Part 1.

In the Philippines, there are different kinds of organizations, associations and/or

enterprises in doing business:

1. Single or sole proprietorship which is composed of one person doing business

either under his own name or a business name. It has no personality separate
from its owner.
2. Partnership which is composed of two or more persons who bind themselves to
contribute money, property or industry to a common fund, with the intention of
dividing profits among themselves. A partnership has a juridical personality
separate and distinct from that of each of the partners.
3. Corporation which is composed of one or more persons and created by operation
of law. It has a personality separate and distinct from its stockholder/s or
member/s.
4. Joint account which is a business arrangement whereby two or more persons
contribute capital in a business and participate in the results thereof. No common
fund is formed and no juridical personality is created. The business will be carried
on in the name of the managing merchant.
5. Joint venture which is an organization formed for some temporary purpose. It is
hardly distinguishable from the partnership, since their elements are similar –
community of interest in the business, sharing of profits and profits and a mutual
rights of control.

Under Section 2 of the Revised Corporation Code of the Philippines, “a corporation is

an artificial being created by operation of law, having the right of succession and the
powers, attributes and properties expressly authorized by law or incident to its
existence.” The definition itself provides the attributes of the corporation.

Artificial being. Corporation is a juridical person whose personality is separate and

distinct from its owner, it simply means that a corporation has some rights that a natural
person possess such as it can be sue and be sued in court.
Created by operation of law. The creation of a corporation does not exist by mere
agreement or a unilateral and self-declaration of existence, it should be granted and
strictly governed by the Philippine law (Corporation Code).

Right of Succession. In the event of death, incapacity or insolvency of any of the

stockholders, the existence of corporation continues.

Powers, Attribute and Properties. Means it is authorized to do activities within the

purpose(s) of its creation, it has its own traits, and it operates based in what has been
expressly provided in the charter including those that are considered incident to its
existence as a corporation.

Every corporation is in business to increase wealth for its shareholders therefore, it is

important to give necessary attention to the factors that may affect and give influence on
achieving its goal. One of the factors is the stakeholders of a corporation, it refers to a
persons or groups that affect, or are affected by, an organization’s decision, policies and
operations. Take note, stakeholder is not the same as stockholders. Stakeholders are
generally divided into internal and external kind.

Internal Stakeholders are entities within a business. These are

individuals or groups who are directly involved in the operational process such as the
Management. Shareholders and Employees.

Firstly, the Management refers to the party given the authority to implement the
policies as determined by the Board in directing activities of the corporation. This is the
group of people running the day-to-day activities of the corporation. The Board entrust
the management as the decision makers who will shape the future of the organization
and has the power and responsibility to control and oversee the entire organization.
Secondly, shareholders are people who invest their capital in the corporation. These are
people who bet their money and assume the high risk of having their money going down
the drain. They are considered part-owner of the entity who receive ownership rights
based on their percentage of ownership in corporate stock. Lastly, the employee, the
people who contribute their skills, abilities and ingenuity to the corporation. They are the
ones who invested their future in the company with full trust and confidence that the
entity would make them secure. Employees and corporations have symbiotic
relationships. Ideally, employees do what is best for the corporation so that the
corporation can provide them gainful and satisfy work. Good employees can contribute
would lead to profit, profit would mean additional benefits to workers.

External Stakeholders are those who do not directly work with the company but
are affected in some way by the actions and outcomes the organization. Some of which
are creditors, clients and government.

The creditors refers to the party who lend to the corporation goods,
services or money. Creditors may gain from corporation by the way of interest for
money loaned or profit for goods sold or services rendered, thus it is important that in
running the corporate affairs, the concerns of the creditor’s should be taken into
consideration. Compare to shareholders, creditors should be the first to be paid since
they have the right to demand payment for principal and interest borrowed by the
company. Next, the party considered to be the very reason for the existence of the
corporation are the clients. They are the buyers of the corporation’s product or services
therefore they should be one of the paramount considerations in the operation of a
corporation. Lastly, the government has several interests in private corporations the
most apparent of which are the taxes that the corporations are paying, applying the “life-
blood” theory of taxation. Apart from taxes, corporate activities help the economy
particularly it provides jobs for the people. Aside from that, the government is also a
buyer of product of some corporation which make it an important stakeholders of
corporations.

Purposes of a Corporation

Early stage survival. There are several theories on the aims and objectives of a
corporation. However, for an entity which has just started, the main objective would be
survival especially during the early years of its existence. Corporation should aim first
for the most basic.

