CORPORATE GOVERNANCE CHARACTERISTICS OF GOOD GOVERNANCE

INTRODUCTION AND FUNDAMENTAL CONCEPTS

OF CORPORATE GOVERNANCE 1. Transparency – information is freely
available and directly accessible to those
INTRODUCTION TO CORPORATE who will be affected by such decisions and
GOVERNANCE their enforcement.
 Well communicated information
Governance – a process of decision-making and  There must be proper dissemination of
the process by which decisions are implemented information/policy.
(or not implemented) through the exercise of  Documents such as minutes of the
power or authority by leaders of the country and/or meeting should be available.
organizations.  To easily understand how the higher
 Speaks of leadership of an entity or ups came up with the policies so that it
organization. can be properly implemented.
 If there is no governance, it will be chaotic. 2. Accountability – the obligation and
responsibility to give an explanation or
Corporate Governance – defined as the system reason for the company’s actions and
of rules, practices, and processes by which conduct.
business corporations are directed and controlled.  Being answerable to an organization’s
 Involves balancing of interests of a stakeholders for all actions and results.
company’s many stakeholders, such as  If there is liability involved, it must be
shareholders, management, customers, implemented if there are rules.
suppliers, financiers, government, and the  To hold the person liable so it may
community. never happen again.
 Purpose: To attain the purpose of the  Does not tolerate employees’
corporation (to meet its objectives) wrongdoings.
o to balance the interest of the  Rules must be implemented to all.
company’s stakeholders 3. Responsiveness – institutions and
o can be found on the Articles of processes try to serve the needs of all
Incorporation (AOI) stakeholders within a reasonable timeframe.
o Why is it important to know?  Issues must be resolved/taken within a
 Ultra vires – outside the power of reasonable period.
the corporation  Competent/dedicated management or
 So the corporation can act within heads of each unit or department
its purpose as stated in the AOI 4. Participation – freedom of association and
otherwise, the actions will be expression on one hand and an organized
invalid/can be questioned. civil society on the other hand.
o To facilitate effective, entrepreneurial,  Involves listening to each stakeholder.
and prudent management that can  Everyone in the organization should be
deliver long term success of the included and heard.
company.  Consequence of not including everyone
 Goal: To control the business in order to in the organization in all decisions – the
attain the purpose of the business. act will be considered invalid.
 View the whole corporation as a whole to 5. Rule of Law – requires fair legal frameworks
create rules and regulations that will affect that are enforced impartially.
the organization.  Requires full protection of human
rights, particularly of those of minorities.
Good Governance – the effective running of an  Rules and policies should be
organization using strategically implemented implemented right.
policies and practices. 6. Equity and Inclusiveness – ensures that all
 The business will be more successful in a its members feel tat they have a stake in it
long-term period. and do not feel excluded from the
 Once you know how to control the business, mainstream of society.
it will be easier to attain the success in a long  Requires all groups, especially the
term basis. most vulnerable, to have opportunities
to improve or maintain their well-being.
7. Effectiveness and Efficiency – processes
and institutions produce results that meet the
 needs of society while making the best use of
resources at their disposal. 2. Accountability / Responsibility
 Sustainable use of natural resources  Is the board taking responsibility?
and the protection of the environment.  Does the board clarify its role and that
 Applying corporate planning. of management?
8. Consensus Oriented – requires mediation 3. Corporate Control / Good and Effective
of the different interests in society to reach a Governance
broad consensus on what is in the best  Has the board built long-term
interest of the whole community and how this sustainable growth in shareholders’
can be achieved. value for the corporation?
 Requires a broad and long-term  Does it create an environment to take
perspective on what is needed for risk?
sustainable human development and
how to achieve the goals of such SARBANES – OXLEY ACT
development.
 Majority votes win. Sarbanes – Oxley Act of 2002 – a federal law
that established sweeping auditing and financial
GOVERNANCE VS. MANAGEMENT regulations for public companies.
 Signed the act into law by Former U.S.
Corporate Governance – the system of President George W. Bush on July 30, 2002.
stewardship and control to guide organizations in  Lawmakers created the legislation to help
fulfilling their long-term economic, moral, legal, and protect shareholders, employees and the
social obligations towards stakeholders. public from accounting errors and fraudulent
financial practices.
Management – a group of executives given the  The main areas that the Act is focused on
authority by the Board of Directors to implement are:
