CORPORATE

GOVERNANCE
 CORPORATE GOVERNANCE

The objective is to make aware the

Board of Directors, Management and
the Stockholders of their roles,
functions and responsibilities, following
the best corporate principles and
practices.
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Corporate Governance Background,
Concepts and Definitions
BSP, in 2001, began to officially issue circulars
to provide for the framework of “good corporate
governance” for the banking industry. However,
“the use of the technical term
“Corporate Governance” may be deemed to
have been legally incorporated into the
Philippine legal system in 2002 with the
promulgation of the SEC Code of Corporate
Governance, as it defined the terms as follows-”
 CORPORATE GOVERNANCE
*“… A SYSTEM WHEREBY SHAREHOLDERS, CREDITORS
AND OTHER STAKEHOLDERS OF A CORPORATION ENSURE
THAT MANAGEMENT ENHANCES THE VALUE OF THE
CORPORATION AS IT COMPETES IN AN INCREASINGLY
GLOBAL MARKET PLACE”
*In 2005, the IC Code gave another, and more process-
driven, definition of corporate governance, to mean –
*“… THE SYSTEM BY WHICH COMPANIES ARE
DIRECTED AND MANAGED. IT INFLUENCES HOW THE
OBJECTIVES OF THE COMPANY ARE SET AND ACHIEVED,
HOW RISK IS MONITORED AND ASSESSED, AND HOW
PERFORMANCE IS OPTIMIZED.”
*The Law and Practice on: Philippine Corporate Governance, Dean Cesar L.
Villanueva c. 2009 p. 31-32
 CORPORATE GOVERNANCE
BSP CG Circulars
BSP Circular No. 283 s. 2001
as Amended by
BSP Circular 456 s. 2004;
BSP Memorandum Circular No. M-2013-002
Good Corporate governance is a
reflection of collective values and
competence of the board of
directors and senior management
team. Hence, supervision should
be focused on the effective
implementation of the governance
standards and principles by
putting greater weight on the
practices and performance of the
board of directors and senior
management.
SEC Code
SEC Memorandum
Circular No. 02 s 2002
Corporate Governance refers to a
system whereby shareholders,
creditors and other stakeholders
of a corporation ensure that
management enhances the value
of the corporation as it competes
in an increasingly global market
place.
IC Code
IC Circular No. 31-2005
Corporate Governance Is the
system by which companies are
directed and managed. It
influences how the objectives of
the company are set and
achieved, how risk is monitored
and assessed, and ho
performance is optimized.
 BOARD OF SHAREHOLDERS/
DIRECTORS OWNERS

EXECUTIVE
MANAGEMEN EXTERNAL
T AUDITORS
SHAREHOLDERS
/OWNERS HAVE
OPERATIONAL
MANAGEMEN RESPONSIBILITIES
T REGULATORS
DELEGATES
RESPONSIBILITIES
INTERNAL
SOCIETY AND
AUDITORS
OTHERS

PUBLIC
CORPORATION STAKEHOLDERS
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Parties involved and their
responsibilities
1. Stockholders
ΘProvide effective oversight through
election of board members, approval of
major initiatives such as buying or
selling stock, annual reports on
management compensation from the
board
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Parties involved and their
responsibilities
1. Stockholders
Common Corporate Governance Failures
ΘFocused on short-term prices

ΘFailed to perform long-term growth

analysis
ΘAbdicated most responsibilities to
management and analysts as long as
stock price increased
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Parties involved and their
responsibilities
2. Board of Directors
ΘThe major representation of
stockholders to ensure that the
organization is run according to the
organization’s charter and that there is
proper accountability
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Parties involved and their responsibilities
2. Board of Directors
Specific Activities
ΘSelecting management

ΘReviewing management performance and

determining compensation
ΘDeclaring dividends

ΘApproving major changes (ex. Mergers)

ΘApproving corporate strategy

ΘOverseeing accountability activities

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Parties involved and their responsibilities
2. Board of Directors
Common CG failures
ΘInadequate oversight of management

