CHAPTER 5

GOOD GOVERNANCE PRINCIPLES AND PRACTICES

Ethical Imperatives Over Legal Considerations (Carly Florina – American Politician and
Businesswoman)

The Winning Companies

● Ultimately, what we are seeing in today’s marketplace is that the winning companies
of this century will be those who increase social value at the same time.
● More and more shareowners, customers, partners and employees will begin
rewarding companies that fuel social change through business initiatives.

It is an incumbent responsibility of management and of corporate officers:

● To lead by example.
● To be accountable to the organization, to serve at the pleasure and the benefit of
their shareowners, customers, and employees and not the other way around.
● To manage the risks in today’s global economy by managing its reputation – and to
know the difference between the legal thing to do and the moral thing to; and that
to do what is profitable without doing right is ultimately to do the wrong.
● To give importance, more than ever before, in a world defined by the newest
technology – to the oldest values of trust, honest, integrity, accountability and
responsibility - as they have never been considered before.
● To take ownership of the problems of accounting and financial deceptions and
manipulations regardless of whether or not the company is touched by scandals.

Characteristics of Abuse, Unethical Practice or Corporate Scandal

● In every company accused of abuse, the traits are all the same: abuses of power,
breach of ethics, undermining of honest accounting, deception of both public and
private watchdog groups and, sometimes, the willing cooperation of such groups.
● In each case, the checks and balance failed, and people tried to get away with
gains made at somebody else’s expense.
● It is also true that these abuses occurred in an era when many quarters – some
media, some analysts, some management teams – seemed to forget their
fundamentals: real profit, real cash flow, and real balance sheets matter –
fundamentals like trust, integrity and responsibility matters.
● The New York Times pointed out “many issues have been blended together in the
public mind-set – from cooking the books and stealing corporate cash to excessive
pay and perks” – making no distinction between crime and common practices.
That’s because, to many, there are no distinctions.

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● As is their role, into this breach, regulators and government official have stepped in
with ideas for new regulation and legislation.
● While the US government has taken a hammer to conflicts of interest among
auditors and executives, the New York Stock Exchange has done the same thing for
boards of directors.
● From the integrity of certified financial audits to appropriate accounting principles
and auditing standards, what used to be the legal ceiling is increasingly becoming
the legal floor.
● True leadership for a new Age of Reform must come from corporations themselves
as it did 100 years ago following a similar decline in public trust.

Some Consequences of Unethical Practice:

● Enron took a billion-dollar write-down of investments. Within three weeks, it reported

it overstated its earnings since 1987 by $586M. Within 6 weeks, it – which was valued
at more than $60 B – filed for bankruptcy.
● The stunning collapse of Enron not only cast a long shadow over capital markets, it
quickly gave way to headlines that more Enrons were to come. And sure enough,
they have come – more than 10 in all – leading one newspaper to refer to the
parade of fallen business leaders at the “corporate perp walk” led by Arthur
Andersen
● Lets call this scandal what it really is: it is greed, pure and simple.

Concepts and Practices of Corporate Governance:

● Stewardship Responsibility of Corporate Directors

▪ To provide oversight in fostering the implementation of the goals and strategies
of the company.
▪ To provide leadership by using its inherent powers to improve shareholder value
and to support a continuing commitment to growth.
▪ To coordinate the relationship among the various participants in determining the
direction and performance of the corporation.

● The art and science of managing the government of the corporation.

▪ A style of leadership set by the Board of Directors characterized by a high degree
of cooperation existing between them and senior management.
▪ A relationship among stakeholders that is used to determine a firm’s direction and
to control the company’s performance.
▪ A system where shareholders, creditors and other stakeholders of a corporation
ensure that management enhances the value of the corporation as it competes
in an increasingly global marketplace.

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● A traditional view of corporate governance which has three basic assumptions:
▪ Primacy of the shareholder.
▪ Diversity of the shareholder group.
▪ The maximization of shareholder wealth as a fundamental “raison d ‘etre (reason
for being or an emotional attraction to a course of action or in Japan ‘ikigai’)

● A shareholder-centric approach concerned with the following:

▪ Investor protection
▪ Management accountability
▪ Transparency
▪ Shareholder activism
▪ Providing adequate incentives to management
▪ Disciplining and replacing bad management
▪ Enhancing corporate performance
▪ Improving access to capital markets
▪ Promoting long-term investment
▪ Encouraging innovation

● A field of economics that investigates the ways to secure or motivate efficient

management of corporations through the use of incentive mechanisms like
contracts, organizational designs and legislation.