the policies it has laid down in the conduct of the o Increasing criminal punishment
business of the corporation. o Accounting regulation
 It is how businesses organize and direct o New protections
workflow, operations, and employees to meet o Corporate responsibility
company goals.  The Act primarily sought to regulate financial
 Implementation, day-to-day operations reporting, internal audits and other business
 Application of those mentioned in practices at publicly traded companies.
governance However, some provisions apply to all
 The ones who implement governance enterprises, including private companies and
 Ex.: president, head of the departments such nonprofit organizations.
as CEO and CFO
Key Provisions and Requirements:
Board of Directors – the governing body elected  Corporate Responsibility for Financial
by the stockholders that exercises the corporate Reports (Section 302)
powers of a corporation, conducts all its business o CEOs and CFOs must review all
and controls its properties. financial reports and that the reports
 The ones laying down and controlling the are "fairly presented" and don't contain
rules in the organization. misrepresentations.
 Ex.: chairman o CEOs and CFOs are responsible for
internal accounting controls.
BASIC PRINCIPLES OF EFFECTIVE
o The Act requires year-end financial
GOVERNANCE
disclosure reports and that all financial
1. Transparency and Full Disclosure reports come with an Internal Controls
 Is the board telling us what is going on? Report. Financial disclosures must
 Does the board meet the information contain reporting of material changes in
needs of investment communities? financial condition.
 Does it safeguard integrity in financial  Management Assessment of Internal
reporting? Controls (Section 404)
 Does the board have sound disclosure o requires companies to publish details
policies and practices? about their internal accounting controls
and their procedures for financial
 reporting as part of their annual Stockholder Theory – states that the managers of
financial reports. a corporation have a duty to maximize stockholder
o requires corporate executives to returns as an act of appreciation for their financial
personally certify the accuracy of their investments in the company.
company's financial statements and
makes them individually liable if the Stakeholder Theory – states that the managers of
SEC finds violations. a corporation have an ethical duty to the
stakeholders that contribute to the success of the
Benefit of the Sarbanes – Oxley Act organization. This makes it imperative that
 The Act helped businesses improve their companies make informed decisions that benefit
financial management by strengthening both the stockholders and stakeholders of their
controls, standardizing processes, improving organization.
documentation and creating stronger board
oversight. PARTIES INVOLVED IN CORPORATE GOVERNANCE
 The Act increased investor confidence.
1. Shareholders – provide effective oversight
through election of board members, approval
CORPORATE GOVERNANCE
of major initiatives such as buying or selling
RESPONSIBILITIES AND ACCOUNTABILITIES
stock, annual reports on management
CORPORATE GOVERNANCE STRUCTURE compensation, from the board.
2. Board of Directors – ensure that the
organization is run according to the
organization’s charter and that there is
proper accountability.
3. Non-Executive or Independent Directors –
the same as the broad role of the entire
board of directors.
4. Management – Operations and
accountability. Manage the organization
effectively; provide accurate and timely
reports to shareholders and other
Governance starts with the shareholders/owners stakeholders.
delegating responsibilities through an elected 5. Audit Committees of the Board of
board of directors to management and, in turn, to Directors – provide oversight of the internal
operating units with oversight and assistance from and external audit function and the process
internal auditors. The board of directors and its of preparing the annual financial statements
audit committee oversee management and, in that as well as public reports on internal control.
role, are expected to protect the shareholders' 6. Regulators
rights. However, it is important to recognize that a. Board of Accountancy – set
management is part of the governance framework; accounting and auditing standards
management can influence who sits on the board dictating underlying financial reporting
and the audit committee as well as other and auditing concepts; set the
governance controls that might be put into place. expectations of audit quality and
accounting quality.
In return for the responsibilities (and power) given b. Securities and Exchange
to management and the board, governance Commission – ensure the accuracy,
demands accountability back through the system timeliness and fairness of public
to the shareholders. However, the accountability reporting of financial and other
does not extend only to the shareholders. information for public companies.
Companies also have responsibilities to other 7. External Auditors – perform audits of
stakeholders. Stakeholders can be anyone who is company financial statements to ensure that
influenced, whether directly or indirectly, by the the statements are free of material