ΘApproval of management compensation plans,

particularly stock options that provided
perverse incentives, including incentives to
manage earnings
ΘDirectors often dominated by management

ΘDid not spend sufficient time or have sufficient

expertise to perform duties
ΘContinually re-price stock options when market
price declined
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Parties involved and their
responsibilities
3. Management
ΘOperations and accountability. To
manage the organization effectively,
provide accurate and timely
accountability to shareholders and other
stakeholders
 CORPORATE GOVERNANCE
Parties involved and their responsibilities
3. Management
Specific activities
ΘFormulating strategy and risk
management
ΘImplementing effective internal controls
ΘDeveloping financial and other reports,
meet public stakeholder and regulatory
requirements
ΘManaging and reviewing operations
ΘImplementing an effective ethical
environment
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Parties involved and their responsibilities
3. Management
Common CG failures
ΘEarnings management to meet analyst

expectation
ΘFraudulent financial reporting

ΘUsing accounting concepts to achieve

reporting objectives
ΘCreated an environment of greed, rather
than one of high ethical conduct
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Parties involved and their
responsibilities
4. Audit Committee
ΘProvide oversight of the internal and
external audit function and the process
of preparing the annual financial
statements and public reports on
internal control
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Parties involved and their responsibilities
4. Audit Committee
Specific activities
ΘSelecting the external audit firm

ΘApproving any non-audit work performed by

the audit firm
ΘSelecting and/or approving the appointment of
the Chief Audit Officer (Internal Auditor)
ΘReviewing and approving the scope and
budget of the internal audit function
ΘDiscussing audit findings with the internal
auditor and external auditor and advising the
board (and management) of specific actions
that should be taken
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Parties involved and their
responsibilities
4. Audit Committee
Common CG failures
ΘSimilar to board of members – did not
have expertise or time to provide
effective oversight of audit functions
ΘWere not viewed by auditors as the
audit client, rather, the power to hire
and fire the auditors, often rested with
management
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Parties involved and their
responsibilities
5. Regulators
A. Board of Accountancy

* Set accounting and auditing

standards dictating underlying
financial reporting and auditing
concepts; set the expectations of
audit quality and accounting quality
 CORPORATE GOVERNANCE
Parties involved and their responsibilities
5. Regulators
A. Board of Accountancy
Specific Activities
ΘEstablishing accounting principles

ΘEstablishing auditing standards

ΘInterpreting previously issued standards

implementing quality control processes to
ensure audit quality
ΘEducating members on audit and
accounting requirements
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Parties involved and their
responsibilities
5. Regulators
B. Securities and Exchange Commission
Θ Ensure the accuracy, timeliness and

fairness of public reporting of

financial and other information for
public companies
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Parties involved and their responsibilities
5. Regulators
B. Securities and Exchange Commission
Specific Activities
Θ Reviewing filing with SEC
Θ Interacting with the FRSC in setting
accounting standards
Θ Specifying independence standards
required of auditors that report on
public financial statements
Θ Identify corporate frauds, investigate
causes, and suggest remedial actions
 CORPORATE GOVERNANCE
Parties involved and their responsibilities
5. Regulators
B. Securities and Exchange Commission
Common CG failures
Θ Inadequate enforcement of existing

audit standards
Θ Identified problems but was not granted

sufficient resources by Congress or the

Administration to deal with the issues
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Parties involved and their
responsibilities
6. External Auditors
Θ Perform audits of company financial
statements to ensure that the
statements are free of material
misstatements including
misstatements that may be due to
fraud
 CORPORATE GOVERNANCE
Parties involved and their
responsibilities
6. External Auditors
Specific Activities
Θ Audits of public company financial
statements
Θ Audits of nonpublic company financial
statements
Θ Other Services such as tax or
consulting
 CORPORATE GOVERNANCE
Parties involved and their responsibilities
6. External Auditors
Common CG failures
Θ Helped companies use accounting concepts
to achieve earnings objectives
Θ Promoted personnel based on ability to sell
nonaudit products
Θ Replaced direct tests of accounting balances
with inquiries, risk analysis and analytics
Θ Failed to uncover basic frauds because
fundamental audit procedures were not
performed
 CORPORATE GOVERNANCE
Parties involved and their
responsibilities
7. Internal Auditors
Θ Performs audits of companies for
compliance with company policies and
laws, audits to evaluate the efficiency
of operations and periodic evaluation
and tests of control
 CORPORATE GOVERNANCE
Parties involved and their
responsibilities
7. Internal Auditors
Specific Activities
Θ Reporting results and analyses to