To increase profit. According to Milton Friedman, the social responsibility of

business is “to increase profit”. This is because stockholders are the owner of the
corporation and therefore corporate profits ultimately accrue to them. Corporation
should earn for the purposes of making the stockholders happy and satisfied and in
order for the corporation to perform its contractual obligation to stakeholders such as
payment of taxes, legal relations and any other legal obligations.

To offer vital services to the general public. There are services that are hard
for the government to offer to the vast majority of people without the help of private
enterprises. Example is in relation to traffic problem in our country, with the help of
private company, such as SLEX or NLEX, the government were able to acquire help
through this private investors. Other service in which the government needs help are in
areas of water, power supply, education and health services.

To offer goods and services to the mass market. Some corporations are run
not only for the sole purpose of generating profit but also to provide service to masses.
This endeavor will meet the needs of the lower income class group by offering them
something at a price they can afford. For example, cheap and accessible transport
service. The difference to the previous one are in the area of pricing and in the area of
competition.

Philippines: Revised Corporation Code is now in effect

On 20 February 2019, Philippine President Rodrigo Duterte signed into law
the Revised Corporation Code of the Philippines (Republic Act No. 11232). The
Revised Code aims to improve the ease of doing business in the country and took effect
on 23 February 2019.
Recent Developments
On 20 February 2019, Philippine President Rodrigo Duterte signed into law
Republic Act (RA) No. 11232 or the Revised Corporation Code of the Philippines
(Revised Code). The Revised Code expressly repeals Batas Pambansa Blg. 68 or the
Corporation Code of the Philippines, and aims to improve the ease of doing business in
the country. The Revised Code took effect on 23 February 2019.
What the regulation says
The Revised Code initiates significant changes to the legal framework for
the registration and operation of private corporation in the Philippines, including the
following:
A. Simplifying Corporate Registration
The Revised Code simplifies the requirements to set-up and register a
corporation with the SEC. The provisions of the new law likewise expressly
recognize the importance of technology and its use to facilitate government and
internal corporate processes.
1. Removal of minimum number of shareholders, directors, trustees, and
minimum capitalization requirements – The Revised Code no longer requires
five shareholders to establish a new corporation. It has also removed, subject to
compliance with special laws, the minimum subscribed and paid-up capital
requirement for stock corporations.
2. One Person Corporation – The new law permits natural persons, trust or
estates to form One Person Corporations, with the single shareholder becoming,
by default, the sole director and president.
3. Perpetual existence – Under the Revised Code, a corporation shall have
perpetual existence unless its articles of incorporation provide otherwise. This
new law repeals the prior 50 year maximum corporate term. The new law grants
perpetual existence to corporation whose corporate terms have not yet expired.
Corporations who intend to be bound by a specific corporate term must notify the
SEC. a corporation whose corporate term has expired may submit an application
to the SEC for a revival of its corporate existence, together with all the rights and
privileges under its certificate of incorporation and subject to all of its duties,
debts, and liabilities existing prior to its revival.
4. Electronic Filling and Monitoring System – In line with the government’s drive
to eliminate red tape and streamline government procedures, the Revised Code
mandates the SEC to develop and implement a system to enable electronic
submission of applications, reports and other documents, as well as the sharing
of pertinent information with other government agencies.
5. Electronic notices and remote communication – Shareholders and directors
are expressly allowed to participate in meetings through remote communication.
To encourage efficient communication of notices to the shareholders, members,
directors or trustees, the Revised Code permits sending of notices by electronic
means.

B. Strengthening Corporate Governance

The Revised Code also aims to improve corporate governance and
protection of minority shareholders, through the following provisions:
1. Appoinment of Independent Directors and Compliance Office – The new law
requires a corporation vested with public interest to have (i) a board with
independent directors occupying at least 20% of its board seats, and (ii) a
compliance officer. An independent director is one, who apart from shareholdings
and fees received from the corporation, is independent of management and free
from any business or relationship which could (or could reasonably be perceived
to ) materially interfere with the exercise of indendent judgment in carrying out
the responsibilities as a director.
2. Additional reporting requirements – Apart from the annual financial
statements and general information sheets required for all corporations, a
corporation vested with public interest must also submit (i) a director
compensation report; and (ii) a director appraisal or performance report, which
should include the standards or criteria used to assess each director.
3. Emergency Board – In the event an emergency action is required to prevent
grave, substancial and irreparable loss or damage to the corporation, and the
current number of directors is not enough to constitute a quorum, the Revised
Code permits the appointment of a temporary director to fill in the vacancy, by
the unanimous vote of the remaining directors. The action by the temporary
director shall be limited to the emergency or upon election of the replacement
director, whichever comes earlier.

