INTERNAL AND EXTERNAL

INSTITUTIONS AND INFLUENCES

OF CORPORATE GOVERNANCE
CODE OF CORPORATE GOVERNANCE
• Issued by SEC under Memo. Circular no. 2, Series of
2002
• Raises investor confidence, develop the capital market,
achieve sustained growth
• Applies to: listed corporations, corporation grantees of
permits/licenses, public companies,
branches/subsidiaries of foreign corporations
• DISCLOSURE - vital theme in the Code, equal to
transparency
• Fine: 100,000
COMMITTEES OF THE BOARD
1. Audit committee
- remind BOD importance of a sound internal control
and their oversight responsibility
2. Nomination
- review and evaluate the qualifications of those
nominated
3. Compensation/Remuneration
- establish policies and procedures on executive
remuneration
4. Corporate secretary
STOCKHOLDER RIGHTS
1. Voting right
2. Pre-emptive right
3. Power of inspection
4. Right to information
5. Right to dividends
6. Appraisal right
INTERNAL FOUNDATION OF CORPORATE
GOVERNANCE
BOARD OF DIRECTORS

is a body of elected or appointed by

shareholders who jointly oversee the activities
and the overall managerial and operational
aspects of the corporation.
INTERNAL FOUNDATION OF CORPORATE
GOVERNANCE
Authority, Responsibility and Purpose of the
Board of Directors

• Protect the resources entrusted to them by

shareholders' and make sure the latter receive a
decent return on their investment.
• Top governing authority within the management
structure at any publicly listed company.
• Select, evaluate, and approve appropriate
compensation for the company’s CEO,
• Assess attractiveness dividend payment scheme and
its amount
INTERNAL FOUNDATION OF CORPORATE
GOVERNANCE
Authority, Responsibility and Purpose of the
Board of Directors

• Recommend stock splits

• Oversee share reacquisition programs
• Approve the company’s financial statement reports
• Recommend or discourage acquisition and mergers
INTERNAL FOUNDATION OF CORPORATE
GOVERNANCE
Structure and Make Up of Board of Directors

• The board is made up of individual men and women,

the “directors” who are elected by shareholders.

• In most cases, directors either;

1. Have a vested interest in the company.
2. Work in the upper management of the company.
3. Are independent from the company but are
known for their business abilities.
INTERNAL FOUNDATION OF CORPORATE
GOVERNANCE
Committees on the Board of Directors
• Audit Committee
is responsible in making sure that the company's financial
statements and reports are reasonably accurate and use fair
estimates in accordance with the applicable financial reporting
standards.
• Compensation Committee
places the base compensation, stock option awards, and incentive
bonuses for the company's executives, including the CEO.
INTERNAL FOUNDATION OF CORPORATE
GOVERNANCE
Ownership Structure and Its Impact on the Board of
Directors
• The particular ownership structure of a corporation
has a huge impact on the efficiency and effectiveness
of the board of directors to govern.
• In a company where a large, single shareholder
exists, that entity or individual can effectively control
the corporation.
INTERNAL FOUNDATION OF CORPORATE
GOVERNANCE
CHIEF EXECUTIVE OFFICER (CEO)
• is usually the singular organizational position that is
principally accountable in carrying out the strategic policies
and procedure as established by the BOD’s.
• is directly under the board of directors.
• is responsible to bring into line the company, internally and
externally, with their long tern vision.
• make possible to engage business outside of the company
while directing employees, managers and other executive
towards a central objective.
INTERNAL FOUNDATION OF CORPORATE
GOVERNANCE
RESPONSIBILITIES OF A CEO
• Support the Board
supports operations and administration of board by giving
information and advice to board members.

• Delivery of Program, Product and Services (PPS)

administer design, marketing, promotion, delivery and quality of
programs, products and services.
INTERNAL FOUNDATION OF CORPORATE
GOVERNANCE
• Financial, Risk and Tax Management
 recommends yearly budget for board’s approval and cautiously
manages organization’s resources within the budget guidelines.
 this utilization of resources may also have other basis such as
laws, regulations, and other directives.