● It deals with ways in which suppliers of finance to corporations assure themselves of

getting a return on their investment.

● A system through which business corporations are directed and controlled and is
defined narrowly – as the relationship of a company to its shareholders, or more
broadly, the relationship of a company to society.

● Promotes corporate fairness, transparency and accountability and a fancy term for
the way in which directors and auditors handle their responsibilities towards the
shareholders.

● Synonymous to shareholder democracy.

● A system within an organization that protects the interests of its diverse stakeholders.

Values of Corporate Governance

● Accountability

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● Trust
● Transparency
● Integrity
● Honesty
● Responsibility
● Leadership by Example
● Ethical Standards

Global Perspectives on Corporate Governance

Organization for Economic Cooperation and Development (OECD) Principles of Good

Governance
1. Corporate Objective
● To optimize over time the returns of the shareholders
● To achieve this – the corporation should endeavor to ensure the long-term
viability of its business, and to manage effectively its relationships with
stakeholders, that is those with legitimate interest in the operation of the business
such as employees, customers, suppliers, creditors, and the communities in which
the company operates.
2. Communications and Reporting: Disclosure and Transparency
● Corporations should disclose accurate, adequate and timely information to allow
investors to make informed
3. Voting Rights
● Ordinary shares should feature one vote for each share
● Corporations should act to ensure the owners right to vote
● Fiduciary investors have a responsibility to vote and regulators and law should
facilitate voting rights and timely disclosure of the levels of voting
● Changes should not be made without prior approval of shareholders
● Use of telecommunications and other electronic channels should be allowed
● Transparency requires that meeting procedures ensure that votes are properly
counted and recorded, and that a timely announcement of the outcomes be
made.
4. Corporate Boards
● The board of directors or supervisory board as an entity and each of its members
as an individual is a fiduciary for all shareholders, and should be accountable to
the shareholder body as a whole.
● Fiduciary – a term derived from Roman Law which means that a person holding
the character of a trustee, or a character analogous to that of a trustee, in
respect to the trust and confidence involved in it, and the scrupulous good faith
and candor which it requires.

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 ● Fiduciary Capacity – means that each director holds in trust the money of
investors and should, therefore, take care of it as if it is their own.
● Disclose information on the identities, core competencies, professional and other
backgrounds; factors affecting independence, and overall qualifications of
board members and nominees so as to enable investors to weigh the value they
add to the company. Appointment procedure should also be disclosed
annually.
● Boards should include a number of independent non-executive members with
appropriate competencies.
● Responsibilities include monitoring and contributing effectively to the strategy
and performance of management, staffing key committees of the board, and
influencing the conduct of the board as a whole.
● Audit, remuneration and nomination board committees should b composed
wholly or predominantly of independent non-executives.
5. Corporate Remuneration Policies
● Remuneration of corporate directors or supervisory board members and key
executives should be aligned with the interests of the shareholders.
● Board should disclose policies on remuneration broken-up per individual board
member and top executives, so investors can judge whether corporate pay
policies and practices meet the standard.
● Broad based employee share ownership plans or other profit-sharing programs
are effective market mechanism that promote employee participation.
6. Strategic Focus
● Board should notify shareholder and get their approval if major strategic
modifications will be made
● Equally major corporate changes which in substance or effect materially dilute
or erode the economic interests of share ownership rights of existing shareholders
should not be made without prior shareholder approval of the change.
● Shareholders should be given sufficient information about any such proposal,
sufficiently early, to allow them to make an informed judgment and exercise their
voting rights.
7. Operating Performance
● Board should focus attention on optimizing over time the company’s operating
performance, in particular, to excel in specific sector peer group comparisons.
8. Shareholder Returns
● Board should optimize over time the returns to shareholders and, in particular,
should strive to excel in comparison with the specific equity sector peer group
benchmark

