CORPORATE GOVERNANCE, BUSINESS ETHICS,
RISK MANAGEMENT AND INTERNAL CONTROL
CHAPTER 1. Introduction to Corporate
Governance
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.
- Process of decision making and
governing.
Characteristics of Good Governance
1. Participation – key cornerstone of good
governance.
- Could be either direct or through
legitimate institutions or
representatives.
- Needs to be informed and organized.
This means freedom of association and
expression on one hand and an
organized civil society on the other
hand.
2. Rule of Law - requires fair legal framework
that are enforced impartially.
- Also requires full protection of human
rights, particularly those of minorities.
3. Transparency - means that decisions taken and
their enforcement and done in a manner that
follows rules and regulations.
- Means that information is freely
available and directly accessible to
those who will be affected by such
decisions and their enforcement.
4. Responsiveness – processes try to serve the
needs all stakeholders within a reasonable
timeframe.
5. Consensus Oriented – requires mediation of the
different interest in society to reach a broad
consensus.
- Result from an understanding of the
historical, culture and social contexts of
a given society or community.
6. Equity & Inclusiveness – All its members feel
that they have a stake in it and do not feel
excluded from the mainstream of society.
7. Effectiveness & Efficiency – processes
institutions produce results that meet the needs
of society while making the best use of
resources at their disposal.
- Also covers the sustainable use of
natural resources and the protection of
the environment.
8. Accountability – key requirement of good
governance. And cannot be enforced without
transparency and the rule of law.
Corporate Governance – the system of rules, practices
and processes by which business corporations are
directed and controlled.
Purpose of Corporate Governance – is to facilitate
effective, entrepreneurial and prudent management that
can deliver long term success of the company.
Objectives of Corporate Governance
1. Fair and Equitable Treatment of
Shareholders
2. Self- Assessment
3. Increase Shareholders’ Wealth
4. Transparency and Full Disclosure
Principles of Good Governance
Note: for best practice recommendations for each
principle, read the book)
1. A company should lay solid foundation for
management and oversight
2. Structure the board to add value.
3. Promote ethical and responsible decision
making.
4. Safeguard integrity in financial reporting.
5. Make timely and balanced disclosure
6. Respect the rights of shareholders and facilitate
the effective exercise of those rights.
7. Recognize and manage the risk.
8. Encourage enhanced performance
9. Remunerate fairly and responsibly.
10. Recognize the legitimate interest of
shareholders.

CHAPTER 2. Corporate Governance
Responsibilities and Accountabilities
Parties Involved in Corporate Governance; Their
respective broad role and specific responsibilities
1. Shareholders – provide effective oversight
through election of board members, approval of
major initiatives such as buying or selling stock,
annual reports on management compensation
from the board.
2. Board of Directors – Majors representative of
stockholders.
3. Non-Executive or Independent Directors –
The same as the broad role of the entire board of
directors.
4. Management – Operations and accountability.
Manage the organization effectively; provide
accurate and timely reports to shareholders and
other stakeholders.
5. Audit Committees of the Board of Directors –
provide oversight of the internal and external
audit function and the process of preparing the
annual financial statements as well as public
reports on internal control.
6. Regulators
a. Board of Accountancy – set accounting and
auditing standards.
b. Securities and Exchange Commission –
ensure the accuracy, timeliness and fairness
of public reporting of financial and other
information for public companies.
7. External Auditors – performs audit of company
financial statements to ensure that the statements
are free of material misstatements including
misstatements that may be due to fraud.
8. Internal Auditors- perform audits of companies
for compliance with company policies and laws,
audit to evaluate the efficiency of operations and
periodic evaluation and tests of controls.
CHAPTER 3. SEC Code of Corporate
Governance for Publicly- Listed
Companies
 Corporate Governance – the system of
stewardship and control to guide the
organization direction.
- Is a system of direction, feedback and
control using regulations, performance
standards and ethical guidelines.
 Board of Directors – the governing body
elected by the stockholders.
 Management – a group of executives given
the authority by BOD to implement policies.
 Independent Director - who is independent
of management and the controlling
shareholder, and is free from any business or
other relationship which could, exercise of
independent judgment in carrying out his
responsibilities as a director.
 Executive Director – who has executive
responsibility of day to day operation.
 Non-Executive Director – who has no
executive responsibility and does not
perform any work related to the operation of
the corporation.
 Conglomerate – a group of corporations
that has diversified business activities in
varied industries. Operation 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.
 Enterprise Risk Management – a process,
effected by an entity’s BOD, management
and other personnel, applied in strategy
 setting and manage risk to be within its risk
appetite.
5. Fairness and Openness -Be fair and open minded,
 Related Party – shall cover the company’s
be willing to admit error.
subsidiaries, as well as affiliates and any
party.

