GOVBUSMAN MODULE 3:

Chapter 3 & 4: SECURITIES and EXCHANGE COMMISSION (SEC) CODE of CORPORATE GOVERNANCE

Expected Learning Outcomes

After studying the chapter, you should be able to …

1. Understand the need for the Code of Governance for publicly-listed companies.
2. Know the Sixteen (16) governance responsibilities of the Board of Directors of publicly-listed
companies.
3. Explain the meaning of ‘comply and explain” approach.
4. 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
 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.

SEC CODE OF CORPORATE GOVERNANCE FOR PUBLICLY-LISTED COMPANIES (“CG Code for PLC’s)
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 developments in corporate governance.
In order for the SEC to be effective and efficient there must be compliance on the side of these publicly
listed companies. Bakit kailangan pa magkaroon ng Public Code of Corporate Governance? (next
paragraph)

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. They want to have uniformity, magkakaroon lang ng tinatawag na
conformance In terms of having this standards for professional and ethical behavior as well as articulate
acceptable and unacceptable conduct and practices.
The BOD is required to implement the code and make sure to be honest and employees comply with the
internal policy said.
While many companies have already developed their own code of business conduct and ethics. The real
challenge is its implementation and monitoring compliance because some companies they just do this
for purposes of compliance. Dapat may pakiaalam sila sa nga third party auditors, sa mga regulators nila
just to provide compliance and show something that they have but the real challenge to here is for
them to be able to comply, implement of such compliance.

CODE OF CORPORATE GOVERNANCE FOR PUBLICLY-LISTED COMPANIES

5 Categories
The Board’s Governance Responsibilities

Principle 1: 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. Simply means the BOD must compose of directors
with a collective working knowledge, expertise that is relevant to the companies industry or sectors.
Now that is normal and logical kasi kailangan yung mga BOD na nakaupo sa corporation are
knowledgeable enough to know how business works.
The BOD should always ensure that it has appropriate mixed of competence and expertise and that the
members remain qualified for the position individually and collectively so means to say they have the
qualifications that need to satisfy individually and more so collectively. Dapat iisa lang ang maging
decision nila.

Principle 2: 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 stockholders and
other stakeholders. BOD should have act in a fully inform basis in good faith with due
diligence and care and in the best interest of the company and all the shareholders.
Dapat lang kasi you cannot make a good decision if the information is incomplete. Also
in this principle the BOD must oversee the development and approve the companies
business objectives and strategies and monitor their implementation in order to sustain
the company's long term ability and strength. We can see here the articles of
incorporation and bylaws which is the main guide of one company or corporation. They
manual operations dito sya laging nakasandig.
other legal pronouncements and guidelines should be clearly made known to all
directors as well as to stockholders and other stakeholders. Dapat lang naman para at
least alam ng ibang shareholders and other stakeholders what the business is going,
how the business operating and what is the effect of the business in the overall
performance of the community.

Principle 3: 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. The board should established board committees that focus on specific board
functions to aid in the optimal performance of its role and responsibility. The creation of
committees approved by the board is very helpful to the operation of the corporation.
The establishment of the committee that aid the whole board of the company in the
operation of business is only a wise thing to do.

Principle 4: 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. Explanation and
recommendations of such principles are as follows
To show full commitment to the company, the directors should attending actively participate all the
meetings

Principle 5: The Board should endeavor to exercise objective and independent judgment on all
corporate affairs. Should have at least 3 independent Board of Directors.

Principle 6: 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.

Principle 7: Members of the Board are duty-bound to apply high ethical standards, taking into
account the interests of all stakeholders. You are BOD tas mababalitaan nila na may
anomalya ka. Sa Banking industry hindi pwedeng maglaro sa Casino kahit manood at
magtingin tingin ka lang. Pag nakita maiisip na baka pinagsusugal ang mga deposits nila.
You need to protect your reputation.

DISCLOSURE AND TRANSPARENCY everting must be laydown

Also called

Principle 8: The company should establish corporate disclosure policies and procedures that are
practical and in accordance with best practices and regulatory expectations. Where the
accountants are joined

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. What we calls strengthening the
external auditor's .
Record
The should have independence

Principle 10: The Company should ensure that material and reportable non-financial and
sustainability issues are disclosed. Need to see the disclosure, and to have sustainability
issues

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. Should maintain
media
Dito tinitigman at ginagamit ang right communication tools

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. Strengthening the internal control system and
enterprise risk management framework is also vital

CULTIVATING A SYNERGIC RELATIONSHIP WITH SHAREHOLDERS

Principle 13: The Company should treat all shareholders fairly and equitably, and also recognize,
protect and facilitate the exercise of their rights.
One of the
Must also increase their wealth, its one way of protecting them

DUTIES TO STAKEHOLDERS

Principle 14: 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. When the rights of the stakeholders
must be very fast to solve it. Kasi mahirap kapag ang stakeholder ang nagka problema

Principle 15: A mechanism for employee participation should be developed to create a symbiotic
environment, realize the company’s goals and participate in its corporate governance
process. The Board is the brain,
It must be continuous

Principle 16: 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. The company must be socially responsible
Needto give back

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.

2. The Code will adopt the “comply and explain” approach. This approach combines voluntary
compliance with mandatory disclosure.
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.

4. The Recommendations are objective criteria that are intended to identify the specific features of
corporate governance good practice that are recommended for companies operating according
to the Code. 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.

5. 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.

6. 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).

7. Definition of Terms:
 Corporate Governance – the system of stewardship and control to guide organizations
in fulfilling their long-term economic, moral, legal and social obligations towards their
stakeholders.
 Board of Directors – the governing body elected by the stockholders the exercises the
corporate powers of a corporation, conducts all its business and control its properties.
 Management – a group of executives given the authority by the Board of Directors to
implement the policies or has laid down in the conduct of the business of the
corporation.
 Independent 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 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
various 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.
 Enterprise Risk Management – a process, effected by an entity’s Board of Directors,
management and other personnel, applied in the 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 the company; the company’s directors; officers;
shareholders and related interest (DOSRI), and their close family members as well, as
well as corresponding persons on affiliate companies. This shall also include such other
persons or juridical entity whose interests 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 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.

DISCUSSION 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 a comprehensive and cost-effective 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. Give at least four (4) responsibilities of the Chief Audit Executive.