9. Corporate Citizenship

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 ● Corporations should adhere to all applicable laws of the jurisdictions in which
they operate.
● Board that strive for active cooperation between them and stakeholders will
most likely create wealth, employment and sustainable economies.
● Board should be accountable to shareholders and responsible for managing
successful and productive relationships with the corporation’s stakeholders.
● Performance-enhancing mechanisms promote employee participation and
align shareholder and stakeholder interests – such as employee share ownership
plans or other profit sharing programs.
10. Corporate Governance Implementation
● Codes of best governance practice must be developed if it does not exist yet,
however, if exists, it must be practiced pragmatically.
● Corporate governance issues between shareholders, the board and
management should be pursued by dialogue and where appropriate, with
government and regulatory representatives, as well as other concerned bodies,
so as to resolve disputes, if possible through negotiation, mediation or arbitration.
● When these fail, more forceful actions should be possible – such as the right of
investors to sponsor resolutions or convene extraordinary meetings.

Developments in Corporate Governance

Developments that Forced Corporations to Rethink their Concepts of Corporate

Governance
1. Globalization
2. Emerging Markets
3. A Networked Economy
4. Changing Ideas at Responsibility

Types of Current Discussions on Governance

1. Regulatory and compliance rules imposed on publicly traded companies or larger
corporations
2. Tool for growth and sustainability for companies
3. Governance is central not only to the success and failure of companies, but of
industries and economies

Emerging Practices in Corporate Governance

1. Has lot to do with transparency, integrity, accountability, communication, and
decision-making
2. Growing interest in the general connection between good governance practices
and corporate performance
3. Goes beyond the simple concept of who is in charge and who is in control

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4. Improves shareholder value as a goal and support for continuing commitment to
growth
5. Becomes a business reality in the different markets in the world
6. However, it is viewed that “natural governance” should be essentially the same in all
markets – emerging and developed
7. Commentators suggest that “one size doe not fit all” when it comes to governance
8. Distinctions in the stages of evolution of start-up companies in the “new economy“
against those in the “old economy” are emblematic (symbolic or representative) of
the view that governance is more than shareholder/management alignment or
about who is in control
● New Economy – two broad trends that have been underway for several years –
the globalization of business (spread of capitalism – introduction of market forces,
freer trade, and deregulation) and the revolution of information technology (fax,
personal computers, modems, internet, but more than these, the digitalization of
information – words, pictures, data and so on.
● Digital Technology – creates new companies and new industries – in Silicon Valley
alone there are 11 new companies born weekly, although not all of them
succeed.
● These trends can combine in powerful ways to raise Americans' standard of living,
create jobs, spur entrepreneurial effort--and do all this without boosting inflation.
9. Governance structures of “new economy” companies must change and react to
rapidly evolving changes in control – old economy companies typically evolve
control structures and governance practices much more slowly
10. Start of trends of “holistic governance
● Traditional concepts of governance – about mere financial return, efficiency in
which companies are operated in the interests of the shareholder, fair treatment
of minority shareholders or other shareholders
11. New thinking in governance
● Company strategy and life cycle development
● Management discipline
● Social responsibility

Holistic Governance – more complex and can be uncovered by asking the following
questions:
1. What are the companies’ primary activities?
2. What is its stage of development?
3. What is its ownership structure and how will it evolve?
4. Where has it raised capital?
5. Is there a controlling strockholder/s?
6. How big is its revenues, employees, locations?
7. Where is its head office?

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8. Where does it carry on business?
9. Where does it sell products/services?
10. What are its human capital needs?
11. How positive is its relationship with its stockholders?
12. How positive is it in encouraging innovation?