 Related Party Transactions – a transfer of

resources, services or obligations between a 6. Caring for Others – Be caring, kind, and
reporting entity, and a related party. compassionate; share, be giving, be of service to
others; help those in need and avoid harming others.
 Stakeholders – any individual, organization
7. Respect for Others – Demonstrate respect for
or society at large who can either affect
human dignity, privacy, and the right to self-
and/or be affected by the company’s
determination of all people.
strategies, policies, business decisions and
operations, in general.
8. Responsible Citizenship – Obey just laws.

(NOTE: READ THE BOARD’S GOVERNANCE 9. Pursuit of Excellence – meeting your personal and
RESPONSIBILITIES) professional responsibilities, be diligent, reliable,
industrious and committed.

CHAPTER 4. SEC Code of Corporate 10. Accountability – Be accountable, accept

Governance, Continued responsibility for decisions.

(REEEEEAAAAD!!)
Why is Ethical Behavior Necessary?

- For a society to function in an orderly

CHAPTER 5. Introduction to Ethics manner.

Ethics – a set of moral principles or values that govern
the action and decisions of an individual or group.
Personal Ethics -vary from individual to individual at
any point in time.
Why do People Act Unethically? 2 primary reasons:
1. The person’s ethical standards are different from
those of society as a whole.
2. The person chooses to act selfishly.

Characteristics and Values Associated with ethical Categories of Ethical Principles

