"Corporation: An ingenious device for obtaining profit without individual responsibility.

"

Ambrose Bierce -

WHAT IS A CORPORATION?

To better understand the term corporation, we need to revisit its definition as stated in
the 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 Corporation Code of the
Philippines, Sec. 2). From the definition, we can get the following attributes of a corporation:

Artificial Being

Which means that, by fiction of law a corporation is a juridical person whose personality
is separate and distinct from its owners. Corporation has some of the rights that a natural
person possesses. It can sue and be sued in court, it can own and dispose properties, and it
is supposed to be given independence by its owners in terms of existence. Corporation can
also be convicted on criminal offense; fraud is an example.

Created by Operation of Law

Which means it will come into existence through a charter or a grant from the state. It
cannot exist by a mere agreement or a unilateral and self-declaration of existence. Functions
of corporations are governed strictly and it has to do within the bounds of what is being
provided in the corporate charter.

Right of Succession

A corporation can continue to exist even in death, incapacity or insolvency of any

stockholder or member. The corporation will not be dissolved even when there are transfers
of ownership.

Powers, Attributes and Properties

Which means it is authorized to do activities within the purpose(s) of its creation, it has
its own traits, and it operates based on what has been expressly provided in the charter
including those that are considered incident to its existence as a corporation. For example, a
fishing company need not ask if they could put up a storage facility for this purpose. These are
examples of implied authority being given occasioned by the giving of the express authority.

STAKEHOLDERS OF A CORPORATION
Management

This refers to the party given the authority to implement the policies as determined by
the Board in directing the course/business activities of the corporation (Securities and
Exchange Commission (SEC), Code of Corporate Governance). This is the group of people
running the day-to-day activities of the corporation. This team is composed of decision makers
from the top to the bottom of the corporate hierarchy. They are the ones entrusted by the
stockholders to do some maneuverings for the corporation to reach its destination. They are
the decision makers who will shape the future of the organization. The decisions that will be
made by these people may spell out failure or success of the corporation. Examples of people
who belong to this party are the board of directors, officers, and other managers that in one
way or another influence on the way the corporation is being run.

Creditors

This refers to the party who lend to the corporation goods, services or money. Creditors
may gain from corporation by 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
creditors should be taken into consideration. It is comforting to note that in the Philippine
setting our laws are protective of creditors. This is evident in the fact that whenever there is a
liquidation the first priority of payment belongs to the outside creditors.

Shareholders

This refers to people who invest their capital in the corporation. The people who, in
some cases considered as the first believer of what the entity can do. These are people who
bet their money and assume the high risk of having their money going down the drain. Unlike
creditors, shareholders being a part-owner of the entity cannot demand payment from the
corporation. Creditors, on the other hand, can demand payment for principal and the interest
and can go to court in case the borrowing corporation cannot pay its obligation

Employees

These are 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. Running the corporation with high
emphasis on employees is popular in corporate world nowadays that when business owners
decide to expand or diversify they always cite the number of jobs being created. And, when
these businessmen are confronted with business challenges they always pose this question,
"what will happen to the employees?"

Employees and corporations have symbiotic relationships. In an ideal scenario,

employees do what is best for the corporation so that the corporation can provide them gainful
and satisfying work. Good employees can contribute would lead to profit, profit could mean
additional benefits to workers.

Clients

The party considered to be the very reason for the existence of the corporation. They
are the buyers of the corporation's product or services for final consumption, enjoyment, or
maybe for the use in the production/creation of another goods. Clients or customers should
be one of the paramount considerations in the operation of a corporation. It is important to
note in this context that big businesses are directly or indirectly touching so many peoples'
lives. Some of these consumers are so dependent on what these big corporations are
producing leaving them vulnerable to commercial exploitation. To balance best the interest of
the customer, first there has to be unilateral and voluntary act of compassion by these
businesses to consumers. Predatory instinct of corporations has to be reduced if not
eradicated by having a sincere and visible operating philosophy which always place clients on
the equation not just plain and simple profit driven motives.

Government

The government has several interests in private corporations the most apparent of
which are the taxes that the corporations are paying. Taxes make government stay afloat and
survive as highlighted in the "lifeblood theory" of taxation. Apart from taxes, corporate activities
help the economy, in general, and the individuals, in particular. Existence of businesses
means jobs. Jobs provide income to individuals in the form of salaries. Salaries translates to
purchasing power. It is worth emphasizing that it is the duty and responsibility of the
government to provide the people the basic ways and means to survive and the government
gets the biggest help from the corporations.

Aside from those mentioned, there are services offered by private corporations that
somehow lessens the burden of the government, for example: health services, education, vital
industries like power, water and transportation. In developing countries like the Philippines, it
can be expected that the government cannot provide these services to level of competence to
the greater majority. The private corporations fill the gaps in helping the government in the
delivery of these basic services to the people. Government is also a buyer of product of some
corporation. Government also set standards and regulate important aspects of corporate
activities. All these things make the government an important stakeholder of corporations.

Public
 The public has a stake in corporations considering that the latter provides the citizens
with the essentials such as goods, services, employment and tax money for public programs.
The result of responsible or irresponsible conduct of these corporations can also affect public
in so many ways. For example, if a corporation is environmentally inconsiderate by giving too
much emphasis to their profit objectives, it is the public that would bear the brunt of the
consequences like pollution, calamities, diseases and many other undesirable consequences.

Another aspect being considered are the concerns on natural resources. There is great
public interest in businesses that belong to the extractive industries like mining, logging, and
petroleum exploration and extraction of exhaustible natural resources. There is nothing wrong
with all these activities so long as what is due to the general public should be considered. In
some cases, however, there is a problem of access to vital information and given that the
locations of the operations of these businesses are in far flung areas then the issue of access
is aggravated. That is why it can be said that sometimes there exists a "bureau-industrial
conspiracy" which means that there is a connivance between the persons who decide on the
part of the government and the representatives of the big businesses seeking government
approval. This scenario leaves the people helpless in asserting their rights as stakeholders.
These natural resources that they are trying to exhaust for profit belongs to the people and it
is but normal and fitting that whatever they do the interest of the public should be considered.

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. That is, how to
gain the momentum especially when its entry is during crisis, for it to withstand the hostile
environment of commercialism.

To Increase Profit

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

This is anchored on the argument that stockholders are the owners of the corporation and
therefore, corporate profits ultimately accrue to them. Corporate executives and hired
managers are the stockholders' agents and should operate in the interests of their principal,
the stockholders.

Stockholders are entitled to their profits as a result of a contract among the corporate
stakeholders. A stakeholder in this perspective refers to employees, managers, customers,
the local community (public) and the stockholders. Each cluster of stakeholder has a
contractual relationship with the firm, since they receive the remuneration they mutually and
freely agreed to, in a pre-established agreement or contract.

Based on the above, giving the corporation the authority to operate carries with it the
idea that corporation should earn for the following purposes: first, to serve its purpose of
existence which is to make the stockholders happy. Second, to perform its contractual
obligation to stakeholders embedded in the grant or authority to operate, These includes but
not limited to the payment of taxes to the government, taking care of employees within the
bounds of what is legal, giving back to the community and many others which is part of the
implied agreement for its existence.

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. The government cannot even solve by itself the
problem as basic as traffic. It is in this context that partnerships between the government and
the private corporations be considered to deal with some problems. Typical example of this in
Metro Manila area where traffic is almost intolerable fortunately, the government got a big help
from private investors in NLEX, SLEX, Northrail, Southrail, and other semi-private
infrastructures and other mass transport system investors. Other services in which the
government needs help are in areas of power, water, 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. Some might ask, what is the difference of this purpose from the
previous one? First, they differ in the area of pricing. Pricing in vital industries are not market-
dictated. The investors are given guaranteed returns to cover for their investment risks. And,
most are government-sanctioned and enjoys an almost monopolized if not fully monopolized
environment. Second, they differ in the area of competition. In a perfectly competitive market,
the services and goods are easily obtainable because there are lots of suppliers. In the less-
competitive vital industries obtained by government contracts, regulations and/or franchises,
the service and goods are only provided by a few or worse, by one producer.

SHAREHOLDERS, BONDHOLDERS AND DIRECTORS

After getting a significant understanding about the corporation and its stakeholders,
one needs to know the other players of the corporation. Shareholders, bondholders and
directors complete the cast when the corporation starts to operate. These are the parties which
will be having various claims over the entity. Shareholders will be having its claim in the form
dividends. Bondholders' claims will be in the form of interest earned via long-term agreement.
And, the directors will have their eyes on their salaries, incentives, stock options and bonuses.

To gain a better understanding, we need to discuss who they are and how they are
related to the corporation

Shareholders

Shareholders or stockholders 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:
 1. The right to vote on matters such as elections of the board of directors.

2. The right to propose shareholder resolutions.

3. The right to receive dividends.

4. Pre-emption right which is the right to purchase new shares issued by the company
to maintain its percentage of ownership in the company. This can also be called right
to first refusal.

5. The right to liquidating dividends. That is the right to receive the company's assets
during liquidation or cessation of business.

However, stockholders' rights to a company's assets come only second to the rights of
the outside creditors of the company. This means that stockholders typically may receive
nothing if after the company is liquidated, there is not enough money to pay its creditors.
Shareholders play an important role in raising capital for organizations, the capital that is
otherwise hard to be raised in a proprietorship or partnership form of business organization.

Shareholders are considered principals, and the directors and officers are considered
agents under the agency theory in governance. As principals, they are expecting that things
that the agents would do would be for the paramount benefit of the stockholders. Although
directors and officers of a company are bound by fiduciary duties to act in the best interest of
the shareholders, still the shareholders themselves deserves an independent third party that
would attest on what the management team is doing. This is here where the external auditors
would come into the picture to lend credibility on the reports prepared by management.