Context of Governance Mechanisms - is the concept and practice of separation of

ownership from management,
1. Modern companies are characterized by an agency relationship that is created
when one party (firm owners) hires and pays another party (top-level managers) to
use its decision-making skills
2. Owners (principals) hire managers (agents) to make decisions to maximize the firm’s
value
3. As risk-bearing specialists, owners diversify their risk by investing in multiple
corporations with different risk profiles
4. As decision-making specialist, owner expect their agents (top level managers) to
make decisions that will lead to maximization of the firm’s values

The Governance Mechanisms in the Modern Corporation:

1. Internal Mechanism
● Board of Directors
● Ownership Concentration
● Executive Compensation
2. External Mechanism – market for corporate control

The Internal Mechanisms

Board of Directors

● A governance mechanism that shareholders expect to represent their collective

interests
● A group of elected individuals whose primary responsibility is to act in the owner’s
interests by formally monitoring and controlling the corporation’s top executives
● Have the power to direct the affairs of the organization, punish and reward
managers, and protect shareholders’ rights and interests, thus, an appropriately
structured and effective BOD protects owners from managerial opportunism
● Board members are stewards of their company’s resources, and the way they carry
out these responsibilities affects the society in which their firm operates

Classes of Board Members

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● Insiders are active top-level managers in the corporation who are elected to the
board because they are a source of information about the firm’s day-to-day
operations
● Related outsiders have some relationship with the firm, contractual or otherwise, that
may create questions about their independence, but they are not involved with the
corporation’s day-to-day activities
● Outsiders provide independent counsel to the firm and may hold top-level
managerial positions in other companies or may have been elected to the board
prior to the beginning of the current CEO tenure
Poor Corporate Practices
● Many do not fulfill their primary fiduciary duty to protect shareholders
● Many boards are a managerial tool – they do not question managers’ actions
● Readily approve managers’ self-serving initiatives
● Inside directors who are top-level managers dominate the boards and exploit their
personal ties with them
● Those with significant percentage of its membership from the firm’s top executives
tends to provide relatively weak monitoring and control of managerial decisions
● Boards have not been vigilant enough in hiring and then monitoring the behavior of
CEOs

Reforms are being advocated that to ensure the independence of the board a
significant majority of the total membership of the board should be outsiders and
independent.

Ownership Concentration

● Ownership Concentration – defined by both the number of large-block shareholders

and total percentage of shares they own
● Large-block shareholders – typically own at least 5 percent of a corporation’s issued
shares.
* Institutional owners are financial institutions such as stock mutual funds and
pension funds that control large-block shareholder positions
* As a governance mechanism has received considerable interest because they
are increasingly active in their demands that corporations adopt effective
governance mechanisms to control managerial decisions
● Diffuse Ownership – in general – large numbers of shareholders with small
shareholdings and few, if any, large-block shareholders – produces weak monitoring
of managers’ decisions
* Makes it difficult for owners to effectively coordinate their actions
● Diversification of the product lines beyond the shareholders’ optimum level might
result from weak monitoring of managers’ decisions

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● Higher levels of monitoring could encourage managers to avoid strategic decisions
that do not create greater shareholder value
● Research evidence shows that ownership concentration is associated with lower
levels of firm’s diversification
● With high degree of ownership concentration, the probability is greater that
manager’s strategic decisions will be intended to maximize shareholder value
● The US SEC issued several rulings that support shareholder involvement and control of
managerial decisions
● Ex. SEC eased its rule regarding communications among stockholders – now they
can by simple communication to the SEC can call and convene a shareholders’
meeting to discuss the corporation’s strategic direction – if a consensus exists,
shareholders can vote as a block

Executive Compensation

● A governance mechanism that seeks to align the interests of managers and owners
through salaries, bonuses, and long-term incentive compensation such as stock
options
● Stock options are mechanisms used to link executives’ performance to the
performance of their company’s stock
● Increasingly long term incentive plans are becoming a critical part of compensation
packages in US firms
● The use of longer-term pay helps firms cope with or avoid potential agency problems
● Because of this the stock market generally reacts positively to the introduction of
long-range incentive plan for top executives
● The primary reasons for compensating executives in stock is that the practice affords
them with an incentive to keep the stock price high and hence aligns managers’
interests with shareholders interests
● However, managers who own greater than 1 per cent of their firm’s stock may be
less likely to be forced out of jobs, even when the firm is performing poorly
● Research show that the firm size accounts for more than 40% of the variance in total
CEO pay, while firm performance accounts for less than 5% of the variance
● Thus, the effectiveness of pay plans as governance mechanism is suspect
● Another way to compensate executives is through loans with favorable or no interest
for the purpose of buying the corporation’s stocks
● It aligns executives priorities with the shareholders in that the executives hold stocks,
not just options. The downside is when the price of the stock tumbles, the executives
may not be able to pay the loan

