Introduction to Corporate Governance employees, customers, suppliers and

communities
Definition  Better relations will develop
[The Organization for Economics Cooperation and shareholders’ wealth
Development (OECD)]  Conscious consideration of the interest of
other stakeholders
 The system by which business corporations  If increase in share value is met, it will
are directed and controlled. have greater internally-generated
 It specifies the distribution of rights and resources in improving its
responsibilities among different participants in environmental, community and social
the corporation: BOD, managers, shareholders & obligations.
other stakeholders
What CG Promotes
 It provides the structure thru which the company
sets its objectives and the means to attain those  Transparency
objectives and to monitor performance.  This is vital due to the critical nature of
[The Financial Times] reporting financial and non-financial
information.
 The relationship of a company to its  Information is the currency of
shareholders or, more broadly, as its democracy
relationship to society.  Transparency lessens the
likelihood of nepotism,
[J. Wolfenshon, the president of World Bank] corruption, favoritism and the
likes
 Promoting corporate fairness, transparency  Most corrupt countries are the
and accountability. least transparent
[Professor Kenneth Scout of Stanford Law School]  Failure in transparency issues
could lead to:
 Includes every force that bears on the 1. Scaring investors
decision making of the firm. It encompasses: 2. Being singled out by
 Control risk of stockholders authorities
 Contractual covenants and insolvency  Accountability
powers of debt holders  It is the recognition and assumption of
 Commitment entered into by employees, responsibility for the decisions, actions,
customers and suppliers policies, administration, governance and
 Regulation issued by government implementation of programs and plans of
agencies the corporation and people involved,
 Statutes enacted by parliamentary bodies including the obligation to report and
explain and be answerable to
[SEC Memo Circ No. 2] consequences.
 It is acknowledging and taking charge for
 System whereby shareholders, creditors and
and being transparent about the impacts
other stakeholders of a corporation ensure of the company’s policies, decisions,
that management enhances the value of the actions, products and its associated
corporation as it competes in an increasingly performance.
global market.  It is based on the premise that an
accountable organization will take action
Fundamental objectives of CG
to
 Improvement of Share Value  Set a policy
 Shareholders’ value can be improved by  Set goals and standards
making a pre-commitment to build better
relations with primary stakeholders:
  Disclose credible information
about strategy, goals, standards
and performance.
 Prudence
 Care, caution and good judgment as well
as wisdom in looking ahead.
 The BOD will be responsible in
safeguarding the interest of the
organization thru good planning and
management of finances and other
resources of the organization.
Benefits of Good Governance
 Reduced vulnerability
 Improved system of internal control
 Marketability
 Access to capital and make corporation
attractive to open markets
 Credibility
 Investors’ trust will create more money and
flexibility
 Valuation
 Global investors are willing to pay a higher
price for the shares of a well-governed
company
Corporate Governance Mechanism
 Effective corporate governance is essential if
a business wants to set and meet its strategic
goals.
 A corporate governance structure combines
controls, policies and guidelines that drive
the organization toward its objectives while
also satisfying stakeholders' needs.
 A corporate governance structure is often a
combination of various mechanisms:
1. Internal Mechanism
 The foremost sets of controls for a
corporation come from its internal
mechanisms.
 These controls monitor the progress and
activities of the organization and take
corrective actions when the business
goes off track.
 Maintaining the corporation's larger
internal control fabric, they serve the
internal objectives of the corporation and
its internal stakeholders, including
employees, managers and owners.
 These objectives include smooth
operations, clearly defined reporting
lines and performance measurement
systems.
 Internal mechanisms include oversight of
management, independent internal
audits, structure of the board of directors
into levels of responsibility, segregation
of control and policy development.
2. External Mechanism
 External control mechanisms are
controlled by those outside an
organization and serve the objectives of
entities such as regulators, governments,
trade unions and financial institutions.
 These objectives include adequate debt
management and legal compliance.
 External mechanisms are often imposed
on organizations by external stakeholders
in the forms of union contracts or
regulatory guidelines.
 External organizations, such as industry
associations, may suggest guidelines for
best practices, and businesses can choose
to follow these guidelines or ignore them.
 Typically, companies report the status
and compliance of external corporate
governance mechanisms to external
stakeholders.
