Corporate Governance, Business Ethics, and Inte FCanrol 2019-2020 Edition MA. ELENITA BALATBAT CABRERA BBA MBA CPA CMA PRESENTLY: Academic and Business Consultant President and CEO, CLA Consultancy and Training Center, Inc. FORMERLY: \Vied Chairman and Examiner, Professional Regulatory Board of Accountancy World Bank Consultant Dean, College of Business Administration, Lyosum University of the Phillippines CPA Review Director & Reviewer, Professional Review and Training Canter, Inc. Professor of Accounting & Finance, University of the East, Far Eastem University, ‘De La Salle University, Centro Escolar University, St. Scholastica’s College Audit Staff, SGV and Co., CPAs GILBERT ANTHONY B. CABRERA BBA MBA CPA PRESENTLY: Vice President - Risk and Finance, Global Insurance Brokerage, USA FORMERLY: : Chief Financial Officer, Food Retail Conglomerate, USA Senior Auditor, SGV and Co., CPAs Accounting Instructor University of Maryland, Robert Smith Schoo! of Business University of the East. ManilaPhilippine Copyright, 2019 by MA. ELENITA RALATBAT CABRERA CILBERrABOMYED.CABRERA Any copy of this book not bearing the signature of the author(s) shall be considered as proceeding from an illegal source. The Internet addresses listed in the text were accurate at the time of publication, The inclusion of a website does not indicate endorsement by the authors or GIC Enterprises & Co., Inc. and they do not guarantee the accuracy of information presented at these sites. ALL RIGHTS RESERVED ISBN: 978-621-416-073-0 Published & Printed by: GIC ENTERPRISES & CO., INC. ‘National Book Development Board Registered 2017 C. M. Recto Avenue, Manila PhilippinesAbout the Authors Ma. Elenita B. Cabrera BBA MBA CPA CMA Dean Cabrera graduated Magna Cum Laude from the University of the East with a degree of Bachelor of Business Administration, major in Accounting and was one of the topnotchers when she passed the CPA Licensure Board Examination. She earned her Master in Business Administration major in Financial Management from the University of the Philippines and is a candidate for Doctor of Education at the University of the East. She.is a holder of a Certificate in Management Accounting from the Institute of Certified Management Accountants of Victoria, Australia. Deen Cabrera worked with SGV & Co. as Staff Auditor. She taught Financial Accounting, Financial Management, Management Advisory Services, Auditing Theory and Practice in various colleges and universities and authored books in these subjects. She previously held the position of Dean of the College of Business Administration at the Lyceum of the Philippines University. A former Vice Chairman of the Professional Regulatory Board of Accountancy, she was the BOA representative to the Financial Reporting Standards Council (FRSC), Philippine Interpretations Committee (PIC) and Auditing and Assurance Standards Council (AASC). She served as the Chairman of the PRC CPE Couneil for Accountancy and Chairman of the CHED Technical Committee for Accountancy Education. She was a World Bank Project Consultant on the creation of an Accounting Oversight Board in the Philippines. She was a recipient of the Philippine Institute of Certified Public Accountants (PICPA) awards as Outstanding CPA in Education, Honorary Life Membership, Distinguished Accountancy Author and 2018 Accountancy Hall of Fame. Gilbert Anthony B. Cabrera BBA MBA CPA Gilbert received his bachelor's degree in Accountancy from the University of the East, Cum Laude, He obtained a Master in Business Administration degree with concentrations on Intemational Finance and Accounting from the University of Maryland, College Park, Robert H. Smith School of Business. ‘A certified public accountant, he has public accounting experience with SGV & Co. (Emst and Young Member Firm) and teaching experience with the University of the East, Manila and University of Maryland, Robert H. Smith School of Business. Presently, he is ~ Vice-President, Risk and Finance, of Global Insurance Brokerage in California, USA. An ‘active member of the Association of Filipino Finance Managers in California, he is also a former Board Member of Bay Area Red Cross.Preface The business environment continues to change in dramatic ways and university graduates joining the corporate world or entering the accountancy profession, whether it be in the public practice sector, management accounting practice, intemal audit or accounting information system management, must be prepared for a high standard of responsbblily. This textbook on Corporate Governance, Business Ethics, Risk Management and Internal Control, aims to Quip its readers the basic knowledge, skills and perspective that are necessary in facing this challenge. Having a solid understanding of fundamental business, Its governance, risk management, ethical practices and intemal control will become even more important in @ world of advancing technology. While businesses in different industry have strikingly different characteristics, most have some fundamental characteristics in common. A fundamental widely accepted model of business consists of governance, objectives, strategies, business processes, risks, controls and reporting. This book is organized to provide authoritative, practical and contemporary content as follows, Unit | - Corporate Governance This unit describes corporate governance and the parties involved in it. It discusses the structure that specifies the distribution of rights and responsibilities among different participants in @ corporation. |t also spells out the rules and procedures for making decisions on corporate affairs. Unit Il - Business Ethics This unit discusses the various forms of unethical business practices. It also articulates how to institutionize integrity in all aspects of business process and how business with integrity enjoys competitive advantage in both govemment and privete transactions. Unit Ill - Risk Management This unit emphasizes the nature, forms and basic management of risks related to business. Unit IV - Intemal Control: A Vital Tool in Managing Risk This unit articulates the nature, scope, elements and importance of internal control. It also covers extensive discussion of what how fraud can be prevented, detected and reduced if not fully eliminated in an enterprise. The end of chapter materials have been thoroughly chosen and streamlined to be much more user friendly. ‘Special thanks to our families for their ‘continued support and encouragement. 6.8.6. g. 2. é.Preface UNIT Chapter Chapter Chapter Chapter UNIT Chapter Chapter Chapter Chapter Chapter Chapter I Contents in Brief CORPORATE GOVERNANCE INTRODUCTION TO CORPORATE GOVERNANCE CORPORATE GOVERNANCE RESPONSIBILITIES AND ACCOUNTABILITIES SECURITIES AND EXCHANGE (SEC) COMMISSION CODE OF CORPORATE GOVERNANCE SEC CODE OF CORPORATE GOVERNANCE, CONTINUED BUSINESS ETHICS INTRODUCTION TO ETHICS BUSINESS ETHICS COMMON UNETHICAL PRACTICES OF BUSINESS ESTABLISHMENTS ETHICAL DILEMMA ADVOCACY AGAINST CORRUPTION INITIATIVES TO IMPROVE BU: AND REDUCE CORRUPTION eee 26 76 93 94 103 109 121 128 146UNIT) =r Chapter i Chapter 12 UNIT IV Chapter 13 Chapter 14 Chapter 15 Chapter 16 Chapter 17 Appendices Appendix A Appendix B Appendix C Appendix D Appendix E Appendix F Appendix G References INTRODUCTION TO RISK MANAGEMENT RISK MANAGEMENT. PRACTICAL INSIGHTS IN REDUCING AND MANAGING BUSINESS RISKS INTERNAL CONTROL: A VITAL TOOL IN MANAGING RISK OVERVIEW OF INTERNAL CONTROL FRAUD-AND ERROR ERRORS AND IRREGULARITIES IN THE TRANSACTION CYCLES OF THE BUSINESS ENTITY INTERNAL CONTROL AFFECTING ASSETS INTERNAL CONTROL AFFECTING LIABILITIES AND EQUITY Code of Ethics for Professional Teachers International Standards for the Professional Practice of Internal Auditing International Standards of Ethical Conduct for Practitioners of Management Accounting Code of Business Conduet and Ethics of a Telecommunications Company Code of Business Conduct and Ethics of Manufacturing Company Code of Business Conduct and Ethics of ‘Commercial Bank j Partial List of Organizations who are actively Participating in the “Integrity Initiative” ‘Campaign against Corruption m 162 163 180 195 196 217 232 244 264 273 281 283 287 293 303 307 311Contents Preface I CORPORATE GOVERNANCE CORPORATE Chapte 1 INTRODUCTION TO a GOVERNANCE UNIT Expected Learning Outcomes Whot is Governance? Characteristics of Good Governance Corporate Governance: A Overview Purpose of Corporate Governance Objectives of Corporate Governance Basic Principles of Effective Corporate Governance Ilustrative Application of the Basic Principles of Corporate Governance and Best Practice Recommendations Review Questions 2 CORPORATE GOVERNANCE RESPONSIBILITIES AND ACCOUNTABILITIES Expected Learning Outcomes Chapter Introduction Relationship between Shareholders / Owners and Other Stakeholders Parties involved in Corporate Governance Their Respective Broad Role and Specific Responsibilities ° Shareholders Board of Directors Non-Executive or Independent Directors Management Audit Committees Regulators Board of Accountancy External Audit Internal Audit Review Questions v YAQUwW wD 16 17 19 19 19 20 21 22 23 23 243 SECURITIES AND EXCHANGE COMMISSION (SEC) CODE OF CORPORATE GOVERNANCE Expected Learning Outeomes The Board's Governance Responsibilities Principles 1107 Disclosure and Transparency Principles 8 0 11 Internal Control System and Risk Management Framework Principle 12 Cultivating a Synergies Relationship with Shareholders Principle 13 Duties to Stakeholders Principles 14 to 16 Introduction The Cade of Corporate Governance Objective Approach Organization Recommendation Explanations Coverage Definition of Terms The Board's Governance Responsibilities Establishing a Competent Board Establishing Clear Roles and Responsibilities of the Board Establishing Board Committees Fostering Commitment Reinforcing Board Independence “Assessing Board Performance Strengthening Board Ethics ‘Enliancing Company Disclosure Policies and Procedure Surengthening the External Auditor's Independence and Improving Review Questions and Exercises 26 28 28 29 29 29 29 29 29 30 30 30 30 30 30 30 3 31 31 34 34 39 49 57 59 65 67 68 a 74 26vi Chapter UNIT Chapter 4 SEC CODE OF CORPORATE GOVERNANCE, CONTINUED Expected Learning Outcomes Increasing Focus on Non-Financial and Sustainability Reporting Promoting a Comprehensive and Cost-efficient ‘Access to Relevant Information Strengthening the Internal Control System and Enierprise Risk Management Framework Cultivating a Synergic Relationship with Shareholders Respecting Rights of Stockholders and Eifective Redvess for Violation of Stakeholder’s Rights Encouraging Employees Participation Encouraging Sustainability and Social Responsibility Review Questions Il BUSINESS ETHICS INTRODUCTION TO ETHICS Expected Learning Outcomes Introduction Characteristies and Values Associated with Ethical Behavior Why is Ethical Behavior Necessary? Why do People Act Unethically? Categories of Ethical Principle The Need for Professional Ethics Review Questions 76 7 7B 78 83 87 88 90 ET 76 93 94vii Chapter’ 6 BUSINESS ETHICS 103 Expected Learning Outcomes Jos Basic Concept of Business Ethics 104 Purposes of Business Ethics 10s Main Purpose 104 Special Purpose 104 Scope and Impact of Business Ethics 105 Economie Impact 106 Social Impact 106 Environmental Impact ; 106 Impact on Business Managers . 106 Ethical Challenges in Today's World 107 Review Questions 18 Chapter 7 COMMON UNETHICAL PRACTICES OF BUSINESS ESTABLISHMENTS. 109 Expected Learning Outeomes . 109 Common Unethical Practices of Business Establishments 110 Misrepresemation and Over Persuasion , 110 Direct Misrepresentation 110 Deceptive packaging 10 Misbranding or mislabeling 10 False or misleading advertisement 110 Adulteration aa Weight understatement Mt Measurenient undersiatement 11 Quantity understatement 2 Indirect Misrepresentation 112 Caveal emptor 2 Deliberate withholding of information 112 Passive deceplion 112 Over Persuasion 113 Corporate Ethics 113 Unethical Practices of Corporate Management 113 Board of Directors 113 Executive Officers and Lower Level Managers 114 Some Unethical Practices of Employees 7 Review Questions 1gviii Chapter 8 ETHICAL DILEMMA Expected Learning Outcomes hs Introduction = Resolving Ethical Dilemmas 122 ‘IMlusirative Case: Resolving an Ethical Dilemma 122 Ethical Issue 123 Who is Affected and How is each Affected 123 Bert's Available Alternatives 124 Consequences of Each Alternative 124 Appropriate Action 125 Review Questions and Exercises 126 Chapter. 9 ADVOCACY AGAINST CORRUPTION Expected Learning Outcomes 128 What is Corruption? 129 What does Corruption Look Like? 130 Why dnd how does a Person Become Corrupt? 131 MN Effects of Corruption 131 Characteristics of Corruption 133 The Philippine Corruption Report 137 Judicial System 137 Police 138 Public Services 138 Land Administration 139 Tax Administration 139 Customs Administration Public Procurement i Natural Resources so Prevention of Corruption ise Clear Business Process a Policy on Gifis and Entertainme a Declaration of Conflict of Interest 142. Comvenient Corruption Reporting, iz Efforts to Curb Corruption Prone Pee ig Vigilance of Civil Socons ‘ough Legislation 142 143, Review Questions 145,Chapter 10 INITIATIVES TO IMPROVE BUSINESS ETHICS AND REDUCE CORRUPTION 146 Expected Learning Outcomes 146 Introduction 147 The Integrity Initiative Campaign 147 Corporate Values 148 Need for a Code of Conduct 149 The Unified Code of Conduct for Business 150 Top Management 150 Human Resources 150 Sales and Marketing 150 Finance and Accounting 1s] Procurement L Logistics 152 Implementation and Monitoring 152 Bishops-Businessmen’s Conference Philippines — Code of Ethics for the Philippine Business 153 Survey of Laws Advocating Business Ethics 159 Review Questions 160 UNIT Ill INTRODUCTION TO RISK MANAGEMENT . 162 Chapter. 11 RISK MANAGEMENT 163 Expected Learning Outeomes 163 Introduction 164 Risk Management Defined 164 Basic Principles of Risk Management 165 Process of Risk Management 165 Elements of Risk Management 166 Relevant Risk Terminologies 167 1. Risk Associated with Investments 167 Il. Risks Associated with Manufacturing, Trading and Service Concerns 170 Il, Risk Associated with Financial Institutions 71 Potential Risk Treatments 172 Areas of Risk Management 173, Risk Management Framework 174 Steps in the Risk Management Process 175 Review Questions 178x IN REDUCING AND Chapt 12 PRACTICAL INSIGHTS D “mer MANAGING BUSINESS RISKS Expected Learning Outcomes Understand the Nature of Risk Identify and Prioritize Risks ; Consider the Acceptable Level of Risk Understand Why Risks Become Reality Apply a Simple Risk Management Process Risk Assessment and Analysis Risk Management and Corurot Avoiding and Mitigating Risks Create a Positive Climate for Managing Risk Overcoming the Fear of Risk Controlling and Monitoring Enterprise-wide Risk Practical Considerations in Managing and Reducing Financial Risk Improving Profitability Assessinent of Market and Exit Barries Break-even Analysis Controlling Costs Practical Techniques lo Improve Profitability Avoiding Pitfalls Review Questions and Exercises UNIT IV INTERNAL CONTROL: . A VITAL TOOL IN MANAGING RISK Chapter 13 OVERVIEW OF INTERNAL CONTROL, Expected Learning Outcumes Nature and Purpose of internal Control Internal Control System Defined Elements of Internat Control A. Control Environment B. Entity’s Risk Assessment Process C._ Information System, including the Business Processes, Relevant to Financial Reporting and Communication D. Control Activities E. Monitoring of Controls Review Questions and Exercises 180 181 181 183 183 184 184 185 186 186 187 187 188 188 189 189 190 191 192 194 196 197 197 198 198 198 203 205 210 2il 180 195 196Chapter Chapter FRAUD AND ERROR Expected Learning Outeomes Introduction Types of Misstatemens Misstatements arising from Misappropriation of Assets Missiatements arising from Fraudulent Financial Reporting The Fraud Triangle Incentives or Pressure to Commit Fraud Opportunities to Commit Fraud Rationalizing the Fraud Risk Factors arising from Misappropriation uf Assets Risk Factors arising from Fraudulent Financial Reporting Responsibility for the Prevention and Detection of Fraud Review Questions and Exercises ERRORS AND IRREGULARITIES IN THE TRANSACTION CYCLES OF THE BU: ENTITY Expected Learning Outcomes ESS Sales and Collections Cycle ‘Errors in Recording Sales Collections Transactions Frauds in sales and Collections Acquisition and Payments Cycle ‘Errors in the Acquisitions and Payments Cycle ‘Frauds in the Acquisitions and Payments Cycle Payroll and Personnel Cycle Errors Frauds involving Payroll Review Questions and Exercises 217 218 218 218 219 219 20 220 221 2m 224 26 227 232 233 233, 233 235 235 236 237 237 237 239 27 232xii INTERNAL CONTROL, AFFECTING ASSETS 244 Chapter 16 244 Expected Learning Outcomes ‘ontrol over Cash Transactions 245 at Misstatements — Cash Receipts 246 Potential Misstatements — Cash Disbursements 248 Internal Conirol over Financial Investments 249 Potential Misstatements — Financial Investments 250 Internal Control over Receivables 251 Sources and Nature of Notes Receivable 251 Internal Control of Accounts Receivable and Revenue 251 Control Environment 252 Potential Misstatements — Revenue / Receivables 252 Internal Control over Notes Receivable 254 Internal Control over Inventories and Cost of Goods Sold 255 Sources and Nature of Inventories and Cost of Goods Sold 255 Potential Misstatements — Inventory / Cost of Goods Sold 256 Internal Control over Property, Plant and Equipment 257 Potential Misstatements — Investments in Property, Plant and Equipment 259 Review Questions and Exercises 260 Chapter 17 INTERNAL CONTROL AFFECTING LIABILITIES AND EQUITY 264 Expected Learning Outcomes 264 Internal Control over Accounts Payable 265 Potential Misstatements — Accounts Payable 266 Internal Control over Other Debts 267 Internal Control over Debt Authorization by the Board of Directors 267 Use of an Independent Trusiee 268 tnterest Payments of Boards and Notes Payable 268 Imernal Control over Owners’ Equity 268 Internal Control on Equity 269 Control of Share Capital Transactions by the Board of Directors ; 269 Independent Registrar and Stock Transfer Agent 269 Internal Control over Dividends 270 Review Questions und Exercises aiAppendices Appendix Appendix Appendix Appendix Appendix Appendix Appendix References > cG ‘Code of Ethics for Professional Teachers International Standards for the Professional Practice of Internal Auditing International Standards of Ethical Conduct for Practitioners of Management Accounting Code of Business Conduct and Ethics of'a Telecommunications Company Code of Business Conduct and Ethics ofa Manufacturing Company Code of Business Conduct and Ethios of a Commercial Bank Partial List of Orgenizations who are actively Participating in the “Integrity Initiative” ‘Campaign against Corruption 273 281 283 287 293 aiiChapter INTRODUCTION TO CORPORATE GOVERNANCE Expected Learning Outcomes After studying the chapter, you should be able to ... ts 2. Describe what governance involves Enumerate the different contexts in which governance can be applied Name and explain the characteristics of good governance Explain the meaning, purpose and objectives of corporate governance . Know and describe the principles of effective corporate governance . Understand how the principles of good corporate governance can be applied VAYCHAPTER 1 INTRODUCTION TO CORPORATE GOVERNANCE WHAT IS GOVERNANCE? Generally, governance refers to a process whereby elements in society wield power, authority and influence and enact policies and decisions concerning public life and social upliftment. It comprises all the processes of governing - whether undertaken by the government of a country, by a market or by a network — over a social system and whether through the laws, norms, power or language of an organized society. Governance therefore means the process of decision-making and the process by which decisions are implemented (or not implemented) through the exercise of power or authority by leaders of the country and / or organizations. Governance can be used in several contexts such as ‘corporate governance, international governance, national governance and local. governance. The focus of this book is on Corporate Governance. CHARACTERISTICS OF GOOD GOVERNANCE Whatever context good governance is used, the following major characteristics should be present: Participation. Rule of Law "Accountability ooo Transparency — governance responsiveness Endy incavenst Consensus _ Oriented4 Chapter I These characteristics are briefly Participation Rule of Law Transparency Responsiveness Consensus Oriented