Executive Compensation in International Strategies

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● Governance mechanism particularly challenging to firms implementing international
strategies
● Ex. the interests of owners of multinational corporations may be best served when
there is less uniformity among the firm’s foreign subsidiaries’ compensation plans
● Levels of pay vary by regions of the world – managers in the US is paid higher than in
Asia
● As corporations acquire firms in other countries, the managerial compensation puzzle
becomes more complex and may cause additional top executives turnover
● Ex. Daimler-Benz acquired Chrysler, the executives of the former were receiving less,
but the executives of the latter ended up reporting to the executives of Daimler-
Benz.
● Lately, executive pay is under fire because it increased by 571% between 1990 and
end of 2000
● In 2000 when Standard & Poor’s stock index of 500 corporations suffered a loss of
10%, this trend of CEO pay continued
● Average workers pay barely outpaced inflation over the same decade; it increased
by 37% vs. inflation of 32%. The discrepancy between their pay and the executive’s
pay defy logic.
● Board of Directors of any large publicly owned corporation make executive pay
decisions, typically through an executive compensation committee
● 1990’s – competitive benchmarking – setting standards based on those of
competitors – became widespread
● It is estimated that 96% of the companies in S&P’s 500 stock index used such
benchmarking to set executive pay.
● Executive compensation committees rationalize that if their CEOs do not earn as
much as their peers, they may seek a position in another company
● Research has shown that this approach has led to underperforming executives
getting increased pay regardless of their performance

External Mechanisms

Market for Corporate Control

● An external governance mechanism that becomes active when a firm’s internal
controls fail.
* It is triggered by a corporation’s poor performance relative to industry
competitors.
* It is shown up by the firm’s earning below-average returns.
* Or that the internal corporate governance mechanisms failed to produce
managerial decisions that maximized shareholder value.

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● Composed of firms and individuals who buy ownership positions to take over the
undervalued corporations. Its executives are replaced because they are held
accountable for their firm’s poor performance.

Corporate Governance and Risk Management

Corporate governance has become an issue for a growing number of risk managers
because of the skyrocketing directors’ and managers’ liability premiums.
● Companies are self-insuring an increasingly large amount of this exposures due to
both higher deductibles and lower coverage levels.
● The current climate makes it increasingly difficult for companies to attract and even
retain top-notch directors, executives and employees, especially if they sense a
company’s corporate governance process is not well defined or well respected.
● The situation put the “risk manager in a place of authority to play a part in managing
corporate governance standards – they ask the following questions:
1. Do we have corporate governance process and, if so, how much effective are
they?
2. Do we need to improve them and, if so, in which specific areas to prevent losses?
3. How can we improve our corporate governance to improve the long-term
sustainability of our organization?

Strategic Role of Risk Managers

Risk managers can play a valuable strategic role in the company by helping to
develop more efficient processes to monitor risks and by strongly supporting a
companywide culture of sound corporate governance, as follows:
● Champion the reasons why corporate governance is critical to a company’s well-
being
* Prevents CEOs and CFOs from having to testify in Congress or being led away in
handcuffs
* Important element of meeting legal requirements and upholding fiduciary
responsibilities to investors
* Helps attract and retain good employees, officers and directors
* Makes the company an attractive business alliance partner and generate
community support
● Good governance is clearly the ethical thing to do – it yields improve shareholder
returns, making the effort well worth the cost
● Corporate governance is now more pro-active and continuous process that
assesses, sources, measures and manages risks across the enterprise
* Instills a culture of sound practices and ethics
* Fosters an understanding of company risks and how to manage them

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 * Puts in place efficient, appropriately executed processes to manage and monitor
risk on an ongoing basis
● New requirements place additional responsibility on the board of directors to
implement strong risk management processes, which more often include more
progressive internal auditing
* Helps companies shift their corporate governance focus from legal and
regulatory compliance to broader-based business risks
* Compels risks managers to work with audit and information technology teams as
well as operating management to deliver this strategic approach to risk
management

