SYNTHESIS OF

CHAPTER 1A-C (QUIZ 3)

DIAZ BAUSTE, ELIZABETH CARMEN SOCORRO C.
BA 8 - 74384 12:00 - 1:30 PM MW
BSBA - 4
Corporation
is an artificial being created by
operation of law, having the right of
succession and the powers,
attributes and properties expressly
authorized by law or incident to its
existence.
are owned by an exclusive membership is open to exist not to make a profit
group of stockholders the public. Ex: SMC, but provide service. Ex:
and it is not open to the Petron, PLDT religious organizations,
public. Ex. Family owned hospitals, schools
corporations
 are formed by various are owned by the
professionals to promote customers who do
better service. Ex. Law business with them. Ex:
firms, doctors hospitals mutual funds
MULTINATIONAL CORPORATIONS (MNC’S)
o A company that maintains significant operations in
multiple countries but manages them from a base in
the home country.

o The company’s shares are traded in the international

stock markets (NYSE, Tokyo, London, Paris, Berlin, HK)

o When there are foreign nationals sitting as members of

the board of directors.
TRANSNATIONAL CORPORATIONS (TNC’S)

o A company that maintains significant operations

in multiple countries but decentralizes
management to the l o c a l c o u n t r y . ( Ne s t l e ,
McDonalds, KFC, Jollibee)
 STAKEHOLDERS OF A
CORPORATION

q MANAGEMENT
 STAKEHOLDERS OF A
CORPORATION

q CREDITORS
 STAKEHOLDERS OF A
CORPORATION

q SHAREHOLDERS
 STAKEHOLDERS OF A
CORPORATION

q EMPLOYEES
 STAKEHOLDERS OF A
CORPORATION

q CLIENTS
 STAKEHOLDERS OF A
CORPORATION

q GOVERNMENT
 STAKEHOLDERS OF A
CORPORATION

q PUBLIC
PURPOSES OF A CORPORATION
PURPOSES OF A CORPORATION
o To Increase Profit
PURPOSES OF A CORPORATION
o To offer vital services to the general public
PURPOSES OF A CORPORATION
o To offer goods and services to the mass market
SHAREHOLDERS, BONDHOLDERS
AND DIRECTORS
§ The right to vote on matters such as elect of the board of directors.

§ The right to propose shareholder resolutions.

§ The right to receive dividends.

§ Pre-emption right which is the right to purchase new shares issued

by the company to maintain its percentage of ownership in the
company. This can also be called right to first refusal.

§ The right to liquidating dividends. That is the right to receive the

company’s assets during liquidation or cessation of business.
q Governing the organization by establishing broad policies
and objectives.

q Selecting, appointing, supporting and reviewing the

performance of the chief executive.

q Ensuring the availability of adequate financial resources.

q Approving annual budgets.

 Corporate
Governance
is the process and structure used to direct
and manage the business and affairs of the
company towards enhancing business
prosperity and corporateaccountability
with the ultimate objective of realizing
long_x0002_term shareholder value, while
taking into -account the interests of other
stakeholders.
• Improvement of Shareholder

Fundamental Objectives
Value

of Corporate Governance
Shareholder’s value can be
improved by making a pre
commitment to build better
relations with primary stakeholders
like employees, customers,
suppliers and communities.
• Conscious consideration of the

Fundamental Objectives
interest of other stakeholders

of Corporate Governance
When a company meets the
objective of increasing the
shareholder value, it will have
greater internally-generated
resources in improving its
commitment in meeting its
environmental, community and
social obligations.
 WHAT GOOD GOVERNANCE PROMOTES
Transparency
is vital with respect to
corporate governance due to
the critical nature of
reporting financial and non-
financial information.
Accountability Prudence
is the recognition and It is based on the premise that an
accountable organization will take action to:
a s s u m p t i o n o f
responsibility for the • Set a policy based in a comprehensive
decisions, actions, and balanced understanding and
policies, administration, response to material stakeholders’ issues
and concerns; the emphasis on this
governance and premise is the overall broad philosophy
implementation of and operating style of the entity itself.
programs and plans of
the corporation and • Set goals ad standards against which
strategy and associated performance
people involved, can be measured and evaluated.
including the obligation
to report, explain and be • Disclose credible information about
strategy, goals, standards, and
answerable for its performance to those who base their
resulting consequences. actions and decisions on this information.
Benefits of Good Governance...

• Good corporate governance

practice leads to an improved
system of internal control.

• This leads to greater

accountability, protection of
corporate resources and
eventually, better profit margins.
Benefits of Good Governance...

• Good corporate governance can

also play a role in enhancing the
corporate value of companies.

• This leads to easy access to

capital in financial markets which
helps the company survive in an
even more competitive
environment.
Benefits of Good Governance...

• Companies that are known for

good governance practices do
not need to sell themselves
that hard for the investors to
fuse-in their investment either
as equity or as debt investors.
Benefits of Good Governance...

• The reliability of company

provided information.
♡ Agency Relationships and Costs

♡ Goals of Financial Management

♡ Do Managers Act in the

Stockholder’s Interests

♡ Managerial Compensation

♡ Control of the Firm

♡ Stakeholders
♥ The connection between of owners and
managers is called an agency relationship and
the conflict is called a principal-agent problem.

♥ Shareholders are the principals; the managers

are their agents.