C. Other Important Provisions

 Other notable amendments introduced by the new law include the following:
1. The corporate articles of incorporation and/or bylaws may include an arbitration
agreements for intra-corporate disputes. In order to be valid, the provisions must
specifically mention the number of arbitrators and manner of their appointment.
2. The minimum amount of security deposit required for foreign corporations doing
business in the Philippines is increased from PhP 100,000 to Php 500,000.
3. A person required to file a report with the SEC may redact confidential
information from such report. The confidential information shall be filed in a
supplemental report labelled “confidential”, together with a request for
confidential treatment of the report and the specific grounds for the grant thereof.

Part II. CORPORATE GOVERNANCE

Corporate Governance is the art of directing and controlling the organization by

balancing the needs of the stakeholders. This involves resolving conflicts of interest
between the various stakeholders and ensuring that the organization is managed well-
meaning that the processes, procedures and policies are implemented according to the
principles of transparency and accountability. The Malaysian High Level Finance
Committee Report on Corporate Governance defined corporate governance as “process
and structure used to direct and manage the business and affairs of the company
towards enhancing business prosperity and corporate accountability with the ultimate
objective of realizing long-term shareholder value, whilst taking into account the
interests of other stakeholders.” In its most basic definition, corporate governance is
defined as the structures and process by which companies are directed and controlled.
Good corporate governance helps companies operate more efficiently, mitigate risk and
safeguard against mismanagement, and improve access to capital that will fuel their
growth. It makes companies more accountable and transparent to investors and gives
them the tools to respond to stakeholders concerns, including implementation of good
environmental and social practices.

Every corporation must be clothed with good governance in order to perfectly

reach its purposes discussed above. In order to carry out corporate good governance,
there is a need to know and determine the key players of a certain corporation, without
them, a corporation cannot be considered having good governance.

Key players:

1. Shareholders
Also known stockholders who are artificial or natural persons that are legally
regarded as owners of the corporation. Stockholders are bestowed with special
privileges depending on the class of their stockholdings. These rights may
include:
a. The right to vote on matters such as elections of the BOD.
b. The right to propose shareholder resolutions.
c. The right to receive dividends.
d. Pre-emption right which is the right to purchase new shares issued by the
company to maintain its percentage of ownership in the company.
e. The right to liquidating dividends

Stockholders’ rights to a company’s assets come only second to the right of the
creditors of the company, typically stockholders may receive nothing if after the
company is liquidated, there is not enough money to pay its creditors. Shareholders
are considered principals, and the directors and officers are considered agents under
the agency theory in governance.

2. Bondholders
Generally defined as a person or entity that is the holder of a currently
outstanding bond. A bond being a certificate of indebtedness by the issuing
corporation provides some advantages on the holder of the said instrument. The
holder has the complete authority to manage the bond in any way that he sees fit
and advantageous to him. He can even sell them for it is an investment on his
part.

3. Board of Directors
 BOD refers to the collegial body that exercises the corporate powers of all
corporations formed under the Corporation Code. It conducts all business and
controls or holds all the assets of such corporation. The BOD are formed by the
stockholders and they will act as the governing body of the corporation. It
includes the Chairman of the Board who is considered as the most influential
person in the corporation. Some of his/her duties are governing the organization
by establishing broad policies and objectives, selecting, appointing, supporting
and reviewing the performance of the chief executive, ensuring the availability of
adequate financial resources, approving annual budgets and accounting to the
stakeholders the organization’s performance.

Fundamental objectives of Corporate Governance

Improvement of Shareholder value. It can be done by making a pre-commitment to

build better relations with primary stakeholders like employees, customers and
communities. By improving the shareholders’ value, the company will gain good
reputation and relations which will lead to an increase profit, development and
expansion of the firm.

Conscious consideration of the interest of other stakeholders. When a company

meets the objective of increasing the shareholder value, it will have greater resources in
improving its commitment in meeting its environmental, community and social
obligations. It can pay taxes well, reward, train, and retain key staff and enhance
employee satisfaction.

Basic Elements of Good Governance

Mainly, good governance is a way of systematic governing established in justice and

peace with the intention of safeguarding rights and freedom of every member of the
society. The assurance of minimized corruption, the accounted views of the minorities
and the protected rights of the most vulnerable society are all considered in good
governance. Here are the basic elements of good governance to understand its concept
more.

Rule of Law
 Good governance requires the rule of law. Rule of law is the protection of human
rights and civil liberties particularly those of minorities by the independent, unbiased and
principled law enforcement agencies. It is exemplified by autonomous judiciary workers
such as lawyers and judge, good legal framework, equal access to justice, incorruptible
police force and testes dispute mechanisms among others.