Seven Commandments of Good Corporate Governance

1. Board of Directors and Committees

* Oversees strategic development and the operational and financial
performance of the organization as well as its conduct and corporate
governance practices
* By-laws describe the technical execution of this responsibility, yet good
governance also depends on the attitude, competencies and independent
voices of individual directors and their chemistry as a group

2. Legal and Regulatory

* Defines the boundaries based on current laws and regulation at the
international, national, and local levels
* Covers the rights of shareholders and legal responsibilities of management and
the board of directors
3. Business Practices and Ethics
* Business ethics are the moral boundaries or values a firm believes it should work
within
* Provide general guidance to employees for situations not explicitly anticipated
by company policy and procedures
* Business practices are the specific ways business ethics are acted upon in a
given circumstances
* Codes of conduct is a cornerstone in the communication of business practices
and ethics
* Senior management needs to show strong support for ethical behavior in words
and action and must visibly and consistently discipline any breaches
4. Disclosure and Transparency
* Executive certification of financial statement required of all publicly trade
companies in the US

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 * Reporting should clearly reflect business reality – should be timely, relevant and
easily understandable to users
* The principles apply to information that companies provide to important
stakeholders other than investors and creditors
5. Enterprise Risk Management (ERM0
* Covers risks that cannot be insured in the financial markets
* A future oriented mechanism that symbolically identifies and assess all risks that
threaten to prevent an organization from achieving its mission and business
strategies
* Encompasses the design, implementation and monitoring of strategies to
reduce, transfer or avoid each significant risk
* A proactive ERM process reduces the likelihood that uncontrolled business risks
will cause unexpected losses, reputational damage or strategic detours and
setbacks.
6. Monitoring
* Activities that ensures all other parts of the corporate governance framework are
working as expected – includes internal audit, legal, regulatory and ethical
compliance functions, management performance reporting and analysis, and
board assessment processes
* Ongoing periodic evaluation and testing help create an ever-improving and
sustainable process
* Collaboration with these groups by risk managers can improve corporate
governance and reduce risk management costs over time
7. Communication
* Communication is the motor oil that makes the six components (parts of the
engines) work effectively without locking up.

Risk Manager’s Role

1. Risk Management – the fundamental strategy for ensuring strong corporate

governance and perpetuation of the business which creates an opening for risk
managers to demonstrate their additional value to the board of directors
2. Proactive role of risk managers can incorporate each component of the corporate
governance system – how to identify and assess risks, how to develop and
implement efficient processes to manage and monitor risks, and support a
company-wide culture of sound business practices and ethics

The Board of Directors

Role and Function of the Board

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1. Overseeing management, reviewing performance, and ensuring that the various
activities of a company are socially responsible and in compliance with the law
(Korsch and Maclaver)
2. A proactive view more in terms of establishing strategic direction and overseeing
company strategy, assessing and monitoring performance, but also, and especially
in the case of executive directors, becoming involved in action to ensure
implementation (Tricker)
3. The legal and formal accountabilities to stakeholders are established by the
legislative and regulatory framework within which the company has incorporated

The Elements of Corporate Governance

● Determining what needs to be done

* Provide and maintain a purpose for the company, a reason for its continued
existence
* Determine, articulate, communicate and share a distinctive and compelling
vision
* Establish, review and communicate clear goals, values, and objectives derived
from the vision
* Ensure that the visions, any associated mission, and the goals, values and
objectives of the company are consistent with the needs, interests, and
requirements of its various stakeholders
* Formulate, review and communicate realistic strategies for the achievement of
the defined goals, values and objectives
● Creating the capability to do what needs to be done
* Ensure that the company has adequate funds, people, organization, support
technology and management and business processes to implement the agreed
strategies and subsequent plans
* Appoint a management team and establish the values, principles of conduct,
and policies that define the framework within management operates
* Appointment of a new CEO is a key opportunity to influence the future direction
and performance of a company
* Establish and maintain partnership relationships with people and organizations
whose cooperation will be required if the visions, goals, values, and objectives
are to be achieved (supply-chain, joint-venture)
● Deciding how to do what needs to be done
* Establish and allocate clear roles and responsibilities with the boardroom team
particularly the Chairman and the Chief Executive and to allocate responsibilities
for the key cross-functional and inter-organizational processes that deliver the
value that is sought by customers