described as follows: p, ipatic both men and women is a key cornerstone aa tes Participation could be either direct or through legitimate institutions or representatives. It is important to point out that representative democracy does not necessarily ‘mean that the concern of the most vulnerable in society would not be taken into consideration in decision making. Participation needs to be informed and organized. This means freedom of association and expression on one hand and an organized civi] society on the other hand. Good governance requires fair legal frameworks that are enforced impartially. It also requires full protection of human rights, particularly those of minorities. Impartial enforcement of laws requires an independent judiciary and an impartial and incorruptible police force. Transparency means that decisions taken and their enforcement are done in a manner that follows rules and regulations. It means that information is freely available and directly accessible to those who will be affected by such decisions and their enforcement. It also means that enough information is provided and that it.is provided in easily understandable forms and media. Good governance requires that institutions and processes try to serve the needs all stakeholders within a reasonable timeframe, Good governance requires mediation of the different interests in society to reach a broad consensus on what is in the best interest of the whole community and how this can be achieved. It also requires a broad and long-term Perspective on what is needed for sustainable human development and ‘how to achieve the goals of such development, This can only result from an understanding of the historical, cultural and social contexts of a given society or community.Introduction to Corporate Governance 5 Equity & Ensures that all its members feel that they have a stake in it Inclusiveness and do not feel excluded from the mainstream of society. This requires all groups, but particularly the most vulnerable, have opportunities to improve or maintain their well being. Effectiveness Good governance means that processes and institutions &Efficiency produce results that meet the needs of society while making the best use of resources at their disposal. The concept of efficiency in the context of good governance also covers the sustainable use of natural resources and the protection of the environment. Accountability Accountability is a key requirement of good governance. Not only governmental institutions but also the private sectar and civil society organizations must be accountable to the public and to their institutional stakeholders. Who is accountable to whom varies depending on whether decisions or actions taken are internal or external to an organization or institution. In general, an organization or an institution is accountable to those who will be affected by its decisions or actions. Accountability cannot be: enforced without transparency and the rule of law. CORPORATE GOVERNANCE: AN OVERVIEW _ Corporate governance is defined as the system of rules, practices and processes by which business corporations are directed and controlled. It basically involves balancing the interests of a company’s many stakeholders, such as sharcholders, management, customers, suppliers, financiers, government and the community. Corporate governance is a topic that has received growing attention in the public in recent years as policy makers and others become more aware of the contribution good corporate governance makes to financial market stability and economic growth. Good corporate governance is all about controlling one’s business and so is relevant, and indeed vital; for all organizations, whatever size or structure.ture specifies the distribution of rights and responsibilities among different participants in the corporation, suchas ie Seas, managers, shareholders, and other stakeholders, and spel oe a ules a procedures for making decisions on corporate affairs. By doing this, it also ves are set and the means of provides the structure through which the objecti “ attaining those objectives and monitoring performance. PURPOSE OF CORPORATE GOVERNANCE ii i i rial and te governance is to facilitate effective, entrepreneurial Prince neeen ta deliver long-term success of the company. In prudent management that can dell simple terms, the fundamental aim of corporate governance Is to enhance her stakeholders by improving shareholders’ value and protect the interests of ot! ‘ the corporate performance and accountability. It is also about what the board of directors of a company does, how it sets the values of the business firm. 6 Chapter I The corporate governance struct OBJECTIVES OF CORPORATE GOVERNANCE The following are the basic objectives of corporate governance: L. Fair and Equitable Treatment of Shareholders A corporate governance structure ensures equitable and fair treatment of all shareholders of the company. In some organizations, a group of high- net-worth individual and institutions who have a substantial proportion of their’ portfolios invested in the company, remain active through occupation of top-level positions that enable them to guard their interest. However, all shareholders deserve equitable treatment and this equity is safeguarded by a good governance structure in any organization. 2. Self-Assessment Corporate governance enables firms to assess their behavior and actions before they are scrutinized by regulatory agencies. Business establishments with a strong corporate governance system are better able to limit exposure to regulatory risks and fines. An active and independent board can successfully point out deficiencies or loopholes in the company operations and help solve issues internally on a timely basis.Introduction to Corporate € 1 Increase Shareholders Wealth snore corporate governanee’s main objective is to protect the long- N interests of the shareholders. Firms with strong corporate Seer are seen to have higher valuation attached to their 1a 'y businessmen. This only reflects the positive perception that good Corporate governance induces potential investors to decide to invest in a company, 4. Transparency and Full Disclosure Good corporate governance aims at ensuring a higher degree of transparency in an organization by encouraging full disclosure of transactions in the company accounts. BASIC PRINCIPLES OF EFFECTIVE CORPORATE GOVERNANCE Effective corporate governance is transparent, protects the rights of shareholders and includes both strategic and operational risk management. It is concerned in both the long-term earning, potential as well as actual short-term earnings and holds directors accountable for their stewardship of the business. The basic principles of effective corporate governance are threefold as presented below: Transparency and Full Disclosure Is the board telling us what is going on? Accountability Is the board {aking responsibly? Good and Effective Governance Corporate Control Is the board doing the tkght thing?i ions i conte ce and Positive answers to the following questions indicate a firm's eae compliance with the basic principles of good corporate governance: A. Transparency and Full Diselosure ©. Does the board meet the information needs of investment communiti + Does it safeguard integrity in financial reporting? Does the board have sound disclosure policies and practices? > Does it make timely and balanced disclosure? > Can an outsider meaningfully analyze the organization's actions and performance? B. Accountability Does the board clarify its role and that-of management? > Does it promote objective, ethical and responsible decision making? > Does it lay solid foundations for management oversight? > Does the composition mix of board membership ensure an appropriate range and mix of expertise, diversity, knowledge and added value? > Is the organization’s senior official committed to widely accepted standards of correct and proper behavior? . C. Corporate Control ¢ . Has the board built long-term sustainable growth in shareholders’ value for the corporation? ° Does it create an environment to take risk? » Does it encourage enhanced performance? > Does it recognize and manage risk? > Does it remunerate fairly and responsibly? > Does itrecognize the legitimate interests of stakeholders? > Are conflicts of interest avoided such that the organization's best interests prevail at all times?Inuroduction lo Corporate Governance 9 ILLUSTRATIVE APPLICATION OF THE BASIC PRINCIPLES OF CORPORATE GOVERNANCE AND BEST PRACTICE RECOMMENDATIONS Principles of Good Corporate Governance Best Practice Recommendations 1, Acompany should lay solid foundation for management and oversight. It should recognize and publish the respective roles ‘and responsibilities of board and management. "Ta, Formalize and disclose the functions reserved to the board and those delegated to management. 2. — Structure the board to add value. Have 2 board of an effective composition, size and ‘commitment to adequately discharge its responsibilities and duties. , 2a. A board should have independent directors. 2b. The roles of chairperson and chief ‘executive officer should not be exercised by the same individual. 2-b. The board should establish a nomination committee 3, Promote ethical and responsible decision- «making, Actively promote ethical and responsible decision-making. 3-a. Establish a code of conduct to guide the directors, the chief executive officer (or equivalent), the chief financial officer (or equivalent) and any other key executives aso © The practices necessary to ‘maintain confidence in the company's integrity; and © The responsibilty and accountability of individuals for reporting and investigating reports of unethical practices 3b. Disclose the policy concerning trading jin company securities by directors, officers and employees.10 Chapter I J, Safeguard integrity in financial reporting. Have a structure to independently verify and safeguard the integrity of the company's financial reporting, Fa, Require the chief executive of (or equivalent) and the chief financial officer (or equivalent) to state in writing to the board 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. 4b. The board should establish an audit committee. 4-c. Structure the audit committee so that it consists of: * Only non-executive or independent directors; ¢ Anindependent chairperson, who is not chairperson of the board; and © Atleast three (3) members. 5. Make imely and balanced disclosure. Promote timely and balanced disclosure of all material matters concerning the company. 5-a. Establish written policies and procedures designed to ensure compliance with IFRS. Listing Rule disclosure requirements. and to ensure accountability at a senior management level for compliance. 5b. s [e- Respect the rights of shareholders and facilitate. the effective exercise of those rights. 6-a. Design and disclose a communicatons 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. bb.Introduction to Corporate Governance _\1 Recognize and mana ige risk. Establish a sound system of risk oversight and ‘management and internal control, Ta. The board or appropriate board committee should establish policies on risk oversight and management. The chief executive officer (or equivalent) and the chief financial officer (or equivalent) should state to the board in miting that: © Thestatement given in accordance with best practice recommendation 4-a (the integrity of financial statements) is founded on a sound system of risk management and internal compliance and control which implements the policies adopted by the board; and © The company's risk management and intemal compliance and control system is operating efficiently in all material respects. 2 Encourage enhanced performance. Fairly review and actively encourage enhanced board and management effectiveness. . Disdose Ihe process for performance evaluation ofthe board, its committees and individual directors, and key executives. 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 ce Provide disclosure in relation to the ‘company/s remuneration policies to enable investors to understand: © The costs and benefits of those policies; and The link between remuneration paid to crectors and key executives and corporate performance. 9-b. The board should estabish a remuneration committee Clearly distinguish the structure of non- executive director's 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, oo. 912 Chapter 1 10. Recognize the legitimate interests of stakeholders. Recognize legal and other 10-a. Establish and disclose 4 code of conduct to guide compliance with legal and other obligations to legitimate Se a dere. obligations to all legitimate stakeholders. So acahioiders! REVIEW QUESTIONS Questions a What does governance mean? Explain whether the following statement is trae or false. “Governance is exercised only by the goverriment of a country”. Explain how governance can be used in the following contexts and give appropriate examples: a. national governance b. local governance c. corporate governance d. international governance Explain briefly the cight (8) basic characteristics of good governance. Transparency and accountability are synonymous. Explain whether the statement is correct or not. Explain whether the following statement is true or false. “Responsiven usually results to effectiveness and. efficiency”. Define corporate governance. What does corporate governance structure involve? State the purpose of corporate governance. . Explain the basic objectives of corporate governance. - Explain the three basic principles of effective corporate governance,ernance 13 Multiple Choice Questions L, The basic principle of “transparency and full disclosure” for effective corporate governance responds positively to the following questions except, a. Does the board of directors safeguard integrity in financial reporting? b. Does the board meet the information needs of investment communities? ©. Can an outsider meaningfully analyze the firm’s actions and performance? d. Has the board -built long-term sustainable growth in sharcholders* value for the corporation? The basic principle of “accountability” for effective governance answers the following questions positively, except if a, Does the board recognize and manage risk? b. Does the board lay solid foundations for management oversight? c. Does the’ composition mix of board membership ensure an appropriate range and risk of expertise diversity, knowledge added value? d. Does the board promote objective, ethical and responsible decision making? “Transparency and full disclosure” principle advocates the following except . a. Sound disclosure policies and practices b. Solid foundations for management oversight c. Meeting the information needs of investment communities d. Safeguards integrity in financial reporting ‘The ‘rights of shareholders can be effectively upheld through the following measures except a, By establishing an audit committee _ b, By designing and disclosing a communications strategy to promote affective communication with shareholders. c. By encouraging active participation at general meetings. d. By requiring the external auditor to attend the annual general meeting and to answer questions about the audit.4 $. 6. , 7. a b. c. Chapter 1 To safeguard integrity in financial reporting, er the business firm should do the following except a, ad Establish an audit committee . Request the external auditor to attend the annual general meeting Disclose the functions reserved to the board and those delegated to management 7 i ding in company securities by irectors, officers and employees. To encourage enhanced performance by the board and management, it is recommended that the following should be adopted except Disclosure of the process for performance evaluation of the board, its committees, individual directors and by executives. A remuneration committee Distinguish between non-executive director’s remuneration from that of executives. Establish policies on risks oversight and management The characteristic of good governance where fair legal framework are enforced impartially is Participation Rule of Law Equity d. AccountabilityCORPORATE GOVERNANCE RESPONSIBILITIES AND ACCOUNTABILITIES Expected Learning Outcomes After studying the chapter, you should be able to... i Explain the relevance of good governance, to both large publicly-listed companies and SMEs Know the relationship between shareholders or owners and other stakeholders Identify the parties involved in Corporate Governance Describe the respective broad rate and specific responsibilities of the different parties in a corporate setting wussCHAPTER 2 CORPORATE GOVERNANCE RESPONSIBILITIES AND ACCOUNTABILITIES INTRODUCTION Many of the characteristics of good governance described in Chapter | are relevant to both SME's and large listed public companies. As an organization grows in size and influence, these issues become increasingly important. However, it is also important to recognize that good corporate governance is based on principles underpinned by consensus and continually developing notions of good practice. There are no absolute rules which must be adopted by all organizations. "There is no simple universal formula for good governance". Instead emphasis is many localities, has been to encourage organizations to give appropriate attention to the principles and adopt approaches which are tailored to the specific needs of an organization at a given point in time. When corporate governance is discussed, it is often spoken of in terms of a company's corporate governance framework. The key elements within an effective governance framework, and the issues relating to each element, are set out on the following pages and are relevant to organizations large and small, in both the private and the public sectors. The table provides a useful structure for any company to consider its own approach to corporate governance and the matters which may assist it to achieve its strategic objectives. Many of the matters listed may not be directly relevant in all situations and some may not, in particular circumstances, be within the board's control, but it provides a useful context in which any organization can consider its governance needs so that they might be most appropriately addressed. The essence of any system of good corporate governance is to allow the board and management the freedom to drive their organization forward and to exercise that freedom within a framework of effective accountabilCorporate Governance Responsibilities and Accoumabilities V7. RELATIONSHIP BETWEEN S| . naiah ENG OTHER STAKEHOLDERS HAREHOLDERS / OWNER(S) AN! The Telationship Between the shareholders / owners, management and other stakeholders in a corporation is shown below. Public Corporation Stakeholders Board of Shareholders 7 Directors Owners Executive External Delegate Management Auditors Shareholders / Owners » Responsibilities | [Operational Regulators Management interval Society and Auditors Others Governance starts with the shareholders/owners delegating responsibilities through an elected board of directors to management and, in turn, to operating units with oversight and assistance from internal auditors. The board of directors and its audit committee oversee management and, in that role, are expected to protect the shareholders’ rights. However, it is important ‘to recognize that management is part of the governance framework; management can influence who sits on the board and the audit committee as well as other governance controls that might be put into place. In return for the responsibilities (and power) given to management and the board, governance demands accountability back through the system to the shareholders. However, the accountabilities do not extend only to the shareholders. Companies also have responsibilities to other stakeholders. Stakeholders can be anyone who is influenced, whether directly or indirectly, by the actions of a company. rd have responsibilities to act within the laws of society Management and the boa i and to meet various requirements of creditors, employees and the stakeholders.18 Crspcer 2 A broad group of stakeholders has an interest in the quality of corners governance because it has a relationship to economic performance a the quality of financial reporting. For example, it is likely that many employees have significant funds invested in pension plans. Those pension plans are designed to protect the financial interests of those employees in their retirement. We use the word society in the diagram to indicate those broad interests. In a similar fashion, employees and creditors have a vested interest in the organization and how it is governed. Regulators are a response to society's wishes to. ensure that organizations, in their pursuit of returns for their owners, act responsibly and operate in compliance with relevant laws. While shareholders / owners delegate responsibilities to various parties within the corporation, they also require accountability as to how well the resources that have been entrusted to management and the board have been used. For example, the owners want accountability on such things as: © Financial performance * Financial transparency — financial statements that are clear with full disclosure and that reflect the underlying economics of the company. * Stewardship, including how well the company protects and manages the resources entrusted to it. * Quality of internal control * Composition of the board of directors and the nature of its activities, including information on how well management incentive systems are aligned with the shareholders’ best interests. ‘The owners want disclosures from management that are accurate and objectively verifiable. For instance, management has 4 respensibility to provide financial reports, and in some cases, reports on intemal control effectiv eness. Management bas always had the primary responsibility for the accuracy and completeness of an organization's financial statemertts. From a financial reporting perspective, it is management's responsibility to: © Choose which accounting principles best Portray the economic substance of company transactions. * Implement a system of internal control that assures completeness and accuracy in financial reporting. ° Ensure that the financial statements contain accurate and complete disclosure.Corporate Governance Responsibilities and Accountabitities 19 PARTIES INVOLVED IN CORPORATE GOVERNANCE: THEIR RESPECTIVE BROAD ROLE AND SPECIFIC RESPONSIBILITIES Corporate governance and financial reporting reliability are receiving considerable attention from a number of parties including regulators, standard setting bodies, the accounting profession, lawmakers and financial statement users. Party” Overview of Responsibilities T._ Shareholders Broad Roe: Provide effective oversight through election of board members, ‘approval of rgjor initiatives such as buying or selling stock, annual reports on management compensation, from the board. 