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Ethical Hemp Ltd 1

EETHICAL HEMP LTD-ASE

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Ethical Hemp Ltd 2

Governance issues in Ethical Hemp Ltd

Corporate governance issues

Corporate governance issues majorly relate to the agency conflict that exist between the

principal (Shareholders) and the agent (management) (CHEN, LU and SOUGIANNIS, 2011).

Ideally, the real owners of resources, shareholders, normally appoint the management, who act as

agents, inorder to full heartedly manage their resources (shareholders). However, management a

times represents their interests rather than representing the interests of the shareholders. This

kind of misrepresentation leads to agency conflict. Agency conflict affects the corporate image

identity and the general overall performance of the company. According to Richard Conti

(2009), one of the objectives of company existence is maximization of shareholder’s value.

Therefore shareholders ‘value can’t be maximized if the quality of companies operations is at

stake because of poor governance and crave ethical concerns.

The case of Ethical Hemp Ltd presents some grave ethical concerns relating to corporate

governance. For example, it has been indicated in the case that there has a lot of mismanagement

of company resources by Tasma Callistemon, the community engagement officer. It is said that a

number of community engagement projects have stagnated because of mismanagement. This

affects company operations and thwarts its growth as the company’s quality of operations is

interfered with. This goes against one of the rules or principles on which listing in the ASE is

based. This contravened principle states that an entity which wishes to be listed in ASE should

satisfy minimum standards of size, quality and operations before it is listed. Ethical Hemp

limited supposedly doesn’t meet the requirements of this principle because of poor governance

that have affected the company to an extend that the company is at the verge of collapsing as Ben

Banksia , one of the directors is heard saying that the company might no longer be viable.

Conflict of interest

Conflict of interest is one of the governance issues affecting most companies. It arises in

instances where management engages in other issues that are not part of the operations of the

company. Ideally, management is selected by the shareholders to maximize shareholder value.

However, maximization of shareholder value is often not achieved because of conflict of interest.

Additionally, conflict of interest includes instances where the affairs of the company are

Ethical Hemp Ltd 3

affected. The management at times make decisions that may affect the operations of the

company and which may threaten the principle of going concern and the concept of separate

legal entity (AA and S, 2016. The concept of separate legal entity states that a company is a

separate legal entity and that the affairs of a company should not be affected by personal affairs

(Aguinis and Bradley, 2015). However, in Ethical Hemp Ltd, this is not the case because the

affairs of the company have been seriously affected by personal affairs of the company.

Additionally, it is said that Max Acacia, one of the directors has lent the company substantial

amount of money which is one of the issues that contributes to conflict of interest. Conflict of

interest affects the inflow of investors into the company. It is apparent that Ethical Hemp Ltd has

limited number of investors, which doesn’t meet one of the threshold principles of company

listing by ASE. One of the principles of that ASE bases to list companies is that a company must

have sufficient shareholder interest demonstration.

Fair representation

One of the duties of the management is to ensure that interests of the shareholders are

taken care of (Petry, 2017). However, most of the shareholder’s interest and trust have been

betrayed by the management who fail to represent the interests of the shareholders. Because of

the lack of trust the shareholders have towards the management, the shareholders appoint an

auditor who acts as a watchdog, monitoring the actions of the management. An appointed auditor

is supposed to be independent from the management inorder for him to express an opinion

regarding the true and fair view of the affairs of the company (Saxena et al., 2010). However,

this is not the case with Ethical Hemp Ltd which is said to have appointed an auditor, Mr

Lawrence Helmsii to audit the books of accounts but again turns out not be to independent

because he is said to have worked closely with accountants in preparation of books of accounts,

an action not accepted in auditing because of the compromise it has on independence. The case

also notes that the auditor find it’s hard to audit books of accounts and give out a report, an issue

that contravenes one of the principles determining company listing by ASE, which requires that

a company should produce financial statements which should be subjected to auditing as per

auditing standards.

Ethical Hemp Ltd 4

Untimely presentation of financial statements

Resources being managed by the board of directors who form the management body

belong to the shareholders and the management has a duty of presenting financial statements to

the shareholders on a timely basis (AA and S, 2016). Additionally, delayed preparation and

presentation of financial statements consequently leads to delayed decision making which

translates to non-achievement of objective in terms of maximization of shareholders’ value. It

has been indicated in the case that the chief accountant, Andy Agapanthus, has always been

away and has delegated most of his work to junior accountants, Conrad Conifer and Helen

Hibiscus, who have always faced difficulty in the preparation and presentation of financial

statements to the board of directors. This contravenes one of the requirements ASE bases to list

companies. ASE’s principle requires that a company prepares timely financial statements, a

principle Ethical Hemp Ltd has failed to observe

Un-approved decisions

Management should make decisions as per the interests of the shareholders (Intezari and

Pauleen, 2017). However, this is not the case in Ethical Hemp Ltd because most of the decisions

are made by the management without any approval. For example, it has been indicated in the

case that Ethical Hemp Ltd is considering expanding its operation to the European market and

has greatly spent on this move. However, it is apparent from the case that the move had not been

authorized by the board. This action in itself is against one of the principles ASE bases on to list

companies. For a company to be listed by ASE, certain significant transactions should be

approved by the shareholders through the board of directors

Changes recommended for listing in ASE

1. Inorder for Ethical Hemp Ltd to qualify to be listed by ASE, it should focus on its

corporate governance. The company should disclose information about its corporate

governance issues and provide explanation for failure to meet generally acceptable

governance standards. The board of directors could have called for a meeting and explain

what is happening in the company and also provide explanation for what happened and

what they plan to do to prevent a repeat of the same.

Ethical Hemp Ltd 5

2. Ensure that the books of accounts are subjected to auditing by an independent auditor as

per generally accepted auditing standards.

3. Be a company exercising full transparency and accountability. It is evident from the case

that Ethical Hemp Ltd is not transparent and their directors are not accountable.

4. Ensure that it works on improving is gearing level. It should focus on increasing its

equity for its to be liquid enough and reduce chances of it being liquidated or even put

under receivership

5. It should ensure that is accounts are prepared and presented on a timely manner inorder to

facilitate informed and timely decision making. This improves on the standards of the

company and attracts investors, especially potential investors. Therefore t be listed by

ASE, Ethical Hemp Ltd should strive to have its books of accounts prepared and

presented in time

Ethical Hemp Ltd 6

References

AA, S. and S, B. (2016). The Going Concern Assumptions and Presentation on Financial

Statements. International Journal of Accounting Research, 4(1).

Aguinis, H. and Bradley, K. (2015). The secret sauce for organizational success. Organizational

Dynamics, 44(3), pp.161-168.

CHEN, C., LU, H. and SOUGIANNIS, T. (2011). The Agency Problem, Corporate Governance,

and the Asymmetrical Behavior of Selling, General, and Administrative Costs*.

Contemporary Accounting Research, 29(1), pp.252-282.

Intezari, A. and Pauleen, D. (2017). Conceptualizing Wise Management Decision-Making: A

Grounded Theory Approach. Decision Sciences.

Petry, S. (2017). Mandatory worker representation on the board and its effect on shareholder

wealth. Financial Management.

Richard Conti, C. (2009). Conflict of Interest. Clinical Cardiology, 32(12), pp.666-667.

Saxena, R., Srinivas, K., Rai, U. and Rai, S. (2010). Auditing. 1st ed. Mumbai [India]: Himalaya

Pub. House.

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