Bondholders

A bondholder is 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.

There are several advantages to being a bondholder rather than a shareholder of a

company. One of the major advantages is that when the company goes through a process
that involves the liquidation of the assets, bondholders and other outside creditors are given
priority over stockholders, which means that the bondholders will receive payments for the
outstanding bonds before any of the stockholders receive theirs in relation to their outstanding
shares. Another advantage is that bonds are not exposed to the fluctuation of interest rates
because whatever is the agreed interest rate when the bonds were issued it will be the one to
be used throughout the life of the bonds. Interest rate is “nailed” so the bondholder need not
worry. There is an element of predictability of income

The bondholder will receive regular interest payments during the life of the bond
computed at face value multiplied by the interest rate. This interest payment usually takes
place every six months and will continue to go until the maturity of the bond. Typically, the life
of a bond would take as short as 5 years to as long as 25 years. The bondholder has a
guaranteed return of the principal at some point in the future. This makes investment in binds
rewarding on the part of the investor who can afford to have their money in the hands of the
investee for longer periods of time.

Board of Directors

BOD refers to the collegial body that exercises the corporate powers of all corporations
formed under the Corporation Code (SEC Code of Corporate Governance). It conducts all
business and controls or holds all the assets of such corporations. This body is formed by the
stockholders and they will act as the governing body of the corporation. The BOD will be
headed by the chairman of the board who is considered as the most influential person in the
corporation. The board’s activities are determined by the powers, duties and responsibilities
delegated to it or conferred on it by an authority. These issues are typically detailed in the
corporation’s by-laws. The by-laws normally specify the number of members of the board. It
may also contain matters such as how the board members are to be chosen including the
specifics on when and where they are going to meet to discuss things concerning the operation
of a corporation.

Duties of the Board of Directors

● Governing the organization by establishing broad policies and objectives;

Examples of these broad policies are as follows: investment policies that will answer
the question as to where to put excess money for additional revenue purposes;
diversification policies that will answer the question as to what type businesses that
the corporation will be getting into as additional lines of business in the near future.

● Selecting, appointing, supporting and reviewing the performance of the chief executive;
As stewards of the corporation, the board of directors is expected to be with the chief
executive in the latter’s direct and indirect dealings with the corporation.

● Ensuring the availability of adequate financial resources;

It is expected from the board that the survival and financially healthy functioning of the
entity will be on the top of their agenda. With the coordination of people from the finance
department, BOD has to make certain that funds are available to finance the day-to-
day activities of the entities.

● Approving annual budgets;

Another responsibility of the board of directors is to approve the annual budget, which
can be described as the reflection of organizational program and plan into financial
terms. The annual budget will more or less define the operations of the corporation at
any given year.

● Accounting to the stakeholders the organization’s performance.

 One of the most critical duty of the board is to account for the entity’s performance to
its stakeholders; more importantly, to the shareholders who are the owners of the
corporation. They need to inform every stakeholder what went on at any particular
given period. This can be accomplished by providing the reports on financial highlights,
short and long-term plans, material investments during the period, including the
financial statements duly audited by an independent auditing firm.

MULTINATIONAL AND TRANSNATIONAL CORPORATIONS

International corporations have several categories depending on the business

structure, investment and product/service offerings. Multinational companies (MNC) and
transnational companies (TNC) are two of these categories. Both MNC and TNC are
enterprises that manage production or delivers services in more than one country. They are
characterized as business entities that have their management headquarters in one country,
known as the home country, and operate in several other countries, known as host countries.
Industries like manufacturing, oil, mining, agriculture, consulting, accounting, construction,
legal, advertising, entertainment, hotels, banking and telecommunications are often run
through TNCs and MNCs.

Multinational corporations (MNC) have investment in other countries, but do not have
coordinated product offerings in each country. They are more focused on adapting their
products and service to each individual local market. Well-known MNCs are mostly consumer
goods manufacturers and quick-service restaurants like Unilever, Proctor & Gamble,
McDonald’s and 7-11.

Transnational corporations (TNC) has been technically defined by the United Nations
Commission on Transnational Corporations and Investments as “enterprises which own or
control production or service facilities outside the country in which they are based.”

A transnational corporation is any corporation that is registered and operates in more

than one country at a time. A transnational has its headquarters in one country and operates
wholly or partially owned subsidiaries in one or more other countries. The subsidiaries report
to the central headquarters.

Compared with MNCs, transnational corporations (TNC) are much more complex
firms. They have invested in foreign operations, have a central corporate facility but give
decision-making, R&D and marketing powers to each individual foreign market. Most of them
come from petroleum, I.T. consulting, pharmaceutical industries among others. Examples are
Shell, Accenture, Deloitte, Glaxo-Smith Klein and Roche.

Many of them are owned by a mixture of domestic and foreign stockholders. Most
TNCs and MNCs are massive with budgets that outweigh small nations’ gross domestic
product (GDP). For example, the combined 2011 GDP and sales revenues of top corporations
(World Bank and Fortune Global 500 date), showed that the sales revenues of Roya Dutch
Shell, Exxon Mobil, Wal-Mart Stores, BP and Sinopec Group was ranked 25th, 26th, 27th,
29th, and 30th, respectively.
 Thus, TNC and MNC alike are highly influential to globalization, economic and
environmental lobbying in most countries. Because of their influence, countries and regional
political districts at times tender incentives to MNC and TNC in form of tax breaks, pledges of
governmental assistance or improved infrastructure, political favors and lenient environmental
and labor standards enforcement in order to be at an advantage from their competitors. Also
due to their size, they can have a significant impact on government policy, primarily through
the threat of market withdrawal. They are powerful enough to initiate lobbying that is directed
at a variety of business concerns such as tariff structures, aiming to restrict competition of
foreign industries.

Corporations have various motives for establishing a corporate presence in other

countries. One possible motive is a desire for growth. A corporation may have reached a
plateau meeting domestic demands and anticipate little additional growth. A new foreign
market might provide opportunities for new growth.

Other corporations desire to escape the protectionist policies of an importing country.

Through direct foreign investment, a corporation can bypass high tariffs that prevent its good
from being competitively priced. For example, when the European Common Market (the
predecessor of the European Union) placed tariffs on goods produced by outsiders, US
corporations responded by setting up European subsidiaries.

Two other motives are more controversial. One is preventing competition. The most
certain method of preventing actual or potential competition from foreign businesses is to
acquire those businesses. Another motive for establishing subsidiaries in other nations is to
reduce costs, mainly through the use of cheap foreign labor in developing countries. A
transnational corporation can hold down costs by shifting some or all of its production facilities
abroad.

Transnational corporations with headquarters in the United States have played an

increasingly dominant role in the world economy. This dominance is most pronounced in the
developing countries that rely primarily on a narrow range of exports, usually primary goods.
A transnational corporation has the ability to disrupt traditional economies, impose
monopolistic practices, and assert a political and economic agenda on a country.

Another concern with transnational corporations is their ability to use foreign

subsidiaries to minimize their tax liability. The Internal Revenue Service (IRS) must analyze
the movement of goods and services between a transnational company’s domestic and foreign
operations and then assess whether the transfer price that was assigned on the paper to each
transaction was fair. IRS studies indicate that US transnational corporations have an incentive
to set their transfer prices so as to shift income away from the United States and its higher
corporate tax rates and to shift deductible expenses into the United States. Foreign-owned
corporations doing business in the United States have a similar incentive. Critics argue that
these incentives also motivate US transnational corporations to move plants and jobs
overseas.

Company Overview: Walt Disney Company

 The Walt Disney Company, together with its subsidiaries and affiliates, is a leading
diversified international family entertainment and media enterprise with five business
segments: media networks, parks and resorts, studio entertainment, consumer products and
interactive media.

Media Networks

Media Networks comprise a vast array of broadcast, cable, radio, publishing and digital
businesses across two divisions – the Disney/ABC Television Group and ESPN Inc. In addition
to content development and distribution functions, the segment includes supporting
headquarters, communications, digital media, distribution, marketing groups.

The Disney/ABC Television is composed of The Walt Disney Company’s global

entertainment and news television properties, owned television stations group, and radio
business. This includes the ABC Television Network, ABC Owned Television Station Group,
ABC Entertainment Group, Disney Channels Worldwide, ABC Family as well as Disney/ABC
Domestic Networks, Hulu, and Fusion round out the Group’s portfolio of media businesses.

Parks and Resorts

When Walt Disney opened Disneyland on July 17, 1955, he created a unique
destination built around storytelling and immerse experiences, ushering in a new era of family
entertainment. More than 55 years later, Walt Disney Parks and Resorts (WDP&R) has grown
into one of the world’s leading providers of family travel and leisure experiences, providing
millions of guests each year with the chance to spend time with their families and friends
making memories that will last forever.

At the heart of WDP&R are five world-class vacation destinations with 11 theme parks
and 44 resorts in North America, Europe, and Asia, with a sixth destination currently under
construction in Shanghai. WDP&R also includes the Disney Cruise Line with its four ships –
the Disney Magic, Disney Wonder, Disney Dream, and Disney Fantasy; Disney Vacation Club,
with 12 properties and approaching a total of 200,000 member families; and Adventure by
Disney, which provides guided family vacation experiences to destinations around the globe.