2. Board of Directors Broad Role: “The major representative of stockholders to ensure that the organization fs run aecording to the organization's charter and that there is proper accountabliy. Specific acti tude among others: 4, Overall Operations © Establishing the organization's vision, mission, values and ethical standards, * Delegating an appropriate level of authority to management © Demonstrating leadership. «Assuming responsibilty for the business relationship with CEO including his or her appointment, succession, performance remuneration and dismissal. Overseeing aspects of the employment of the management team including management remuneration, performance and succession planning. = Recommending auditors and new directors to shareholders. Ensuring effective communication with shareholders other stakeholders. © Crisis management. «Appointment of the CFO and corporate secretary.20 Chapter 2 + 2, Performance 3. Complianes / Legal Conformance + compliance including compliance with accounting Ensuring the organization's long term viability and enhancing the financial position. : Formulating and overseeing Implementation of corporate strategy. ; Approving the plan, budget and corporale policies. ‘Agresing key performance’ indicators (KPIs) Monitoring / assessing assessment, performance of the organization, the board itself, management and major projects. ean the risk management framework and monitoring business risks, ‘ Monitoring developments in the industry and the operating environment. - Oversight of the and organization, including its control and accountabilily systems, Approving and monitoring the progress of major capital expenditure, capital management and acquisitions and divestitures. Understanding and protecting the organization's financial position, Requiring and monitoring legal and regulatory standards, unfair trading legislations, occupational health and safety and environmental standards, Approving annual financial reports, annual reports and other public docurnents / sensitive reports, Ensuring an effective system of internal controls exists and is operating as expected. 3. Non-Executive or Independent Directors Broad Role. ‘The same as the broad role of the entire board of directors Specific activities include emong others: o understand the organization, its business, its operating environment and its financial position, to apply expertise and skills in the organization's best interests, o assist management to keep performance objectives al the top of its agenda,Corporate Governance Responsibilities and Accountabitities 2 © to understand that his/her role is not to act 2s auditor, nor o act as a member of the management team, . © to respect the collective, cabinet nature of the board! decisions, # to prepare for and altend board meetings, © toseek information on a timely basis to ensure that helshe is in a position to contribute to the discussion when a matter comes before the board, or alert the chairman in advance to the need for further information in relation to a particular matter, and * to ask appropriate quostions relative to operations. T—Management Broad Role: Operations and accountabtity. Manage the organization effectively, provide accurate and timely reports to shareholders and other stakeholders, - iners: ‘recommend the strategic direction and translate the strategic plan into the operations ofthe business ‘© manage the company's human, physical and financial ~ fesources to achieve the organization's objectives — run the business «assume day to day responsbiliy for the organization's conformance with relevant laws and regulations and its compliance framework ‘« develop, implement and manage the organization's risk management and intemal control frameworks «develop, implement and update povicies and procedures «be alert io relevant trends in the industry and the onganization's operating environment 4 provide information to the board ® acta conduit between the board and the organization e developing financial and other reports that meet public, stakeholder and regulatory requirements.22_Chapter 2 [5 Aucit Committees ofthe Board of Directors Broad Role: Provide oversight of the internal and external audit function and the process of préparing the annual financial statements as well as public reports on internal control, Specific acl include among others: * Selecting the extemal audit firm ‘* Approving any non-audit work performed by the audit firm ‘* Selecting and / or approving the appointment of the Chief Audit Executive (Internal Auditor) * Reviewing and approving the scope and budget of the internal audit function * Discussing audit findings with intemal auditor and external auditor and advising the board (and management) on specific actions that should be taken 6 Regulators a Board of Accountaricy Broad Role; Set accounting and auditing standards dictating underlying financial reporting and auciting concepts; sel the expectations of audit quality and accounting quality. ‘Specific activities include among others: Conducting CPA Licensure Board Examinations Approving accounting principles Approving auditing standards Interpreting previously issued standards implementing quality control processes to ensure audit quality * Educating members on audit and accounting Tequirements °Corporate Governance Responsibilities and Accountabilities 2% b. Securities and | Brond Rola: | Exchange Commission Enwure the avcurasy,tinalingss and fainess of putlic reporting of | financial and other information for publi vompanis, ‘Shocific activities include among others: | © Reviewing flings with the SEC © Interacting with the Financial Reporting Standards Council in setting accounting standards * Specifying independence standards required of auditors that report on public financial statements © IWentity corporate frauds, investigate causes, and | suggest remedial actions 7. Extermal Auditors Broad Role: Performn audits of company financial statements to ensure that the statements are free of material misstatements including | misstaternents that may be due to fraud, ‘Specific activities include among others: | * Auditof public company financial statements + Audits of nonpublic company financial statements * _ Other services such as tax or consuling 8. Internal Auditors Broad Role: Perform audits of companies for compliance with company policies and laws, audits to evaluate the efficiency of operations, and periodic evaluation and tesis of controls. Specific activities include among others: © Reporting results and analyses to management ((ncluding operational management) and audit committees # Evaluating internal controis24 Chapter? REVIEW QUESTIONS Questions LL y ws “Small business enterprises do not need good governance Do you agree? Explain. Does good governance require absolute rules that must be adopted by all organizations? ‘What is the essence of any system of corporate governance? Where does the board of directors derive its authority? To whom is the board of directors accountable? On what aspects do shareholders demand accountability from the board of directors? What is management’s responsibility as far.as financial reporting is concerned? Describe the broad role of the shareholders in a corporation. Describe the broad role of the Board of Directors. 10. What are the specific activities of the board of directors? Multiple Choice Questions Approving annual financial reports and other public documents ‘are specific responsibilities of a. Management b. Board of directors c. Shareholders d. EmployeesCorporate Governance Responsibilities and Accountabilities 25 2. Providing oversight of the internal and external audit function, the Process of preparing the annual financial statements and public reports on internal control are the responsibility of a Board of directors b. Chief executive officer Chief financial officer 4. “Audit committee of the board of directors Who is responsible for ensuring the accuracy, timeliness of public reporting of financial and other information for public companies? a. External auditors b. Seéurities and exchange commission c. Shareholders d. Board of Accountancy 4. Who performs audit of companies for compliance with company policies and laws, audits efficiency of operations and periodic evaluation and tests of controls? a. External auditors b. Internal auditors c. Commission on audit d. Chief accountant 5. An independent director is expected to a. Apply expertise and skills in the corporations best interest b. Asset management to keep performance objectives at the top of its agenda c. Respect the collective, cabinet nature of the board’s decision d. Act as conduit between the board and the organizationem SECURITIES AND EXCHANGE COMMISSION (SEC) CODE OF CORPORATE GOVERNANCE Expected Learning Outcomes After studying the chapter, you should be able to... 1. Uriderstand the need for the Code of Governance for’ publicly-listed companies. . 7 2. Know the sixteen (16) governance responsibilities of the Board of Directors of publicly-listed companies Explain the meaning of "comply and explain’ approach Describe the three aspects of the Code, namely * Principles * Recommendations + Explanations 5. Know what constitutes a competent board and how can it be established. 6. Understand the composition, functions and responsibilities of the board committees that can be established such as the * Audit Committee * Corporate Governance Committee * Board Risk Oversight Committee * Related Party Transaction Committee 7. Know how the directors can show full commitment to the company 8. Understand how independence and objectivity of the board can be reinforced and enhanced. 9. Describe how the performance and effectiveness of the board can be assessed. AseCHAPTER 3 SEC CODE OF CORPORATE GOVERNANCE FOR PUBLICLY-LISTED COMPANIES (“CG Code for PLCs”) Securities and Exchange Commission SEC MC No. 19, Series of 2016 * On November 10, 2016, the Securities and Exchange Commission approved the Code of Corporate Governance for publicly-listed companies. Its goal is to help companies develop and sustain an ethical corporate culture and keep abreast with recent deyelépments in corporate governance. One of its salient provisions is for publicly-listed companies to establish a code of business conduct and submit a new manual on Corporate Governance that would “provide standards for professional and ethical behavior as well as articulate acceptable and unacceptable conduct and practices”. The Board of Directors is required to implement the code and make sure that management and employees comply with the internal policies set. While many companies have already developed their Code of Business Conduct and Ethics, the real challenge, is in its implementation and monitoring compliance. The SEC Code of Corporate Governance is published in this book, not only to acquaint readers particularly future professionals and businessmen of these rules and regulations but also to serve as reference and guidelines to currently existing publicly-listed corporations. (Source: www.sec.gov-ph)28 Chapter 3 CODE OF CORPORATE GOVERNANC : PUBLI Y-LISTED COMPANIES THE BOARD'S GOVERNANCE RESPONSIBILITIES Principle 2: Principle 3: Principle 4: Principle 5: Principle 6: Principle 7: ‘The company should be headed by a competent, working, boord to foster the long-term success of the corporation, and fo sustain its competitiveness and profitability in a manner cons at wih its corporate objectives and the long-term best interests of its shareholders and other stakeholders, responsibilities and accountabilities of the the company’s articles and by- \d guidelines should be I] as to stockholders The fiduciary roles, Board as provided under the law, laws, and other legal pronouncements an clearly made known to all directors as wel and other stakeholders, Board committees should be set up to the extent possible to support the effective performance of the Board’s functions, particularly with respect to audit, risk management, related party transactions, and other key corporate governance concerns, such as nomination and remuneration, The composition, functions and responsibilities of all committees established should be contained in a publicly available Committee Charter, To show full commitment to the company, the directors should devote the time and attention necessary to properly and effectively perform their duties and responsibilities, including, sufficient time to be familiar with the corporation’s business. The Board shauld endeavor to exercise objective and independent judgment on all corporate affairs, ‘The best measure of the Board’s effectiveness is through an assessment process. The Board should regularly carry out evaluations to appraise its performance as a body, and assess whether it possesses the right mix of backgrounds and competencies, Members of the Board are duty-bound to apply high ethical standards, taking into account the interests of all stakeholders,SEC Code of Corporate Governance _29 DISCLOSURE TRANSPARENCY Principle 8: The company should establish corporate disclosure policies and Procedures that are practical and in accordance with best Practices and regulatory expectations. Principle 9: The Company should establish standards for the appropriate selection of an external auditor, and exercise effective oversight of the same to Strengthen the external auditor’s independence and enhance audit quality. Principlel0: The company should ensure that material and reportable non- financial and sustainability issues are disclosed. Principle 11: The company should maintain a comprehensive and cost- efficient communication channel for disseminating relevant information. This channel is crucial for informed decision- making by investors, stakeholders and other Interested users. INTERNAL CONTROL SYSTEM AND RISK MANAGEMENT FRAMEWORK Principle 12: To ensure the 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 inci " mpany should treat all shareholders fairly and equitably, arc pre ae ne eevee recognize, protect and facilitate the exereise of theit rights.30__ Chapter 3 DUTIES TO STAKEHOLDERS holders established by law, by contractual voluntary commitments must be rights and/or interests are at ‘the opportunity to obtain ion of their rights. Principle 14: The rights of stakel relations and through respected. Where stakeholders’ stake, stakeholders should have prompt effective redress for the violati Principle 15: A mechanisin for employee participation should be developed & create a symbiotic environment, realize the company’s goals and participate in its corporate governance processes. The company should be socially responsible in all its dealings Principle 16: 2 with the communities where it operates. It should ensure that its interactions serve its environment and stakeholders in a posi and progressive manner that is fully supportive of its comprehensive and balanced development. INTRODUCTION 1. The Code of Corporate Governance is intended to raise the corporate governance standards of Philippine corporations to a level at par with its regional and global counterparts. The latest G20/OECD1 Principles of Corporate Governance and the Association of Southeast Asian Nations Corporate Governance Scorecard were used as key reference materials in the drafting of this Code. 2, The Code will adopt the “comply or explain” approach. This approach combines voluntary compliance with mandatory disclosure. Companies do not have to comply with the Code, but they must state in their annual corporate governance reports whether they comply with the Code provisions, identify any areas of non- compliance, and explain the reasons for non-compliance. 