• Human Capital Management

efficiently manages the human capital of the organization based on
personnel policies and procedures that fully conform to current
laws, regulations and standards both local and international.
INTERNAL FOUNDATION OF CORPORATE
GOVERNANCE

• Public Relations (PR)

pledge that the organization and its mission, programs and
initiatives, products and services are consistently presented in
strong and physically visible manner to the community.
INTERNAL FOUNDATION OF CORPORATE
GOVERNANCE
CHIEF FINANCIAL OFFICER (CFO)

FUNCTIONS OF A CHIEF FINANCIAL OFFICER

• Implements Internal Control
responsible for conveying the important financial controls to a
company.
• Supervises Major Impacts Projects
handles and supervise projects that require significant quantitative
and qualitative interpretations and analysis to reach at an
understanding options that are available.
INTERNAL FOUNDATION OF CORPORATE
GOVERNANCE
• Develops Relations with Financing Sources
institute good working relationships with banks and other financial
institutions that may impact on the company’s ability to finance its
operations.

• Advisor to Management
facilitate and help the business owners, executives and other top
managers make the substantial connection between a company ‘s
operations and its financial performance that are reflected in
financial figures.
INTERNAL FOUNDATION OF CORPORATE
GOVERNANCE
• Drives major Strategic Issues
expected to take part in important role of attending some
major strategic issues that will have an impact on the
company’s long-term future.

• Risk Manager
best position to foresee risk considering that they have this
rare perspective on how the company operates.
INTERNAL FOUNDATION OF CORPORATE
GOVERNANCE
• Relationship Role
is a nucleus in an organization with many
connections.

• Objective Referee
needs to demonstrate impartially, such as when
advising the CEO or the board of directors on
accounting matters.
INTERNAL FOUNDATION OF CORPORATE
GOVERNANCE
SHAREHOLDERS
• Share Ownership
 gives the owner with the right to a share of the income of the
company called dividend and a right to a share of net proceeds
on the sale during liquidation of the company.
 includes the right to sell or transfer that share without the need
to inform or getting the consent of the other stockholder.
 an important right and responsibility of the shareholders is to
vote.
INTERNAL FOUNDATION OF CORPORATE
GOVERNANCE
Responsibilities of the Shareholders

• They must ensure that the obligation to provide information

to shareholders does not detract the company’s ability to
compete in its marketplace.
• They must ensure that their right to attempt to influence the
company does not translate into behavior that will paralyze
and detrimental to the company.
INTERNAL FOUNDATION OF CORPORATE
GOVERNANCE
Fundamentals that Requires the Approval of the Shareholders,
Under the Corporation Code of the Philippines, includes;
• Effecting certain merger or reorganizations.
• Selling all or substantially all of the corporation’s assets.
• Adding or removing any restrictions on the business that the corporation
may carry on.
• Changing the corporation’s share capital.
• Increasing or decreasing the number of directors or the minimum or
maximum numbers of directors.
• Confirming by-laws.
• Adding or changing restrictions on the issue, transfer or ownership of
shares.
INTERNAL FOUNDATION OF CORPORATE
GOVERNANCE
Shareholder Ability to Change the Board

• Shareholders who are dissatisfied with how the directors are

running the corporation may remove the directors or refuse
to re-elect them.
• In practice, this may be a difficult course to take, particularly
where the shares of the corporation are widely held.
EXTERNAL ENVIRONMENT OF CORPORATE
GOVERNANCE
 AUDITORS
– One of the most important external institutions in governance.
– Their job is to help to ensure that firms are run efficiently by keeping public
records accurate, adhering standards of reporting for public purposes, and
taxes paid properly and on time.