Independent Audit
 An independent external audit of a
corporation’s financial statements is part of
the overall corporate governance structure.
 An audit of the company's financial
statements serves internal and external
stakeholders at the same time.
 An audited financial statement and the
accompanying auditor’s report helps
investors, employees, shareholders and
regulators determine the financial
performance of the corporation.
 This exercise gives a broad, but limited, view
of the organization’s internal working
mechanisms and future outlook.
Small Business Relevance
 Corporate governance has relevance in the
small business world as well. Internal
mechanisms of corporate governance may
 not be implemented on a noticeable scale by
a small business, but the functions can be
applied to many small businesses
nevertheless.
 Business owners make strategic decisions
about how workers will do their duties, and
they monitor their performance; this is an
internal control mechanism -- part of
business governance.
 Likewise, if a business requests a loan from a
bank, it must respond to that bank’s demands
to comply with liens and agreement terms --
an external control mechanism.
 If the business is a partnership, a partner
might demand an audit to place reliance on
the profit figures provided -- another form of
external control.
Shareholder vs Stakeholder Theory
[The Cadbury Committee (1992)]
 Defined corporate governance as "the system
by which companies are directed and
controlled.
Numerous theories have been proposed on corporate
governance best practice, none more popular than the
shareholder and stakeholder theories.
Shareholder Theory
 Originally proposed by Milton Friedman and
it states that the sole responsibility of
business is to increase profits.
 It is based on the premise that management
are hired as the agent of the shareholders to
run the company for their benefit, and
therefore they are legally and morally
obligated to serve their interests.
 The only qualification on the rule to make as
much money as possible is “conformity to the
basic rules of the society, both those
embodied in law and those embodied in
ethical custom.”
 Now seen as the historic way of doing
business with companies realizing that there
are disadvantages to concentrating solely on
the interests of shareholders.
 A focus on short term strategy and greater
risk taking are just two of the inherent
dangers involved.
 The role can be seen in the demise of
corporations such as Enron and Worldcom
where continuous pressure on managers to
increase returns to shareholders led them to
manipulate the company accounts.
Stakeholder Theory
 Edward Freeman, the original proposer of the
stakeholder theory, recognized it as an
important element of Corporate Social
Responsibility (CSR), a concept which
recognizes the responsibilities of
corporations in the world today, whether they
be economic, legal, ethical or even
philanthropic.
 Nowadays, some of the world’s largest
corporations claim to have CSR at the center
of their corporate strategy.
 Whilst there are many genuine cases of
companies with a “conscience”, many others
exploit CSR as a good means of PR to
improve their image and reputation but
ultimately fail to put their words into action.
 Recent controversies surrounding the tax
affairs of well-known companies such as
Starbucks, Google and Facebook in the UK
have brought stakeholder theory into the
spotlight.
 Whilst the measures adopted by the
companies are legal, they are widely seen as
unethical as they are utilizing loopholes in the
British tax system to pay less corporation tax
in the UK.
 The public reaction to Starbucks tax dealings
has led them to pledge £10m in taxes in each
of the next two years in an attempt to win
back customers.
Enlightened Shareholder Value - A Happy
Medium?
 Enlightened shareholder value (ESV) states
that “corporations should pursue shareholder
wealth with a long-run orientation that seeks
sustainable growth and profits based on
 responsible attention to the full range of
relevant stakeholder interests”.
 Essentially, it focuses on generating
shareholder value, whilst having regard to the
long term external impacts of the wealth
generation.
 The importance of the concept was
recognized in the UK when it was adopted
into law in the Companies Act 2006.
 The move represents an important
development in corporate governance and a
clear move away from the shareholder
theory.
Code of Corporate Governance for Publicly Listed
Companies
The Philippine Securities and Exchange Commission
(SEC) recently released a new Code of Corporate
Governance for Publicly-Listed Companies (CG
Code) last 22 November 2016.
The CG Code is the first action item for
implementation in the Philippine Corporate
Governance Blueprint launched on November 2015
and is the first of a series of CG Codes for different
types of Philippine corporations under the SEC’s
supervision.
The intent of the new CG Code is to raise the
corporate governance standards of Philippine
corporations to a level at par with its regional and
global counterparts. • The latest G20/OECD
Principles of Corporate Governance and the ASEAN
Corporate Governance Scorecard were used as key
reference materials in the drafting of this Code.
