions   $ millions   $ millions   $ millions   $ millions   $ millions    $ millions
Sales revenue                                   4,297        4,150        3,831        3,489        3,280        4,012         3,914
Other operating revenue                            49           35           45           37          205          230           127
Total group revenue                             4,346        4,185        3,876        3,526        3,485        4,242         4,041

Earnings before interest, tax, and
                                                  819          794          672          531          451          563           569
amortisation (EBITDA)¹
Depreciation, and amortisation                    215          195          194          188          189          203           216
Earnings before interest and tax¹                 604          600          478          343          262          360           353

Profit/(loss) from disposal of businesses
                                                 (16)           —            —            —            39          (33)            —
/ Adelaide Brighton bid costs
Profit before interest and tax                    588          600          478          343          301          327           353
Net interest expense                             (71)         (66)         (68)         (63)         (70)          (90)        (120)
Profit before tax                                 517          534          410          280          232          238           233
Income tax expense                              (140)        (163)        (126)         (87)         (78)          (70)          (87)
Outside equity interests                      (1)           (1)      (1)     —       —       —        3

Operating profit attributable to members
                                             377           370       283    192     153     169     150
of Boral Limited

Total assets                               5,104         4,511     4,038   3,915   3,950   3,873   4,172
Total liabilities                          2,632         2,151     1,898   1,966   2,096   2,096   2,455
Net assets                                 2,472         2,360     2,140   1,950   1,855   1,777   1,717
Shareholders' funds                        2,472         2,360     2,140   1,950   1,855   1,777   1,717

Dividends paid or declared                   197           175       133    109     102     102     102

Dividend per ordinary share                  34c           30c       23c    19c     18c     18c     18c
Dividend payout ratio                       52%           47%       47%    57%     67%     61%     68%
Dividend cover                                1.9           2.1      2.1     1.8     1.5     1.7     1.2
Earnings per ordinary share                 64.7c        63.8c     49.1c   33.7c   27.0c   29.7c   26.3c
Return on equity                           15.3%         15.7%     13.2%   9.9%    8.3%    9.5%    8.7%
EBIT to sales¹                             14.1%         14.4%     12.5%   9.8%    8.0%    9.0%    9.0%

                                                    Page 3 of 39
EBIT to funds employed¹                15.6%        18.2%         16.4%   12.1%   9.2%    13.2%   11.2%
Net interest cover (times)²              8.5           9.1          7.1     5.4     4.3     3.7     2.9
Gearing (net debt to equity)            56%          40%           36%     45%    53%      54%     83%
Gearing (net debt to net debt plus
                                        36%          28%           26%     31%    35%      35%     45%
Net tangible asset backing per share   $3.76        $3.65         $3.27   $3.02   $2.89   $2.78   $2.62

                                                  Page 39 of 39

                                               Page 4 of 39