 INDEPENDENT AUDITORS
– Independent auditors analyze and communicate financial information
for various entities such as companies, potential investors, individual
clients, government both at the local and national level.
– They may also engage in consultancy services which may include,
financial and investment planning, information technology consulting,
and limited legal services.
EXTERNAL ENVIRONMENT OF CORPORATE
GOVERNANCE
 LEGAL ENVIRONMENT
• Some contend that it is the market that can really press real
governance considering that it is a variable independent from
anybody.
• There are, however, some limits to this connection.
• Markets may be good for some governance tasks, weak for
others.
• Markets may be good at limiting some types of “skirting”, but
be less good at limiting “stealing”, especially if the stealing
represents a small part of the firm's total value.
EXTERNAL ENVIRONMENT OF CORPORATE
GOVERNANCE
THREE DISTINCT DIMENSIONS OF LEGAL ENVIRONMENT
1. The domestic laws of home countries.
2. The domestic laws of each of foreign markets.
3. International law in general

 MARKETS
• Most important institution of corporate governance
• Measures if the firm could survive the business world
EXTERNAL ENVIRONMENT OF CORPORATE
GOVERNANCE
THREE CENTRAL POINTS OF TERM MARKETS
1. The firm’s product market
2. Capital market
3. The managerial labor market

 OTHER EXTERNAL FACTORS

a. Political environment
– affects the policies and benefits
– major pool from which human resource is selected from
EXTERNAL ENVIRONMENT OF CORPORATE
GOVERNANCE
b. Technological environment
– new development may render an organization as obsolete
if it’s not quick to adapt to such change

c. Social environment
– General behavior of society and ethical leanings of the
individuals
– The ecosystem with which organization thrive
CORPORATE PROTECTION WITHIN LEGAL
BOUNDARIES

ANTI-TAKEOVER DEFENSE
– shark repellent/poison pill
– Defensive means or tactics that companies to defy
a lurking merger of two or more businesses into
one
– Hostile takeover - a business is acquired against
the management or shareholders’ wishes
CORPORATE PROTECTION WITHIN LEGAL
BOUNDARIES
What may be done to prevent the unwelcome takeover?
1. Flip-in - purchase more shares at a discount to dilute
value of shares
2. Flip-over - purchase bidder’s shares at a discount
3. Acquisition of treasury stock
4. “One can never be a board member if you are already
a board member of a competitor company”
5. Supermajority vote required for major company moves
CORPORATE PROTECTION WITHIN LEGAL
BOUNDARIES
What may be done to prevent the unwelcome takeover?
6. Shareholders sell shares for more than market price
7. Debt façade - company takes on plenty of debts,
bidder becomes answerable once a shareholder
8. Debenture sheltering - issues bonds that are
redeemed at a higher price In the future
9. Employees are offered stock options, incentives
10. Locking horns with a hostile board of directors
CORPORATE PROTECTION WITHIN LEGAL
BOUNDARIES
ADVANTAGES OF ANTI-TAKEOVER DEFENSES
1. When stock has a higher market price than reflected
2. The acquirer uses acquired company for not good purposes
3. Helps company go through difficult financial period

DISADVANTAGES OF ANTI-TAKEOVER DEFENSES

4. Prevents genuinely good takeover
5. Embed management and prevent shareholders from selling
stocks
6. BOD hide behind poison pills to retain position
LIABILITY ISSUES AND INDEMNIFICATION OF
OFFICERS
PERSONAL LIABILITY OF OFFICERS AND DIRECTORS
• Misappropriation
• Nondisclosure of conflict of interest
• Loyalty
• Non-separation of personal & business concerns
• Prudence
LIABILITY ISSUES AND INDEMNIFICATION OF
OFFICERS
INDEMNIFICATION
– act of reimbursing officers and directors for expenses incurred
in defending claims brought to them for actions taken on
behalf of the claim

INSURANCE COVERAGE
– corporations allowed to purchase insurance to cover matters
from acts taken by officers and directors
– different and separate from general liability insurance
SHAREHOLDERS’ IMPOSABLE LIMITATIONS – THROUGH CLASSES OF
STOCKS