The Walt Disney Studios

For over 90 years, The Walt Disney Studios has been the foundation on which The
Walt Disney Company was built. Today, the Studio brings quality movies, music and stage
plays to consumers throughout the world. Feature films are released under the following
banners: Disney, including Walt Disney Animation Studios and Pixar Animation Studios;
Disneynature; Marvel Studios; Lucasfilm; and Touchstone Pictures, the banner under which
live-action films from DreamWorks Studios are distributed. The Disney Music Group
encompasses the Walt Disney Records and Hollywood Records label, as well as Disney Music
Publishing. The Disney Theatrical Group produces and licenses live events, including Disney
on Broadway, Disney on Ice, and Disney Live!

Disney Consumer Products

 Disney Consumer Products (DCP) is the business segment of The Walt Disney
Company (NYE:DIS) and its affiliates that delivers innovative and engaging product
experiences across thousands of categories from toys and apparel to books and fine art. As
the world’s largest licensor, DCP inspires the imaginations of people around the world by
bringing the magic of Disney into consumers’ homes with products they can enjoy year-round.
DCP is comprised of of three business units: Licensing, Publishing, Disney Store. The
Licensing business is aligned around five strategic brand priorities: Disney Media, Classics &
Entertainment, Disney & Pixar Animations Studio, Disney Princess & Disney Fairies, Lucasfilm
and Marvel. Disney Publishing Worldwide (DPW) is the world’s largest publisher of children’s
books, magazines, and digital products and also includes an English language learning
business, consisting of over 40 Disney English learnings centers across China and a
supplemental learning book program. DPW’s growing library of digital products includes best-
selling eBook titles and original apps that leverage Disney content in innovative ways. The
Disney Store retail chain operates across North America, Europe, and Japan with more than
350 stores worldwide and is known for providing consumers with high-quality, unique products.

CORPORATE GOVERNANCE

DEFINITIONS

The Malaysian High Level Finance Committee Report on Corporate Governance

defined corporate governance as follows:

“Corporate governance is the 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.

The Wall Street Journal (3 June 1999) defined corporate governance as:

“Corporate governance, in principle, refers to the joint responsibility imposed on the

Board of Directors and management to protect shareholder rights and enhance shareholder
value. In practice, the Board is the real representative of shareholders and acts as a check
against management. The Board must ensure, among other things, that the company is
accountable to shareholders, that it gives equitable treatment to all its “owners,” small as well
as large, and that it acts transparently.”

Corporate governance refers to 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 marketplace (SEC Memorandum Circular No. 2,
Series of 2002, Code of Corporate Governance).

According to Sir Adrian Cadbury, corporate governance is concerned with holding the
balance between economic and social goals and between individual and communal goals.
Corporate governance framework is there to encourage the efficient use of resources and
equally to require accountability for the stewardship of those resources. The aim is to align as
nearly as possible the interests of Individuals, corporations and society.
 Corporate governance is defined as the structures and processes 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 stakeholder concerns, including implementation of good
environmental and social practices.

Corporate governance also contributes to development. Increased access to capital

encourages new investments, boosts economic growth, and provides employment
opportunities. Businesses that operate more efficiently tend to allocate and manage resources
more sustainably. Better stakeholder relationships help companies address environmental
protection, social, and labor issues.

FUNDAMENTAL OBJECTIVES OF CORPORATE GOVERNANCE |.

Improvement of Shareholder Value

Shareholders’ value can be improved by making a pre-commitment to build better relations

with primary stakeholders like employees, customers, suppliers and communities. Better
relations will lead to an increase in shareholders’ wealth since this would help the firms expand
and develop intangibles which the firm could capitalize on and in turn become a source of their
competitive advantage. Good reputation is just one example to these intangibles which could
largely predict the future of the business, Better relations with employees engender
employees’ commitment. Good relations with customers and suppliers complete the full circle
of strong alliances.

Conscious Consideration of the Interests of Other Stakeholders

When a company meets the objective of increasing the shareholder value, it will have
greater internally-generated 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. A key focus area is a company’s human
capital, which is a lead indicator of success (Principle 1, Corporate Governance Principle, ADB
and Hermes Pension Management).

WHAT GOOD GOVERNANCE PROMOTES

Transparency

Transparency is vital with respect to corporate governance due to the critical nature of
reporting financial and non-financial information. The aim includes maintaining investor,
consumer and other stakeholders’ confidence. The lack of dedication to corporate governance
policies particularly those related to transparency will drive home the point that the company
is unbalanced and the leadership is not incorporating it to the highest level of truthfulness.
Failure in transparency issues could lead to many things, scaring off of investors is just one of
them; being singled out by the authority is another which could mean the watchful eyes of the
agencies will be focused on the company and many other uncomfortable scenarios which no
company wants to be in.

Information is the currency of democracy according to Thomas Jefferson.

Transparency is a thing of huge concern in government setting since it entails giving out of
information. It is crucial because nearly all the decisions of government officials are in the
interest of the public. Transparency lessens the likelihood of nepotism, corruption, favoritism
and the likes. Shortage of information about the how the government agencies functions can
make it easy for corrupt officials to cover their tracks. It can be said that the most corrupt
countries are the least transparent. Sunshine has its cleansing properties; so let the light in.

Accountability

Accountability 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. It is acknowledging and taking charge for and
being transparent about the impacts of the company’s policies, decisions, actions, products
and its associated performance.

It is based on the premise that an accountable organization will take action to:

* Set a policy based on a comprehensive and balanced understanding ang response to

material stakeholders’ issues and concerns; the emphasis On this premise is the overall broad
philosophy and operating style of the Entity itself.

*Set goals and standards against which strategy and associated performance can be
measured and evaluated. This highlights the deliverables by the people to the organization.

*Disclose credible information about strategy, goals, standards and performance to those who
base their actions and decisions on this information. In this way, there will be goal congruence
in the organization,

Recall that the above premises are actually the fundamental objectives of corporate
governance: (1) improvement of shareholders value and (2) conscious consideration of the
interests of other stakeholders.

Prudence
Prudence is defined within the Code of Governance as "care, caution and good
judgment as well a wisdom in looking ahead." It is the management committee which is in
corporate setting, the board of director, 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

To put it into perspective, Arthur Levitt (former chairman of the US Securities &
Exchange Commission) once said: “If a country does not have a reputation for strong
‘corporate governance practices, capital will flow elsewhere. If investors are not confident with
the level of disclosure, capital will flow elsewhere. If a country opts for lax accounting and
reporting standards, capital will flow elsewhere. All enterprises in that country suffer the
consequences.” From the investors’ perspective a simple question can be raised, “will you
invest in a region or a country the track record of which in governance is questionable? If yes,
how long?”
It is a well-established reality that investors would behave differently in setting in which
good governance, both in political and corporate setting, is not seriously practiced. Investors’
concern will be more on short-term prosperity instead of long-term stability. There are many
countries in the world where investors are so speculative. One of evidences of these
speculative behaviors are the fact that they are now more flexible in term of locations. For
instance, HSBC, in Hong Kong, has a collapsible building; that is, it can be dismantled, shipped
out, and assembled at a place of choice. A better example is in utility services, there was a
time in Nigeria when utility companies providing power are having their main supply of power
on barges for them to easily get out of the country if something goes wrong.
It can be deduced that good governance immeasurably benefits not only a specific
company or industry but also the country. The following are the specific benefits of good
governance: oy

Reduced Vulnerability
Adopting good corporate governance practices leads to an improved system of,
internal control. This leads to greater accountability, protection of corporate resources and
eventually, better profit margins. Good corporate governance practices will also pave the way
for probable future development, diversification, including the capability to attract investors,
both sourced nationally and abroad. Good corporate governance will also reduce the cost of
loans or credits for corporations since companies with good corporate governance can be
considered low-risk companies in the eyes of debt investors.

Marketability
Embracing principles of good corporate governance can also play a role in enhancing
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. Good corporate
governance will also make the company more attractive in open market. This attribute will be
beneficial and will place the company at the finer end of the bargaining in times when strategic
alliances are needed. Examples of these strategic alliances are mergers, acquisitions,
corporate absorptions and buy outs, partnerships, joint ventures and other risk mitigating
initiatives.
Credibility
There are a good number of benefits when an entity embraces good corporate
governance, one of which is the company need\not spend more resources in compliance with
the regulatory and other financial institutions’ requirements necessary since all these things
are already integrated in company’s operating approach.

Companies that are known for good governance practices do not need to sell
themselves that hard for the investors to fuse-in their investment either as equity or as debt
investors. In the context of investment, everything could raise and fall in credibility and
reputation. When a company is credible, investors’ trust comes next; where investors’ trust is
in, money follows; when there is money, there is flexibility. It is in having that flexibility in a
competitive world that could spell out the difference between failure and success.
Valuation
Observed evidence and studies conducted in recent years back the idea that it ‘pays
to have good corporate governance. It was found out that more than 84% of the global
investors are willing to pay a higher price or a premium for the shares of a well, governed
company over one considered poorly governed given all financial figures comparably equal.
The issue is reliability of company-provided information. This is one convincing fact that
embracing corporate governance principles and practices affects corporate financial and non-
financial value of the enterprise.