In the context of rule of law, the absence of governance in a country may give
rise to political instability and widespread corruption that could have severe
consequences on the investment climate. Businesses in particular are affected by such
bad governance. Biased rules and unethical practices in the public sector mean added
costs of doing business and new business entrants as well as contract-bidders are
discourage to provide fair and healthy competition. In the corporate world, members of
the board should be fair and impartial in their collaborations and in their decision-making
practice of the rule of law. Good corporate governance entails boards to perform their
duties and responsibilities ethnically, honestly and with the highest integrity.

What Good Governance Promotes

Transparency. In business world, transparency is the process of being honest,

open and straight forward about the company operations. This is an indispensable
character in an organization given the fact that there are stakeholders that looks forward
for the success of a certain company. The aim includes maintaining investor, consumer
and other stakeholders’ confidence. Otherwise, it will result to an imbalanced company
and loss obedience with recognized rules and regulations.

In the business sector, transparency can earn a level of trust in winning over
shareholders, employees, and the general public. Transparency means making sure
everyone is aware of what is going on throughout the organization at all time. Applying
transparency in the workplace offers a lot of advantages including speedy problem
solving, healthy employer-employee relations, enhanced teamwork and trust leading to
better productivity. Records and processes are transparent and available to
shareholders and stakeholders in the practice of good governance. There must be
neither inflation nor exaggeration in reporting the financial health of the company.
Financial records and findings should be reported to shareholders and stakeholders in
an understandable and easily interpreted manner.

Revealing salaries of employees throughout the organization is a transparency

practice that shows a level of fairness which could reduce employee frustration and
boost their morale. Letting employees know the determinants of their pay structure will
make them understand more about compensation differences in the company.

Accountability. It is the recognition and assumption of responsibility for the

decisions, actions, policies, administration, governance and implementation of programs
and plans of the corporation and people involved, including the obligation to report,
explain and be answerable for its resulting consequences.

Accountability is a key requisite of good governance. Institutions such as

government agencies, civil society, and the private sector ought to be accountable to
one another as well as to the public and to their institutional stakeholders. Who is
accountable for whatever decisions or actions should be documented in policy
statements. Generally, an organization is accountable to those who will be affected by
its decisions or actions whether they are internal or external to an organization.
Accountability also extends to the applicable rules of law which could be violated in the
course of the implementation of the decisions or actions. Accountability cannot be
enforced without transparency too.

Accountability is key governance best practice in many other aspects of

business and social life. The accountability of the boards of directors for instance,
extends to the groups and individuals such as the shareholders, stakeholders, vendors,
employees, and the general public who may be affected by their decisions and actions.

Responsiveness

Responsiveness is a requirement in good governance. Responsiveness simply

means that organizations and their processes need to be planned in a manner that
serves the best interest of all stakeholders within a practical and realistic period of time.
 Responsiveness is the combination of two inseparable elements which are value
and speed. Value is any information in the forms of questions, data, insights, research,
context, case studies and so on that a company can offer, and that allows its buyer in
moving closer to making decision. Speed, apparently, is the time it takes to give the
demanded information to a customer.

Sometimes the corporate world is faced with numerous crises and controversies
and become unconscious of time. In the practice of good governance, companies must
always fine time to better communicate to shareholders and stakeholders with a
sensible time period to provide honest answers to these crises and controversies in
order to provide direction to the organization.

Responsiveness is very critical in the workplace and the lack of it may cost real
money. A delayed response may leave valuable resources idled without direction on
how to move forward. In business, even spam e-mail, unsolicited phone call or direct
mail item received should be provided response immediately especially when the
person is known, and the inquiry is reasonable

Consensus Oriented

Good governance required knowing the broad consensus about the best interest
of the entire stakeholder group and how this can be achieved in a practical way.
Reaching this consensus means seeking the many different needs, perspectives, and
expectations of a diverse of people. Making decision through consensus manner allows
a group to produce a solution greater than any one member could reach alone. The
consensus process necessitates commitment and patience, but the resulting decisions
are better, more effective and, in the long term, more time efficient.

A consensus decision depends on the assumption that every individual’s input is

valuable and significant to the final solution. Occasionally, it may be challenging to
attain shared understanding but valuing each and every input is vital to the decision-
making process. With all the opposing viewpoints and different personalities in the
company, assisting group decision making easier said than done. Inside the boardroom
a lot of robust discussions and debates happens which is normally expected. Most of
the times, these intense and heated debated would generate the best consensus
because of varying perspectives from diverse representatives of broad background and
experiences.

Equity and Inclusiveness

Equity and inclusiveness is based on the idea that all members of an

organization or society must feel the sense of belongingness and must not have the
impression of being excluded from the typical group. Those individuals and groups that
are the most vulnerable must also feel the same and should have opportunities to
improve or maintain their well-being.

