Corporate Governance, Business Ethics, Risk Management and Internal Control

CHAPTER 1
REVIEW QUESTIONS

1. What does governance mean?

Governance is a process wherein the people as a society wield power,

authority and influence and enact policies and decisions concerning public life
and social upliftment. It may be undertaken by the government of a country, by
a market or by a network -- over a social system. It can be used in different
aspects such as corporate governance, international governance, national and
local governance. Hence, Governance pertains to the process of decision
making and the process by which decisions are implemented or not through
the exercise of power or authority by leaders of the country and/ or
organizations.

2. Explain whether the following statement is true or false. “Governance

is exercised only by the government of the country”

False. The scope of Governance is not limited to the government of the

country. Governance is a broad term that can be used in different contexts
such as corporate governance, international governance, national and local
governance. Moreover, Governance 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.

3. Explain how governance can be used in the following contexts and

give appropriate examples:

A. National Governance

National Governance is widely understood as the principal unit of

contemporary political order throughout the world or society the state.
The systems of political and economic power which shape
fundamental dimensions of our world are not fixed, but changing, with
significant transitions underway. Further, It is responsible for
maintaining internal and external security and stability.We take for
example Philippine National Government as a separate government
to other countries national government.
 B. Local Governance

Local Governance is defined technically as the administration of the

local affairs of a city, town, or other district by its inhabitants. This context
governs a special unit in a particular business or country, and gives the
right and actual capability of local government bodies to regulate and
govern a considerate portion of public affairs, acting within the law at their
own responsibility and for the benefit of local community. For example,
the LGU’s or Local Government Unit in which they are responsible for the
municipal/city affairs.

C. Corporate Governance

Corporate Governance adheres to a system of rules, practices and

processes by which business corporations are directed and controlled. It
basically involves balancing the interests of a company’s shareholders,
management, customers, suppliers, financiers, government and the
community. In addition, it also facilitates effective, entrepreneurial and
prudent management that can deliver long-term success of the company
just like how the big corporation in the Philippines governs their company
to achieve fair and equitable treatment of shareholders, enable to assess
their behavior, increase shareholders wealth and give transparency and
full disclosure.

D. International Governance

The concept of International Governance refers to the pattern of rule

found at the global level. It is also addressed as global governance or
world governance. Further, is a movement towards political cooperation
among transnational actors, aimed at negotiating responses to problems
that affect more than one country or region. International Monetary Fund,
World Bank, United Nations Children's Fund, etc are examples of how
international governance works.

4. Explain briefly the eight (8) characteristics of good governance.

1.Participation
All men and women should have a voice in decision-making, either
directly or through legitimate intermediate institutions that represent their
interests. Such broad participation is built on freedom of association and
speech, as well as capacities to participate constructively.

2.Rule of law
Legal frameworks should be fair and enforced impartially, particularly
the laws on human rights.
 3.Transparency
Transparency is built on the free flow of information. Processes,
institutions and information are directly accessible to those concerned
with them, and enough information is provided to understand and monitor
them.

4.Responsiveness
Institutions and processes try to serve all stakeholders.

5.Consensus orientation
Good governance mediates differing interests to reach a broad
consensus on what is in the best interests of the group and, where
possible, on policies and procedures.

6.Equity
All men and women have opportunities to improve or maintain their
well-being.

7.Effectiveness and efficiency

Processes and institutions produce results that meet needs while
making the best use of resources.

8.Accountability
Decision-makers in government, the private sector and civil society
organizations are accountable to the public, as well as to institutional
stakeholders. This accountability differs depending on the organizations
and whether the decision is internal or external to an organization.

5. Transparency and accountability are synonymous. Explain whether

the statement is correct or not.

The term transparency and accountability are often used interchangeably. To

provide clarification, Transparency denotes that the information is freely
available and directly accessible to those who will be affected by such
decisions and enforcement. Meanwhile, Accountability pertains to who is
responsible by the decision made by governing body. Hence, there is a
complex relationship between because transparency is considered as a
pre-requisite of accountability as well; they have become synonymous.