AGENCY PROBLEM IN CORPORATIONS

In traditional (neo-classical) approach, corporation is treated as a single entity, it is

often called holistic approach. It is one of the features of a sole proprietorship, Owner—
managers have no conflicts of interest. In big companies, we almost always have the
separation of owners and managers. Financial manager should work in the best interests of
the owners by taking actions that increase the value of the company. However, we’ve also
seen that in large corporations ownership can be spread over a huge number of stockholders.
If we assume that stockholders buy stock because they seek to gain financially, then
the answer is obvious; good decisions{increase the value of the stock, and poor decisions
decrease the value of the stock. Given our observations, it follows that the financial manager
acts in the shareholders’ best interests by making decisions that increase the value of the
stock. The goalLof fi financial management is to maximize the current value per share of the
existing sock
The separation of stockholders and management has some advantages. It allows
share ownership to change without interfering so much with the operations of the business. It
allows the company to ine professional managers. This dispersion of ownership means that
rhanagers, ndt owners ° can contra] the firm. But, it brings problems, if the managers §” and
owners’ objectives are not the same and whether management really acts in the best interests
of the owners.
The goal of maximizing the value of the stock avoids the problems associated with the
sometimes conflicting parochial goals. There is no ambiguity in the criterion, and there is no
short-run versus long run issue. We explicitly mean that our goal is to maximize the current
stack value. By this, we mean that they are only entitled to what is left after employees,
suppliers, and creditors (and anyone else with a legitimate claim)” are paid their due. If any of
these groups go unpaid, the stockholders get nothing. Because the goal of financial
management is to maximize the value of the stock, we need to learn how to identify those
investments and financing arrangements that - favorably impact the value of the stock.
Agency Relationships and Costs
The connection is calle owners and managers is called an principal-agent problem and
the conflict is called an agency relationship. Such a relationship exists whenever someone
(the principal) hires another (the agent) to represent his interests. The shareholders are the
principals; the managers are their agents. Shareholders want management to increase the
value of the firm, but managers may have their own axes to grind or nests to feather. Agency
costs are incurred when (1) managers do not attempt to maximize firm value and (2)
shareholders incur costs to monitor the managers and influence their actions. More generally,
the term agency costs refers to the cost of the conflict of interest between stockholders and
management. Of course, there are foxo osts when the shareholders are also the managers.

Agency costs can be indirect or direct. An indirect agency cost is a-lost opportunity
such as the one we have just described. Direct agency costs come in two. orms.-the first type
is a corporate expenditure that benefits management but costs the stockholders. Perhaps, the
purchase of a luxurious and unneeded corporate jet would fall under this heading. The second
type of direct agency cost is an expense that arises from the need to monitor management
actions. Paying outside auditors to assess the accuracy of financial statement information
could be one example.

Goals of Financial Management

Assuming that we restrict ourselves to for-profit businesses, the goal of financial

management is to make money or add value for the owners) This goal is a little vague, of
course, so we examine some different ways of formulating it in order to come up with a more
precise definition. Such a definition is important because it leads to an objective basis for
making and evaluating financial decisions.

lf we were to consider possible financial goals, we might come up with some ideas like the
following:

1. To survive.
2. To avoid financial distress and bankruptcy.
3. To beat the competition.
4. To maximize sales or market share.
5. To minimize costs.
6. To maximize profits.
7. To Maintain a steady earnings growth. .

What would be the management goal if they have no control at all? One of main answer comes
from outside the mainstream economy. It is the idea that managers prefer the company to be
Miggér than more profitable. So, managers left to themselves would tend to maximize the
amount of resources over which they have control or, more generally, corporate power or
wealth. This goal could lead to an overemphasis on corporate size or growth.

Page 1-20

Our discussion indicates that management may tend to overemphasize organizational

survival to protect job security Also, management may dislike outside interference, so
independence and corporate self-sufficiency may be important goals.

Do Managers Act in the Stockholders' Interests?

Principal-agent problems would be easier to resolve if everyone had the same

information. That is rarely the case in finance Managers, shareholders, and lenders may all
have different information about the value of a real or financial asset, and it may be many
years before all the information, the perfect information, is revealed. Financial managers need
to recognize these information asymmetries and find ways to reassure investors that there are
no nasty surprises on the way.

Whether managers will, in fact, act in the best interests of stockholders depends on
two factors. First, how closely are management goals aligned with stockholder goals? This
question relates to the way managers are compensated. Second, can management be
replaced if they do not pursue stockholder goals? This issue relates to control of the firm. As
we will discuss, there are a number of reasons to think that, even in the largest firms,
management has a significant incentive to act in the interests of stockholders.

Managerial Compensation

Management will frequently have a significant economic incentive to increase share

value for two reasons. First, managerial compensation, particularly at the top, is usually tied
to financial performance in general and oftentimes to share value in particular. For example,
managers are frequently given the option to buy stock at a bargain price. The more the stock
is worth, the more valuable is this option. In fact, options are increasingly being used to
motivate employees of all types, not just top management.

The second incentive managers have relates to job prospects. Better performers within
the firm will tend to get promoted. More generally, those managers who are successful in
pursuing stockholder goals will be in greater demand in the labor market and thus command
higher salaries. In fact, managers who are successful in pursuing stockholder goals can reap
enormous rewards.

Control of the Firm

 Control of the firm ultimately rests with stockholders. They elect the board of directors
who in turn, hire and fire management. An important mechanism by which unhappy
stockholders can act to replace existing management is called a proxy fight. A proxy is the
authority to vote someone else's stock. A proxy fight develops when a group solicits proxies
in order to replace the existing board and thereby replace existing management.

1-20 | Good Governance and Social Responsibility

Another way that management can be replaced is by takeover. Those firms that are
poorly managed are more attractive as acquisitions than well-managed firms because a
greater profit potential exists. Thus, avoiding a takeover by another firm gives management
another incentive to act in the stockholders' interests.

Stakeholders

Management and stockholders are not the only parties with an interest in the firm's
decisions. Employees, customers, suppliers and even the government all have a financial
interest In the firm. Taken together, these various groups are called stakeholders in the firm.
In general, a stakeholder is someone other than a stockholder or creditor who potentially has
a claim on the cash flows of the firm. Such groups will also attempt to exert control over the
firm, perhaps to the detriment of the owners.

AGENCY THEORY IN GOVERNANCE

Agency theory suggests that the firm can be viewed as a loosely defined contract
between resource providers and the resource controllers. It is a relationship that came into
being occasioned by the existence of one or more individuals, called principals, employing
one or more other individuals, called agents, to carry out some service and then entrust
decision-making rights to the agents. Agency theory argues that in the modern corporation, in
which share ownership is publicly or widely-held, managerial actions sometimes depart from
those required to maximize shareholder returns. In agency theory language, the owners are
principals and the managers are agents, and there is an agency loss necessary, the extent of
which, is the benefits that should have accrued to the owners had the owners been the ones
who exercised direct control of the corporation.

This agency loss can be reduced through the installation of some mechanism like
providing financial incentives for executives and managers for their efforts of putting priority
on maximizing the shareholders' wealth. This system includes shares options for senior
executives at discounted prices. This way the senior executives' interest will be aligned to that
of the shareholders. Other similar systems tie executive compensation and levels of benefits
to the shareholders' returns and have part of executive compensation deferred to the future.
This is to provide executive rewards on for the long-run value maximization of the corporation.
This system would deter short run executive mentality of "harvest and enjoy while available"
and other actions which harms corporate value.

In similar terms, the related theory of organizational economics, is concerned in

anticipating managerial "opportunistic behavior" which includes policy skirting and indulging in
excessive privileges at the expense of shareholder interests. The key structural mechanism
to restrain such managerial "opportunism" is the board of directors. This body should provide
a monitoring of managerial actions on behalf of shareholders. Such impartial review will only
take place when the chairman of the board is independent of executive management. Where
the chief executive officer is also

Corporation and Corporate Governance 1-21

chairman of the board of directors, the objectivity of the board will possibly be compromised.
Agency and organizational economics theories predict that when the CEO also holds the dual
role of chair, then the interests of the owners will be sacrificed to a certain degree in favor of
management, that is, there will be managerial opportunism and agency loss. This loss is way
above the owners normal benefits had they been the ones performing the agents' functions of
running the day-to-day corporate activities.

EFFECTS OF AGENCY IN GOVERNANCE

As said earlier, corporation is a form of business organization where a principal agent

relationship exists; the shareholder being the principal and the board of directors, executive
and managers as the agents. This unique relationship also presents a very unique effect in
the context of corporate governance. The following are the effects of agency in corporate
governance:

Conflict of Interest

Principal and agent have diverse interests, and the separation of ownership and control
provides potential for different interests to surface. Shareholders lack direct control of
corporations, especially those which are publicly-traded corporations. Board of directors, on
the other hand, has the direct control on the activities of these enterprises being the ones
entrusted by the shareholders to decide on corporate affairs. In the above situation, it can
never be avoided that sometimes problems arise when the agent makes decisions that result
in the quest of goals that conflict with those of the shareholders.

Managerial Opportunism

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. Sometimes, the
uncalibrated and unchecked enjoyment of corporate resources and capabilities contradicts the
idea of increasing the shareholders' and firm's value. Excessive monetary benefits like
bonuses and privileges, routine efforts of trying to secure comfortable position like undue
diversification to increase compensation and to reduce employment risk, are just some of
examples of managerial opportunism.
Incurrence of Agency Cost

As mentioned earlier, agency presents conflicts of interest because agents might do

things which are detrimental to the maximization of shareholders' wealth. To counter this, the
principal needs to sacrifice resources for him to closely monitor and control the agent's
behavior. These costs are called agency cost, which refers to the sum of incentive costs,
supervision and monitoring costs, enforcement costs and other agency losses incurred by
principals in trying to ensure that agent's operating style is consistent with the aim of
maximizing the shareholders' and the firm's value.

