CORPORATE

GOVERNANCE
-Visperas
Corporate Governance

Corporate Governance is the process and structure used

to direct and manage the business and affairs of the
company towards enhancing business prosperity and
corporate accountability with the ultimate objective of
realizing long-term shareholder value, whilst taking into
account the interests of other stakeholders.
Fundamental Objectives of Corporate
Governance
1. Improvement of Shareholder Value. Shareholders’ value can be
improved by making a pre-commitment to build better relations
with primary stakeholders like employees, customers, suppliers
and communities.
2. Conscious Consideration of the interest of Other Stakeholders.
When a company meets the objective of increasing the
shareholder value, it will have greater internally-generated
resources in improving its commitment in meeting its
environmental, community and social obligations.
What Good Governance Promotes

1. Transparency. Transparency is vital with respect to corporate governance due to the

critical nature of reporting financial and non-financial information. The aim includes
maintaining investor, consumer and other stakeholders confidence.
2. Accountability. Accountability is the recognition and assumption of responsibility for
the decisions, actions, policies, administration, governance and implementation of
programs and plans of the corporation and people involved, including the obligation to
report, explain and be answerable for its resulting consequences.
3. Prudence. Prudence is defined with the Code of Governance as “care, caution and good
judgment as well as wisdom in looking ahead.”
Benefits of Good Governance

1. Reduced Vulnerability. (Improved system of internal control)

2. Marketability. (Easy access to capital in financial markets) (More
attractive in open market)
3. Credibility. (Company need not spend more resources in
compliance with regulatory and other financial institutions’
requirements)
4. Valuation. (Reliability of company-provided information)
Agency Problem in Corporations

In traditional approach, corporation is treated as a single

entity, it is often called holistic approach. It is one of the
features of a sole proprietorship. Owner-managers have
no conflicts of interest. In big companies, we almost
always have the separation of owners and managers.
Financial manager should work in the best interests of the
owners by taking actions that increase the value of the
company.
Agency Relationships and Costs

The connection between owners and managers is called an

principal-agent problem and conflict is called an agency
relationship. Such a relationship exists whenever someone (the
principal) hires another (the agent) to represent his interests. The
shareholders are the principals; the managers are their agents.
Shareholders want management to increase the value of the firm,
but managers may have their own axes to grind or nests to feather.
Goals of Financial Management

1. To survive
2. To avoid financial distress and bankruptcy
3. To beat the competition
4. To maximize sales or market share
5. To minimize costs
6. To maximize profits
7. To maintain a steady earnings growth
Do managers Act in the Stockholders’
Interests?
Principal-agent problems would be easier to resolve if everyone had
the same information. That is rarely the case in finance. Managers,
shareholders, and lenders may all have different information about
the value of a real or financial asset, and it may be many years
before all the information, the perfect information, is revealed.
Financial managers need to recognize these information
asymmetries and find ways to reassure investors that there are no
nasty surprises on the way.
Managerial Compensation

Management will frequently have a significant economic incentive

to increase share value for two reason. First, managerial
compensation. Second incentive managers have relates to job
prospects.
Control of the Firm

Control of the firm ultimately rests with stockholders. They elect the
BODs who in turn, hire and fire management. An important
mechanism by which unhappy stockholders can act to replace
existing management is called a proxy fight. A proxy is the authority
to vote someone else’s stock.
Stakeholders

◦ Management and stockholders are not the only parties

with an interest in the firm’s decisions. Employees,
customers, suppliers and even the government all have a
financial interest in the firm. Taken together, these
various groups are called stakeholders in the firm.
Agency Theory in Governance

Agency theory suggests that the firm can be viewed as a loosely defined contract
between resource providers and the resource controllers. It is a relationship that
came into being occasioned by the existence of one or more individuals, called
principals, employing one or more individuals, called agents, to carry out some
service and then entrust decision-making rights to the agents.
Effects of Agency in Governance

1. Conflict of Interest
2. Managerial Opportunism
3. Incurrence of Agency Cost
4. Shareholder Activism
Concept of Goal Congruence

Goal congruence is the harmony and alignment of goals of both the

principal and the agent which is consistent with the overall
objectives of the organization. While it is true that in agency
relations, the presence of self-interested behaviors is a given,
nevertheless, managers can be encouraged to act in shareholders’
best interests by giving incentives which will compensate them for
good performance on one hand at the same time give them
disincentives on their poor performance on another.
Performance Incentives and Disincentives

1. Pay dependent on Profit Level

2. Shares incentives
3. Shareholders Intervention
4. Threat of Being Fired
5. Threat of Being Fired
6. Takeover Threat
Roles of the Non-Executive Directors

A non-executive director is a member of the board of directors of a company who does not
take part in the executive function of the management team. This director is not an
employee of the company or connected with it in any other way. He is separate from the
inside directors who are members of the board who also serve or previously served as
executive managers of the company.
Responsibilities of Non-Executive Director
1. Strategy
2. Establishing networks
3. Monitoring of Performance
4. Audit
Roles of the Chief Financial Officer (CFO)
The CFO is a corporate officer principally accountable for managing the financial risks of the
corporation. This officer is also responsible for financial planning and record-keeping, as well as
financial reporting to higher management. He will be the one who will direct the corporation’s
finances.

CFO roles:

1. Implements Internal Controls

2. Supervises Major Impact Projects

3. Develops Relations with Financing Sources

4. Advisor to Management

5. Drives major Strategic Issues

6. Risk manager

7. Relationship role

8. Objective referee
Roles of the Audit Committee

The audit committee is an essential component in the overall corporate

governance system. The objectives of this committee should be geared toward
carrying out practical, progressive changes in the functions and expectations
placed on corporate boards. One of the fundamental principles of an effective
audit committee is that committee members should be independent from the
operational aspects of the company. Examples of issues that the audit committees
should consider:
1. Risk identification and response
2. Pressure to mage earnings
3. Internal controls and company growth
Roles of the External Auditor

Auditing is a systematic process by which a competent, independent person objectively

obtains and evaluates evidences regarding assertions about economic actions and events
to ascertain the degree of correspondence between those assertions and established
criteria and communication the results to interested users (American Accounting
Association)
Need for External Auditor
There is a need for independent auditor because of apparent separation of ownership and
management. Audit services are used extensively by business organizations to cast away
doubts on the information given by the management which are also generated under its
direct control
Factors that Contribute to Information Risk

1. Remoteness of Information Providers to the Information Users

2. Bias of Information Providers
3. The Volume of Data
4. Complexities in Transactions
Auditor’s Duties

In most countries, the auditor has a legal duty to make a report to the
enterprise on the fact and fairness of the entity’s annual accounts.
This report should state the auditor’s opinion on whether the
statements have been prepared in accordance with the relevant
standards more importantly on relevant legislation and whether
they present a true and fair view of the profit or loss at any given
period.
In the conduct of an audit, the audit must
consider whether the following are present:
1. Proper accounting records being kept by the company
2. Financial statement figures that agree with accounting records
3. Adequacy of notes to financial statement and other disclosures
necessary
4. Compliance with relevant laws and standards of financial
accounting and reporting
References

Biore, Gonzales, Caparas, Burgos and Ballada, 2017, Good

Governance and Social Responsibility, DomDane
Publishers, Manila
Disclaimer:
No copyright infringement intended for this presentation,
solely for educational purposes only.