The main feature of this new Code that deserves
emphasis is the adoption of the “comply or explain”
approach, which differs from the combined
mandatory/voluntary approach of the previous CG
Code. – This approach combines voluntary
compliance with mandatory disclosure. – Companies
do not have to comply with the Code but they must
disclose in their annual corporate governance reports
whether they complied with the Code provisions,
identify any area of non-compliance, and explain the
reasons for non-compliance and how the over-all CG
Principle recommended in the Code is still being
achieved.
The adoption of the “comply or explain” approach is
in recognition of the fact that there is no “one size fits
all” in corporate governance.
Under this approach, companies are given flexibility
in determining their corporate governance
arrangements while also giving the market the power
to decide whether these arrangements are indeed
good practices.
In this way, companies become accountable to their
shareholders, who can choose to pull-out their
investments and sell their shares if the companies’
CG practices falls below recognized standards.
Hence, the penalty for poor CG is market-driven
rather than regulator imposed.
The Principles of Proportionality is also considered
in the application of the provisions of the new Code.
This is to recognize that not all publicly-listed
companies are similarly situated.
There are Philippine PLCs that would be bigger and
have more complex operations than others and as
such, would be more able to comply with the CG
practices recommended in the Code.
In addition, the new Code has an increased focus on
the areas of Disclosure and Transparency, Internal
Control and Risk Management and the Role of
Stakeholders. • Further, there is also an item on
Sustainable Development, taking into consideration
economic, environmental, social and governance
(EESG) concerns.
The new Code has sixteen (16) principles that are
distributed among five (5) main sections, namely: 1.
Board’s Governance Responsibilities – Principles 1
– 7 2. Disclosure and Transparency – Principles 8 –
11 3. Internal Control System and Risk Management
Framework – Principle 12 4. Cultivating a Synergic
Relationship with Shareholders – Principle 13 5.
Duties of Stakeholders – Principles 14 -16
[Boards’ Governance Responsibilities]
 Principle 1 is on establishing a competent
board to foster the long-term success of the
 corporation and to sustain its competitiveness constitute at least one-third of the Board,
and profitability in a manner consistent with whichever is higher;
its corporate objectives and the long-term 2. the independent director should serve for a
best interests of its shareholders and other maximum cumulative term of nine years; and
3. There should be a lead independent director
stakeholder. The recommended good
if the Chairman of the Board is not
corporate governance practices under this
independent.
principle include having a board composed of
 Principle 6 is on assessing board
a majority of non-executive directors and
performance which states that board should
having a policy on the training of directors.
regularly carry out evaluations to appraise its
 Principle 2 is on establishing clear roles and
performance and whether it possesses the
responsibilities of the board, which should be
right mix of backgrounds and competencies.
clearly made known to all directors as well as
An annual self-assessment of the board’s
to shareholders and other stakeholders. This
performance, including the performance of
principle provides an overview of the
the Chairman, individual members and
fiduciary duty and responsibility of the
committees is recommended. It is further
Board.
recommended that every three years the
 Principle 3 is on establishing board
assessment should be supported by an
committees, which should be set up to the
external facilitator.
extent possible to support the effective
 Principle 7 is on strengthening board ethics
performance of the Board’s functions. Under
and provides that members of the board are
this principle, it is recommended that all
duty bound to apply high ethical standards,
PLCs have Audit and Corporate Governance
taking into account the interest of all
Committees. The Corporate Governance
stakeholders. Under this principle, it is
Committee can perform the functions of the
recommended that Boards adopt a Code of
Nomination and Remuneration Committee.
Business Conduct and Ethics and ensure the
A Board Risk Oversight Committee and
proper and efficient implementation and
Related Party Transaction Committee is
monitoring of compliance with said Code.
recommended also subject to a corporation’s
size, risk profile and complexity of [Disclosure & Transparency]
operations.
 Principle 8 is on enhancing company
 Principle 4 is on fostering commitment. To
disclosure policies and procedures and states
show full commitment, the director should
that the company should establish policies
devote time and attention to properly and
and procedures that are practical and in
effectively perform his duties. Its
accordance with best practices and regulatory
Recommendations include a limit of five (5)
expectations. Included are recommendations
directorships in publicly-listed company for
on disclosure of policies governing Related
nonexecutive directors and prior notice to the
Party Transactions and on full disclosure of
incumbent board before accepting a
all relevant and material information on
directorship in another company.
individual board members.