management(including operational
management) and audit committees
Θ Evaluating internal controls
 CORPORATE GOVERNANCE
Parties involved and their responsibilities
7. Internal Auditors
Common CG failures
Θ Focused efforts on operational audits
and assumed that financial auditing was
addressed by the external auditors
Θ Reported primarily to management with
little reporting to the audit committee
Θ In some instances, did not have access
to the corporate financial accounting
records
 CORPORATE GOVERNANCE
Actual Major CG Failures resulting to
Financial Reporting Fraud
1. Enron

2. 2. Workd.com

3. 3. Lucent

4. 4. Parmalat

5. 5. Healthsouth

6. 6. Adecco

7. 7. Dell
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Some scrupulous practices and
observations
ΘImproper revenue recognition

ΘCreative accounting for mergers and

acquisitions that did not reflect
economic reality
ΘIncreased use of stock-based
compensation that put increased
pressure on meeting earnings target
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Some scrupulous practices and observations
ΘAnalytical procedures were being used
inappropriately to replace direct test of account
balances
ΘAudit firms were not thoroughly evaluating internal
control and applying substantive procedures to
address weaknesses in internal control
ΘAudit documentation, especially related to the
planning of the audit, was not in compliance with
professional standards
ΘAuditors were ignoring warning signals of fraud
and other problems
ΘAuditors were not providing sufficient warning to
investors about companies that might not continue
as going concerns
 CORPORATE GOVERNANCE
Principles of Good Corporate
Governance and Best Practice
Recommendations:
1. Solid foundation for management
oversight
Recognize and publish the roles and
responsibilities of board and
management
Formalize and disclose the functions
reserved to the board and those
delegated to management
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Principles of Good Corporate Governance and Best
Practice Recommendations:
2. Structure the board to add value
Have a board of an effective composition, size and
commitment to adequately discharge its
responsibilities and duties
•A majority of the board should be independent
directors
•The chairperson should be an independent director

•The roles of the chairperson and chief executive

officer should not be exercised by the same
individual
•The board should establish a nomination
committee
 CORPORATE GOVERNANCE
Principles of Good Corporate Governance and Best Practice
Recommendations:
3. Promote Ethical and responsible decision-making
 Actively promote ethical and responsible decision-making
Establish a code of conduct to guide the directors, the
•
chief executive director (or equivalent), the chief financial
officer and any other key executives as to the:
1. practices necessary to maintain confidence in the
•
company’s integrity
•2. the responsibility and accountability of individuals for
the reporting and investigating reports of unethical
practices
Disclose the policy concerning trading in company
securities by directors, officers and employees
 CORPORATE GOVERNANCE
Principles of Good Corporate Governance and
Best Practice Recommendations:
4. Safeguard Integrity in Financial Reporting
Have a structure to independently verify and
safeguard the integrity of the company’s
financial reporting
•Require the chief executive officer and the chief
financial officer to state in writing to the BOD
that the company’s financial reports present a
true and fair view, in all material respects, of
the company’s financial condition and
operational results and are in accordance with
relevant accounting standards.
•The board should establish an audit committee
 CORPORATE GOVERNANCE
Principles of Good Corporate Governance and
Best Practice Recommendations:
4. Safeguard Integrity in Financial Reporting
•Structure the audit committee so that it
consists of:
•1. Only non-executive directors

