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DRIVING FORCES OF GOVERNANCE CODE DEV’T

CORPORATE 1. GLOBALIZATION
GOVERNANCE 2. INVESTOR CONCERNS
3. CORPORATE SCANDALS
CODE

PRINCIPLES BASED APPROACH CHARACTERISTICS OF PRINCIPLE BASED APPROACH

Voluntary code coupled with disclosure.
• Focus on aims
• Flexibility
• Breadth of Application
• Comply or explain
• Role of capital markets

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RULES BASED APPROACH
Based on detailed laws or regulations.
ADVANTAGES OF PRINCIPLE BASED APPROACH
• Avoids legislation
• Less costly
• Appropriate for company
• Emphasis on explanations
• Emphasis on investor decisions
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CHARACTERISTICS OF RULES BASED APPROACH
• Emphasis on achievements
• Compulsory compliance
• Visibility of compliance
• Limitations of rules
• Criminal Sanctions
CRITICISMS OF PRINCIPLE BASED APPROACH
• Broadness of principles
• Consistency between companies
• Confusion over rules
• Inadequate explanation
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INSIDER OR OUTSIDER SYSTEMS OECD

Insider or relationship-based systems are where most
companies listed on the local stock exchange are owned
and controlled by a small number of major
shareholders.
Outsider systems are ones where shareholding is more
widely dispersed, and there is the manager ownership
separation.
The Organization for Economic Co-operation and
Development (OECD) has carried out an extensive
consultation with member countries, and developed a
set of principles of corporate governance that countries
and companies should work towards achieving.

OECD PRINCIPLES ICGN REPORT

1. The right of shareholders The International Corporate Governance Network (ICGN)
2. The equitable treatment of shareholders issued a report (published in 2005, revised in 2009)
3. The role of stakeholders aiming to enhance the guidance produced by the OECD.
4. Disclosure and Transparency The purpose is to provide practical guidance for boards
5. The responsibilities of the Board to meet expectations so that they can operate efficiently
and compete for scarce capital effectively.

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ICGN REPORT EMPHASIS SARBANES OXLEY ACT

1. Sustainable value Also known as “Public Company Accounting Reform and
2. Structure of the Board Investor Protection Act” in the Senate. “Corporate and
3. Corporate Culture Auditing Accountability and Responsibility Act” in the
4. Risk Management House
5. Remuneration Commonly called as Sarbanes-Oxley, Sarbox or SOX.
6. Audit Enacted on July 30, 2002 and named after sponsors,
7. Disclosure and Transparency U.S. Senator Paul Sarbanes and U.S. Representative
8. Shareholders Michael G. Oxley.

REASONS FOR SARBANES OXLEY ACT SARBANES OXLEY ACT APPLIES TO…
Includes reforms in corporate governance and the accounting All public companies in the U.S. and international
profession intended to: companies that have registered equity or debt securities
q Improve corporate financial reporting and internal control with the SEC and the accounting firms that provide
q Strengthen audit committees
auditing services to them
q Change the relationship between the auditor and client
q Improve auditor independence
q Provide additional auditor assurance over internal control
q Provide oversight and regulation for auditors of publicly
traded companies.

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SARBANES OXLEY ACT SOX AFFECTS

Contains 11 Titles ü External Auditors
1. Public Company Accounting Oversight Board (PCAOB) ü Internal Auditors
2. Auditor Independence
3. Corporate Responsibility
ü Board of directors and Committees
4. Enhanced Financial Disclosures ü Top Executives
5. Analyst Conflicts of Interest ü Senior Managers
6. Commission Resources and Authority
ü Attorneys, both internal and external
7. Studies and Reports
8. Corporate and Criminal Fraud Accountability ü Regulators
9. White-Collar Crime Penalty Enhancements
10. Corporate Tax Returns
11. Corporate Fraud and Accountability

MAJOR PROVISIONS OF SOX MAJOR PROVISIONS OF SOX

ü Chief executives and financial officers are held
responsible for their companies’ financial reports.
ü Executive officers and directors may not solicit or
accept loans from their companies.
ü Insider trades are reported more quickly.
ü Insider trades are prohibited during pension-fund
blackout periods.
ü Disclosure of executive compensation and profits is
mandatory.
ü Internal audits and review and certification of audits
by outside auditors are mandatory.
ü There will be criminal and civil penalties for securities
violations.
ü There will be longer jail sentences and larger fines for
executives who intentionally misstate financial
statements.
ü Audit firms may no longer provide actuarial, legal, or
consulting services to firms they audit.