1-22 Good Governance and Social Responsibility

Shareholder Activism

Shareholders can call together to discuss the corporation's direction. They can vote as
a block to elect their candidates to the board. Institutional activism will also offer a premium
on companies with good corporate governance since this type of activism carries with it the
capability to give incentive when agents perform well. Another issue that is well connected to
shareholder activism is share ownership. Having some board members, executives and
managers that are at the same time shareholders may cause alignment of their interests with
plain shareholders. This is especially applicable with institutional investors. The increasing
pressure and power of institutional owners to discipline ineffective top-level managers will now
definitely influence the firm's choice of strategies to be employed in internal governance.

Managerial Defensiveness

This is in relation to issues of takeovers whereby management will employ some tactics
to discourage takeovers and buyouts. These tactics may involve asset restructuring via
termination of investments, changes in the financial structure of the firm such as acquisition of
own shares in the open market, presenting bad takeover scenarios to shareholders for them
not to approve takeover. Normally, in a takeover, the non-performing executives and
managers are dismissed from their jobs. These anti takeover tactics are discussed in another
chapter of this book.

CONCEPT OF GOAL CONGRUENCE

Goal congruence is the harmony and alignment of goals of both the principal and the
agent which is consistent with the overall objectives of the organization. While it is true that in
agency relations, the presence of self-interested behaviors is a given, nevertheless, managers
can be encouraged to act in shareholders' best interests by giving incentives which will
compensate them for good performance on one hand at the same time give them disincentives
on their poor performance on another.

Corporate Governance at Oracle Corporation

 The Board of Oracle Corporation has throughout its history developed corporate
governance practices to fulfill its responsibility to Oracle Corporation stockholders. The
composition and activities of the Company's Board of Directors, the approach to public
disclosure and the availability of ethics and business conduct resources for employees
exemplifies the Company's commitment to good corporate governance practices, including
compliance with new standards. The Board has adopted the following corporate and
committee guidelines to help ensure it has the necessary authority and procedures in place to
oversee the work of management and to exercise independence in evaluating Oracle
Corporation's business operations. These guidelines allow the Board to align the interests of
directors and management with those of Oracle Corporation's stockholders. All guidelines are
subject to future refinement or

Corporation and Corporate Governance | 1-23

changes as the Board may find necessary or advisable for Oracle Corporation in order to
achieve the above objectives.

Oracle continually applies good corporate governance principles to multiple areas of

the Company. In addition to these guidelines, Oracle has had a Code of Ethics and Business
Conduct since 1996.

PERFORMANCE INCENTIVES AND DISINCENTIVES

Pay Dependent on Profit Level

When management is rewarded based of the level of profits made, naturally members
of management will make every effort to achieve high profit levels for them to earn more. This
system is the most effective way to increase not only the value of shareholders wealth but also
the value of the firm, both in tangible and intangible context. The flip side of this scheme,
however, is that it encourage the use of creative accounting and reporting practices to attain
certain profit objectives. For example, the infamous corporate scandals, the mark to market
accounting used by Enron Corporation is one of the most glaring of these creative practices.

Shares Incentives

This can be done when a company is a publicly-listed company and managers are
given a chance to subscribe shares of the company at a discounted price. Managers will have
something to protect and it can be naturally expected that they will venture into projects which
will improve the firm's value. In this system, there is commonality of stake between the plain
shareholders, and those executives and managers that are at the same time shareholders.
Duality of capacities of executives and managers are not without disadvantages, intricacies
on shareholders at the same time agents will be discussed further in agency problem in a
succeeding chapter of this book.

Shareholders' Intervention

There is now a visible shift of character of shareholders by a large scale. Shareholders

of today are now more active than before. They now dip their hands more unlike before when
some of them will just wait on what the board will present on the table. Some shareholders are
now active institutional investors who will definitely exercise a more direct influence over the
performance of an enterprise. They are now taking an active role by scrutinizing performance
of the company, and are very swift in their efforts of lobbying with other small shareholders
when they believe poor service or any mismanagement by the directors is happening.

It is the above characters that will make board, executives, and managers more
conscious on the way they manage and decide things. It will make their decisions more leaning
in favor of shareholders knowing that somebody is watching over their shoulders. Somebody
keenly monitoring on the operating philosophies they employ.

1-24 | Good Governance and Social Responsibility

Threat of Being Fired

The shareholders who have ultimate control over of the corporation can take a straight
and hostile approach by threatening the board, executives and managers with removal from
office if they place their personal interests over that of shareholders and that of maximizing
the value of the firm, The increase in numbers of institutional investors has enhanced the
shareholders powers to discharge directors since they are able not only to dominate but also
lobby other shareholders in decision making.

Takeover Threat

It is but normal for board, executives, and managers to move heaven and earth to
avoid or discourage corporate takeovers as they are aware that their job would at least be at
risk if not to be lost totally if takeover takes place. To push for goal congruence, that is to have
things in accordance with welfare o shareholders and enhancement of firm's value, the
shareholders can easily make a threat to accept takeover proposal if their set objectives are
not met by the agents (board, executives, and managers) in general.

ROLES OF THE NON-EXECUTIVE DIRECTORS

A non-executive director is a member of the board of directors of a company who does

not take part in the executive function of the management team. This director is not an
employee of the company or connected with it in any other way. He is separate from the inside
directors who are members of the board who also serve or previously served as executive
managers of the company.

Fundamentally, the non-executive director's role is to give a meaningful contribution to

the board by providing objective criticism, At present, it is widely accepted that non-executive
directors have an important contribution to make for the proper administration of companies
and, therefore, on the economy at a larger content. Non-executive director "should bring an
independent judgment to bear on issues of strategy, performance and resources including key
appointments and standards of conduct." (taken from The Cadbury Report).

Non-executive directors have the responsibilities in the following areas:

Strategy

As an outsider, the non-executive director may have an impartial, clearer, and wider
view of external factors affecting the company and its business environment than the executive
directors. The normal role of the non-executive director in strategy development is therefore
to offer a creative contribution and to act as a constructive reviewer in looking at the goals and
plans developed by the chief executive and his executive team.

Corporation and Corporate Governance | 1-25

Non-executive director should continually face and contribute in the development of

the company's long-term goals and visions. Together with the other directors and officers of
the company, he is expected to participate in setting long-term broad operational principles
and policies that benefits the stakeholders in areas that concerns on company stability,
increasing the firm's value, and ultimately, in increasing shareholders' value.

Establishing Networks

One of the important functions of the non-executive director is to represent the

company in some external corporate undertakings. It is the job of the non-executive director
(NcD) to connect the company to the outside world and in the process, gain benefit from
networks of businesses. This network of businesses are no doubt beneficial to the organization
since this could spark certain avenues for alliances which the most effective way to survive in
a very competitive environment.

Monitoring of Performance

Non-executive directors should take responsibility for monitoring the performance of

executive management, more particularly on matters relating to the progress made towards
realizing the established company strategies. Non-executive directors should not be concern
only on strategy alone. Included in his responsibility is to monitor and examine the
performance of management in meeting agreed goals and objectives of the company.
Succession planning is also part of his responsibilities but taking into consideration the
sensitivity of the matter he should do it more carefully with the concurrence of the other
directors and officers.

Audit

It is the duty of the whole board to ensure that the company report properly to its
shareholders, this can be done by presenting a true, fair and real reflection on how the
company was administered at any given time. Included in this report is financial performance
and highlights that are deemed necessary, including the assurance that the internal control
systems are in place and monitored routinely and thoroughly. A non- executive director has
an important role to play in fulfilling this responsibility whether or not a formal audit committee
of the board has been established.

ROLES OF THE CHIEF FINANCIAL OFFICER (CFO)

The chief financial officer (CFO) is a corporate officer principally accountable managing the
financial risks of the corporation. This officer is also responsible for financial planning and
record-keeping as well as financial reporting to higher management. He will be the one who
will direct the corporation's finances corporations large and small, a CFO is needed to handle
both the cash inflow outflow and to create reports about the corporation's spending Keeping
track on the working capital requirements of the company to meet short-term and day
requirements on operation are also the responsibilities of the CFO.

1-26
In large corporations, the primary duties of the CFC may be to supervise and manage
a large accounting department, while coming up with ways to maximize profit to the company.
A CFO might, for example, evaluate the way in which employees work to determine the way
to most efficiently get work done for the least amount of money. These responsibilities
however can be shared with other corporate heads or with general managers or lower level
supervisors

CFOs have different specific roles depending on so many things: industry peculiarity,
corporate structure, profile of investors (e.g majority family-owned), government intervention,
and whether the company listed or not both in local stock exchange or international
exchanges. However, the following roles cut across corporate s around the world:

Implements Internal Controls

A CFO will be the one responsible for conveying the important financial controls to a
company. . These controls features should include the effective administration of cash flow
and overhead expenses, establishing credit policies for customers and working with major
vendors to attain more favorable payment terms, and implementing measures for assessing
and evaluating optimal inventory levels. At a higher level, a CFO should also develop effective
controls that provide supervision against fraudulent activities.

Supervises Major Impact Projects

Outside of implementing and monitoring company controls relating finance, an

effective CFO also handles and supervises those projects that require significant quantitative
and qualitative interpretations and analysis in order to reach an understanding of the options
that are available. For example, a CFO will take responsibility for developing a company's
annual budget, work together with the business owners and division or department managers
to ensure that the final financial product accurately and objectively projects the real requisites
of the business. A CFO might also carry out a meticulous analysis of a company's future capital
investment requirements as a prerequisite in securing additional financing

Develops Relations with Financing Sources

 One of the most important responsibilities of an effective CFO is to institute good
working relationships with banks and other financial institutions that may impact on the
company's ability to finance its operations Specific activities in this area may include regular
meetings with officers of the company's banks to review ongoing operations, discussing
possible future loan transactions, revisiting ioan covenants if there is any negotiating more
favorable terms for bank lines of credit, and discussion with private investors on how additional
capital might be invested into the enterprise.