•2. A majority of independent directors

•3. An independent chairperson, who is not

chairperson of the board
•4. At least 3 members

> The audit committee should have a formal

operating charter
 CORPORATE GOVERNANCE
Principles of Good Corporate Governance
and Best Practice Recommendations:
5. Make timely and balanced disclosure
Promote timely and balanced disclosures
of all material matters concerning the
company
Establish written policies and procedures
designed to ensure compliance with PFRS
Listing Rule disclosure requirements and
ensure accountability at a senior
management level for that compliance.
 CORPORATE GOVERNANCE
Principles of Good Corporate Governance
and Best Practice Recommendations:
6. Respect the Rights of Shareholders
Design and disclose a communications
strategy to promote effective
communication with shareholders and
encourage effective participation at general
meetings
Request the external auditor to attend the
annual general meeting and be available to
answer shareholder questions about the
audit
 CORPORATE GOVERNANCE
Principles of Good Corporate
Governance and Best Practice
Recommendations:
7. Recognize and Manage Risk
Establish a sound system of Risk
Oversight and Management and Internal
Control
•The board should establish policies on

risk oversight and management

 CORPORATE GOVERNANCE
Principles of Good Corporate Governance and
Best Practice Recommendations:
7. Recognize and Manage Risk
•The CEO and the CFO should state to the board
in writing that:
1. The statement given in accordance with best
practice (integrity of FS) is founded on a sound
system of risk management and internal
compliance and control which implements the
policies adopted by the board and
2. The company’s risk management and
internal compliance and control system is
operating effectively and efficiently in all
material respects.
 CORPORATE GOVERNANCE
Principles of Good Corporate
Governance and Best Practice
Recommendations:
8. Encourage Enhanced Performance
Fairly review and actively encourage
enhanced board and management
effectiveness.
Disclose the process for performance
evaluation of the board, its committees
and individual directors and key
executives
 CORPORATE GOVERNANCE
Principles of Good Corporate Governance and
Best Practice Recommendations:
9. Remunerate fairly and responsibly
Ensure that the level and composition of
remuneration is sufficient and reasonable and
that its relationship to corporate and individual
performance is defined
•Provide disclosure in relation to the company’s
remuneration policies to enable investors to
understand:
1. The costs and benefits of those policies
2. The link between remuneration paid to
directors and key executives and corporate
performance
 CORPORATE GOVERNANCE
Principles of Good Corporate Governance
and Best Practice Recommendations:
9. Remunerate fairly and responsibly
•The board should establish a remuneration
committee
•Clearly distinguish the structure of non-
executive directors’ remuneration from
that of executives
•Ensure that payment of equity-based
executive remuneration is made in
accordance with thresholds set in plans
approved by shareholders
 CORPORATE GOVERNANCE
Principles of Good Corporate
Governance and Best Practice
Recommendations:
10. Recognize the legitimate interests of
stakeholders
Recognize legal and other obligations
to all legitimate stakeholders
Establish and disclose a code of
conduct to guide compliance with legal
and other obligations to legitimate
stockholders.
 CORPORATE GOVERNANCE
Principles of Good Corporate Governance
1. Solid foundation for management oversight
2. Structure the board to add value
3. Promote Ethical and responsible decision-
making
4. Safeguard Integrity in Financial Reporting
5. Make timely and balanced disclosures
6. Respect the Rights of Shareholders
7. Recognize and Manage Risk
8. Encourage Enhanced Performance
9. Remunerate fairly and responsibly
10. Recognize the legitimate interests of
stakeholders
 CORPORATE GOVERNANCE
1. Framework
2. Rights of shareholders-ownership & transfer
of shares, inspection of records, voting,
general meeting, share in profits
3. Equitable treatment of shareholders-majority
and minority
4. Role of Stakeholders- corporate social
responsibility to society
5. Disclosure and Transparency-
acquisition/disposal of assets, off-balance
sheet transactions, related party
transactions, remuneration of BOD and
management
6. Responsibilities of the Board-obedience, due
diligence and care, loyalty
 CORPORATE GOVERNANCE
6. Responsibilities of the Board-obedience, due
diligence and care, loyalty
a. Mix of competent directors
b. Appoint CEO and other executive
c. Professional Development program for
officers/employees and succession plan for
senior management
d. Strategic planning and risk management
e. Guidelines for capital expenditures
f. Policies for long-term growth and viability
g. Monitoring of strategies, business plans
h. Compliance with laws, regulations, code
i. Identify stakeholders and establish
communication
 CORPORATE GOVERNANCE
6. Responsibilities of the Board-obedience, due
diligence and care, loyalty
j. Investor relations program
k. System of internal control
l. Appropriate technology and systems for
proper accounting and to remain competitive
m. Identify key risk areas, key performance
indicators and monitoring of factors
n. Establish audit and compliance committee
o. Meet regularly to function effectively, and
having minutes of all meetings
p. Authority of board should be within powers
defined in articles of incorporation and by
laws
 CORPORATE GOVERNANCE
 Actual cases-VMCI, BW,
etc.