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 * Delegate responsibilities as appropriate to the management team and ensure
that these, together with the operating framework and environment of the
company, and understood by management
* Ensure members of the management team are involved, empowered, and
equipped to do what is expected of them
● Ensuring that what needs to be done actually is done
* Examine proposals and approve and review various plans submitted by the
management team
* Monitoring performance against agreed “output targets, taking corrective
action when appropriate”
* Identify and initiate steps to overcome specific obstacles or barriers that hinder
the achievement of corporate goals and objectives
* Ensure that what is done and how it is done satisfies legal and other requirements
* Ensure that the business of the company is conducted in an ethical and
responsible way, even if this involves a conflict with economic objectives
* Ensure that all activities of the company observes the laws of those countries
within which it operates and are compatible whenever possible with local
customs
* Ensure observance of those laws which particularly relate to companies and the
duties and responsibilities of company directors
● Reporting to stakeholders upon what has been achieved
* Sustain relationships with the stakeholders in the company – the need and
requirements and priorities can change over time
* Report performance to the stakeholders in the company and company owners
* Maintain a balance between the various stakeholders in the company, including
a duty of care to the company itself
* Maintain a balance between short – medium – and long-term pressures and
requirements
* Maintain the capacity to care and cope in the face of adversity, uncertainty
and surprise, and the will to confront what is new, daunting and unfamiliar

Board Review Process

● Comprehensive – all major accountabilities of the board and key requirements of

stakeholders
● Understood by all members and each director should understand their roles and
responsibilities in relation to the process
● All directors should be committed to its success – and treat it as important
● No room for cosmetics, everything should be real
● Tough and not rushed – if process is quick and easy it is probably not implemented
with the required vigor

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● Sequential – not build on “foundations of sand”
● Focused – that the customer is the source of all value
● Facts rather than opinion – discussions based on evidence and informed comment
rather that uninformed opinion
● Supported by sub-processes and documents that assist understanding – not relevant
information should be avoided
● Actionable – outputs of the review process should be capable of implementation
● Documented – a record should be kept of process outputs and “next-step”
accountabilities

Board Accountability
● Company itself
● Shareholders
● Parent company
● Bankers
● Employees
● Social partners
● Customers
● Suppliers
● Business partners
● Government and public bodies
● Financial advisers
● Local communities
● The public at large

Director’s Must
● Understand the distinct interests, needs and requirements of each group of
stakeholders
● Communicate and establish relationships with them
● Be sensitive to differences of view and perspective within particular groups where the
stakeholders are not homogeneous
● Understand the minimum requirements of each group, in order to judge such factors
as how far each can be pushed or to what extent each should be satisfied
● Appreciate the relative power of these groups in terms of the sanctions they could
wield
● Where necessary, establish priorities and the basis for trading of the interests of one
group of stakeholders against another
● Ensure that any review process used by the board and the allocation of the roles
and responsibilities in the board room are such that all accountabilities are covered
● Ensure that the resources and management and business processes are in place to
deliver

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Culture, Attitudes, and Values
● Culture embraces both attitudes and values and has grown in importance
● Boards attempt to define a unique culture so it can differentiate the company from
competitors in the marketplace
● Without common visions and shared goals and values, a network organization could
fragment, as members of the network compete rather than cooperate
● Board of an international company may be so concerned that the culture and style
of the firm is harnessed to obtain the commitment and talents of those from a variety
of national, religious, ethnic and cultural backgrounds
● Board could seek to match the values of a company to those of particular groups, to
attract certain types of potential employees, build closer relationships with
customers, or to demonstrate to a local community that the company is concerned
about their environment

The climate and opinion and tone of a company can be set by the board. Values can
also be an important differentiator:
● A business philosophy and corporate values can exist in a company as a pious
resolution
● Lip service might be paid to values by some companies thus, are conveniently
forgotten when it is thought they could get in the way of a profitable deal
● There are other companies that do not allow trade-offs against what are regarded
as core corporate values

All these things are value less without the support of the board.