1-27
Advisor to Management
An effective CFO is also an important member of the management team of some
emerging companies. Because of his financial sharpness and general business knowledge, a
good CFO can facilitate and help the business owners, executives and other top managers
make the substantial connection between a company's operation and its financial performance
that are reflected in the actual figures and also with the of projections

Drives Major Strategic Issues

A good CFO can also be expected to take part in important role of getting involved on
some major strategic issues that will have an impact on the company's long term future. These
issues include the hatching of the company acquisition strategy which in the end would help
fuel and boost the company's additional growth. Keeping an eye on diversification of a
particular product lines, business activities, and pontol also part of the CFOs concern. A CFO
would also play a significant role in any endeavor the purpose of which is to seek investment
from the public or financial markets especially in times when the company is having an initial
public offering (IPO).

Risk Manager

The CFO is in the best position to foresee risks considering that they have this rare
perspective on how the company operates. CFOs are close to the internal control system and
financial reports which pass through many operational areas. CFOS are high ranking officers
doing real and actual things in the infantry. Their views are not just “tree top” their views are
real and they are in proximity of hard figures that could back their decision.

The CFO's viewpoint on risk can be a helpful source to the board of directors and the
CEO as well as other senior officers as they manage the corporate affairs. The CFO may be
in the best position to anticipate high risks transactions and the adverse consequences of a
changing external environment. This unique capability of CFOS however is only valuable if
the CFO is communicating well with the CEO, the board and the other officer of the
organization.

Relationship Role
Mare often, the CFO is the nucleus in an organization with many connections. The CFO will
work together with the CEO, the board of directors, the audit committee, the internal auditor
and the external auditor, Strong verbal and written communication skills are indispensable if
the nucleus is to support the connections effectively. CFP serves the bridge between these a
variety of parties within the organization

1-28
Objective Referee

CFO needs to demonstrate impartiality such as when advising the CEO or the board
of directors on accounting matters. The skill to present important financial issues is an
invaluable resource but it should always be in the context that it is not being done to favor
somebody. CFOs are not valued by board of directors or audit committees attributes or
tendencies of boosting financial figures with sacrificed transparency.

In consonance with the principle of good corporate governance, boards of directors,

audit committees and CEOS need to understand all sides of a financial accounting or
disclosure issues so they can make an informed and rational decision. The CFO can and
should be a trusted adviser in matters of financial reporting

ROLES OF THE AUDIT COMMITTEE

The audit committee is an essential component in the overall corporate governance

system. The objectives of this committee should be geared toward carrying out practical,
progressive changes in the functions and expectations placed on corporate boards. One of
the fundamental principles of an effective audit committee is that committee members should
be independent from the operational aspects of the company. This means that a company's
senior management should not be audit committee members. The senior management
however has to be given the opportunity for important communication with the audit committee

Understanding the Audit Committee's Responsibilities

An audit committee should be engaged mainly in an oversight function and ultimately

is responsible for the company's financial reporting processes and the quality of its financial
reporting. For the committee to carry out the said responsibilities, the committee must have a
working knowledge on the company's goals and its long-term plans and visions including the
issues the company is facing in trying to achieve these objectives. Examples of issues that
the audit committees should consider:

● Risk identification and response

● Pressure to manage earnings
● Internal controls and company growth
Risk Identification and Response

To be effective, an audit committee must have an understanding of the risks the

company faces, and more importantly, the company's internal control system for identifying
and mitigating those risks. Risks that could affect the company and that the audit committee
should be conscious about include:

1-29

● External Risk (independent)

Rapid technological changes

Audit committee should always be on the lookout for the company not to be left
behind due to advancement of technology. The new rule In this modern time is
embrace things brought about by technology and be a survivor.

Downturns in the industry

The product that the company is selling may have passed already its maturity
stage and it is already its way down. The audit committee should have a clear picture
of the "what if scenario" of the entity. A very good example, Nokia began as a textile
company then went into electronics, and from electronics migrated to wireless devices
(mobile phone) but they missed the next boat.

Unrealistic earnings expectations by analysts

An audit committee is expected to be not just composed and collected but also
less aggressive when it comes to expectations of business outcomes. Audit
committees should be associated with conservative and realistic information, and thus
they should deal figures from the realist point of view. They should reasonably know
how much meat within a cup of soup because this would be the real basis in putting
up plans for the company's future.

● Operating/Internal Risk
Recurring organizational changes, turnover of key personnel are some of the
danger signs that the audit committee cannot afford to neglect Things like this hamper
the operational momentum of the company rendering it slow in its progress in achieving
its vision.
Another internal risk worthy of consideration is the complexities of transactions,
complex organizational structure, swift growth, performance based compensation that
are excessively inappropriate, exposure to currency differences on foreign currency
denominated loans, and financial results that are abnormally different from that of the
industry.

● Information and Control Risk

 The audit committee, in carrying out its responsibility has to address the
following concerns which are considered as perennial in most organizations:
unsuitable control environment that are sometimes "toned at the top." Another is the
lack of sincere management supervision and inappropriate management override of
existing controls which is by description, the best habitat for abuse. Timeliness is
another concern since information needs to be communicated early enough to the
stakeholder for these information to be useful.

1-30
Who is responsible for financial reporting? The responsibility for financial reporting is
vested in three groups:
1. The BOD - the company's board of directors including the audit committee
2. Finance and Accounting - financial management including the internal auditors
3. Auditor - the independent auditors

While it is true that this triumvirate forms a "three-legged stool," there is a need to
emphasize that the audit committee must take the lead in the financial reporting process, since
the audit committee is an extension of the full board and hence the ultimate monitor of the
process. An audit committee that functions well could definitely send a strong message and
partial assurance to the other stakeholders that the system is in place and it is protecting the
organization both in short and long-term basis.

ROLES OF THE EXTERNAL AUDITOR

Auditing is a systematic process by which a competent, independent person objectively

obtains and evaluates evidence regarding assertions about economic actions and events to
ascertain the degree of correspondence between those assertions and established criteria
and communication the results to interested users (American Accounting Association).

Need for External Auditor

There is a need for independent auditor because of the apparent separation of
ownership and management. Audit services are used extensively by business organizations
to cast away doubts on the information given by the management which are also generated
under its direct control. There exist information risk. Business structures are becoming more
complex which increases the possibility that unreliable information might be fed not only to
decision makers but more importantly to the shareholders.

Factors that Contribute to Information Risk

1. Remoteness of Information Providers to the Information Users

This makes first-hand knowledge difficult to obtain by some stakeholders

because they are divorced from management. Complex corporate structures, less
involvement by the shareholders in day-to-day operations or decisions as well as
 geographical dispersion are just some of the factors that widen the distance between
the information user and provider.

2. Bias of Information Providers

There is an assumed conflict of interest between the shareholder and
management regarding financial information. Financial statements and other

1-31

Page 1-32 – Page 1-37 - start

financial information serves as the “report card” of management of its stewardship, the only
report card presented by one being graded. Having said this, information may be presented
in favor of the provider when his goals are different with some stakeholders.

3. The Volume of Data

When business grow, possibly thousands if not millions of transactions are

process daily through the sue of sophisticated computer programs or via manual system.
There is this possibility therefore that improperly recoded information may be buried in the
records leaving the overall results inaccurate if not misleading, trained professionals therefore
are needed in the area.

4. Complexities in Transactions

Changing and new relationship in business leads to some innovations in

accounting and reporting process. Transactions nowadays are getting complicated and
becoming more difficult to record let alone be understood by the stakeholders. Examples of
these are derivatives, future, multi-level mortgages in securities, reinsurances, different
valuations, and other complex transactions in the financial markets which the board of
directors and other decision makers in the company might venture into it.

Auditing is an endeavor of assuring the reads of the financial statements with

confidence in the figures of financial statements. This is highlighted by the accountancy
profession’s meaning of an audit. Audit of Financial statements which is; an exercise, the
objective of which is to permit auditors to express an opinion as to whether the financial
statements give a true and fair view of the affairs of an entity at a given periods in accordance
with the relevant framework and standards (lifted and reworded from International Standard
on Auditing (ISA) 2000, Objective and General Principles Governing an Audit of Financial
Statement).

The logic behind this definition is that the auditor’s opinion will lend and add some
credibility to the financial statements. It is expected that the auditor, as an independent expert
on financial preparation and reporting, should conduct the examination exhaustively for him to
have good backings on the opinion he will be expressing in the independent audit report.

Auditor’s Duties

In most countries, the auditor has a legal duty to make a report to the enterprise
on the fact and fairness of the entity’s annual accounts. This report should state the auditor’s
opinion whether the statements have been prepared in accordance with the relevant standards
more importantly on relevant legislation and whether they present a true and fair and view of
the profit or loss at any given period. The responsibility to report on the truth and fairness of
the financial statements rests with the management, the auditor therefore has a responsibility
to form an opinion on certain other matters and to report any reservations that he has on the
reports. In the audit report, these reservations can be seen in the qualification of opinion by
the auditor.

In the conduct of an audit, the auditor must consider whether the following are
present:

1. Proper accounting records being kept by the company.

2. Financial statement figures that agree with accounting records.

3. Adequacy of notes to financial statement and other disclosures

necessary

4. Compliance with relevant laws and standards of financial accounting

and reporting.