♥ Agency costs: (1) managers do not attempt to

maximize firm value, (2) shareholders incur
costs t monitor the managers and influence
their actions.

♥ Direct agency cost – come in two forms: (1) a

corporate expenditure that benefits
management but costs the stockholders, (2) an
expense that arises from the need to monitor
management actions.
♥ The goal is to make money or add value for the
owners.

♥ Financial goals:
1. To survive

2. To avoid financial distress and bankruptcy

3. To beat the competition

4. To maximize sales or market share

5. To minimize costs

6. To maximize profits

7. To maintain a steady earnings growth

♥ These could lead to two questions:

(1) how closely are management goals

aligned with stockholder goals?

(2) can management be replaced if

they do not pursue stockholder goals?
♥ To increase share value for two
reasons:

1. Managerial compensation is usually

tied to financial performance in general
and oftentimes to share value in
particular.

2. Incentive managers have relate to

job prospects.

♥ Managers who are successful in

pursuing stockholder goals can reap
enormous rewards.
This is ultimately done with stockholders.

They elect the BOD who in turn, hire and

fire management.

An important mechanism by which

unhappy stockholders can act to replace
existing management is called a proxy
fight.

A proxy is the authority to vote someone

else’s stock.
Stakeholders
Employees, customers,
suppliers and even the
government all have a
financial interest in the
firm.

They also attempt to exert

control over the firm,
perhaps to the detriment
of the owners.
Agency Theory in Governance

o The owners are principals, and the managers are agents, and there is
an agency loss necessary, the extent of which, is the benefits that
should have accrued to the owners had the owners been the ones who
exercised direct control of the corporation.
 Concept of Goal
Congruence
Goal congruence is the harmony and alignment of goals of both the principal and the
agent which is consistent with the overall objectives of the organization. While it is true
that in agency relations, the presence of self-interested behaviors is a given,
nevertheless, managers can be encouraged to act in shareholders’ bet interests by
giving incentives which will compensate them for good performance on one hand at
the same time give them disincentives on their poor performance on another.
 Performance Incentives and Disincentives
When management is This can be done when a
company is a publicly-listed
rewarded based of the
level of profits made. company and managers are
given a chance to subscribe
shares of the company at a
discounted price.
They are now taking an active role
by scrutinizing performance of the
company, and are very swift in their
efforts of lobbying with other small
shareholders when they believe
poor service or any
mismanagement by the directors
is happening.
 Performance Incentives and Disincentives

The shareholders who have ultimate It is normal for the board,

control over of the corporation can
take a straight and hostile approach by
threatening the board, executives and
managers with removal from office of
they place their personal interests over
that of shareholders’ and that of
maximizing the value of the firm.
executives, and managers to
avoid or discourage corporate
takeovers as they are aware
that their job would at least be
at risk if not to be lost totally if
takeover takes place.
ROLES OF NON-EXECUTIVE DIRECTORS
Non-executive director – is a member of the board of directors of a company who
does not take part in the executive function of the management team.

o He should bring an independent judgment to bear on issues of strategy,

performance and resources including key appointments and standards of
conduct.

o His role in strategy development is to offer a creative contribution and to act

as a constructive reviewer in looking at the goals and plans developed by the
chief executive and his executive team.

o He is expected to participate in setting long-term broad operational

principles and policies that benefits the stakeholders in areas that concerns
on company stability, increasing the firm’s value, and ultimately, increasing
shareholder’s value
ROLES OF NON-EXECUTIVE DIRECTORS
o Establishing Networks

It is the job of the non-executive director to connect the company to the outside
world and in the process, gain benefit from networks of businesses.

o Monitoring Performance

His responsibility is to monitor and examine the performance of management in

meeting agreed goals and objectives of the company.

o Audit

The financial performance and highlights that are deemed necessary, including
the assurance that the internal control systems are in place and monitored
routinely and thoroughly.
CFO – is a corporate officer principally accountable for managing the financial risks of the corporation. He
is needed to handle both the cash inflow and outflow and to create reports about the corporation’s
spending.

♥ Implements Internal Controls

These controls features should include the effective administration of cash flow and overhead expenses,
establishing credit policies for customers and working with major vendors to attain more favorable
payment terms, and implementing measures for assessing and evaluating optimal inventory levels.

♥ Supervises Major Impact Projects

He carries out meticulous analysis of a company’s future capital investment requirements as a
prerequisite in securing additional financing.

♥ Develops Relations with Financing Sources

He institutes good working relationships with banks and other financial institutions that may impact on
the company’s ability to finance its operations.
♥ Advisor to Management

He facilitates and helps 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 the actual
figures and also with that of projections.

♥ Drives Major Strategic Issues

He takes part of strategic issues include the hatching of the company

acquisition strategy which in the end would help fuel and boost the
company’s additional growth. Keeping an eye on diversification of a
particular product lines, business activities, and portfolios.
♥ Risk Manager

CFO’s viewpoint on risk can be a helpful source to the board of directors

and the CEO as well as other senior officers as they manage the corporate
affairs.

♥ Relationship Role

He will work together with the CEO, the board of directors, the audit
committee, the internal auditor and the external auditor.

♥ Objective Referee

He must be trusted adviser in matters of financial reporting.

 Integrity gives you real
freedom because you have
nothing to fear since you have
nothing to hide.

—Zig Zagler