6. Explain whether the following statement is true or false.

“Responsiveness usually results to effectiveness and efficiency”

True. Responsiveness will usually result to effectiveness and efficiency

because when you’re responsive on a certain thing, it will get you to where you
need to be and connotes effectiveness and efficiency in work.
7. Define corporate governance

Corporate Governance is defined as system of rules, practices, and

processes by which a firm is directed and controlled. Corporate governance
essentially involves balancing the interests of a company's many stakeholders,
such as shareholders, senior management executives, customers, suppliers,
financiers, the government, and the community. It encompasses practically
every sphere of management, from action plans and internal controls to
performance measurement and corporate disclosure. In simple words,
Corporate governance is the structure of rules, practices, and processes used
to direct and manage a company.

8. What does corporate governance structure involve?

Corporations can have many different structures, but the most typical
structure consists of the shareholders, board of directors, officers and the
employees. The structure of corporate governance determines the distribution
of rights and responsibilities between the different parties in the organization
and sets the decision-making rules and procedures. It is usually up to the
management board to decide how the company will develop.

9. State the purpose of corporate governance

The purpose of corporate governance is to have the company’s vision

aligned with their goals and objective. Further, it will facilitate effective
entrepreneurial and prudent management that can deliver long-term success
of the company.Apart from this, the fundamental aim of corporate governance
is to enhance shareholders’ value and protect the interests of other
stakeholders by improving the corporate performance and accountability.
Moreover, it will help build an environment of trust, transparency and
accountability necessary for fostering long-term investment, financial stability
and business integrity, thereby supporting stronger growth and more inclusive
societies.

10. Explain the basic objectives of corporate governance.

The concept of basic objectives of corporate governance are: (1) Fair and
Equitable Treatment of Shareholders, (2)Self-Assessment,(3) Increase
Shareholders’ Wealth, and (4)Transparency and Full Disclosure.

Fair and Equitable Treatment of Shareholders - the structure of governance

must observe integrity and fairness in treating the shareholders.All
stakeholders should be treated equally whether you are major/minor
shareholder.
 Self-Assessment - pertains on how a corporation evaluate and assess their
performance and behavior before they are scrutinized by regulatory agencies.

Increase Shareholders’ Wealth - the long-term success of the company’s

shareholder should be protected with aiming to increase their wealth. This only
reflects the positive perception that good corporate governance induces
potential investor to decide to invest in a company.

Transparency and Full Disclosure - having this as objective, shareholders will

not doubt company’s capability into accounts because a good corporate
governance ensure a higher degree of transparency in an organization by
encouraging full disclosure of transaction of the company.

11. Explain the three basic principles of effective corporate governance.

The three basic principles of effective corporate governance includes the

following:

Transparency - this is where the question “ is the board telling us what is

going on?” arise. This principle must address the safeguard integrity in financial
reporting, and meets the information need in investment communities.

Accountability - this is a concept of responsibility on who should be

accountable on decisions made for the organization. This principle must clarify
each role and that of management.

Corporate Control - the notion here are whether the board is doing the right
thing or not, and have the board built long-term sustainable growth in
shareholders value for the corporation.

These three basic principle makes up a corporate government good and

effective.

Multiple Choice Answers:

1. 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?
 c) Can an outsider meaningfully analyse the firm’s actions and
performance?
d) Has the board built long-term sustainable growth in shareholder’s
value for the corporation?

2. The basic principle of “accountability” for effective governance answers the

following questions positively, except.
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 expensive diversity, knowledge added
value?
d) Does the board promote objective, ethical and responsible decision
making?

3. “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

4. 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 communication strategy to promote
affective communication with shareholders
c) Bu 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.

5. To safeguard integrity in financial reporting, the business firm should do the

following except.
a) Establish an audit committee
b) Request the eternal auditor to attend the annual general meeting
c) Disclose the functions reserved to the board and those delegated to
management
d) Disclose the policy concerning trading in company securities by
directors, officers and employees.

6. To encourage enhanced performance by the board and management, it is

recommended that the following should be adopted except
a) Disclosure of the process for performance evaluation of the board,
its committees, individual directors and by executives.
b) A remuneration committee
 c) Distinguish between non-executive director’s remuneration from
that of executives.
d) Establish policies on risks oversight and management.

7. The characteristics of good governance where fair legal framework are

enforced impartially is.
a) Participation
b) Rule of Law
c) Equity
d) Accountability