behavior
Principles of Personal Ethics
1. Integrity – be principled, honorable, upright,
courageous and act on convictions; do not be 1. Basic justice, fairness
twofaced or unscrupulous, or adopt an end justifies- 2. Respect for the right of others
the means philosophy that ignores principle. 3. Concern for the others
4. Concern for the well-being on welfare of others
2. Honesty – Be truthful, sincere, forthright, 5. Benevolence, trustworthiness, honesty
straightforward, frank, candid; do not cheat, steal, lie 6. Compliance with the law
deceive or act deviously.
3. Trustworthiness and Promise Keeping – Be Professional Ethics
worthy of trust, keep promises and full
commitments. 1. Integrity, impartiality, objectivity
2. Professional competence
4. Loyalty (Fidelity) and Confidentiality – Be 3. Confidentiality
faithful and loyal to family; do not use or disclose 4. Professional Behavior
information learned in confidence. 5. Avoidance of potential or apparent conflict of
interest.
 Business Ethics
1. Fair competition
2. Global as well as domestic justice
3. Social responsibility
4. Concern for environment
The Need for Professional Ethics
All the recognized professions have several common
characteristics. The most important of these
characteristics are:
1. A responsibility to serve the public
2. A complex body of knowledge
3. Standards of admission to the profession
4. A need for public confidence
Code of Good Governance for the Profession in the
Philippines (E.O. No. 220, June 23.2003)
- This code is adopted by the
Professional Regulation Commission
(PRC) and the 42 professional
regulatory boards to cover an
environment of good governance in
which all Filipino professionals shall
perform their tasks.
Specific Principle of Professional Conduct
1. Serve to others – committed to a life of service
to others.
2. Integrity and Objectivity – shall perform their
responsibilities with the highest sense of
integrity and imbued with nationalism and
spiritual values.
3. Professional Competence – i.e knowledge,
technical skills, attitudes, and experience.
4. Solidarity and Teamwork - shall nurture and
support one organization for all its members.
5. Social and Civic Responsibility – shall always
carry out their professional duties with due
consideration of the broader interest of the
public.
6. Global Competitiveness - shall remain open to
challenges of a more dynamic interconnected
world. Shall rise up global standards.
7. Equality of all Professions – All professionals
shall treat their colleagues with respect and shall
strive to be fair in their dealings with one
another.
CHAPTER 6. Business Ethics
Business Ethics – refers to standards of moral
conduct, behavior and judgment in business.
- Is an area of corporate responsibility
where businesses are legally bound and
socially obligated to conduct business
in an ethical manner.
- Is based on the personal values and
standards of each person engaged in
business.
Main Purpose
- Is to help business and would be
business to determine what business
practices are right and what are wrong
Special Purpose
1. To make businesses realize that they cannot
employ double standards to the actions of
other people and to their own actions.
2. To show businesses that common practices
which they have thought to be right because
they see other businessmen doing it, are
really wrong.
3. To serve as a standard or ideal upon which
business conduct should be based.
Scope and Impact of Business Ethics
 Economic Impact – through the wages it
pays to its employees, the materials that they
buys from their suppliers and the prices it
charges its customers.
 Social Impact – contributes to the ethical
climate of society
 Environmental Impact – is a key area of
business influence on society.
 Impact on Business Managers – although
the manager is expected to act in the best
interest of the business, he cannot be
expected to act in a manner that is contrary
to the law or to his conscience.
 CHAPTER 7. Common Unethical
Practices of Business Establishments
 Misrepresentation- may be classified into
two types:
1. Direct Misrepresentation – actively
misrepresenting about the product or
customers.
 Deceptive Packaging – placing the
product in containers of exaggerated
sizes and misleading shapes to give
a false impression of its actual
contents.
 Misbranding or Mislabeling –
making of false statements on the
label of a product or making its
container similar to well-known
product.
 False or Misleading Advertising –
greatly exaggerates the virtues of a
product and tells only half of the
truth.
 Adulteration – debasing a pure or
genuine commodity by imitating or
counterfeiting.
 Weight understatement or Short
Weighing – tampered with or
something is unobtrusively attached
to it so that the scale registers more
than the actual weight.
 Measurement understatement or
Short measurement- measuring
stick or standard is shorter than the
real length or smaller in volume
than the standards.
 Quantity understatement or Short
Numbering – seller gives the
customer less than the number asked
for or paid for.
2. Indirect Misrepresentation – by
omitting adverse or unfavorable
information about the product or
services.
 Caveat Emptor – very common
among salesmen. “Let the buyer
beware”
 Deliberate Withholding of
Information – where one of the
parties does not exactly know what
he is giving away or receiving in
return.
 Passive Deception – businessman is
unable to provide the customer with