actions of a company. Management and the board misstatements including misstatements that
have responsibilities to act within the laws of may be due to fraud.
society and to meet various requirements of 8. Internal Auditors – perform audits of
creditors, employees and the stakeholders. companies for compliance with company
policies and laws, audits to evaluate the
STOCKHOLDER AND STAKEHOLDER THEORY efficiency of operations, and periodic
evaluation and tests of controls.
 CODE OF CORPORATE GOVERNANCE FOR Members of the Board are duty-bound to apply
PUBLICLY LISTED COMPANIES high ethical standards, taking into account the
interests of all stakeholders.
DISCLOSURE AND TRANSPARENCY
SEC MEMORANDUM CIRCULAR NO. 19 S. 2016
Principle 8: Enhancing Company Disclosure
THE BOARD’S GOVERNANCE RESPONSIBILITIES Policies and Procedures
The company should establish corporate
Principle 1: Establishing a Competent Board disclosure policies and procedures that are
The company should be headed by a competent, practical and in accordance with best practices and
working board to foster the long-term success of regulatory expectations.
the corporation, and to sustain its competitiveness
and profitability in a manner consistent with its Principle 9: Strengthening the External
corporate objectives and the long-term best Auditor’s Independence and Improving Audit
interests of its shareholders and other Quality
stakeholders. The company should establish standards for the
appropriate selection of an external auditor, and
Principle 2: Establishing Clear Roles and exercise effective oversight of the same to
Responsibilities of the Board strengthen the external auditor’s independence
The fiduciary roles, responsibilities and and enhance audit quality.
accountabilities of the Board as provided under the
law, the company’s articles and by-laws, and other Principle 10: Increasing Focus on Non-
legal pronouncements and guidelines should be Financial and Sustainability Reporting
clearly made known to all directors as well as to The company should ensure that material and
stockholders and other stakeholders. reportable non-financial and sustainability issues
are disclosed.
Principle 3: Establishing Board Committees
Board committees should be set up to the extent Principle 11: Promoting a Comprehensive and
possible to support the effective performance of Cost-Efficient Access to Relevant Information
the Board’s functions, particularly with respect to The company should maintain a comprehensive
audit, risk management, related party transactions, and cost-efficient communication channel for
and other key corporate governance concerns, disseminating relevant information. This channel is
such as nomination and remuneration. The crucial for informed decision-making by investors,
composition, functions and responsibilities of all stakeholders and other interested users.
committees established should be contained in a
publicly available Committee Charter. INTERNAL CONTROL SYSTEM AND RISK
MANAGEMENT FRAMEWORK
Principle 4: Fostering Commitment
To show full commitment to the company, the Principle 12: Strengthening the Internal Control
directors should devote the time and attention System and Enterprise Risk Management
necessary to properly and effectively perform their Framework
duties and responsibilities, including sufficient time To ensure the integrity, transparency and proper
to be familiar with the corporation’s business. governance in the conduct of its affairs, the
company should have a strong and effective
Principle 5: Reinforcing Board Independence internal control system and enterprise risk
The Board should endeavor to exercise objective management framework.
and independent judgment on all corporate affairs.
CULTIVATING A SYNERGIC RELATIONSHIP
Principle 6: Assessing Board Performance WITH SHAREHOLDERS
The best measure of the Board’s effectiveness is
through an assessment process. The Board should Principle 13: Promoting Shareholder Rights
regularly carry out evaluations to appraise its The company should treat all shareholders fairly
performance as a body, and assess whether it and equitably, and also recognize, protect and
possesses the right mix of backgrounds and facilitate the exercise of their rights.
competencies.
Principle 14: Respecting Rights of
Principle 7: Strengthening Board Ethics Stakeholders and Effective Redress for
Violation of Stakeholder’s Rights
The rights of stakeholders established by law, by
contractual relations and through voluntary
commitments must be respected. Where
stakeholders’ rights and/or interests are at stake,
stakeholders should have the opportunity to obtain
prompt effective redress for the violation of their
rights.

Principle 15: Encouraging Employees’

Participation
A mechanism for employee participation should be
developed to create a symbiotic environment,
realize the company’s goals and participate in its
corporate governance processes.

Principle 16: Encouraging Sustainability and

Social Responsibility
The company should be socially responsible in all
its dealings with the communities where it
operates. It should ensure that its interactions
serve its environment and stakeholders in a
positive and progressive manner that is fully
supportive of its comprehensive and balanced
development.