Lesson 5: Good Governance/Corporate Governance

CORPORATE GOVERNANCE

INTRODUCTION

-As many companies become bigger and powerful, corporate governance remains important.
-Shareholders need to be protected from crooked/merely boards of directors and executives.
-Same way, the public interest is in danger when huge companies are misgoverned.
-Where corporate governance practices have demoralizing effects on shareholders and the bigger public,
-Quite obvious, proper corporate governance is completely a substance of ethics.
-It concerns about who is responsible to whom and for what and under what circumstances.
-The manners in which decisions are prepared and the interest that corporate policies convey decision-makers to
serve are ethically vital things.

WHAT IS CORPORATE GOVERNANCE

(it is a fact that inside any company is a diverse group of people with their respective interest, therefore there is a
system required in order create and sustain good relationship among this people to avoid anyone be cheated or
exploited. Basically this is the reason for the need to have corporate governance).
 System of rules, practices and processes by which a company is directed and controlled.
 Essentially involves balancing the interests of a company’s many stakeholders.
 Also provides the framework for attaining company’s objectives. (Investopedia)
 A process that aims to apportion corporate resources in a way that enhances value for all stakeholders.
 A system whereby shareholders, creditors and other stakeholders of a corporation ensure that
management enhances the value of the corporation as it competes in an increasingly global market place.
 Code of Corporate Governance Memorandum Circular No.2 Series of 2002. (Ong Camilar-Serrano)
 (it also host those a decontrols to account by evaluating their decisions on: transparency, inclusivity,
equity and responsibility).

FUNDAMENTAL OBJECTIVE OF CORPORATE GOVERNANCE

 Main objective: To put an end to the abusive and somehow unlawful and improper activities of some
entrepreneurs and business owners. (to discontinue the abusive action of entrepreneurs and owners as
representative of the company)
 To gain the trust of investors and other stakeholders.
 “Corporate governance is about harmonizing profitability and sustainability”

9 ELEMENTS OF CORPORATE GOVERNANCE

1. DIRECTION
 Making strategic discussions and discussing current and future concerns of the company
 Company mission and vision statements stem from the governance role of business
-provide a sense of purpose and illustrate primary motives for the company’s business activities.
2. OVERSIGHT
 Provides some level of leadership oversight in companies.
 Leaders act in the best interest of shareholders and other stakeholders.
3. STAKEHOLDER RELATIONS
 More emphasis on balancing investor interest with concern for other stakeholders.
4. CORPORATE CITIZENSHIP (Ex. Philanthropy/ charitable contributions)
 Business intent to act with social and environmental responsibility.
 Governance includes awareness that companies should balance profitgenerating activities with
responsible policies and practices.
5. INDEPENDENCE OF DIRECTORS
 Majority of non-executive independent directors will help avoid prejudice and conflicts of
interest between the board and the management.
 Independent judgment is almost always in the best interest of the company.
6. EFFECTIVE RISK MANAGEMENT
 Companies cannot avoid risk, so it is vital to implement effective strategic risk management.
 Diversification strategy. (don not put all your eggs in one basket)
7. SOLID STRUCTURE AND ORGANIZATION
 Rigidly structured framework through which to trace all such activity efficiently.
 Companies will need to be able to monitor all of their dealings, interactions and transactions
effectively.
 8. TRANSPARENCY
 Helps unify the organization.
 It also is important to the public, who tend not to trust secretive corporations.
9. SELF EVALUATION
 Employee and customer surveys can supply vital feedback about the effectiveness of the current
policies.
 Hiring outside consultants to analyze the operations also can help identify ways to improve a
company’s efficiency and performance.

8 POTENTIAL CHALLENGES IN CORPORATE GOVERNANCE 5) ETHICAL VIOLATIONS

1. CONFLICT OF INTEREST
 Avoiding conflict of interest is vital.
 A conflict of interest within the framework of corporate governance occurs when an officer or
other controlling member of an organization has other financial interest that directly conflict with
the objectives of the corporation.
 When conflicts of interest are present, they deteriorate the trust of shareholders and the public
while making the corporation vulnerable to mitigation.
2. TRANSPARENCY
 Over inflating profits or minimizing losses can seriously damage company’s relationship with
stockholders that they are enticed to invest under false feculences.
3. SHORT-TERMISM
 In order to implement effectively good governance, it must need boards that can manage the
company on continuing years to produce sustainable value for the company.
 However, this is problematic since definite period for the directors to seat as part of the board.
 The result of the election would determine whether directors would remain and reelected or to
leave if not given the opportunity for another term.
4. OVERSIGHT ISSUES
 The board protects the interest of the shareholders acting as a check and balanced against the
executive staff.
 Without this oversight corporate staff may violate corporate laws facing substantial fines from
regulatory agencies and suffering reputational damages with the public.
5. ETHICAL VIOLATIONS
 A corporation has an ethical duty to protect the social welfare of others including the greater
community in which they operate.
6. DIVERSITY
 Based on good judgment and practicality, boards should possess a good combination of skills
and perspectives to ensure the success of any organization.
7. ACCOUNTABILITY ISSUES
 The action of each level of the corporation is accountable to the shareholders and the public.
 Without accountability, one division of the corporation might endanger the success of the entire
company of cause the stakeholders to lose the desire to continue their investment.
8. GOVERNANCE STANDARDS
 A board should always produce unbiased rules and policies and disseminates those standards in
the business.
 This may lead the company unprotected against law violations and damage to stakeholder’s
reputation.(kailangan mareach yung governance standards)