 Youtube video: 10 reasons

boards fail

 For case study: Toys R Us

 CORPORATE GOVERNANCE
For case study: Toys R Us
1. What and when were good
governance principles applied?
2. What were the corporate
governance failures that happened
and who were responsible?
3. What could Toys R Us have done
differently in order to avoid their
demise?
 AUDIT COMMITTEE OVERSIGHT
A, J

Financial Management of credit,

market, liquidity, Audit Functions
Reporting C, H
Processes operational, legal and
I other risk management
activities
B External
Auditors
Internal E, K
Financial Controls over
Reporting Financial Internal
Reporting Auditors
D, L, F
 CORPORATE GOVERNANCE
Audit Committee Oversight Responsibilities
A. Assist the Board in the performance of its
oversight responsibility for
- the financial reporting process,
- system of internal control, audit process, and
monitoring of compliance with applicable laws, rules
and regulations
B. Provide oversight over management’s activities
in:
- managing credit, market, liquidity, operational,
legal and other risks of the corporation.
- This function shall include regular receipt from
management of information on risk exposures and
risk management activities
 CORPORATE GOVERNANCE
Audit Committee Oversight Responsibilities
C. Perform oversight functions over the
corporation’s internal and external auditors.
- It should ensure that the internal and external
auditors act independently from each other, and
that both auditors are given unrestricted access
to all records, properties and personnel to
enable them to perform their audit functions
D. Review the annual internal audit plan to
ensure its conformity with the objectives of the
corporation. The plan should include the audit
scope, resources and budget necessary to
implement it.
 CORPORATE GOVERNANCE
Audit Committee Oversight Responsibilities
E. Prior to the start of the audit, discuss
with external auditor, the nature, scope
and expenses of the audit and ensure
proper coordination if more than one audit
firm is involved in the activity to secure
proper coverage and minimize duplication
of efforts.
F. Organize an internal audit department,
and consider the appointment of an
independent internal auditor and the terms
and conditions of its engagement and
removal
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Audit Committee Oversight Responsibilities
G. Monitor and Evaluate the adequacy and
effectiveness of the corporation’s internal
control system, including financial
reporting control and information
technology security
H. Review the reports submitted by
internal and external auditors
I. Review the quarterly, half-year and
annual FS before their submission to the
Board, with particular focus on the ff:
 CORPORATE GOVERNANCE
Audit Committee Oversight Responsibilities
I. (continued) :
- Any changes in accounting policies and
procedures
- Major judgmental areas
- Significant adjustments resulting from
the audit
- Going concern assumptions
- Compliance with accounting standards
- Compliance with tax, legal and regulatory
requirements
 CORPORATE GOVERNANCE
Audit Committee Oversight Responsibilities
J. Coordinate, monitor and facilitate compliance
with laws and regulations
K. Evaluate and determine the non-audit work
of the external auditor, and review periodically
the non-audit fees paid to the external auditor
in relation to their significance to the total
annual income of the external auditor, and to
the corporation’s overall consultancy expense.
The committee shall disallow any non-audit
work that will conflict with his duties and
external auditor, or may pose a threat to his
independence. The non-audit work should be
disclosed in the corporation’s annual report
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Audit Committee Oversight
Responsibilities
L. Establish and identify the reporting
line of the Internal auditor to enable
him to properly fulfil his duties and
responsibilities. He shall functionally
report to the Audit committee