the complete information that the
latter needs to make a fair decision.
 Over-Persuasion – appealing to the
emotions of a prospective customer and
urging him to buy an item of merchandise he
needs.
Corporate Ethics
Some Unethical Practices of the Board of Directors
1. Plain Graft – done by voting for themselves and the
executive officers huge per diems, large salaries, big
bonuses that do not commensurate to the value of
their services.
2. Interlocking Directorship – practice by a person
who holds directorial positions on two or more
corporation that do business with each other.
3. Insider Trading – when a broker or another person
with access to confidential information uses that
information to trade shares and securities of a
corporation.
4. Negligence of Duty – fail to attend board meetings
regularly.
Some Unethical Practices of Executive Officers
and Lower Level Managers
1. Claiming a vacation trip to be a business trip
2. Having employees do work unrelated to the
business
3. Loose or ineffective controls
4. Unfair Labor practices
5. Making false claims about losses to free
themselves from paying the compensation and
benefits provided by law.
6. Making employees sign documents showing that
they are receiving fully what they are entitled to
under the law when in fact they are only
receiving a fraction of what they are supposed to
get.
7. Sexual Harassment
Some Unethical Practices of Employees
1. Conflict of Interest – where his decision or
actuation is influenced by what he can gain.
2. Dishonesty
 CHAPTER 8. ETHICAL DILEMMA
Ethical Dilemma – a situation a person faces in which a
decision must be made about the appropriate behavior.
Resolving Ethical Dilemmas
1. Obtain the relevant facts.
2. Identify the ethical issues from the facts.
3. Determine who is affected by the outcome of the
dilemma and how each person or group is
affected.
4. Identity the alternative available to the person
who must resolve the dilemma.
5. Identify the likely consequences of each
alternative
Efforts to Curb Corruption through Legislation
6. Decide the appropriate action.
CHAPTER 9. Advocacy against Corruption
Corruption – is the abuse of private and public office for
personal gain. It includes acts of bribery, embezzlement,
nepotism, kickbacks and state capture.
- Misuse of entrusted power.
Why and how does a person become Corrupt
 Career Advancement
 Earning of more income
 Financial problems caused by
illness, loss of property, etc.
Characteristics of Corruption
a. Recipient and payers
b. Extortion
c. Lubricant of Society
d. Poverty alleviation
e. Culture
f. Kindness among friends
CHAPTER 10. Initiative to Improve Business
Prevention of Corruption
1. Clear Business Processes – can help flag
irregularities in a business or organization.
2. Policy on Gifts and Entertainment – to promote
good relations. The risk of corruption can be
reduced by setting a policy on when gifts and
entertainment may be given and accepted and
what records need to be kept.
3. Declaration of Conflict of Interest – In order to
safeguard the business interest, a declaration
system that is applicable to all levels of
employees may be instituted.
4. Convenient Corruption Reporting System – Is a
key function to control corruption and bribery
risk, and can comprise a whistle-blowing policy
or feedback channel.
 Anti-Graft and Corrupt Practices – Act
criminalizes active and passive bribery,
embezzlement, extortion, abuse of office
and conflict of interest in the public sector.
 Anti- Red Tape Act – Act forbids office
holders from accepting any gifts or
materials benefits in exchange for any
government permit or license.
 Under the Revised Penal Code, gifts are
classified as indirect bribery.
 Anti- Money Laundering Act – criminalizes
money laundering and organized crime.
 Act Establishing a Code of Conduct and
Ethical Standards for Public Officials
Employees – formulates standards for the
personal integrity and accountability of civil
servants.
 Government Procurement Reform Act –
requires competitive and transparent
bidding.
 The Philippine has ratified the United
Nations Convention against Corruption.
Ethics and Reduce Corruption
( REAAAAD ONLY )
 CHAPTER 11. Risk Management  Liquidity Risk - Is associated with
the uncertainty created by the
Risk Management – is the process of measuring or inability to sell the investment
assessing risk and developing strategies to manage it. quickly for cash.
- Is a systematic approach in identifying,  Management Risk – Decisions
analyzing and controlling areas or made by a firm’s management and
event. board of directors materially affect
- Act or practice of controlling risk the risk faced by investors.
 Purchasing Power Risk – Is
perhaps, more difficult to recognize
than the other types of risk.
As defined in the International Organization of
Standardization (ISO) – Risk management is the II. Risk Associated with Manufacturing, Trading, and
identification, assessment, and prioritization of risks Services Concerns
followed by coordinated and economical application or
resources to minimize unfortunate events. A. Market Risk
 Product Risk
Risk Management should:  Complexity
 Obsolescence
1. Create value
 Research and Development
2. Address uncertainty and assumptions
 Packaging
3. Be an integral part of the organizational
 Delivery of Warranties
processes and decision-making.
 Competitor Risk
4. Be dynamic
 Pricing Strategy
5. Create capability
 Market Share
6. Be systematic
 Market Strategy