Inclusivity means individuals are expect to be treated with respect, dignity,

collegiality, and kindness. Each member of an organization can and should use their
voice to share their experiences, opinions and philosophies to enrich and extend
discussions. No one should feel that they do not belong or feel that their opinion have
less significance compared with others. Employees feel being included when they
experienced both:

1. A sense of uniqueness that they are acknowledged and appreciated for their
specific attributes and contributions.
2. A sense of belonging that they are received and treasured as member of their
workgroups and among their coworkers.

Employees on the other hand, experience a sense of exclusion when they feel:
1. Degraded, dismissed, or discounted for the exceptional qualities they bring to the
company.
2. Treated like outsiders because of their differences such gender, race/ethnicity,
nationality, age, religion, sexual orientation, and, in some cases, job role or
formal position of power.

Effectiveness and Efficiency

 Effectiveness and efficiency is vital in good governance. It is developed by
making sustainable use of resources to create advantageous results to meet the needs
of its stakeholders. Sustainability means guaranteeing social investments are carried
through and protecting natural environment, human and ecological health for future
generations while driving innovation and not compromising people’s way of life.

Everyone in the organization from the lowest ones to top management including
the board directors must be responsible in conducting their duties effectively and
efficiently. Material resources and time are the concerns of effectiveness and efficiency.
Majority of companies also reflect the effect on the environment of their operations as
the accomplish their duties and responsibilities. A Very good example of effectiveness
and efficiency is the trend of automation. Automation is the shift from manual paper
processes to software solutions.

Participation

Participation in good governance requires equal participation by all groups with

everyone having a role in the process of decision-making, either directly or through
legitimate representatives. In participation everyone must be informed and organized. It
consists of the freedom of association and expression. In general, it needs attentive
concern for the best interest of the organization and society especially for those most
weak and helpless.

Good governance these days gives emphasis on the importance of combined

men and women perspectives in decision-making. Historically, the top management is
mainly composed of men. Today, a lot of companies have recognized the importance of
having gender and ethnic diversity in the workplace. Even in the company boards,
women and members of ethnic groups to their boards are increasingly added for the
purpose of diversity. Tough, well-composed boards embrace a diversity of people, skills,
talents, abilities, experiences, and perspectives from both gender and the minorities.

Prudence. In Code of Governance, prudence is defined as “care, caution and

good judgment as well as wisdom in looking ahead.” It is the management committee
which is in corporate setting, the BOD, who will be the body responsible in safeguarding
the interests of the organization through good planning and management of finances
and other resources of the organization.

Benefits of Good Governance

a. Reduced Vulnerability. It improved system of internal control and pave the way
for probable future development, diversification, including the capability to attract
investors. Aside from these, it will reduce the cost of loans or credits for
corporations since companies with food corporate governance can be considered
low-risk companies in the eyes of debt-investors.
b. Marketability. It enhance the corporate value of companies. This leads to easy
access to capital in financial markets which helps the company survive in an
even more competitive environment and become more attractive in open market.
c. Credibility. Companies that are known for good governance practices do not
need to sell themselves that hard for the investors to fuse-in. When a company is
credible, investors’ trust comes next; where investors’ trust is in, money follows;
when there is money, there is flexibility.

Agency problem in corporations

This is very common problem every organization may encounter however

this can easily be solve upon the willingness of the organization. Agency problem is
defined as when a conflict takes place when the agents who are entrusted with the
responsibility of looking after the interests of the principals, in business, agency problem
usually between the management of a company and its stockholders. In general terms,
the principals of a corporation are the owners or investors, referred to as shareholders
or stockholders. The agents of the corporation are generally considered to be the board
of directors, officers or other persons the corporation authorizes to act on its behalf.

Effects of Agency in Governance

Conflict of Interest – principal and agent have diverse interests and ways to solve
certain issues or problem in the organization. Different techniques or strategies in
decision-making give rise to conflict.

Managerial Opportunism – refers to the act by the agent of taking advantage on things
that are within his control by virtue of the rights given to him by the principal, however,
sometimes, agents act beyond the power and responsibility that overstepped the
principal’s interest.

Incurrence of Agency Cost – when conflict of interest exist, the principal, in order to
counter, needs to sacrifice resources for him to closely monitor and control the agent’s
behaviour. These costs are called agency cost. This cost can be address as a loss to
the company, although it is acted in order to avoid future problems

Shareholder Activism – the increasing pressure and power of institutional owners to

discipline ineffective top-level managers. Since shareholders are considered co-owners
of a corporation, when they noticed discrepancy between principal and agent, they tried
to step in which somehow resulted to agency problem. Shareholders vote as to solution
can be dividend, some can be in favour of the agent or of the principal that causes
delays in resolving issues and ineffective decision-making.