3. The Code is arranged as follows: Principles, Recommendations and Explanations. The Principles can be considered as high-level statements of corporate governance good Practice, and are applicable to all companies. ,» SEC Code of Corporate Governance _31 - The Recommendations are objective criteria that are intended to ‘dentfy the specific features of corporate governance good practice C are recommended for companies operating according to the ode. Alternatives to a Recommendation may be justified in particular circumstances if good governance can be achieved by other means. When a Recommendation is not complied with, the company must disclose and describe this non-compliance, and explain how the overall Principle is being achieved. The alternative should be consistent with the overall Principle. Descriptions and explanations should be written in’ plain language and in a clear, complete, objective and precise manner, so that shareholders and other stakeholders can assess the company's governance framework. The Explanations strive to provide companies with additional information on the recommended best practice. . This Code does not, in any way, prescribe a “one size fits all” framework. It is designed to allow boards some flexibility in establishing their corporate governance arrangements. Larger - companies and financial institutions would generally be expected to follow most of the Code’s provisions, Smaller companies may decide that the costs of some of the provisions outweigh the benefits, or are less relevant in their case. Hence, the Principle of Proportionality is considered in the application of its provisions. |. The Code of Corporate Governance for publicly listed companies is the first of a series of Codes that is intended to cover all types of corporations in the Philippines under supervision of the Securities and Exchange Commission (SEC). |. Definition of Terms: Corporate Governance ~ the system of stewardship and control to guide organizations in fulfilling zeit longderm economic, moral Fagal and social obligations towards their stakeholders. Corporate governance is a system of direction, feedback and control sais regulations, performance standards and ethical guidelines to hold the Board and senior management accountable for ensuring veel behavior — reconciling long-term customer satisfaction with errschotder value —to the benefit of all stakeholders and society.2 Chapter 3 Its purpose is to maximize the organization's long-term aa creating sustainable value for its shareholders, stakeholders and the nation. Board of Directors - the governing body elected by the stockholders that exercises the corporate powers of a corporation, conducts all its business and controls its properties. cutives given the authority by the Management — a group of exe 2 r ane the policies it has laid down in the Board of Directors to implement C conduct of the business of the corporation. Indeperident director — a person who is independent of management and the controlling shareholder, and is free from any business or other relationship which could, or could reasonably be perceived to, materially interfere with his exercise of independent judgment in carrying out his responsibilities as a director. Executive director — a director who has executive responsibility of day-to-day operations of a part or the whole of the organization. Non-executive director — a director who has no executive responsibility and does not perform any work related to the operations of the corporation. Conglomerate — a group of corporations that has diversified business activities in yaried industries, whereby the operations of such businesses are controlled and managed by a parent corporate entity. Internal control — a process designed and effected by the board of directors, senior management, and all levels of personnel to provide reasonable assurance on the achievement of objectives through efficient and effective operations; reliable, complete and timely financial and management information; and compliance with applicable laws; regulations, and the organization's policies and procedures. EEE 3 Organization for Economic Co-operation and DevelopmentSEC Code of Corporate Governance 33 Enterprise Risk Management — a process, effected by an entity’s Board of Directors, management and other personnel, applied in Strategy setting and across the enterprise that is designed to identify potential events that may affect the entity, manage risks to be within its risk appetite, and provide reasonable assurance regarding the achievement of entity objectives? Related Party — shall cover the company’s subsidiaries, as well as affiliates and any party (including their subsidiaries, affiliates and special purpose entities), that the company exerts direct or indirect control over or that exerts direct or iridirect control over the company; the company’s directors; officers; shareholders and related interests (DOSRI), and their close family members, as well as corresponding persons in affiliated companies. This shall also include such other person or juridical entity whose interest may pose a potential conflict with the interest of the company. Related Party Transactions — a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged. It should be interpreted broadly to include not only transactions that are entered into with related parties, but also outstanding transactions that are entered into with, an unrelated party that subsequently becomes a related party. Stakeholders — any individual, organization or society at large who can either affect and/or be affected by the company’s strategies, policies, business decisions‘and operations, in general. This includes, among others, customers, creditors, employees, suppliers, investors, as well as the government and community in which it operates. Ramone Organi 7 Committee uf Sponsoring Organi: Framework)34__ Chapter 3 THE BOARD'S GOVERNANCE RESPONSIBILITIES 1. ESTABLISHING A COMPETENT BOARD Principle The company should be headed by a competent, working board to foster the long-term success of the corporation, and to sustain its competitiveness and profitability in a manner consistent with its corporate objectives and the long-term best interests of its shareholders and other stakeholders. Recommendation 1.1 The Board should be composed of directors with a collective working knowledge, experience or expertise that is relevant to the company’s industry/sector. The Board should always ensure that it has an appropriate mix of competence and expertise and that its members remain qualified for their positions individually and collectively, to enable it to fulfill its roles and responsibilities and respond to the needs of the organization based on the evolving business environment and Strategic direction. Explanation Competence can be determined from the collective knowledge, experience and expertise of each director that is relevant to the industry/sector that the company is in. A Board with the necessary knowledge, experience and expertise can properly perform its task of overseeing management and governance of the corporation, formulating the corporation’s vision, mission, strategic -objectives, policies and procedures that would guide its activities, effectively monitoring management's performance and supervising the Proper implementation of the same, In this regard, the Board sets qualification standards for its members to facilitate the selection of potential nominees for board seats, and to serve as a benchmark for the evaluation of its performance,SEC Code of Corporate Governance _ 38 Recommendation 1.2 The Board should be composed ofa majority of non-executive directors Who possess the necessary qualifications to effectively participate and help secure objective, independent judgment on corporate affairs and to substantiate proper checks and balances. Explanation The right combination of non-executive directors (NEDs), which include independent directors (IDs) and executive directors (EDs), ensures that no director or small group of directors can dominate the decision-making process. Further, a board composed of a majority of NEDs assures protection of the company’s interest over the interest of the individual shareholders. The company determines the qualifications of the NEDs that enable them to effectively participate in the deliberations of the Board and carry out their roles and responsibilities. Recommendation 1.3 The Company should provide in its Board Charter and Manual on Corporate Governance a policy on the training of directors, including an orientation program for first-time - directors and relevant annual continuing training for all directors. Explanation The orientation program for first-time directors and relevant annual continuing training for all directors aim to promote effective board performance and continuing qualification of the directors in carrying-out their duties and responsibilities. It is suggested that the orientation program for first-time directors, in any company, be for at least eight hours, while the annual continuing training be for at least four hours. All directors should be properly oriented upon joining the board. This ensures that new members are appropriately apprised of their duties and responsibilities, before beginning, their directorships. The orientation program covers SEC-mandated topics on corporate governance and an introduction to the company’s business, Articles of Incorporation, and Code of Conduct. It should be able to meet the specific needs of the36 Chapter 3 nd aid any new directo company and the individual directors 4! effectively performing his or her functions. fl other hand, makes The annual continuing training progr eet ne developments certain that the directors are continuously 1m ie a aing tale va the business and regulatory environments, "4. governance relevant to the company. It involves etl a jnternal controls, risk matters relevant to the company, including 206) - oouraged that inabili is management, sustainability and strategy- It ern companies assess their own training and developer determining the coverage of their continuing training program. Recommendation 1.4 The Board should have a policy on board diversity. Explanation Having a board diversity policy is a move to avoid groupthink and ensure that optimal decision-making is achieved. A board diversity policy is not limited to gender diversity. It also includes diversity in age, ind knowledge. On gender ethnicity, culture, skills, competence ai diversity. policy, a good example is to increase the number of female directors, including female independent directors. Recommendation 1.5 The Board should ensure that it is assisted in its duties by a Corporate Secretary, who should be a separate individual from the Compliance Officer. The Corporate Secretary should not be a member of the Board of Directors and should annually attend a training on corporate governance. Explanation The Corporate Secretary is primarily responsible to the corporation and its shareholders, and not to the Chairman or President of the Company and has, among others, the following duties and responsibilities: a, Assists the Board and the board committees in the conduct of their meetings, including preparing an annual schedule of Board andSEC Code of Corporate Governance _37 committee meetings and the annual board calendar, and assisting the chairs of the Board and its committees to set agendas for those meetings; Safekeeps and preserves the integrity of the minutes of the meetings of the Board and its committees, as well as other official records of the corporation; Keeps abreast on relevant laws, regulations, all governance issuances, relevant industry developments and operations of the corporation, and advises the Board and the Chairman on all relevant issues as they ari Works fairly and objectively with the Board, Management and stockholders and contributes to the flow of information between the Board and management, the Board and its committees, and the Board and its stakeholders, including shareholders; Advises on the establishment of board committees and their terms of reference; Informs members of the Board, in accordance with the by-laws, of the agenda of their meetings at least five working days in advance, and ensures that the members have before them accurate information that will enable them to arrive at intelligent decisions on matters that require their approval; Attends all Board meetings, except when justifiable causes, such as illness, death in the immediate family and serious accidents, prevent him/her from doing so; Performs required administrative functions; Oversees the drafting of the by-laws and ensures that they conform with regulatory requirements; and Performs such other duties and responsibilities as may be provided by the SEC.Chap Recommendation 1.6 38 ‘The Board should ensure that it is assisted in its duties by a Compliance Officer, who should have a rank of Senior Vice President or = equivalent position with adequate stature and authori 2 oe corporation, The Compliance Officer should not be a member of the Board of Directors and should annually attend a training on corporate governance. Explanation . The Compliance Officer is a member of the company’s management team in charge of the’ compliance function, Similar to the Corporate Secretary, he/she is primarily liable to the corporation and its shareholders, and not to the Chairman or President of the company. He/she has, among others, the following duties and responsibilities: a. Ensures proper onboarding of new directors (i.e., orientation on the company’s business, charter, articles of incorporation and by-laws, among others); b. Monitors, reviews, evaluates and ensures the compliance by the corporation, its officers and directors with the relevant laws, this Code, rules and regulations and all governance issuances of regulatory agencies; c. Reports the matter to the Board if violations are found and recommends the imposition of appropriate disciplinary action; d. Ensures the integrity and accuracy of all documentary submissions to regulators; e. Appears before the SEC when summoned in relati , with this Code; ion to compliance f. Collaborates with other departments to i c te properly addres: issues, which may be subject to investigation; szonmplanice g. Identifies possible areas of compliance issues resolution of the same; P andor towards theSEC Code of Corporate Governance _ 39 Ensures the attendance of board members and key officers to relevant trainings; and i. Performs such other duties and responsibili by the SEC. as may be provided 2. ESTABLISHING CLEAR ROLES AND RESPONSIBILITIES OF THE BOARD Principle The fiduciary roles, responsibilities and accountabilities of the Board as provided under the law, the company’s articles and by-laws, and other legal pronouncements and guidelines should be clearly made known to all directors as well as to shareholders and other stakeholders. Recommendation 2.1 The Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the company and all shareholders. Explanation There are two key elements of the fiduciary duty of board members: the duty of care and the duty of loyalty. The duty of care requires board members to act on a fully informed basis, in good faith, with due diligence and care. ‘The duty of loyalty is also of central importance; the board member should act in the interest of the company and all its shareholders, and not those of the controlling company of the group or any other stakeholder. Recommendation 2.2 The Board should oversee the development of and approve the company’s business objectives and strategy, and monitor their implementation, in order to sustain the company’s long-term viability and strength.40 Chapter 3 Explanation According to the OECD, the Board should review i ape ea strategy, major plans of action, risk manageme : Pp ri eruice procedures, annual budgets and business plans; tf cfoemante objectives; monitor implementation and Sore pate ane ‘oversee major capital expenditures, acquisitions i ve See eee strategic policies and objectives translate to the © Pe ee identification and prioritization of its goals and guidance o1 achieve them. This creates optimal value to the corporation. Recommendation 2.3 ‘The Board should be headed by a competent and qualified Chairperson. Explanation ‘The roles and responsibilities of the Chairman include, among others, the following: a. Makes certain that the meeting agenda focuses on strategic matters, including the overall risk appetite of the corporation, considering the developments in the business and regulatory environments, key governance concerns, and contentious issues that will significantly affect operations; b. Guarantees that the Board receives accurate, timely, relevant, insightful, concise, and clear information to enable it to make sound decisions; c. Facilitates discussions on key issues by fostering an environment conducive for constructive debate and leveraging on the skills and expertise of individual directors; d. Ensures that the Board sufficiently challenges and inquires on reports submitted and representations made by Management; e. Assures the availability of proper orientation for first-time directors and continuing training Opportunities for all directors; and f. Makes sure that performance of the Board is evaluated at least once a year and discussed/followed up on.SEC Code of Corporate Governance _41 Recommendation 2.4 acre tould be responsible for ensuring and adopting an effective toe planning program for directors, key officers and management ensure growth and a continued increase in the shareholders” value. This should include adopting a policy on the retirement age for directors and key officers as part of management succession and to promote dynamism in the corporation. Explanation The transfer of company leadership to highly competent and qualified individuals is the goal of succession planning. It is the Board’s responsibility to implement a process to appoint competent; professional, honest and highly motivated management officers who can add value to the.company. A good succession plan is linked to the documented roles and responsibilities for each position, and should start in objectively identifying the key knowledge, skills, and abilities required for the position. For any potential candidate identified, a professional development plan is defined to help the individuals prepare for the job (eg., training to be taken and cross experience to be achieved). The process is conducted in an impartial manner and aligned with the strategic direction of the organization. Recommendation 2.5 ‘The Board should align the remuneration of key officers and board members with the long-term interests of the company. In doing so, it Should formulate and adopt a policy specifying the relationship between remuneration and performance. Further, no director should participate in discussions or deliberations involving his own remuneration. Explanation Companies are able to attract and retain the services of qualified and competent individuals if the level of remuneration is sufficient, in line swith’ the business and risk strategy, objectives, values and incorporate measures to prevent conflicts of interest. Remuneration policies promote r sound risk culture in which risk-taking behavior is appropriate. ‘TheyAz Chapter 3 also encourage employees to act in the long-term interest of the company as a whole, rather than for themselves or their business lines only. Moreover, it is good priictice for the Board to formulate and adopt a policy specifying the relationship between remuneration and performance, which includes specific financial and non-financial metrics to measure performance and set specific provisions for employees with significant influence on the overall risk profile of the corporation. Key considerations in determining proper compensation include the following: (1) the level of remuneration is commensurate to the responsibilities of the role; (2) no director should participate in deciding ‘on his remuneration; and (3) remuneration pay-out schedules should be sensitive to risk outcomes over a multi-year horizon. For employees in control functions (e.g., risk, compliance and internal audit), their remuneration is determined independent of any business line being overseen, and performance measures are based principally on the achievement of their objectives so as not to compromise their independence. Recommendation 2.6 The Board should have and disclose in its Manual on Corporate Governance a formal and transparent board nomination and election policy that should include how it accepts nominations from minority shareholders and reviews nominated candidates. The policy should also include an assessment of the effectiveness of the Board’s processes and procedures in the nomination, election, or replacement of a director. In addition, its process of identifying the quality of directors should be aligned with the strategic direction of the company. Explanation It is the Board’s responsibility to develop a policy on board nomination, which is contained in the company’s Manual on Corporate Governance. The policy should encourage shareholders’ participation by including procedures on how the Board accepts nominations from minority shareholders. The policy should also promote transparency of the Board's nomination and election process.SRC Cate uf Corporate Governance _ 43 The nomination and election process also includes the review and evaluation of the qualifications of all persons nominated to the Board, including whether candidates: (1) possess the knowledge, skills, experience, and particularly in the case of non-executive directors, independence of mind given their responsibilities to the Board and in light of the entity’s business and risk profile; (2) have a record of integrity and good repute; (3) have sufficient time to carry out their responsibilities; and (4) have the ability to promote a smooth interaction between board members. A good practice is the use of professional poarch firms or external sources when searching for candidates to the oard. In addition, the process also includes monitoring the qualifications of the directors. The qualifications and grounds for disqualification are contained in the company’s Manual on Corporate Governance. The following may be considered as grounds for the permanent disqualification of a director: a. Any person convicted by final judgment or order by a competent judicial or administrative body of any crime that: (a) involves the purchase or sale of securities, as defined in the Securities Regulation Code; (b) arises out of the person’s conduct as an underwriter, broker, dealer, investment adviser, principal, distributor, mutual fund dealer, futures commission merchant, commodity trading advisor, or floor broker; or (¢) arises out of his fiduciary relationship with a bank, quasi-bank, trust company, investment house or as an affiliated person of any of them; b. Any person who, by reason of misconduct, after hearing, is permanently enjoined by a final judgment or order of the SEC, Bangko Sentral ng Pilipinas (BSP) or any court or administrative body of competent jurisdiction from: (a) acting as underwriter, broker, dealer, investment adviser, principal distributor, mutual fund dealer, futures commission merchant, commodity trading advisor, or floor broker; (b) acting as director or officer of a