2 APPROACHES TO CORPORATE GOVERNANCE

1. RULE-BASED APPROACH
 Use to implement/develop corporate governance: All provisions are legal rules, supported by law
which attracts punishment from the law, if there is failure to comply. (Sumusunod tayo sa
minimum requirements ng government, Batas- kung ano ang nasa batas yun ang susundin natin
supported by law which attracts punishment from the law if there is failure to comply) (nakastick
lang tayo sa law di tayo flexible).

2. PRINCIPLE-BASED APPROACH
 Grounded on the outlook that a distinct set of rules is unfitting for every company.
 Legal force applies to the provisions of company laws but additional listing rules are enforced on
a “comply or explain” basis (if there is a reason why there is non-compliance there should be an
explanation for the shareholders and other shareholders)
 This approach is effective because principles are very beneficial in consenting organizations to
tailor-fit their interpretation of how best to apply new practices for the distinctive situations and
operational realisms of their organization and industry, this must there for result in better more
 applicable governance action in comparison to minimum obedience with a set of basic role.
(kailangan talaga kahit papano so mag –aadjust yung mga set of rules the ginawa depende sa
kung ano sitwasyon ang meron sa isang company)

3 THEORIES OF CORPORATE GOVERNANCE (TYPES OF GOVERNANCE)

1) AGENCY THEORY IN GOVERNANCE

It is based on:
CONCEPT OF GOAL CONGRUENCE:
 Harmony and alignment of goals of both the principal and the agent which is consistent with the
overall objectives of the organization.
 Though self-interested behavior is given in agency relations, performance incentives and
disincentives can be given.
 Principals – people that are that are elected to be board of directors in a corporation
 Agent – managers we hire. Those who are in Executive team, pinapasahod para imanage yung
corp.
AGENCY PROBLEMS:
 Separation of owners (shareholders/stockholders) and managers in corporations.
 Good decisions increase the value of the stock.
 At times, managers’ and owners’ objectives are not the same and whether the management really
acts in the best interests of the owner.
AGENCY RELATIONSHIPS AND COST:
 Principal-agent problem (connection between owners and managers).
 Conflict is called the agency relationship.
 Agency costs are the costs of the conflict of interest between shareholders and management. -
Agency theory in governance focuses on a “check-and-balance” type of governance.
 CEO and Chairman of the Board are two distinct entities.
 The theory suggests that the firm can be viewed as a loosely defined contract between resource
providers (principals) and resource controllers (agents).
 The theory argues that in modern corporations (share ownership is publicly held), managerial
actions sometimes depart from those required to maximize shareholder returns (agency loss)
EFFECTS OF AGENCY IN GOVERNANCE:
 Conflict of interest (between the owners and managers) (self-directed behaviors)
 Managerial opportunism
Uncalibrated and unchecked enjoyment of corporate resources and capabilities.
 Incurrence of agency cost (incentive cost, supervision cost)
 Shareholder (institutional) activism (collective effort is powerful)
 Managerial defensiveness
PERFORMANCE INCENTIVES:
 Pay dependent on profit level
 Shares incentives
 Shareholders’ intervention (shareholders activism)
PERFORMANCE DISINCENTIVES:
 Threat of being fired
 Takeover threat

2) STEWARDSHIP THEORY IN GOVERNANCE

 Company executives protect the interest of the owners or shareholders and make decisions on
their behalf.
 STEWARD is someone who protects and takes care of the needs of others. (agents- managers)
 SOLE OBJECTIVE: to create and maintain a successful organization so the shareholders
prosper.
 Places the CEO and Chairman responsibilities under one executive.
 Having a single leader creates one channel to communicate business needs to the shareholders’
needs to the business.
 Requires CEO is trustworthy and willing to put personal gains aside. (bawal dito ang mga
opportunista)

3) STAKEHOLDER THEORY IN GOVERNANCE

 This examines the needs of not only shareholders but of every fraction associated with the
organization.
 No one group is more important than the other.
 We should need to strike a balance among all of our stakeholders as far as their interests are
concerned.