Managerial Defensiveness – this is in relation to issues to takeover whereby

management will employ some tactics to discourage takeovers and buyouts.

Types of Agency Problems

Stockholder
v
Management

Stockholder Stockholder
v Agency v
Creditors Other stockholder
Problems
 1. Stockholders vs Management - Segregating ownership from management has
endless advantages as it does not have any implications upon the regular
business operations and the company will hire professionals for managing the
key operations of the same. But hiring outsiders may become troublesome for
stakeholders. The managers hired may take unjust decisions and might even
misuse the shareholders’ money and this can be a reason for the conflict of
interests between the two and hence, agency problems.
2. Stockholders vs Creditors - he stockholders might pick up risky projects for
making more profits and this increased risk might elevate the required ROR on
the company’s debt and hence, the overall value of the pending debts might fall.
If the project sinks, the bondholders will supposedly have to participate in losses
and this can result in agency problems with the stockholders and the creditors.
3. Stockholders vs other Stockholders - The stakeholders of a company may
have a conflict of interests with other stakeholders like customers, employees,
society, and communities. For example, the employees might be asking for a
hike in their salaries which if rejected by the stakeholders then there are
probabilities of agency problems to take place.

Solutions

The agency problems existing between the stockholders and the management of
the company can be resolved by means of offering stock packages or commission to
the decisions taken by the management and their outcomes on the shareholders. The
companies can try to resolve these problems that can exist between its stockholders
and management/ creditors/ other stakeholders (employees, customers, society,
commTHeunity, etc) by means of taking instituting measures like tough screening
mechanisms, offering of incentives for good performance and behavior and likewise
penalizing for poor performance and bad behavior, and so on. However, it is not
possible for an organization to get completely healed from agency problems since the
costs associated have the tendency to outweigh the total outcomes sooner or later.

AGENCY THEORY IN GOVERNANCE

 Agency theory in corporate governance is an extension of the agency theory
discussed above. It tells about the definite type of agency relationship that happens
between the shareholders and top management of a company. The true owners of the
corporation or the shreholders as principal select the members of the board who would
act and make decisions on their behalf. The objective is to represent the outlooks of the
shareholders or owners and conduct actions in their interest. Although there is a clear
basis of the board of director’s election, there are still numerous situations when
complex issues happen. Sometimes, intentional or unintentional executives make and
implement decisions that do not replicate the shareholders’ best interest. In the dynamic
business environment, agency theory of corporate governance has been an attractive
concern but is understood and valued from diverse points of view.

Professionals such as economist, financiers, accountants or legal

practitioners are now trying to gain wider knowledge in corporate governance to
contribute to the good performance of the company. Though, it is not all times possible
to measure the effects of agency theory. A good example is the policy for dividend
payout of a corporation. When the company is making big profits, majority of the
shareholders are delighted with both additional cash on their hands and added valuation
on the current capital stock they possess. As a part of the long term strategy, the top
management on the contrary may possibly choose to retain a huge share of profits. This
retention of profits perhaps would be used to advance their technology or buy important
assets in the future. A conflict of interest may arise among the shareholders and top
executives in these circumstances. Such conflict can produce a feeling of argument
between shareholders and top management which may cause inefficiencies and worst
even losses.

Corporate governance using agency theory particularly in finance is becoming

more and more forceful for practicality and ethical reasons. Importantly, the interest of
the shareholders and the company must be taken care of as markets are getting
increasingly unstable as ever. The shareholders must place their trust to the top
management of the company and strive harder to understand their daily business
decisions. Likewise, the top management must always preserve the interest of the
shareholders as true owners of the company in their decision-making. In order to help
shareholders comprehend and recognize changes if any behind major business
decisions, a clear communication should be disseminated to them. This could be
successfully done with a strong corporate policy to solve the indifferences between the
agent and the principal.

THE STEWARDSHIP THEORY

A steward is define as someone who protects and take care of the needs of
others. Under the stewardship theory, company top executives protect the interests of
the owners or shareholders and make decisions on their behalf. Their sole objective is
to create and maintain a successful organization so the shareholders prosper.
Companies that embrace stewardship place the Chief Executive Officer (CEO) and
Chairman responsibilities under one executive, with a board comprised mostly of in-
house members. This allows for intimate knowledge of organizational operation and a
deep commitment to success.

While profit energies any business, some companies may consider themselves
part of something greater. Stewardship theory holds that ownership does not actually
own a company but simply hold it in trust. This means that profit takes a second priority
after meeting a company’s design of honoring a founder’s primary vision. Often
managers’ seek other ends besides financial which could be in the form of a sense of
worth, altruism, a good reputation, a job well-done, a feeling of satisfaction and a sense
of purpose.