bank, quasi-bank, trust company, investment house, or investment company: () engaging in of continuing any conduct or practice in any of the capacities mentioned in sub-paragraphs (a) and (b) above, or willfully violating the laws that govern securities and, banking activities.44 M4 Chopier3 eS The disqualification should also apply if (@) such person is the subject of an order of the SEC, BSP or any court or administrative body denying, revoking or suspending any registration, license or permit issued to him under the Corporation Code, y other law administered by the Securities Regulation Code or am admin le or regulation issued by the SEC or BSP, or under any rul 0 Commission or BSP; (b) such person has otherwise been restrained to engage in any activity involving securities and banking; or (c) such person is the subject of an effective order of a self-regulatory organization suspending or expelling him from membership, participation or association with a member or participant of the organization; Any person convicted by final judgment or order by a court, or competent administrative body of an_ offense involving moral turpitude, fraud, embezzlement, theft, estafa, counterfeiting, misappropriation, forgery, bribery, false affirmation, perjury or other fraudulent acts; ‘Any person who has been adjudged by final judgment or order of the SEC, BSP, court, or competent administrative body to have willfully violated, or willfully aided, abetted, counseled, induced or procured the violation of any provision of the Corporation Code, Securities Regulation Code or any other law, rule, regulation or order administered by the SEC or BSP; Any person judicially declared as insolvent; Any person found guilty by final judgment or order of a foreign court or equivalent financial regulatory authority of acts, violations or misconduct similar to any of the acts, violations or misconduct enumerated previously; Conviction by final judgment of an offense punishable by imprisonment for more than six years, or a violation of the Corporation Code committed within five years prior to the date of his election or appointment; and Other grounds as the SEC may provide.SEC Code of Corporate Gave _ SEC Code of Corporate Governance _as In addition, the following may be grounds for temporary disqualification of a director: a. Absence in more than fifty percent (50%) of all regular and special meetings of the Board during his incumbency, or any 12-month period during the said incumbency, unless the absence is due to illness, death in the immediate family oF serious accident. The disqualification should apply for purposes of the succeeding election, b. Dismissal or termination for cause 8S director of any publicly-listed company, public company, registered issuer of securities and holder of a secondary license from the Commission. The disqualification should be in effect until he has cleared himself from any involvement in the cause that gave rise to his dismissal or termination; c. If the beneficial equity ownership of an independent director in the corporation or its subsidiaries and affiliates exceeds two percent (2%) of its subscribed capital stock. The disqualification from being elected as an independent director is lifted if the limit is later complied witli; and 4. Ifany of the judgments or orders cited in thergrounds for permanent disqualification has not yet become final. | Recommendation 2.7 ‘The Board should have the overall responsibility in ensuring that there is a group-wide policy and system governing related party transactions (RPTs) and other unusual or infrequently occurring transactions, particularly those which pass certain thresholds of materiality. The policy should include the appropriate review and approval of material or significant RPTs, which guarantee fairness and transparency of the transactions, The policy should encompass all entities within the group, taking into account their size, structure, risk profile and complexity of operations. Explanation Ensuring the integrity of related party transactions is an important fiduciary duty of the director. It is the Board’s role to initiate policies and measures geared towards prevention of abuse and promotion ofc ulations t transparency, and in compliance with apt le laws nie required protect the interest of all shareholders. One such ee TB aaraved ratification by shareholders of material or significant re heluas the Board, in accordance with existing laws. Other measwres nelle ensuring that transaetions occur at market prices, at ack Ser ea aes and under conditions that protect the rights of all shareholders. plicabl The following are suggestions for the content of the RPT Policy: + Definition of related parties; + Coverage of RPT policy; . Guidelines in ensuring arm’s-length terms; + Identification and prevention or management of potential or actual conflicts of interest which arise; + Adoption of materiality thresholds; + Internal limits for individual and aggregate exposures; + Whistle-blowing mechanisms, and * + Restitution of losses and other remedies for abusive RPTs. In addition, the company is given the discretion to set their materiality threshold at a level where omission or misstatement of the transaction could pose a significant risk to the company and influence its economic decision. The SEC may direct a company to reduce its materiality threshold or amend excluded transactions if the SEC deems that the threshold or exclusion is inappropriate considering the company’s size, risk profile, and risk management systems. Depending on the materiality threshold, approval of management, the RPT Committee, the Board or the shareholders may be required. In cases where the shareholders’ approval is required, it is good practice for interested shareholders to abstain and let the disinterested parties or majority of the minority shareholders decide. Recommendation 2.8 The Board should be primarily responsible for aj ii i k ipproving the sel and assessing the performance of the Management led by ‘he cae Executive Officer (CEO), and control functions led by their respective heads (Chief Risk Offi i i Peeve sk Officer, Chief Compliance Officer, and Chief AuditSEC Code of Corporate Governance _ 47 Explanation i“ eS the responsibility of the Board to appoint a competent management managen times, monitor and assess the performance of the Tanagement team based on established performance standards that are Onsistent with the company’s strategic objectives, and conduct a regular review of the company’s policies with the management team. In the selection process, fit and proper standards are to be applied on key Personnel and due consideration is given to integrity, technical expertise and experience in the institution’s business, either current or planned. Recommendation 2.9 The Board should establish an effective performance management framework that will ensure that the Management, including the Chief Executive Officer, and personnel’s performance is at par with the standards set by the Board and Senior Management. Explanation Results of performance evaluation should be linked to other human resource activities such as training.and development, remuneration, and succession planning. These should likewise form part of the assessment of the continuing fitness and propriety of management, including the Chief Executive Officer, and personnel in carrying out ‘heir respective duties and responsibilities. Recommendation 2.10 The Board should oversee that an appropriate internal control system is in place, including setting up a mechanism for monitoring and managing potential conflicts of interest of Management, board members, and shareholders. The Board should also approve the Internal Audit Charter. Explanation In the performance of the Board’s oversight responsibility, the minimum internal control mechanisms may include overseeing the implementation of the key control functions, such as risk management, compliance and internal audit, and reviewing the corporation’s human resource policies,48 Chapter 3 conflict of interest situations, compensation program for employees and management succession plan. Recommendation 2.11 The Board should oversee that a sound enterprise risk management (ERM) framework is in place to effectively identify, mmc a manage key business risks. The risk management a Feel guide the Board in identifying units/business lines and enterp! ! risk exposures, as well as the effectiveness of risk management strategies. Explanation Risk management policy is part and parcel of a corporation’s corporate strategy. The Board is responsible for defining the company’s level of risk tolerance and providing oversight over its risk management policies and procedures. : Recommendation 2.12 The Board should have a Board Charter that formalizes and clearly states its roles, responsibilities and accountabilities in carrying out its fiduciary duties. The Board Charter should serve as a guide to the directors in the performance of their functions and should be publicly available and posted on the company’s website. Explanation The Board Charter guides the directors on how to discharge their funetions. It provides the standards for evaluating the performance of the Board. The Board Charter also contains the roles and responsibilities of the Chairman.a RY Code of Con 3. ESTABLISHING BOARD COMMITTEES Principle Bone commits should be set up to the extent possible to support the om pert poernetiess of the Board’s functions, particularly with respect wdit, risk management, related party transactions, and other key Corporate governance concems, such as nomination and remuneration. The composition, functions and responsibilities of all committees established should be contained in a publicly available Committee Charter. Recommendation 3.1 The Board should establish board committees that focus on specific board functions to aid in the optimal performance of its roles and responsibilities. Explanation Board committees such as the Audit Committee, Corporate Governance Committee, Board Risk Oversight Committee and Related Party Transaction Committee are necessary to support the Board in the effective performance of its functions. The establishment of the same, oF any other committees that the company deems necessary, allows for specialization in issues and leads to a better management of the Board's sesrkload. The type of board committees to be established by a company would depend on ils size, risk profile and complexity of operations. However, if the committees are not established, the functions of these committees may be carried out by the whole board or by any other committee. Recommendation 3.2 should establish an Audit Committee to enhance its ov ersight capability over the company’s financial reporting, internal control system, internal and external audit processes, and compliance with applicable laws and regulations. The cormmites should be composed of at least three appropriately’ Qualified non-executive directors, the majority of whom, including the Chairman, should be independent, All of the members ‘of the committee must have relevant background, The Board50_Chapter 3 and/or experience in the areas of accounting, auditing i Is, ‘ sates n of the Audit Committee should not be the and finance. The Chairmat 0 chairman of the Board or of any other committees. Explanation The Audit Committee is responsible for overseeing the senior management in establishing and maintaining an adequate, effective on efficient internal control framework. It ensures that systems an processes are designed to provide assurance in areas including re OrS Es monitoring compliance with laws, regulations and internal policies, efficiency and effectiveness of operations, and safeguarding of assets. The Audit Committee has the following duties and responsibilities, among others: a. Recommends the approval the Internal Audit Charter (IA Charter), which formally defines the role of Internal Audit and the audit plan as well as oversees the implementation of the [A Charter; b. Through the Internal Audit (1A) Department, monitors and evaluates the adequacy and effectiveness of the corporation’s internal control system, integrity of financial reporting, and security of physical and information assets. Well-designed internal control procedures and processes that will provide a system of checks and balances should be in place in order to (a) safeguard the company’s resources and ensure their effective utilization, (b) prevent occurrence of fraud and other irregularities, (c) protect the accuracy and reliability of the company’s financial data, and (d) ensure compliance with applicable laws and regulations; c. Oversees the Internal Audit Department, and recommends the appointment and/or grounds for approval of an internal audi p n g audit head or Chief Audit Executive (CAE). The Audit Committee should oe approve the terms and conditions for ing i it a outsourcing internal audit d. Establishes and identifies the reporting line of the Internal Auditor to enable him to’prorerly fulfill his duties i Mu ¥ and responsibi this purpose, he should directly report to the Audit eomaniaer 2e@ SEC Code of Corporate Governance 51 Reviews and y i Monitors Mai a : Auditor’s fin ding agement’s responsiveness to the Internal 3S and recommendations; P Ae oe commencement of the audit, discusses with the External wuditor the nature, scope and expenses of the audit, and ensures thé Proper coordination if more than one audit firm is involved in the: ee to secure proper coverage and minimize duplication of 8 Evaluates and determines the non-audit work, if any, of the External Auditor, and periodically reviews the non-audit fees paid to the Extemal Auditor in relation to the total fees paid to him and to the corporation’s overall consultancy expenses. The committee should disallow any non-audit work that will conflict with his duties as an External Auditor or may pose a threat to his independence3. The non-audit work, if allowed, should be disclosed in the corporation’s Annual Report and Annual Corporate Governance Report; h. Reviews and approves the Interim and Annual Financial Statements before their submission to the Board, with particular focus on the following matters: Any change/s in accounting policies and practices ‘Areas where a significant amount of judgment has been exercised Significant adjustments resulting from the audit Going concern assumptions Compliance with accounting standards Compliance with tax, legal and regulatory requirements Reviews the disposition of the recommendations in the External ‘Auditor’s management letter; Performs oversight functions over the corporation’s Internal and External. Auditors. It ensures the independence of Internal and External Auditors, and that both auditors are given unrestricted access to all records, properties and personnel to enable them to perform their respective audit functions; k. Coordinates, monitors and facilitates compliance with laws, rules and regulations; TAs defined under the Code of Ethics for Professional Accountantsj ointment, 1. Recommends to the Board the appalh n eeed eyithe removal and fees of the External Auditor, duly in e it of the Commission, who undertakes an independent ae e corporation, and provides an objectiv assurance i ae which the financial statements should be prepared’ a the stockholders; and a Board Risk Oversight ‘ons Committee, performs as provided under m, In case the company does not have a Committee and/or Related Party Transacti the functions of said _ committees Recommendations 3.4 and 3.5. The Audit Committee meets with the Board at least every at without the presence of the CEO or other management team members, and periodically meets with the head of the internal audit. Recommendation 3.3 The Board should establish a Corporate Governance Committee that should be tasked to assist the Board in the performance of its corporate governance responsibilities, including the functions that were formerly assigned to a Nomination and Remuneration Committee. It should be composed of at least three members, all of whom should be independent directors, including the Chairman Explanation The Corporate Governance Committee (CG Committee) is tasked with ensuring compliance with and proper observance of corporate governance principles and practices, It has the following duties and functions, among others: a, Oversees the implementation of framework and periodically reviews tl that it remains appropriate in light corporation's size, complexity and bu: business and regulatory environments; the corporate governance he said framework to ensure of material changes to the SINESS Strategy, as well as its b. Oversees the periodic performance ev: committees as well as executive ma annual self-evaluation of its performan aluation of the Board and its anagement, ‘and conducts an ce;SEC Code of Corporate Governance _ 53 Ensures that the results of the Board evaluation are shared, discussed, and that concrete action plans are developed and implemented to address the identified areas for improvement; Recommends continuing education/training programs for directors, assignment of tasks/projects to board committees, succession plan for the board members and senior officers, and remuneration packages for corporate and individual performance; €. Adopts corporate governance policies and ensures that these are reviewed and updated regularly, and consistently implemented in form and substance; f. Proposes and plans relevant trainings for the members of the Board; g Determines the nomination and election process for the company’s directors and has the special duty of defining the general profile of board members that the company may need and ensuring appropriate knowledge, competencies and expertise that complement the existing skills of the Board; and h. Establishes a formal and transparent procedure to develop a policy for determining the remuneration of directors and officers that is consistent with the corporation’s culture and strategy as well as the business environment in which it operates. ‘The establishment of a Corporate Governance Committee does not preclude companies from establishing separate Remuneration or Nomination Committees, if they deem necessary. Recommendation 3.4 Subject to a corporation's size, risk profile and complexity of operations, the Board should establish a separate Board Risk Oversight Committee (BROC) that should be responsible for the oversight of a company’s Enterprise Risk Management system to ensure _its Fonctignality and effectiveness. The BROC should be composed of at Teast three members, the majority of whom should be independent tors, ineluding the Chairman. The Chairman should not be the Chairman of the Board or of any other committee. At least one member of the committee must have relevant thorough knowledge and experience on risk and risk management.34 Chapter 3 Explanation The establishment of a Board Risk Oversight Commits cane) is generally for conglomerates and companies with a high risk profile. to an effective corporate f a company's value creation \e Board in Enterprise risk management is integral governance process and the achievement of a c« an objectives. Thus, the BROC has the responsibility to assis a ensuring that there is an effective and integrated risk lite process in place. With an intograted approach, the Boar a ep management will be in a confident position to make wel -informe decisions, having taken into consideration risks related to significant business activities, plans and opportunities. The BROC has the following duties and responsibilities, among others: a. Develops a formal enterprise risk management plan which contains the following elements; (a) common language or register of risks, (b) well-defined risk management goals, objectives and oversight, (c) uniform processes of assessing risks and developing strategies to manage prioritized risks, (d) designing and implementing risk management strategies, and (c) continuing assessments to improve risk strategies, processes and ‘measures; b. Oversees the implementation of the enterprise risk management plan through a Management Risk Oversight Committee. The BROC conducts regular discussions on the company’s prioritized and residual risk exposures based on regular risk management reports and assesses how the concerned units or offices are addressing and managing these risks; c, Evaluates the risk management plan to ensure its continued relevance, comprehensiveness and effectiveness, The BROC revisits defined risk management strategies, looks for emerging or changing material exposures, and stays abreast of significant developments that seriously impact the likelihood of harm or loss; 4. Advises the