Process of Risk Management B. Operation Risk

 Process Stoppage
1. Establishing the Context
 Health and Safety
2. Identification of potential risks
3. Risk assessment  After Sales Services Failure
 Environmental
Relevant Risk Terminologies  Technological Obsolescence
i. Risk Associated with Investments  Integrity
 Business Risk – refers to the  Management Fraud
uncertainty about the rate of return  Employee
caused by nature of the business.  Illegal Acts
 Default Risk – related to the C. Financial Risk
probability that some or all of the  Interest Rates Volatility
initial investment will not be  Foreign Currency
returned.  Liquidity
 Financial Risk – The firm’s capital
 Derivative
structure or source of financing
 Viability
determine financial risk..
D. Business Risk
 Interest Rate Risk – fluctuation in
 Regulatory Change
interest rate will cause the value of
an investment to fluctuate also. The  Reputation
most commonly associated with  Political
bond price movements, rising  Regulatory and Legal
interest rates cause bond prices to  Shareholder Relations
decline and declining interest rate  Credit Rating
cause bond price to rise.  Capital Availability
 Business Interruptions

Potential Risk Treatments
These techniques can fall into one or more of these
four categories:
 Risk Avoidance – performing an activity
that could carry risk.
- Losing out the potential gain.
- Not entering a business to avoid risk of
loss also avoids the possibility of
earning profits.
 Risk Reduction – involves reducing the
severity of the loss or the likelihood of the
loss from occurring.
- Finding a balance between the negative
risk reduction and the benefit of the
operation or activity.
 Risk Sharing – means sharing with another
party the burden of loss or the benefit of
gain from a risk.
 Risk Retention – involves accepting the
loss or benefit of gain from a risk when it
occurs.
Areas of Risk Management
The most commonly encountered areas of risk
management include:
1. Enterprise risk management
2. Risk management activities as applied to project
management
3. Risk management for megaprojects
4. Risk Management of information technology
5. Risk management techniques in petroleum and
natural gas.
CHAPTER 12. Practical Guidelines in Reducing
and Managing Business Risks
( REEEEEEEEAAAAAD !! )
CHAPTER 13. OVERVIEW OF INTERNAL
CONTROL
Internal control – the process designed and effected by
those charged with governance.
- Designed and implemented to address
identified business risks that threaten
the achievement of any of these
objectives.
Those objectives fall into three
categories:
 Reliability of the entity’s financial reporting
 Effectiveness and efficiency of operations
 Compliance with applicable laws and
regulations
Internal control system – all policies and procedures
(internal controls) adopted by the management of an
entity to assist in achieving management’s objective,
and safeguarding of assets.
Elements of Internal Control
The internal control system extends beyond these
matters which relate directly to the functions of the
accounting system and consists of the following
components:
a. The Control Environment – means the
overall attitude, awareness and actions of
directors and management regarding the
internal control system and its importance
in the entity.
Several factors comprise the control
environment:
1. Communication and
Enforcement of Integrity and
Ethical Values - essential
elements of the internal
control environment
2. Commitment to competence –
is the knowledge and skills
necessary to accomplish task.
3. Participation by those
charged with Governance –
include independence from
management, their experience
and stature, the extent of their
involvement and scrutiny of
activities.
4. Management’s Philosophy
and Operating Style - refers
to management’s attitude
towards; business risk,
financial reporting, meeting
budget, profit and other
established goals which all
 have impact on the reliability
of the financial statements.
5. Organizational Structure –
responsibilities and authorities
of the various personal within
the organization should be
established in such a manner.
6. Assignment of Authority and
Responsibility – personnel
within an organization need to
have a clear understanding of
their responsibilities and the
rules and regulations that
govern their actions.
7. Human Resources Policies
and Procedures – the most
important element of an
internal accounting control
system is the people who
perform and execute the
established policies and
procedures.
b. Entity’s Risk Assessment Process
Risk assessment – is the identification,
analysis, and management of risks
pertaining to the preparation of financial
statements.
Risks can arise or change due to
circumstances such as the following:
 Changes in operating environment
 New personnel
 New or revamped information
systems
 Rapid growth
 New technology
 New business models, products, or
activities
 Corporate restructurings
 Expanded foreign operations
 New accounting pronouncements
c. Information System, including the
Business Processes, Relevant to Financial
Reporting and Communication - an
information system consists of
infrastructure (physical and hardware
components), software, people,
procedures and data.
Journal Entries – required on a recurring
basis to record transactions.
Related Business Processes – designed to:
develop, purchase, produce, sell and
distribute an entity’s products and services
; Ensure compliance with laws and
regulations ; Record information, including
accounting and financial reporting
information.
Application to Small Entities - small
entities with active management
involvement may not need extensive
descriptions of accounting procedures,
sophisticated accounting records, or
written policies.
d. Control Activities – are the policies and
procedures that help ensure that
management directives are carried out.
Major Categories of control procedures
are:
A. Performance Review –
management uses accounting
and operating data to assess
performance, and it then
takes corrective action.
B. Information Processing
Control – are policies and
procedures designed to
require authorization of
transactions and to ensure
the accuracy and
completeness of transaction
processing.
C. Physical control – intended to
prevent theft of assets.
e. Monitoring Control – the final component
of internal control.
- The process that an entity uses to
assess the quality of internal control
overtime.
- May include communications from
external parties.
“ STUDY S M A R T . PASAR LGE KA  “