In the stewardship theory, managers innately seek to do a good job, maximize

company profits and bring good returns to stockholders because they feel a strong duty
to the company. They do this essentially for the interest of the company and not for their
own financial interest. Managers are not considered isolated individuals but rather part
of the company. Usually the ego and sense of worth of managers are combined with the
image of the company based on the stewardship theory.

There are several models that a company may use to operate using stewardship
theory, which could be in the form of:
 1. Operating with as little as negative impacts as possible against the environment
or the earth;
2. Supporting human and animal rights;
3. Abstaining from using products made in sweatshop (business employing workers
at low wages, for long hours, and under poor conditions);
4. Renouncing product testing on living subjects; and
5. Honoring the belief of servant leadership.
Often this models mentioned above are likely to be subjective, which give
management a bit of headache in identifying the borderline concerning socially
responsible and irresponsible behavior.

Those companies that are stewardship-based find it very challenging to do

such. For instance, the company may lose the trust of its customers or employees if
they suspect that the higher responsibility is merely talk. Or a company may refer to
social responsibility to provide the rationale behind high pricing. Although, a company
may be truly socially responsible, it may often forego profitability secondary only to this
higher purpose. Often too when the founders are no longer in existence to set the tone,
stewardship may be given up as the company becomes more established.

STEWARDSHIP THEORY IN CORPORATE GOVERNANCE

Clearly, the main purpose of the stewardship theory of governance is to satisfy

shareholders. With a single leader, a strong channel is formed to convey business
requirements to the shareholders and vice versa. During difficult situations faced by the
business this set-up helps to obviously know who is really in-charge or responsible. It is
the requisite that stewardship governance takes a Chief Executive Officer (CEO) who is
dependable and prepared to set his personal interest only secondary for the interest of
the company. Stewardship governance entails choosing the right personality that would
lead the boardroom of the company.

The stakeholder theory recognizes the needs of every segment that comprises
the company which consist of but not limited to the employees, suppliers and business
partners with equal importance. Here are some significant applications of stewardship
theory in corporate governance:
1. On Business – A company dedicated to a higher purpose will attract customers
who believe in similar purpose. On the other hand, customers cautiously
compare how the company truly operates against what it talks about stewardship
in its corporate governance. Any gap identified between action and talk will
create a big impact on the customers.
2. On Employees – Company’ stewardship attitude can be clearly seen at an
instant by employees on the way they are treated. Employees may possibly have
higher expectations when a company operates with identical vision would prefer
to stay with a company and perform excellently to attain company’s goal though
they may have higher pay in other companies. When employees sense that they
are part of something greater, a strong and concrete practice of stewardship
improves company drive and determination.
3. On Customers – Likewise, just like employees, when customers sense that they
are part of a something greater, they may likely stay connected with business
that are stewardship-driven. Even if the price for goods or services become
higher, they would remain loyal to these business. Yet stewardship standpoint
may also dismay some possible customers by mistake. This situation would likely
happen when the cause is not favorable to customers or when the management
becomes strident about their beliefs.

THE STAKEHOLDERS THEORY

Stakeholder theory states that the purpose of a business is to create a value

for wider group stakeholders other than just shareholders. This theory considers the
corporate environment as a network of interconnected groups, all of which are
required to be pleased to sustain the healthy and success of the company in the
long-term. A stakeholder refers to any individual or group of individuals who can
affect or be affected by any actions done by a business. It consist of those who work
in its stores, those who work and live close to its factories, those who do business
with it, and even of competitors, as the company may form the setting in its industry.
 The stakeholder theory was coined originally by Edward Freeman as he
recognized such as an important element of Corporate Social Responsibility (CSR).
Corporate Social Responsibility is a concept that places bigger responsibilities on
companies in the form of economic legal, ethical or even philanthropic, which shall
be discussed in Chapter 5. Freeman’s theory advocates that a company’s genuine
success comes from satisfying all its stakeholders, not only those who might gain
profit from its stock.