Board on its risk appetite levels and risk tolerance limits;SEC Code of Corporate Governance 55. Reviews at least annually the company’s risk appetite levels and risk tolerance limits based on changes and developments in the business, the regulatory framework, the external economic and business environment, and when major events occur that are considered to have major impacts on the company; f. Assesses the probability of each identified risk becoming a reality and estimates its possible significant financial impact and likelihood of occiitrence. Priority areas of coneern are those risks that are the most likely to occur and to impact the performance and stability of the corporation and its stakeholders; & Provides oversight over Management's activities in managing credit, market, liquidity, operational, legal and other risk exposures of the corporation. This function, includes regularly receiving ‘aformation on risk exposures and risk management activities from Management, and h. Reports to the Board on a regular basis, or as deemed necessary, the company’s material risk exposures, the actions taken to reduce the risks, and recommends further action or plans, as necessary. Recommendation 3.5 Subject to a corporation's size, isk profile and complexity of to Board should establish a Related Party Transaction (RPT) Committee, which should be tasked with reviewing all material ated party transactions of the company and should be composed of at Teast three non-oxecutive direotors, two of whom should be independent, including the Chairman. Explanation Examples of companies that may have a separate RPT Committee are conglomerates and Tiniversalicommercial banks in recognition of the potential magnitude of RPTs in these kinds of corporations.56 Chapter 3 ee ‘The following are the functions of the RPT Committee, among others: a. Evaluates on an ongoing basis existing relations between and among businesses and counterparties to ensure that all relnted pariics are continuously identified, RPTs are monitored, and subsequent changes in relationships with counterparties (from non-related to related and vice versa) are captured, Related parties, RPTS and changes in relationships should be reflected in the relevant reports to the Board and regulators/supervisors; Evaluates‘all material RPT’s to ensure that these are not undertaken on more favorable economic terms (c.g., price, commissions, interest rates, fees, tenor, collateral requirement) to such related parties than similar transactions with non-related parties under ilar circumstances and that no corporate or business resources of the company are misappropriated or misapplied, and to determine any potential reputational risk issues that may arise as a result of or in connection with the transactions. In evaluating RPTs, the Committee takes into account, among others, the following: |. The related party's relationship to the company and interest in the transaction; 2. The material facts of the proposed RPT, aggregate value of such transaction: 3. The benefits to the corporation of the proposed RPT; 4. The availability of other sources of comparable products or services; and . 5. An assessment of whether the proposed RPT is on terms and conditions that are comparable to the terms generally available to an unrelated party under similar circumstanees. The company should have an effective price discovery system in place and exercise due diligence in determining a fair price for RPTs: r ineluding the proposed Ensures that appropriate disclosure is made, and/or information is provided to regulating and supervisi 8 authorities relating to the company’s RPT exposures, and policies on conflicts of interest or potential conflicts of interest. The disclosure should include information on the approach to managing material conflicts of interest that are inconsistent with such policies, and conflicts that could arise as a result of the company’s affiliation or transactions with other related parties$8 Ch napter 3 a Recommendation 4.1 i icipate i eetings of The directors should attend and actively participate in a as of the Board, Committees, and Shareholders in person oF in ac ce with the rules and ideoconferencing conducted in accordance aeinees st ihe vhen justifiable causes, such as, regulations of the Commission, except t eh, illness, death in the immediate family and. serious eco preven them from doing so. In Board and Committee meetin a should review meeting materials and if called for, ask the ry questions or seek clarifications and explanations. Explanation A director's commitment to the company is evident in th amount of time he dedicates to performing his duties and responsi ies, which includes his presence in all meetings of the Board, Committees and Shareholders. In this way, the director is able to effectively perform his/her duty to the company and its shareholders. The absence of a director in more than fifty percent (50%) of all regular and special meetings of the Board during his/her incumbency is a ground for disqualification in the succeeding election, unless the absence is due to illness, death in the immediate family, serious accident or other unforeseen or fortuitous events. Recommendation 4.2 The non-executive directors of the Board should concurrently serve as directors to a maximum of five publicly listed companies to ensure that they have sufficient time: to fully prepare for meetings, challenge Management’s proposals/views, and oversee the long-term strategy of the company. . Explanation Being a director necessitates a commitment to the corporation there is a need to set a limit on board directorships. Thi ensues ther ire members of the board are able to effectively commit themselves to perform their roles and responsibilities, regularly ‘update their knowledge and enhance their skills. Since sitting on the board of too many companies may interfere with the optimal performance of board members, in that they may not be able to contribute enough time to keepSEC Code of Corporate Governance _57 4. Reports to the Board of Direetors on « regular basis, the status and aggregate exposures to cach related party, as well as the a) amount of exposures to all related parties; e, Ensures that transactions with related parties, including write-off of exposures are- subject to a periodic independent review or audit process; and f. Oversees the implementation of the system for identifying, monitoring, measuring, controlling, and reporting RPTS, including a periodic review of RPT policies and procedures; Recommendation 3.6 All established committees should be required to have Committee Charters stating in plain terms their respective purposes, memberships, structures, operations, reporting processes, resources and other relevant information. The Charters should provide the standards for evaluating the performance of the Committees. It should also be fully disclosed on the company’s website: Explanation ‘The Contmittee Charter clearly defines the roles and accountabilities of each committee to avoid any overlapping funetions, which aims at having a more effective board for the company. This can elso be used as basis for the assessment of committee performance. 4, FOSTERING COMMITMENT Principle To show full commitment to the company, the directors should devote the time and attention necessary to properly and etfectively perform their duties and responsibilities, including sufficient time to be familiar with the corporation’s business.SEC Code of Corporate Governance 59 abrea ; sail of the. corpraton’s operations and te attend and actively Participate during meetings, a maximum board seat limit of five irectorships is recommended. Recommendation 4.3 a director should notify the Board where he/she is an incumbent irector before accepting a directorship in another company. Explanation The Board expects commitinent from a director to devote sufficient time and attention to his/her duties and responsibilities. Hence, it is important that @ director notifies hisfher incuribent Board before accepting @ directorship in another company. This is for the company'to be able to assess if his/her present responsibilities and commitment to the company ‘vill be affected and if the director can stil adequately provide what is expected of him/her. 5. REINFORCING BOARD INDEPENDENCE Principle The board should endeavor to exercise an objective and independent judgment on all corporate affairs. Recommendation 5.1 ‘The Board should have at least three independent directors, or such number as to constitute at least one-third of the members of the Board, whichever is higher- Explanation ste presence of independent directors in the Boards to entre the The presence jependent judgment on corporate affis and proper exercise OF anager performances nein prevention of confit of Oye placing of competing demands ofthe corporation. There ral recognition that more independent dirctors in the jective decision-making, particularly in conflict of In addition, experts have recognized that there are is increasing Board lead to more interest situations.$0 Chapter 7 number of independent directors in the i ions 1c optimal ‘ varying opinions on the opt ea third to a substantia] board. However, the ideal number ranges from majority. Recommendation 5.2 indent directors possess the I ensure that its indepe! The Board should ensure that i Pi re Hisqualifications fet at necessary qualifications and none of th independent director to hold the position. Explanation Independent directors need to possess a good general understanding of the industry they are in. Further, it is worthy to note that independence and competence should go hand-in-hand. It is therefore important that the non-executive directors, including independent directors, possess the qualifications and stature that would enable them to effectively and objectively participate in the deliberations of the Board. An Independent Director refers to a person who, ideally: a. Is not, or has not been a senior officer or employee of the covered company unless there has been a change in the controlling ‘ownership of the company; b. Is not, and has not been in the three years immediately preceding the election, a director of the covered company; a director, officer, employee of the covered company’s subsidiaries, associates, affiliates or related companies; or a director, officer, employee of the covered company’s substantial shareholders and its related companies; ¢. Has not been appointed in the covered company, its subsidiaries. associates, affiliates or related companies as Chanaan pes “Ex-Officio” Directors/Officers or Members of any Advisor Board, or otherwise appointed in a capacity to assist the Board in he performance of .its duties and responsibilities within thi immediately preceding his election; _—_SEC Code of Corparate Governance 61 Is not an owner of more than two percent (2%) of the outstanding shares of the covered company, its subsidiaries, associates, affiliates or related companies; t Not a relative of a director, officer, or substantial shareholder of ine company or any of its related companies or of any of its Substantial shareholders. For this purpose, relatives include spouse, ae child, brother, sister and the spouse of such child, brother or ister; Is not acting as a nominee or representative of any director of the covered company or any of its related companies; Is not a securities broker-dealer of listed companies and registered issuers of securities. “Securities broker-dealer” refers to any person holding any office of trust and responsibility in 2 broker-dealer firm, which includes, among others, a director, officer, principal stockholder, nominee of the firm to the Exchange, an associated person or salesman, and an authorized clerk of the broker or dealer; Is not retained, either in his personal capacity or through a firm, as a professional adviser, auditor, consultant, agent or counsel of the covered company, any of its related companies or substantial shareholder, or is otherwise independent of Management and free from any business or other relationship within the three years immediately preceding the date of his election: Does not engage or has not engaged, whether by himself or with other persons of through a firm of which he is a partner, director or substantial shareholder, in any transaction with the covered company or any of its related companies or substantial shareholders, ‘other than such transactions that are conducted at arm’s length and could not materially interfere with or influence the exercise of his independent judgment; affiliated with any non-profit organization that receives ing from the covered company or any of its related stantial shareholders; and Is not significant fund! companies or sul as an executive officer of another company where Is not employed : kK .d company’s executives serve as directors. any of the covere62_Chapter 3 Related companies, as used in this section, refer to (a) the covered + entity’s holding/parent company; (b) its subsidiaries; and (c) subsidiaries of its holding/parent company. Recommendation 5.3 The Board’s independent directors should serve for a maximum cumulative term of nine years. After which, the independent director should be perpetually barred from re-election as such in the same company, but may continue to qualify for nomination and election as a non-independent director. In the instance that a company wants to retain an independent director who has served for nine years, the Board should provide meritorious justification/s and seek shareholders’ approval during the annual shareholders’ meeting, Explanation Service in a board for a long duration may impair a director’s ability to act independently and objectively. Hence, the tenure of an independent + director is set to a cumulative term of nine years. Independent directors (TDs) who have served for nine years may continue as a non- independent director of the company. Reckoning of the cumulative nine- year term is from 2012, in connection with SEC'Memorandum Circular No. 9, Series of 2011. Any term beyond nine years for an ID is subjected to particularly rigorous review, taking into account the need for progressive change in the Board to ensure an appropriate balance of skills and experience. However, the shareholders may, in exceptional cases, choose to re-elect an independent director who as served for nine years. In such ieaeness, the Board must provide a meritorious justification for the re- election. Recommendation 5.4 The positions of Chairman of the Board and Chief Executive Officer should be held by separate individuals and each should h | defined responsibilities. —SEC Code of Corporate Governance _ 63 Explanation ee id conflict or a split board and to foster an appropriate balance of Rowers increased accountability and better capacity for independent gecision-making, it is recommended thatthe positions of Chairman and ‘ecutive Officer (CEO) be held by different individuals. This type of organizational structure facilitates effective decision making and good overnance. In addition, the division of responsibilities and accountabilities between the Chairman and CEO is'clearly defined and delineated and disclosed in the Board Charter. The CEO has the following roles and responsibilities, among others: a, Determines the corporation’s strategic direction and formulates and implements its strategic plan on the direction of the business; b, Communicates and implements the corporation’s vision, mission, values and overall strategy and promotes any organization or stakeholder change in relation to the same; ©. Oversees the operations of the corporation and manages human and financial resources in accordance with the strategic plan; d. Has a good working knowledge of the corporation’s industry and market and keeps up-to-date with its core business purpose; e, Directs, evaluates and guides the work of the key officers of the corporation; Manages the corporation’s resources prudently and ensures a proper balance of the same; Provides the Board with timely information and interfaces between the Board and the employees; h. Builds the corporate culture and motivates the employees of the corporation; and he link between internal operations and external i. Serves as tl stakeholders, The roles and responsibilities of the Chairman are provided under Recommendation 2.3.64 Chapter t Recommendation §, The Board should designate a tend director nmong the independent directors if the Chairman of they Board is not independent, inelus if the positions of the Chairman of the Board and Chief Executive Officer are held by one person, Explanation In cases where the Chairman is not independent and where the roles of Chair and CEO are combined, putting in place proper mechanisms ensures independent views and perspectives, More importantly, it avoids the abuse of power and authority, and potential conflict of inter suggested mechanism is the appointment of a strong “lead direct among the independent directors. This lead director has sufficient authority to lead the Board in cases where management has clear conflicts of interest, ‘The functions of the lead director include, among others, the following: a, Serves as an intermediary between the Chairman and the other directors when necessary; b. Convenes and chairs meetings of the non-executive directors; and c. Contributes to the performance evaluation of the Chairman, as required. : Recommendation 5.6 A director with a material interest in any transaction affecting the corporation should abstain from taking part in the deliberations for the same, Explanation The abstention of a director from participating in a meeting when related party transactions, self-dealings or any transactions or matters on which he/she has a material interest are taken Up ensures that he hi influence over the outcome of the deliberations. The funda: = tal principle to be observed is that a director does not use his positon a peor ain Some benefit or advantage for his himself and/or his/herSEC Code of Corporate Governance 65 Recommendation 5.7 The non-executive directors (NEDs) should have separate periodic meetings with the external auditor and heads of the internal audit, compliance and risk functions, without any executive directors present to ensure that proper checks and balances are in place within the Corporation. The meetings should be chaired by the lead independent director, ‘ Explanation NEDs are expected to scrutinize Management's performance, particularly in meeting the companies’ goals and objectives. Further, it is their role to satisfy themselves on the integrity of the corporation's internal control and effectiveness of the risk management systems. This role can be better performed by the NEDs if they are provided access to the external auditor and heads of the internal audit, compliance and risk functions, as well as to other key officers of the company without any executive directors present. The lead independent director should lead and preside over the meeting. 