In three (3) of the above, the auditor is impliedly given the right to access to any
information or material that is relevant to examination of the financial statements. In addition,
the auditor has a duty to review the other information issued alongside the audited financial
statements. There is, however, no guarantee that the statements are free from misstatements
ana errors, this is partly because the auditor is only required to form an opinion for him to
discharge his duties. This must he understood that audit is not designed to discover errors,
irregularities, and fraud. Activities in external auditing are only designed to form an opinion,
not conclusion; it can only give reasonable assurance, not absolute assurance.

Based on the preceding items, it can be summarized that the external auditor is there
to attest to the data and other information prepared by management in accordance with some
legal and other established criteria. The criteria in the Philippine setting are provided by
Philippine Financial Reporting Standards and other standards. The overall role of the external
auditor is to express an opinion on the financial statements prepared by management. This
means that an external auditor lends credibility to financial statements which are to be used
by the shareholders and other stakeholders.

Supplemental Readings
Corporate Governance Awards
Received by Premier Philippine Corporations

Manila Water
Source: www.manilawoter.com

Corporate Governance Asia Annual Recognition Awards 2009

Manila Water was cited as one of the best in Corporate Governance in the Philippines
in the Corporate Governance in Asia Annual Recognition Awards for 2009. This the third
straight year that Manila Water was cited by Corporate Governance Asia. The awarding was
held last June 26, 2009 at the JW Marriott Hotel in Hong Kong.

Gold Award for ICD's CorpGov Scorecard Project

For the third straight year, Manila Water has been recognized as one of the best in
Corporate Governance in the last Corporate Governance scorecard by the Institute of
Corporate Directors (ICD). Given in the last ICD’s Annual Dinner last May 27, 2009, the Gold
Award was received by Manila Waters president, Jose Rene Almendras.

The Asset Magazine’s Annual Corporate Governance Index 2008

 Manila Water has been named the best company in the Philippines, in terms of
Corporate Governance in The Asset Magazine's annual Corporate Governance Index 2008.
The results were published in the November 2008 issue of the asset.

The publication’s basis for corporate governance standards is The Combined Code
Principles of Good Governance and Code of best practice divided by the committee on its final
report and from the Cadbury and Greenbury Reports. it also based it on the White paper on
Corporate Governance in Asia produced by the Organizations for Economic Cooperation and
Development (OECD). As in previous years, The Asset invite companies to present their
annual results in complying with best practices.

Corporate Governance Asia Annual Recognition Awards 2008

Manila Water was one of the recipients of the corporate Governance Asia Annual
Recognition Awards for 2008. This marks the second straight year that Manila Water was cited
by Corporate Governance Asia. This year, Corporate Governance Asia included the following
items to its criteria for the award:

● Rights of shareholders
● Disclosure and transparency
● Board and management discipline
● Audit and remuneration committee
● Independent, non-executive directors
● Public impression
● Investor relations
● Corporate governance as a business proposition
● Corporate social responsibility and environmental practices

2007 Corporate Governance Scorecard Project

Manila Water received two awards at the Institute of Corporate Directors’ (ICD) Annual
Dinner on May 28, 2008. Manila Water was among the 20 companies given an award for
garnering the highest ratings in 2007 Corporate Governance Scorecard Project, jointly
conducted by the ICD, Philippine Stock Exchange and Securities and Exchange Commissions
among 138 publicly listed companies. From its average rating of 71% in the 2006 Corporate
Governance Scorecard Project where Manila Water ranked 7th out of 64 listed companies,
Manila Water’s rating jumped to 85% in 2007.
 Manila Water was also one of 11 companies to receive a citation for its active
participation in the ICD Companies Circle, composed or publicly listed companies who have
committed to strengthen corporate governance practices in the country. The Companies’
Circle meets monthly and undertakes projects such as the review of SEC Code of Corporate
Governance and the SEC Manual of Corporate Governance.

Corporate Governance Asia Annual Recognition Awards 2007

Manila Water was one of the recipients of the Corporate Governance Asia Annual
Recognition Awards in 2007. The award was given to Manila Water in recognition of its
continuing commitment to the development or corporate governance in the region.

Corporates Governance Asia is the only journal currently specializing in corporate

governance in the region. It evaluated the performance or key companies and listed those that
have contributed significantly to the over-all development or corporate governance during the
past year. In the Philippines, seven companies were chosen. Along with Manila Water, Ayala
Corporation, Globe, Metrobank, PLDT, San Miguel Corporation and SM investments were
also cited.

According to Corporate Governance Asia, the annual recognition awards recognize

Asian companies that demonstrate excellence in corporate governance with Asian values and
spirit.

The criteria for the award are as Follows:

● The awardee must have a previous publicly acclaimed track record for corporate
governance (This can come in the form of other CG-related awards)
● The awardee must have been involved in a specific publicly known activity/activities
(legislation, surveys, studies, etc.) directly related to improving or enhancing the
standards of corporate governance during the past 12 months, and
● The awardee must have implemented significant and specific G-related reforms during
the past 12 months.

2007 Asiamoney Award

 In January 2007, Manila Water was voted 2nd Best Over-all for Corporate Governance
in the Philippines for 2006 in a survey conducted by Asiamoney. The criteria for the survey
were disclosure and transparency, responsibilities of management and the board of directors,
shareholders' rights and equitable treatment, and investor relations. Manila Water considered
the high rating as a significant achievement for the company especially since it was evaluated
only months after its listing in March 2005 Further, Manila Water is the only medium-sized
company among the seven Philippine awardees. The rest of the awardees were large-cap
stocks.

Asiamoney, a leading financial publication, conducted the survey among CEOs, CIOs
and senior executive from fund management and hedge fund companies in the Asia-Pacific
region, UK and USA, as well as heads of research and senior analysts in brokerages across
the region. Asiamoney received a total of 88 valid responses, from 76 different institution.
Seventeen Philippine companies were cited in the survey, with Manila Water coming after
PLDT. Manila Water's parent company Ayala Corporation was voted third best.

2006 Corporate Governance Scorecard Project

Manila Water ranked seventh in the 2006 Corporate Governance Scorecard Project
for Publicly-Listed Companies conducted by the Institute of Corporate Directors. This marked
the first time that Manila Water was rated by the Scorecard Project as it was listed only in
March 2005, making ranking so high even more of an achievement.

The Scorecard Project involves an annual rating of the corporate governance practices
of local publicly-listed companies. 64 listed companies were rated for 2006. The project was
conducted under the auspices of the Capital Markets Development Council and the
President's Governance Advisory Council. The criteria for the project are rights of
shareholders, equity of shareholders, role of stakeholders, disclosure and transparency, and
board responsibility.

SM Investments
Source: www.sminvestments.com

Corporate Governance Asia Annual Recognition Awards

In recognition of its continuing commitment to the development of corporate

governance in the region, SMIC has been chosen as one of the recipients of the Corporate
Governance Asia Annual Recognition Awards for two successive years, 2007 and 2008.
Corporate Governance Asia is the only journal currently specializing in corporate governance
in the region. The annual recognition awards recognize Asia companies that demonstrate
excellence in corporate governance with Asian values and spirit. TO this end, Corporate
Governance Asia evaluated the performance of listed companies to determine which
companies have contributed significantly to the overall development of corporate governance
for a given year. In the Philippines, seven companies were chosen in 2007 and eight in 2008.

In 2007, the criteria for the award were as follows:

● The awardee must have a previous publicly acclaimed track record for
corporate governance (This can come in the form of other CG-related awards)
● The awardee must have been involved in a specific publicly known
activity/activities (legislation, surveys, studies, etc.) directly related to
improving or enhancing the standards of corporate governance during the past
12 months, and
● The awardee must have implemented significant and specific G-related
reforms during the past 12 months.

In 2008, Corporate Governance Asia included the following criteria for the award:

● Rights of shareholders
● Disclosure and transparency
● Board and management discipline
● Audit and remuneration committee
● Independent, non-executive directors
● Public impression
● Investor relations
● Corporate governance as a business proposition
● Corporate social responsibility and environmental practices

The Asset

SMIC has been cited as 2nd Best in Corporate Governance in the Philippines in 2008
and 3rd Best in 2007 by The Asset, one or Asia’s leading finance monthly publications
circulated worldwide, mostly to major institutional investors invested in Asia. The Asset
conducted a survey among listed companies in the Philippines and evaluated each company's
financial highlights, board of directors. Audit Committee, Risk
Page 1-32 – Page 1-37 - end

Management Committee, corporate social responsibility, investor relations and digital

communications. The Asset also consulted institutional investors, sell-side analysts and its
board of editors through The Asset Benchmark Surveys or in the course of the Triple A
selection.

According to The Asset, The Best in Corporate Governance Award is given to the companies
that have gone beyond regulatory compliance to promote a corporate culture that is
transparent, investor-friendly and that takes cognizance of the rights of minority shareholders.
The award is also given to companies who have taken the lead in engaging with the community
they operate within in a socially responsible way.

Finance Asia

SMIC was awarded 4th Most Committed to Corporate Governance in the Philippines in 2007
and 8th in 2008. Finance Asia is one of the region's leading financial publishing companies
based in Hong Kong and covering Asia's financial and capital markets. It conducts an annual
Best Managed Company poll among investment professionals and financial analysts.
Respondents are asked to rank companies in 10 Asian countries on the basis of over-all
management, corporate governance, investor relations and their commitment to strong
dividend payments.