ORDINARY PREFERENCE
SHARES SHARES

CUMULATIVE
REDEEMABLE
PREFERENCE
SHARES
SHARES
SHAREHOLDERS’ IMPOSABLE LIMITATIONS – SUPERMAJORITY

½ +1 67% TO 90% FULL CONTROL

SMALL BUSINESS
AMENDING THE ANTI-TAKEOVER OWNERS GIVING OUT
CHARTER DEVICE SUPERMAJORITY
VOTING RIGHTS
SHAREHOLDERS’ IMPOSABLE LIMITATIONS
SHAREHOLDER VOTING AGREEMENTS
• Legal contract involving voting of shares.
• Covers how BODs are to be selected.
• Covers major corporate events such as mergers and acquisitions.
• Executed in connection with start up company in the case of
venture capitalist
• Can pool votes for a particular goal or whether it can be casted
collectively or cooperatively.
• Should relate to shareholders vote and should not have
malicious intention.
SHAREHOLDERS’ IMPOSABLE LIMITATIONS
SHAREHOLDERS – MANAGEMENT AGREEMENTS
– the most recommended system for protection of
shareholders

• Main features of a shareholder’s agreement

a. Board appointment rights
— atleast one BOD act as representative of minority
shareholders
– Larger shareholders reflect proportionate holding of
shares
SHAREHOLDERS’ IMPOSABLE LIMITATIONS
b. Veto rights
- right to overturn decisions reached by the board (fundamental
matters)
c. Adoption and amendment of business plans and budgets
d. Scope of business
e. Intellectual property rights
f. Right to information
g. Warranties from the management team
h. Strategic investor rights
i. Restrictions on transfer of shares
j. Restrictive covenants
k. Exit provisions
BEHAVIORAL MANAGEMENT THEORY
- Human relations movements
- Addresses human dimension of work
- A better understanding of human
behavior improves productivity
BEHAVIORAL MANAGEMENT THEORY
1. Elton Mayo
- Hawthorne studies - a series of experiments
that rigorously applied classical management
theory only to reveal its shortcomings.
- The intense interest that supervisors displayed
for the workers was a basis for the increased
motivation and resulting productivity.
- Human relations and social needs of workers
are crucial aspects of business management.
BEHAVIORAL MANAGEMENT THEORY
2. Abraham Maslow
- human needs are never completely satisfied, human
behavior is purposeful and motivated by need for
satisfaction.
a. Physiological - necessary physical needs
b. Safety needs - basic security, stability, protection, freedom of
fear
c. Belonging/love - meaningful relationships
d. Esteem - status, reputation, fame and glory
e. Self-actualization - a need to find oneself
MASLOW’S HIERARCHY OF NEEDS
BEHAVIORAL MANAGEMENT THEORY

3.Douglas Mcgregor
a. Theory X - assumes negative view on
employees (lazy, untrustworthy,
incapable of assuming responsibility)
b. Theory Y - positive view on employees
(high levels of motivation)
BEHAVIORAL MANAGEMENT THEORY
4.Frederick Herzberg
• Two-need system
- content theory which explains the factors of an individual’s
motivation by identifying needs and desires.

FACTORS OF MOTIVATION
• Hygiene Factors - maintenance factors that can demotivate or
cause dissatisfaction if not present.
• Motivation Factors - motivate or create satisfaction and are
rarely a cause of dissatisfaction.
REFRAMING ORGANIZATION

FRAMES/PERSPECTIVES

—a defense against thrashing around without a

clue about what you are doing or why.
— Filters for sorting essence from trivia, maps
that aid navigation and tools for solving
problems and getting things done.
REFRAMING ORGANIZATION
FOUR FRAMES WHICH ROOTED IN BOTH MANAGERIAL
WISDOM AND SOCIAL SCIENCE KNOWLEDGE

1. Structural approach
- architecture of an organization
- design of units and subunits, rules and roles, goals and
policies

2. Human resource lens

- emphasizes understanding people, strengths & foibles,
reason and emotion, desires and fears.
REFRAMING ORGANIZATION
3. Political view
- organization are competitive arenas of scarce
resources, competing interests, struggles for power
and advantage.

4. Symbolic frame
- issues of meaning and faith
- It puts ritual, ceremony, story, play, and culture at
the heart of organizational life.
EMPLOYEE STOCK OWNERSHIP PLAN
(ESOP)
- A trust to which it makes annual
contributions for its employees
- Vesting - a process whereby employees are
entitled to an increasing percentage of their
accounts over time to be received upon
death, retirement, disability, termination.