6. ASSESSING BOARD PERFORMANCE Principle ‘The best measure of the Board’s effectiveness is through an assessment process. The Board should regularly carry out evaluations to appraise its performance as a body, and assess whether it possesses the right mix of backgrounds and competencies. Recommendation 6.1 ‘The Board should conduct an annual self-assessment of its performance, including the performance of the Chairman, individual members and committees. Every three years, the assessment should be supported by an external facilitator.6 Charen t Fyplanation thoroughly review their went helps the direetors to he The and understand their roles and responsibilitie ment of the Board's performance as a body, individual directors, and the Chairman show how the aforementioned should perform their responsibilities effectively. In addition, it provides a means (0 assess a director's attendance at board and commitice meetings, participation in boardroom discussions and manner of voting on material issues, The use of an external facilitator in the assessment process increases the objectivity of the same. The external facilitator can be any independent third party such as, but not limited to, a consulting firm, academic institution or Roand ay performanee periodic review and ass: the board committees, the ation. professional organi: v 2 Recommendation 6.2 The Board should have in place a system that provides, at the minimum, criteria and process to determine the performance of the Board, the individual directors, committees and such system should allow for a feedback mechanism from the shareholders, Disclosure of the criterin, process and collective results of the assessment ensures transparency and allows shareholders and stakeholders to determine if the directors are performing their responsibilities to the company. Companies are given the discretion to determine the assessment criteria and process, which should be based on the mandates, functions, roles and responsibilities provided in the Board and Committee Charters, In establishing the criteria, attention is given to the values. principles and skills required for the company. The Corporate Governance Committee oversees the evaluation process, rocess,SEC Code of Corporate Governance _67 7. STRENGTHENING BOARD ‘HICS Principle Monibers of the Board are duty-bound to apply high ethical standards; ‘Ing Into account the interests of all stakeholders. Recommendation 7.1 The Board should adopt a Code of Business Conduct and Bthics, which would provide standards for professional and ethical behavior, as well as articulate acceptable and unacceptable conduct and practices in internal and external dealings. The Code should be properly disseminated to the Board, senior management and employees. It should also be disclosed and made available to the public through the company website. Explanation- ‘A Code of Business Conduct and Ethics formalizing ethical values is an important tool to instill an ethical corporate culture that pervades throughout the company. The main responsibility to create and design a Code of Conduct suitable to the needs of the company and the culture by which it operates lies with the Board. To ensure proper compliance with the Code, appropriate orientation and training of the Board, senior management and employees on the same are necessary. Recommendation 7.2 ‘The Board should ensure. the proper and efficient implementation and monitoring of compliance with the Code of Business Conduct and Ethics and internal policies. Explanation ‘The Board has the primary duty to make sure that the infernal controls are in place to ensure the company’s compliance with the Code of Business Conduct and Ethics and its internal policies and procedures. Hence, it needs to ensure the implementation of said internal controls to support promote and guarantee compliance, This includes efficient communication channels, which aid and encourage employees, customers, suppliers and creditors to raise concerns on potential‘unlawful behavior without fear of retribution. A company’s ethics policy can be made effective and ineuleated in the company culture through a communication and awareness campaign, continuous training to reinforce the code, strict monitoring and inpienen ae 7 setting in place proper avenues where issues may be raised an addressed without fear of retribution, DISCLOSURE AND TRANSPARENCY 8. ENHANCING COMPANY DISCLOSURE POLICIES AND PROCEDURES Principle 8 The company should establish corporate disclosure policies and procedures that are practical and in accordance with best practices and regulatory expectations. Recommendation 8.1 The Board shoutu establish corporate disclosure policies and procedures to ensure a comprehensive, accurate, reliable and timely report to shareholders and other stakeholders that gives a fair and complete Picture of a company’s financial condition, results and business operations. Explanation Setting up clear policies and procedures on corporate disclosure that comply with the disclosure requirement as provided in Rule 68 of the Securities Regulation Code (SRC), Philippine Stock Exchange Listing and Disclosure Rules, and other regulations such as those required by the Bangko Sentral ng Pilipinas, is essential for comprehensive and timely reporting. Recommendation 8,2 The Company should have a policy requirin; i 1 ig all directors and officers t disclose/report to the company any dealings i fee Ic t in th i within three business days, Es Sspmpenyts: lacesSEC Code of Corporate Governance 69 Explanation ene Ben have access to material inside information on the iain eae to reduce the risk that the directors might take palen Bee of this information, it is crucial for companies to have a with Se iring directors to timely disclose to the company any dealings dhectane Company shares. It is emphasized thatthe policy is on internal isclosure to the company of any dealings by the director in company shares. This supplements the requirement of Rules 18 and 23 of the Securities Regulation Code. Recommendation 8.3 The Board should fully disclose all relevant and material information on individual board members and key executives to evaluate their experience and qualifications, and assess any potential conflicts of interest that might affect their judgment. Explanation A disclosure on the board members and key executives” information is prescribed under Rule 12 Annex C of the SRC. According to best practices and standards, proper disclosure includes directors and key officers’ qualifications, share ownership in the company, membership of other boards, other executive positions, continuous trainings attended ‘and identification of independent directors. Recommendation 8.4 ‘The company should provide a clear disclosure of its policies and procedure for setting Board and executive remuneration, as well as the fevel and mix of the same in the Annual Corporate Governance Repor. _ Also, companies should disclose the remuneration on an individual ination and retirement provisions. basis, including termi Explanation Disclosure of remuneration policies and procedure enables investors to understand the link between the remuneration paid to directors and key management personnel and the company’s performance,70 Chapter 3 The Revised Code of Corporate Governance requires only a disclosure of all fixed and variable compensation that may be paid, directly or indirectly, to its directors and top four management officers during the preceding fiscal year. However, disclosure on board and executive remuneration on an individual basis (including termination and retirement provisions) is increasingly regarded as good practice and is now mandated in many countries. Recommendation 8.5 The company should disclose its policies governing Related Party Transactions (RPTs) and other unusual or infrequently occurring transactions in their Manual on Corporate Governance. The material or significant RPTs reviewed and approved during the year should be disclosed in its Annual Corporate Governance Report. Explanation ‘A full, accurate and timely disclosure of the company’s policy governing RPTS and other unusual or infrequently occurring transactions, as well as the review and approval of material and significant RPTs, is regarded as good corporate governance practice geared towards the prevention of abusive dealings and transactions and the promotion of transparency. These policies include ensuring that transactions occur at market prices and under conditions that protect the rights of all shareholders. The said disclosure includes directors and key executives reporting to the Board when they have RPTs that could influence their judgment. Recommendation 8.6 The company should make a full, fair, accurate and timely disclosure to the public of every material fact or event that occurs, particularly on the acquisition or disposal of significant assets, which could adversely affect the viability or the interest of its shareholders and other stakeholders. Moreover, the Board of the offered company should appoint an independent party to evaluate the fairness of the transaction price on the acquisition or disposal of assets.nde of Corporate Explanation The disclosure on the includes, among others, t at board meetings wit] acquisition or disposal of -significant assets the rationale, effect on operations and approval ey S with independent directors present to establish nsparency and independence on the transaction. The independent evaluation of the fairness of the transparent price ensures the protection of the rights of shareholders. Recommendation 8.7 The company’s corporate governance policies, programs and procedures should be contained in its Manual on Corporate Governance, which should be submitted to the regulators and posted on the company’s website. Explanation Transparency is one of the core principles of corporate governance. To ensure the better protection of shareholders and other stakeholders’ rights, full disclosure of the company’s corporate governance policies, programs and procedures is imperative. This is better done if the said policies, programs and procedures are contained in one reference document, which is the Manual on Corporate Governance. The submission of the Manual to regulators and posting it in companies” websites ensure easier access by any interested party. 9. STRENGTHENING THE EXTERNAL AUDITOR’S INDEPENDENCE AND IMPROVING AUDIT QUALITY Principle 9 ‘The company should establish standards for the appropriate selection of an external auditor, and exercise effective oversight of the same to strengthen the external auditor's independence and enhance audit quality. Recommendation 9.1 ‘The Audit Committee should have a robust process for approving and recommending the appointment, reappointment, removal, and fees of the external auditor. The appointment, reappointment, removal, and fees of72_Chapter 4 the external auditor should be recommended by the Audit Committee, approved by the Board and ratified by the shareholders. For removal of the external auditor, the reasons for removal or change should be losed to the regulators and the public through the company website id required disclosures, dis Explanation The appointment, reappointment and removal of the external auditor by the Board’s approval, through the Audit Committee’s recommendation, and shareholders’ ratification at shareholders’ meetings are actions regarded as good practices. Shareholders’ ratification clarifies or emphasizes that the external auditor is accountable to the shareholders ‘or to the company as a whole, rather than to the management whom he may interact with in the conduct of his audi Recommendation 9.2 The Audit Committee Charter should include the Audit Committee’s responsibility on assessing the integrity and independence of external auditors and exercising effective oversight to review and monitor the external auditor's independence and objectivity and the effectiveness of the audit process, taking into consideration relevant Philippine professional and regulatory requirements. The Charter should also contain the Audit Committee’s responsibility on reviewing and monitoring the external auditor’s suitability and effectiveness on an annual basis. ‘ Explanation The Audit Committee Charter'includes a disclosure of its responsibility on assessing the integrity and independence of the external auditor, It establishes detailed guidelines, policies and procedures that are contained in a separate memorandum or document. Nationally and internationally recognized best practices and standards of external auditing guide the committee in formulating these policies and procedures. Moreover, establishing effective communication with the external auditor and requiring them to report all relevant matters help the Audit Committee to efficiently carry out its oversight responsibilities,SEC Code of Corporate Governance _ 73 Recommendation 9,3 oe cen she Id disclose the nature of non-audit services performed eeanlict pee auditor in the Annual Report to deal with the potential omenct OF interest. The Audit Committee should be alert for any potential conflict of interest situations, given the guidelines or policies on non-audit services, which could be viewed as impairing the external auditor’s objectivity, Explanation The Audit Committee, in the performance of its duty, oversees the overall relationship with the external auditor. It evaluates and determines the nature of non-audit services, if any, of the external auditor. Further, the Committee periodically reviews the proportion of non-audit fees paid to the external auditor in relation to the corporation’s overall consultancy expenses. Allowing the same auditor to perform non-audit services for the company may create a pote! conflict of interest. In order to mitigate the risk of possible conflict between the auditor and the company, the Audit’Committee puts in place robust policies and procedures designed to promote auditor independence in the long run. In formulating these policies and procedures, the Committee is guided by nationally and intemationally recognized best practices and regulatory requirements or issuances.REVIEW QUESTIONS AND EXERCISES Multiple Choice Questions 1. Audit committee activities and responsibilities include which of the following? a. Selecting the external audit firm. b. Approving corporate strategy. c. Reviewing management _ performance and compensation. d. None of the above. determining Which of the following audit committee responsibilities has the SEC mandated? Obtaining each year a report by the internal auditor that addresses the company’s internal control procedures, any quality control or regulatory problems, and any relationships that might threaten the independence of the internal auditor. b. Discussing in its meetings the company’s earnings press releases, as well as financial information and earnings guidance provided to analysts. c. Reviewing with the internal auditor any audit problems or difficulties that they have had with management. d. All of the above. a. Exercises Exercise 1 Below is a summary of the SEC corporate governance requirements of compares publicly-listed in the stock exchange. For each requirement, state how it is intended to help to address the risk of fraud in i orga publicly traded a. Boards need to consist of at least 3 independent di board which is higher. Pendent directors or 1/3 of the b. Boards need to hold regular executive i i . Bo k sessions of inde| i without management present. eeSEC Code of Corporate Governance _78 ©. Boards must have a / corporate governance committee composed at least 3 of independent directors, d. a Corporate governance committee must have a written charter that addresses the committee's purpose and responsibilities, and there must annual performance evaluation of the committee. ©. Boards “must have an audit committee with a minimum of three independent members. , f The audit committee must have a written charter that addresses the committee's purpose and responsibilities, and the committee must produce an audit committee report; there must also be an annual performance evaluation of the committee. Exercise 2 Below is a summary of the SEC ing requirements for audit committee responsibilities of companies listed on this stock exchange. For each requirement, state how it is intended to help to address the risk of fraud in publicly traded organizations. h. Obtaining each year a report by the external auditor that addresses the company’s internal control procedures, any quality control or regulatory problems, and any relationships that might threaten the independence of the external auditor ' Discussing the company’s financial siatements with management and the external auditor Discussing in its meetings the company’s earnings press releases, as well as financial information and earnings guidance provided to analysts Discussing in its’ meetings policies with respect to risk assessment and risk management Meeting separately with management, internal aiditors, and the external auditor on a periodic basis . Reviewing with the external auditor any audit problems or difficulties that they had with management Setting clear ning policies For employees or former employees of the extemal auditors Reporting regularly to the board of directorsChapter SEC CODE OF CORPORATE GOVERNANCE, CONTINUED Expected Learning Outcomes © After studying the chapter, you should be able to... 1 Understand how the ethical behavior of the board can be strengthened. Describe how the company disclosure policies and procedures can be enhanced. . Appreciate how the external auditors independence can be strengthened and how audit quality can be enhanced. Understand how a company could increase focus on non- financial and sustainability reporting. Explain how a company can promote a comprehensive and cost- efficient access to relevant information. Understand how integrity, transparency and proper governance of a company could be ensured through effective internal control system and enterprise risk management framework. Describe briefly how a synergic relationship with shareholders could be cultivated and promoted. Explain. how the rights of stakeholders could by respected and how to institute effective redness for the violation of their rights. QUACHAPTER 4 SEC CODE OF CORPORATE GOVERNANCE, CONTINUED 10. INCREASING FOCUS ON NON-FINANCIAL AND SUSTAINABILITY REPORTING Principle 10 The company should ensure that the material and reportable non financial and sustainability issues are disclosed. Recommendation 10.1 The Board should have a clear and focused policy on the disclosure of nonefinancial information, with emphasis on the management of cconomic, environmental, social and governance (EESG) issues of its business, which underpin sustainability. Companies should adopt @ globally recognized standard/framework in reporting sustainability and non-financial issues. Explanation ‘As’ external pressures including resource scarcity, globalization, and access to information continue to increase, the way corporations respond to sustainability challenges, in addition to financial challenges, determines their long-term viability and competitiveness. One way to respond to sustainability challenges is disclosure to all shareholders and other stakeholders of the company’s strategic (long-term goals) and operational objectives (shor-term goals), as well as the impact of a wide range of sustainability issues. Disclosures can be made using standards/frameworks, such as the G4 Framework by the Global Reporting Initiative (GRI), the Integrated Reporting Framework by the Intemational Integrated Reporting Council (IIRC) and/or the Sustainability ‘Accounting Standards Board (SASB)’s Conceptual Framework.78 Chapter 4 11, PROMOTING A COMPREHENSIVE AND. COST-EFFICIE ACCESS TO RELEVANT INFORMATION Principle 11 The company should maintain a comprehensive and cost-efficient communication channel for disseminating relevant information. This channel is crucial for informed decision-making by investors, stakeholders and other interested users. Recommendation 11.1 ehelt of media ix aisemination of information The company should include media and analysts’ briefings as channels of communication to ensure the timely and accurate dissemination of public, material and relevant information to its shareholders and other investors. Explanation The manner of disseminating relevant information to its intended users is as important as the content of the information itself. Hence, it is essential for the company to have a strategic and well-organized channel for reporting. These communication channels can provide timely and up-to-date information relevant to investors’ decision-making, as well as to other interested stakeholders. INTERNAL CONTROL SYSTEM AND RISK MANAGEMENT FRAMEWORK 12, STRENGTHENING THE INTERNAL CONTROL SYSTEM AND. ENTERPRISE RISK MANAGEMENT FRAMEWORK 7 Principle To ensure the 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.SEC Code of Corporate Governance, Continued 79 Recommendation 12.1 The Company should have an adequate and effective internal control system and an enterprise risk management framework in the conduct of its business, taking into account its size, risk profile and complexity of operations. Explanation An adequate and effective internal control system and an enterprise risk management framework help sustain safe and sound operations as well as implement management policies to attain corporate goals. An effective internal control system embodies management oversight and control culture; risk recognition and assessment, control activi information and communication; monitoring activities and correcting deficiencies. Moreover, an effective enterprise risk management framework typically includes such activities as the identification, sourcing, measurement, evaluation, mitigation and monitoring of. risk. Recommendation 12.2 The Company should have in place an independent internal audit function that provides an independent and objective assurance, and consulting services designed to add value and improve the company's operations. Explanation A separate internal audit function is essential to monitor and guide the implementation of company policies. It helps the company accomplish its objectives by bringing a systematic, disciplined approach to evaluating and improving the effectiveness of the company’s