Legal Constraints

● A board may be subject to operational and moral constraints that are, to a degree,
self-imposed.
● It is also subject to other constraints that are imposed and must be accepted as
given
● Internal – articles of incorporation, by-laws, memorandum and articles of association
● External – corporation code and law on agency, companies act, insolvency act,
financial services act, and other legislations placing specific duties and
responsibilities upon directors and boads
● Public Sector in RP – constitution, anti graft and corrupt practices law, code of
conduct for public official act, by its statutory charter, contractual relationship with
government, etc.

Duties and Responsibilities of Directors

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Conflict of Interest
● Happens when an individual member of the board might have separate interests in
and obligations to a company by virtue of being a director, an employee or
manager, and owner and these roles are combined.

Disqualification of Directors
● Provided by the corporation code of the Philippines

Perils of Insolvency
● When experiencing financial difficulties, directors should take particular care not to
trade wrongfully or fraudulently, or to enter into transactions at an “undervalue” or
which give a preference. (In RP – criminal liabilities may attach to fraudulent acts
under pertinent laws)

Legal Responsibilities of Directors

● The members of the board are concerned with the direction and governance of the
company
● They also must ensure the accuracy of financial information, and the accuracy of
the financial recording and reporting system, requires them to have some
understanding of the principles of accounts and financial reporting.

Role of the Chairman

● Ensure that all directors understand the purpose and function of the board and their
legal duties and responsibilities
● Create excellence within the board room

Directorial Qualities
● Strategic awareness and planning
● Objectivity – ability to see company as a whole
● Long-term vision
● Ultimate responsibility of the company
● Commanding respect/leadership
● Decision/policy making
● Anticipate changing trends
● Delegation
● Lateral thinking
● Responsibility to shareholders

Myth and Reality

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● Myth - directors are directed towards the outside world while managers are directed
to internal environment
● Reality – directors are directed to outside world, while managers are directed to
internal environment and outside environment

Relationship Between Directors and Managers

● There should be mutual understanding, trust and respect, and the commitment of all
directors and managers, however, it should not be forgotten that the authority of the
managers derives from the board.

Corporation

● An artificial being created by operation of law, having the right to succession and
the powers, attributes and properties expressly authorized by law or incident to its
existence.

Attributes of a Corporation
● Artificial Being – it comes into existence and becomes an artificial being by
operation of law.
* Corporate Law – says that it is a being with legal personality of its own,
independent, separate and distinct of the incorporators or founding stockholders,
and the shareholders who may buy in after its incorporation
* Like a natural person – with the attributes of an individual, with the same capacity
of a natural person to enter into contractual or legal relations, and to possess the
right to sue and be sued and to have the right of succession
● Man-made Creature of Law – it comes into existence by virtue of mere registration
with the Securities and Exchange Commission – it assumes that the incorporators
have entered into an agreement among themselves to form a corporation.
● Right of Succession – stockholders may come and go, buy into the corporation and
sell out of it, but the corporation continues to exist because it is an artificial being
with personality separate and distinct from its stockholders
● Limited Power – express powers, implied powers and incidental powers granted by
the corporation code.
* Ultra vires – outside its powers
* Intra vires – within its powers

Corporate Charter
● The constitution of the corporation is the articles and by-laws.

Articles of Incorporation

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● A basic contract document which defines the charter of the corporation and is
declared as a contract between three parties:
* Between the state and the corporation
* Between the stockholders and the state
* Between the corporation and the stockholders
● An article of incorporation is a legal document that establishes the structure and
purpose of a corporation. It is submitted to a regulatory authority. Sometimes it is also
called a "Certificate of Incorporation."

By-Laws
● The rules and regulations or private law enacted by the corporation to regulate,
govern and controls its own actions, affairs, and concerns, and its stockholders or
members and directors/trustees and officers with relation thereto and among
themselves in their relation to it
● Relatively permanent and continuing rules of action adopted by the corporation for
its own government and that of the individual comprising it and having direction,
management, and control of its affairs, in whole or in part, in the management and
control of its affairs and activities.
● Purpose is to regulate the conduct and define the duties of the members towards
the corporation and among themselves. It is self-imposed, and, although adopted
pursuant to statutory authority, it has not status as public law.

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