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I. Public Company Accounting Oversight Board
v establishes the Public Company Accounting Oversight
Board, to provide independent oversight of public
accounting firms providing audit services.
v creates a central oversight board tasked with
registering auditors, defining the specific processes
and procedures for compliance audits, inspecting
and policing conduct and quality control, and
enforcing compliance with the specific mandates of
SOX.
III. Corporate Responsibility
v mandates that senior executives take individual
responsibility for the accuracy and completeness of
corporate financial reports.
v It defines the interaction of external auditors and
corporate audit committees, and specifies the
responsibility of corporate officers for the accuracy and
validity of corporate financial reports.
v It enumerates specific limits on the behaviors of
corporate officers and describes specific forfeitures of
benefits and civil penalties for non-compliance.
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II. Auditor Independence
v establishes standards for external auditor
independence, to limit conflicts of interest.
v It also addresses new auditor approval requirements,
audit partner rotation, and auditor reporting
requirements.
v It restricts auditing companies from providing non-
audit services (e.g., consulting) for the same clients.
IV. Enhanced Financial Disclosures
v and describes enhanced reporting requirements for
financial transactions, including off- balance sheet
transactions, pro-forma figures and stock transactions
of corporate officers.
v requires internal controls for assuring the accuracy of
financial reports and disclosures, and mandates both
audits and reports on those controls.
v requires timely reporting of material changes in
financial condition and specific enhanced reviews by the
SEC or its agents of corporate reports.
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V. Analyst Conflict of Interest
v includes measures designed to help restore investor
confidence in the reporting of securities analysts.
v defines the codes of conduct for securities analysts and
requires disclosure of knowable conflicts of interest.
VII. Studies and Reports
v requires the Comptroller General and the SEC to
perform various studies and report their findings.
v Studies and reports include the effects of consolidation
of public accounting firms, the role of credit rating
agencies in the operation of securities markets,
securities violations and enforcement actions, and
whether investment banks assisted Enron and Global
Crossing and others to manipulate earnings and
obfuscate true financial conditions.
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VI. Commission Resources and Authority
v defines practices to restore investor confidence in
securities analysts.
v defines the SEC’s authority to censure or bar securities
professionals from practice and defines conditions
under which a person can be barred from practicing as
a broker, advisor, or dealer.
VIII. Corporate & Criminal Fraud Accountability
v also referred to as the “Corporate and Criminal Fraud
Accountability Act of 2002”.
v It describes specific criminal penalties for manipulation,
destruction or alteration of financial records or other
interference with investigations, while providing certain
protections for whistle-blowers.
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IX. White-Collar Crime Penalty Enhancements X. Corporate Tax Returns

v also called the “White Collar Crime Penalty v states that the Chief Executive Officer should sign the
Enhancement Act of 2002.” company tax return.
v increases the criminal penalties associated with white-
collar crimes and conspiracies.
v recommends stronger sentencing guidelines and
specifically adds failure to certify corporate financial
reports as a criminal offense.

XI. Corporate Fraud and Accountability ACTIVITY

v called as “Corporate Fraud Accountability Act of 2002”. If you were writing a corporate governance code, would you
v It identifies corporate fraud and records tampering as employ a principles-based or rules-based approach? Will
criminal offenses and joins those offenses to specific your answer be the same if you operate your company in
penalties. It also revises sentencing guidelines and the Philippines?
strengthens their penalties.
v enables the SEC to resort to temporarily freezing
transactions or payments that have been deemed
"large" or "unusual".