According to Freeman there are six principles that must direct the
connection between the stakeholders and the corporation, which are:

1. The principle of entry and exit – based on this principle, there must be clear-
cut and transparent rules and policies such as hiring employees and terminating
their employment.
2. The principle of governance – This principle considers the manner of modifying
the rules about the relationship between the stakeholders and the company.
3. The principle of externalities – This is about a group that does not gain from
the actions of the company has to undergo some problems because of the said
actions. Additionally, it suggests that anybody who has to shoulder the cost of
other stakeholders has the right to turn into a stakeholder too. Somebody who is
affected by a business develops into a stakeholder.
4. The principle of contract cost – Each group to a contract should either endure
identical amount when it comes to cost or the cost they endure should be
proportionate to the benefits they have earned in the company. Not all of these
costs are purely financial, so they may be demanding to measure.
5. Agency principle – This principle reflect on the manager of a company as its
agent and hence has responsibilities to the stakeholders and also the
shareholders.
6. The principle of limited immortality – This principle ensures the success of the
company and its owners similarly for a longer time period. Although it is
impossible for a company to be immortal but it must and can remain in existence
for a length of time.
 In stakeholders theory, a company must not lose sight of each person involved
in its success. For instance, a company should always treat its employees well. Projects
that may have harmful effects on communities around a business location should not be
continued or the company may likely fail. Any company that desires to survive and
continue to have positive growth should not ignore its stakeholders instead they must be
completely satisfied.

Here are the categories of stakeholders inside the company, namely:

Organizational Stakeholders

Organizational Stakeholders are those people that are present inside the
company. They have a direct interest on how the company is doing. They have a direct
interest on how the company is doing. These stakeholders usually make certain that the
company is robust and healthy to seek advantages and benefits from it. The staff and
employees as well as the stakeholders and the managers are the main stakeholders
here. All these people are interested in the smooth operations of a company which
could be supported by a CSR policy.

Economic Stakeholders

In this group, the customers in addition to bankers, creditors and suppliers are
the most important stakeholders. These people function as the essential boundary
between the company and the bigger societal environment. Customers are regarded as
very important because without their loyal customers a company may not even exist.

In modern businesses, creating a loyal and long-term relationship with

customers should be the primary task of a company. This is the reason why some
companies establish CSR policy, firstly to nurture customers’ loyalty and secondly to
differentiate its brand from the rest. Identifying itself as a valuable company to
customers is vital particularly to those companies in the mass-consumer field.

Societal Stakeholders
 These stakeholders regulate the business setting under which the companies
function. Government agencies, regulators, communities and the environment itself are
the major players here. Obviously, a company is required to follow the laws and to
respect certain issues the society is involved. A company will not go wrong in its
business dealings when it has a good relationship with these stakeholders

Stakeholder Theory in Corporate Governance

The stakeholder theory in corporate governance centers on the effects of

the corporate activities on all recognizable stakeholders of the company. This theory
suggests that corporate officers and directors must consider the interests of every
stakeholder in its governance practice. This consists of taking extra efforts to reduce or
lessen any conflicts that may confront stakeholders’ interests. Further, besides the
usual members of the company such as the corporate officers, directors and
shareholders, it also promotes the interests of any third party that may have some
degree of reliance on the company.

It is highly essential that a company must communicate its corporate

governance to make sure that there is a strong relationship between the community and
the investor.

It is the board of directors who could either be appointed but mostly are
elected that makes important decisions. As representatives of the shareholders of a
company their role is to manage important concerns that would meet the needs of the
group they represent.

Members of the boards could consist of people from inside and those
independent members. Major shareholders, founders and top executives are the
insiders of the company. On the other hand, independent directors who are chosen
based from their expertise are very vital in the company. They are beneficial in the
sense that they weaken the concentration of power and help make parallel the interest
of the shareholders with those of the insiders.

There are certain general principles around which businesses are

expected to operate, which are:
 1. Rights and equitable treatment of shareholders-Shareholders have certain rights
which a company must respect. They should be permitted to use these rights. A
company can help shareholders apply their rights by openly and effectively
communicating information and by inspiring shareholders to actively partake in
general meetings.
2. Interests of other stakeholders- Companies must know that they have legal,
contractual, social, and market-driven responsibilities to non-shareholder
stakeholders, such as the employees, investors, creditors, suppliers, local
communities, customers, and policy makers.
3. Role and responsibilities of the board- The board requires adequate pertinent
skills and understanding to appraise and challenge management performance. It
also needs acceptable size and suitable levels of objectivity and commitment.
4. Integrity and ethical behavior- In selecting corporate officer board members on of
the fundamental requirements is integrity. Companies have to fashion a code of
conduct for their directors and executives that encourages ethical and
accountable decision making.
5. Disclosure and transparency- Companies must explain and make transparent to
the public the roles and responsibilities of board and top management in order to
offer stakeholders with a level of accountability. They should also write and
implement distinct procedures to freely authenticate and protect the truthfulness
of the company’s financial reports. There should be timely and balance release of
substantial matters about the company so that investors are sure to receive clear
and factual information.
There is an assurance of good corporate governance following these
principles that is accommodating to all the needs of all the stakeholders of the company