governance, risk management and control functions. The following are the functions of the internal audit, among others: Provides an independent risk-based assurance service to the Board, Audit Committee and Management, focusing on reviewing the effectiveness of the governance and control processes in (1) promoting the right values and ethics, (2) ensuring effective performance management and accounting, in the organization, (3) communicating risk and control a80 Chaprerd a eel activities and information internal auditors, and information, and (4) coordinating the among the Board, external and Management: ‘al audit as contained in the annual b. Performs regular and speci ; company’s risk assessments audit plan and/or based on the c. Performs consulting and advisory services related to governance and control as appropriate for the organization; of relevant laws, rules and d other commitments, fhe organization; d. Performs compliance audit regulations, contractual obligations an which could have a significant impact on @ e. Reviews, audits and assesses the efficiency and effectiveness of the internal control system of all areas of the company; {Evaluates operations or programs to ascertain whether results are consistent with established objectives and goals, and whether the operations or programs are being carried out as planned; g. Evaluates specific operations at the request of the Board or Management, as appropriate; and h. Monitors and evaluates governance processes. A company’s internal audit activity may ve a fully resourced activity housed within the organization or may be outsourced to qualified independent third party service providers. Recommendation 12.3 Subject to a company’s size, risk profile and complexity of operations, it should have a qualified Chief Audit Executive (CAE) appointed by the Board. The CAE shall oversee and be responsible for the internal audit acti of the organization, including that portic.. that is outsourced to a third party service provider. In case of a fully outsourced internal audit ant, fe suai independent executive or senior management el should be assi, ibili i personnel should be ee responsibility for managing the fullyExplanation SEC Code of Corporate Governance, Continued 81 The CAE, in order to achieve the necessary independence to fulfill his/her responsibil s, directly reports functionally to the Audit Committee and administratively to the CEO. The following are the responsibilities of the CAE, among others: a. Periodically reviews the internal audit charter and presents it to senior’ management and the Board Audit Committee for approval; Establishes a risk-based internal audit plan, including policies and procedures, to determine the priorities of the internal audit activity, consistent with the organization’s goals; Communicates the internal audit activity’s plans, resource requirements and impact of resource limitations, as well as significant interim changes, to senior management and the Audit Committee for review and approval, Spearheads the performance of the internal audit activity to ensure it adds value to the organization; Reports periodically to the Audit Committee on the internal audit activity’s performance relative to its plan; and Presents findings and recommendations to the Audit Committee and gives advice to senior management and the Board on how to improve internal processes. Recommendation 12.4 Subject to its size. risk profile and complexity of operations, the company should have a separate risk management function to identify, assess and monitor key risk exposures. Explanation The risk management function involves the following activities, among others: a. Defining a risk management strategy;82_ Chapter t b. * ‘ Fag. ti Identifying and analyzing key risks exposure en economic, environmental, social and governance Lee factors and the achievement of the organization’s strateg: objectives; Evaluating and categorizing each identified risk using the company’s predefined risk categories and parameters; Establishing a risk register with clearly defined, prioritized and residual risks; Developing a risk mitigation plan for the most important aks to the company, as defined by the risk management strategy; Communicating and reporting significant risk exposures includimg business risks (i,e., strategic, compliance, operational, financial and reputational risks), control issues and risk mitigation plan to the Board Risk Oversight Committee; and Monitoring and evaluating the effectiveness of the organization's risk management processes. Récommendation 12.5 In managing the company’s Risk Management System, the company should have a Chief Risk Officer (CRO), who is the ultimate champion of Enterprise Risk Management (ERM) and has adequate authority, stature, resources and support to fulfill his/her responsibilities, subject to company’s size, risk profile and complexity of operations, Explanation The CRO has the following functions, among others: Supervises the entire ERM Process and spearheads the development, implementation, maintenance and continuous improvement of ERM processes and documentation; Communicates the top risks and the status of implementation of risk management strategies and action plans to the Board Risk Oversight Committee;SEC Code of Corporate Governance. Continued 69 c Collaborates with the CEO in updating and making recommendations to the Board Risk Oversight Committee; d. Susgeste ERM policies and related guidance, as may be needed; an e. Provides insights on the following: «Risk management processes are performing as intended; Risk measures reported are continuously reviewed by risk owners for effectiveness; and © Established risk policies and procedures are being complied with ‘There should be clear communication between the Board Risk Oversight Committee and the CRO. CULTIVATING A SYNERGIC RELATIONSHIP WITH SHAREHOLDERS 13. PROMOTING SHAREHOLDER RIGHTS Principle ‘The company should treat all shareholders fairly and equitably, and also recognize, protect and feilitate the exercise oftheir right. Recommendation 13.1 ‘The Board should ensure that basic shareholder rights are disclosed in te Manual on Corporate Governance and on the company’s website Explanation It is the responsibility of the Board to adopt a policy informing, the shareholders of all their rights. Shareholders ore encouraged to exercise thate rights by providing clear-cut processes and procedures for them to / follow. Shareholders’ rights relate tothe Following, among others: 1) Pre-emptive rights; 1 Dividend policies;84 Chapter 4 i ‘a i it id to include Right to propose the holding of meetings an: agenda items ahead of the scheduled Annual and Special Shareholders’ Meeting; . ; Right to nominate candidates to the Board of Directors; 7 Nomination process; and ~ Voting procedures that would govern the Annual and Special Shareholders’ Meeting. The right to propose the holding of meetings and items for inclusion in the agenda is given to all shareholders, including minority and foreign shareholders. However, to prevent the abuse of this right, companies tay require that the proposal be made by shareholders holding a specified percentage of shares or voting rights. On the other hand, to ensure that minority shareholders are not effectively prevented from exercising this right, the degree of ownership concentration is considered in determining the threshold. Further, all shareholders must be given the opportunity to nominate candidates to the Board of Directors in accordance with the existing laws. The procedures of the nomination process are expected to be discussed clearly by the Board. The company is encouraged to fully and promptly disclose all information regarding the experience and background of the candidates to enable the shareholders to study and conduct their own background check as to the candidates? qualification and credibility. Shareholders are also encouraged to participate when: given sufficient information prior to voting on fundamental corporate changes stich’ as: (1) amendments to the Articles of Incorporation and By-Laws of the company; (2) the authorization on the increase in authorized capital stock; and (3) extraordinary transactions, including the transfer of all or substantially all assets that in effect result in the sale of the company. In addition, the disclosure and clear explanation of the voting procedures, as well as removal of excessive or unnecessary costs and other administrative impediments, allow for’ the effective exercise of the shareholders’ voting rights. Poll voting is highly encouraged as opposed to the show of hands. Proxy voting is also a good practice, including the electronic distribution of proxy materials. The related shareholders? rights and relevant company policies should — be contained in the Manual on Corporate Governance.C Code of Corporate Governance, Cominued 88 Recommendation 13.2 The Board should encourage active sharcholder participation by sending the Tickles of Annual and Special Shareholders’ Meeting with sufficient and relevant information at least 28 days before the meeting. Explanation Required information in the Notice include, among others, the date, location, meeting agenda and its rationale and explanation, and details of issues to be deliberated on and approved or ratified at the meeting. Sending the Notice in a timely manner allows shareholders to plan their participation in the meetings. It is good. practice to have the Notice sent to all shareholders at least 28 days before the meeting and posted on the company website, Recommendation 13.3 ‘The Board should encourage active shareholder participation by making the result of the votes taken during the most recent Annual or Special Shareholders’ Meeting publicly available the next working day. In addition, the Minutes of the Annual and Special Shareholders’ Meeting should be available on the company website within five business days from the end of the meeting. Explanation piscrosed Voting results include a breakdown of the approving and dissenting votes on the matters raised during the Annual or Special Stockholders? Meeting, When a substantial number of votes have been cast against a proposal made by the company, it may make an analysis of the reasons protie same and consider having a dialogue with its shareholders. “The Minutes of Meeting include the following matters: (|) A deseription ‘of the voting and the vote tabulation procedures used; (2) they opportunity given to shareholders to ask questions, as well as a record of the questions and the answers received: (3) the matters discussed and the ine lutions reached; (4) a record of the voting results for each agenda item; (5) a list of the directors, offi ers and sharcholders who attended ier ing; and (6) dissenting opinion on any agenda item that is Considered significant in the discussion process.Recommendation 13.4 of a shareholder, an s in an in the The Board should make available, at the option a alternative dispute mechanism to resolve intra-corporate dispute: amicable and effective manner. This should be included company”s Manual on Corporate Governance. Explanation he shareholders to be well-informed of the It is important for gz to redress the company’s processes and procedures when seel violation of their rights. Putting in place proper safeguards ensures suitable remedies for the infringement of shareholders’ rights and prevents excessive litigation. The company may also consider adopting in its Manual on Corporate Governance established Alternative Dispute Resolution (ADR) procedures. Recommendation 13.5 The Board should establish an Investor Relations Office (IRO) to ensure constant engagement with its shareholders. The IRO should be present at every shareholders’ meeting. Explanation Setting up an avenue to receive feedback, complaints and queries from shareholders assure their active participation with regard to activities and policies of the company. The IRO has a designated’ investor relations officer, email address and telephone number, Further, creating an Investor Relations Program ensures that all information regarding the seve oF the company are properly and timely communicated toSEC Code of Corporate Governance, Continued _ 87 DUTIES TO STAKEHOLDERS IRESS FOR VIOLATION OF STAKEHOLDER'S RIG) TS Principle The rights of stakeholders established by law, by contractual relations and through voluntary commitments must be respected. Where stakeholders” rights and/or interests are at stake, stakeholders should have the opportunity to obtain prompt effective redress for the violation of their rights. Recommendation 14.1 The Board should identify the company’s various stakeholders and promote cooperation between them and the company in creating wealth, growth and sustainability. Explanation Stakeholders in corporate governance include, but are not li customers, employees, suppliers, shareholders, investors. creditors, the community the company operates in, society, the government, regulators, competitors, external auditors, etc.,In formulating the company’s strategic and operational decisions affecting its wealth, growth and sustainability, due consideration is given to those who have jan interest in the company and are directly affected by its operations. Recommendation 14.2 id establish clear policies and programs to provide a The Board shoul 3 fair treatment and protection of stakeholders. mechanism on the Explanation in instances when stakeholders” interests are not legislated, companies” voluntary commitments ensure the protection of the stakeholders’ rights. he company’s Code of Conduct ideally includes provisions on the and. procedures on dealing with various company’s policies P ; corrrmjgers. "The company”s stakeholders, include its customers88 Chapter 4 ity i ich it operates. nmunity in which i and the eine well as clear, timely and ings as v y an i stakeholders ensure their fair resource providers, creditors Fair, professional and objective deal regular communication with the various treatment and bettor protection of their rights. Recommendation 14.3 allow ‘The Board should adopt a transparent framework and Po le stakeholders to communicate with the company and to ol the violation of their rights. Explanation The company's stakeholders play a role in its growth and long-term viability. As such, it is crucial for the company to maintain open and easy communication with its stakeholders. This can be done through stakeholder engagement touchpoints in the company, such as the Investor Relations Office, Office of the Corporate Secretary, Customer Relations Office, and Corporate Communications Group. 15. ENCOURAGING EMPLOYEES’ PARTICIPATION Principle A mechanism for employee participation should be developed to create a symbiotic environment, realize the company’s goals and participate in its corporate governance processes, Recommendation 15.1 The Board should establish policies, programs and procedures that encourage employees to actively participate in the realization of the company’s goals and in its governance. Explanation The establishment of policies and programs covering following: (1) health, safety and welfare: (2) training __ and (3) reward/compensation for employees. caen perform better and motivates then corporation. Active participation among others, the and development; employees, encourages employees to m A take a more dynamic role in the is further fostered When the company= SEC Ce yf Corporate Governance, Cominued 89 recognizes the firm-spe contribution in corpor certain key decisions n through work councils skills of its employees and their potential ale governance. The employees’ viewpoint in may also be or employee repre: onsidered in governance processes ntation in the board. Recommendation 15,2 The : Board should set the tone and make a stand against corrupt practices oy adepting an anti-corruption policy and program in its Code of nduct. Further, the Board should disseminate the policy and program to employees across the organization through trainings to embed them in the company’s culture, Explanation The adoption of an anti-corruption policy and program endeavors to mitigate corrupt practices such as, but not limited to, bribery, fraud, extortion, collusion, conflict of interest and money laundering. This encourages employees to report corrupt practices and outlines procedures on how to combat, resist and stop these corrupt practices. Anti-corruption programs are more effective when the Board sets the tone and leads the company in their execution. Recommendation 15.3 The Board should establish 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 a unit created to handle whistleblowing concerns. The Board should be conscientious in establishing the framework, as well as in. supervising and ensuring its enforcement. Explanation istleblowing framework sets up the procedures and safe- mplaints of employees, either personally or through their concerning illegal and unethical behavior. One framework is the inclusion of safeguards to secure informer and to ensure protection from f the framework is granting individuals or A suitable whi harbors for complal representative bodies, essential aspect of the the confidentiality of the retaliation. Further, part 0!90 Chapter 4 ces ie access to either an independent representative bodies confidential direct « " director or a unit designed to deal with whistle blowing concerns, dsman to deal with complaints id e-mail facilities to receive Companies may opt to establish an ombu and/or established confidential phone ani allegations. 16, ENCOURAGING SUSTAINABILITY AND SOCIAL RESPONSIBILITY Principle The company should be socially responsible in all its dealings with the communities where it operates. It should ensure that its interactions serve its environment and stakeholders in a positive and progressive manner that is fully supportive of its comprehensive and balanced development. Recommendation 16.1 The company should recognize and place an importance on the interdependence between business and society, and promote a mutually beneficial relationship that allows the company to grow its business, while contributing to the advancement of the society where it Operates. Explanation The company’s value chain consists of inputs to the production process, the production process itself and the resulting output. Sustainable development means that the company not only complies with existing regulations, but also voluntarily employs value chain processes that takes into consideration economic, environmental, social and governance issues and concerns. In considering sustainability concerns the company plays an indispensable role alongside the government and civil Society in contributing solutions to complex global challenges like ‘poverty, inequality, unemployment and climate change.SEC Code of Corporate Governance, Continued 91 REVIEW QUESTIONS Questions 1, Assume that management had determined that its organization's audit committee is not effective. How do the weaknesses in audit committee affect management’s evaluation of internal control over financial reporting? Would an ineffective audit committee constitute a material weakness in internal control over financial reporting? State the rationale for your response. 2. Why is there a need for a corporation to maintain @ comprehensive and cost-efficient communication channels to shareholders and other investors? | 3. What is the objective of the company in having a, strong and effective internal control system? . 4, What is the purpose of having an independent internal audit function in @ publicly-listed corporation? 5. Give at least four (4) responsibilities of the Chief Audit Executive. 6. Enumerate the activities of the Risk Management department in a publicly-listed corporation. 7. To what may the shareholders’ rights relate? participation of employee in corporate governance be 8. How may encouraged? 9, True or False. Sustainability reporting includes voluntary corporate disclosures about sustainability initiatives, plans, and associated outcomes. 10. True or False. The terms non-financial reporting, corporate social responsibility reporting, and iriple bottomline reporting, are each sustainability-related terms.92. Chapter 4 11. Define the terms nonfinancial reporting, corporate social responsibility reporting, and triple bottom-line reporting. How do these terms relate to sustainability reporting? 12, What factors have driven the demand for sustainability reporting? 13. Why is there a demand for independent assurance on sustainability reporting? , ‘ 14. In unethical for a company to provide a sustainability report, but provide no assurance on the reliability of the information contained therein?