 Principle 5 is on reinforcing board
 Principle 9 is on strengthening the external
independence and states that the Board
auditor’s independence and improving audit
should endeavor to exercise an objective and
quality. The recommendation under this
independent judgment on all corporate
principle focus on having a robust process for
affairs. Among the recommendations under
the appropriate selection of an external
this Principle are the following:
auditor and disclosure of the nature of non-
1. the Board should have at least three
independent directors, or such number as to audit services performed by the company’s
 external auditor to deal with any potential
conflict of interest.
 Principle 10 is on increasing focus on
nonfinancial and sustainability reporting. It
provides that the company should ensure that
the material and reportable non-financial and
sustainability issues are disclosed.
 Principle 11 is on promoting a
comprehensive and cost-efficient access to
relevant information which is crucial for
informed decision-making by investors,
stakeholders and other interested users.
[Internal Control System and Risk Management
Framework]
 Principle 12 is on strengthening the internal
control system and enterprise risk
management framework. This principle
states that to ensure integrity, transparency
and proper governance in the conduct of its
affairs, the company should have a strong and
effective internal control system and
enterprise risk management framework.
[Cultivating a Synergic Relationship with
Shareholders]
 Principle 13 is on promoting shareholder
rights and provides that the company should
treat all shareholders fairly and equitably, and
also recognize, protect and facilitate the
exercise of their rights. Among the
recommendations to promote shareholders
rights are ensuring that the notice of Annual
Shareholders’ Meeting are sent out at least 28
days before the meeting and establishing an
Investor Relations Office to ensure constant
engagement with its shareholders.
[Duties of Stakeholders]
 Principle 14 is on respecting rights of
stakeholders and effective redress for
violation of stakeholders’ rights. Where
stakeholders’ rights and/or interests are at
stake, stakeholders should have the
opportunity to obtain effective redress for the
violation of their rights. It is recommended
that the company identify its various
stakeholders, promote cooperation between
them and the company, establish clear
policies and programs to provide a
mechanism on the fair treatment and
protection of shareholders and have a process
that allows stakeholders to communicate with
the company.
 Principle 15 is on encouraging employees’
participation. The key recommendation
under this principle is the establishment of a
suitable framework for whistleblowing that
allows employees to freely communicate
their concerns about illegal or unethical
practices, without fear of retaliation and to
have direct access to an independent member
of the board or unit created to handle
whistleblowing concerns.
 Principle 16 is on encouraging sustainability
and social responsibility, which puts
emphasis on the company’s social
responsibility in dealing with its various
stakeholders. The company should recognize
the interdependence between its business and
the society where it operates and promote a
mutually beneficial relationship between the
two.
• Most relevant to the agenda of this
meeting is Principle 10 under Disclosure
and Transparency which is on increasing
focus on non-financial and sustainability
reporting and states that the company
should ensure that the material and
reportable non-financial and
sustainability issues are disclosed. • It is
recommended that the Board should have
clear and focused policy on the
disclosure of non-financial information,
with emphasis on the management of
economic, environmental, social and
governance (EESG) issues of its
business.
• It is further recommended that
companies adopt a globally recognized
standard/framework in reporting
sustainability and non-financial issues. •
The inclusion of this Principle and
Recommendation in the new CG Code
highlights the SEC’s thrust to introduce
and showcase EESG and Sustainability
Reporting as a good corporate
governance practice for Philippine
 corporations. Albeit not yet mandatorily
required, Philippine PLCs would still be
compelled to explain why they do not
comply with this recommendation.
• In addition to Principle 10, it is also
specifically included under
Recommendation 12.4 (Internal Control
System and Risk Management
Framework) that the risk management
function involves identifying and
analyzing key risk exposures relating to
EESG factors in recognition that due
consideration should be given to EESG
risks.

Conclusion
 To sum up, the new CG Code aims to
increase the responsibilities of the board and
ensure the competence and commitment of
the directors. Further, it hopes to strengthen
the protection of shareholders and other
stakeholders, as well as promote full
disclosure and transparency in both financial
and nonfinancial reporting.