1-38 Good Governance and Social Responsibility

“One of the greatest delusions in the world is the hope that the evils in this world are to be
cured by legislation” – Thomas B. Reed (1886)

UNDERSTANDING THE ORGANIZATIONAL ENVIRONMENT

To understand the internal and external organizational environment, it is important to cover

first organizational theory, organizational structure, centralization and decentralization, levels
of the organization, Mintzberg's nine design parameters, and formal relationships.
Organizations are complex adaptive systems that use people, tasks and technologies to
achieve specified goals and objectives. Structuring the organization represents the division
and distribution of work among members of the organization, and the coordination of their
activities in such a way that they are directed towards achieving the declared goals and
objectives of the organization. Management is about how the organization manages the
structure, the resources and the activities within the organization and how it measures and
monitors the resulting performance towards achieving the declared goals and objectives of
the organization.

Organizational theory attempts to explain how organizations work by defining the common
features that organizations share, by collecting data and by analyzing them, assessing "what
works where - and why!". It is important to understand that structure and management of
organizations will differ depending on the following: the sector they operate in (public, private,
non-profit), the stakeholder configuration, the particular strategic goals and objectives they set
themselves. There is therefore no one recipe that will work across all organizations, the
structure will reflect the DNA of organizations which translates to "the way we do things around
here" and other factors particular to any one organization.

ORGANIZATIONAL THEORY

Organizational theory is especially useful for people who manage organizations, or who aspire
to do so in the future. But whether or not you are a manager, for example, if you work in public
health, you will be working with organizations (like hospitals, charities, local and national
government etc.) so you need to understand them. It enables the manager to see that his or
her organization and its problems are rarely wholly unique. Usually, much of value can be
learned from examining the behavior of other organizations in broadly similar circumstances.
It can help us to explain what is happening in our own organization and to identify possible
solutions to its challenges, issues and problems, provided the solutions selected take into
account cultural and other key aspects and are not simply 'broad-brush' or replica
implementations based on what is done elsewhere.

2-2 | Good Governance and Social Responsibility

Organizations, especially large organizations are generally 'complex', having many inter-
related facets and areas that need to be coordinated, managed together to achieve efficiencies
and effectiveness in achieving stated goals and objectives. Organizations also need to be
'adaptive', they need to respond to ongoing changes in the environment in which they operate
(i.e. the political, social, economic and technological conditions) that together form the
environment in which organizations operate.

Even if you do not aspire to be a manager, organizational theory should be of interest to you
for it's around us. Organizational theory can help explain how they work and why they work in
the ways they do.

Drucker suggests three criteria for effective organizations:

a. They must be organized for business performance.

b. Their structure should contain the least number of management levels.

c. Organizational structure should facilitate training and testing of future organization leaders.

ORGANIZATIONAL STRUCTURE

Organization structure is the pattern of relationships among positions in the organization and
among members of the organization. The purpose of structure is the division of work among
members of the organization, and the coordination of their activities so that they are directed
towards achieving the same goals and objectives of the organization. Structure defines tasks
and responsibilities, work roles and relationships and channels of communication.

Objectives of an Organizational Structure

· accountability for areas of work undertaken by groups and individual members of the
organization

· coordination of different parts of the organization and different areas of work

· effective and efficient organizational performance including resource utilization

· monitoring the activities of the organization

· flexibility in order to respond to changing environmental factors

· the social satisfaction of members of the organization

Dimensions of Organizational Structure

Child (1988) suggests six major dimensions as components of an organization structure:

· allocation of individual tasks and responsibilities, job specialization and definition

· formal reporting relationships, levels of authority and spans of control

Organizations: Their Political, Structural and Economic Environment | 2-3

· grouping together of sections, departments, divisions and larger units

· systems for communication of information, integration of effort and participation

· delegation of authority and procedures for monitoring and evaluating the action

· motivation of through systems for performance appraisal

Consequences of Structural Deficiencies (Child):

· low motivation and morale

· late and inappropriate decisions

· conflict and lack of co-ordination

· poor response to new opportunities and external change

· rising costs - e.g. diseconomies of scale

Principles of Organizational Design and Diagnosis

Mintzberg suggests that organizational structures fall into five basic categories:
· simple structure: a centralized, perhaps autocratic arrangement typical of the entrepreneur-
founded company. Little hierarchy or control exercised by the chief executive.

· machine bureaucracy: best at mass produced tasks and is characterized by many layers
of management and formal procedures

· professional bureaucracy: likely to include some parts of the administration is set by

independent professional bodies. It tends to be more democratic and more highly motivated,
with its lines of authority less clearly set.

· divisionalized form of bureaucracy: applies more to multinational or industrial corporations

where a small central core controls key guidelines for a number of otherwise autonomous
units.

· adhocracy: often found in new technology industries, which need constantly to innovate
and respond to quickly changing markets.

Types of Organizational Structure

This is essentially the process by which the organization's mission is divided into discrete roles
and tasks of individuals within the organization. There are different ways of doing this. All
essentially act initially by grouping key activities in the organization and then allocating
roles/tasks to individuals. These can fall into the following categories:

· functional

· product/service

· geographical

· divisional

· matrix

2-4 | Good Governance and Social Responsibility

Functional - grouping of major functions e.g. contracting, information, finance, personnel and
public health in health authorities
Advantages:

· increases utilization and coordination of groups of people with technical/specialized

expertise

· increases development and career opportunities for people in departments

Disadvantages:

· encourages sectional interests and conflicts

· difficult for organization to adapt to product/service diversification

Product/Service - grouping by service/ product. For example, in a hospital; into orthopedic,

surgical, psychiatric rather than medical, nursing, paramedical, hotel services (functional).

Advantages:

· increases diversification

· adaptability increased if service/product requires technical knowledge or large equipment

Disadvantage:

· encourages service conflicts

Geographical - a nationalized service develops regions, areas or district authorities.

Advantage:

· more responsive to local/regional issues and different cultures, national/local laws.

Disadvantage:

· can lead to localities/regions conflicting with each other

Divisional - grouping of services and/ or geography and functionality (but with functions such
as finance, personnel, planning retained at headquarters).
Advantages:

· suitable for international companies who are highly diversified, working in more than one
country. For example, a pharmaceutical company with divisions in each country producing
and marketing products developed by the parent company.

· corporate strategic control with production and marketing independence at divisions

Organizations: Their Political, Structural and Economic Environment | 2-5

Matrix - grouping of projects and functions.

Advantages:

· combines vertical and lateral lines of communication and authority

· stability and efficiency (of mechanistic structure) with flexibility and informality (of inorganic
structure)

· emphasizes that project aims are all-important

Disadvantages:

· potential conflict between project leader and functional leader regarding resources

· project may be jeopardized if project members as well as leaders enter the conflict on
opposite sides

· does not tolerate diversification well

CENTRALIZATION AND DECENTRALIZATION

Centralization when all the power for decision making rests at a single point in the organization
ultimately in the hands of one person or group, the structure is centralized. If the power is
dispersed among many people/groups, it is known as decentralized or distributed. Note that
some functions (research, planning, finance, personnel) are less amenable to decentralization
than others (e.g. contracting, client services). Centralization and decentralization should not
be treated as absolutes, but rather as two ends of a continuum.
Advantages:

· frees top management of routine every day decisions to concentrate on strategic

responsibilities

· decisions are more local, quicker, more responsive to clients

· increased awareness of cost effectiveness through the organization

· increased motivation and satisfaction by junior management

2-6 | Good Governance and Social Responsibility

2-7
Disadvantages:
● Requires good communication and adequate control to and from the center
● Need for center to coordinate/integrate
● Can lead to inequity in treatment of clients
● Need individuals willing to take on additional responsibilities
In general, large organizations lean towards:
● Less centralization
● More specialization
● More rules and procedures to be followed

LEVELS OF THE ORGANIZATION

According to Drucker, organizations are layered into three main levels:
● The technical level of the organization is concerned with specific operations and
defined tasks with actual jobs to be done, and with performance of the technical
function.
● The managerial level (or organizational level) is concerned with the coordination and
integration of work, at the technical level, e.g. resource allocation, administration and
control of the operations of the technical function.
● The community level (or institutional level) is concerned with the broad objectives and
the work of the organization as a whole. Decisions made at this level will include the
selection of operations, development of organizations in relation to external agencies
and the wider social environment.

MINTZBERG”S NINE DESIGN PARAMETERS

Design assumes discretion, an ability to alter the system. In the case of the
organizational structure, design means ‘turning those knobs’ that influence the division of labor
and the coordinating mechanisms thereby affecting how the organization functions. Consider
the following questions, which are the basic issues of structural design:
a. How many tasks should a given position in the organization contain, and how
specialized should each task be?
b. To what extent should the work content of each position be standardized?
c. What skills and knowledge should be required for each position?
d. On what basis should positions be grouped into units and units into larger units?
e. How large should each unit be; how many people should report to a given manager?
f. To what extent should the output of each position or unit be standardized?
2-8
g. What mechanisms should be established to facilitate mutual adjustment among
positions and units?
h. How much decision power should be delegated to the managers of line units down the
chain of authority?
 i. How much decision making power should pass from the line managers to the staff
specialists and operators?

These nine design parameters are the basic components of organizational structure
and they fall into four broad groupings:

Groups Design Parameters Related Concepts

Design of
positions Job specialization Basic division of labor

Behavior formalization Standardization of work content

System or regulated flows

Training and indoctrination Standardization of skills

Design of Unit grouping Direct Supervision

superstructure

Administrative division of labor

Systems of formal authority, regulated

flows, informal communication, and work
constellations

Organogram

Unit size System of informal communication

Direct supervision

Span of control

Design of Planning and control systems Standardization of output

lateral linkages
System of regulated flows
 Liaison devices Mutual adjustment

Systems of informal communication,

work constellations, and ad hoc decision
processes

Design of Vertical decentralization Administrative division of labor

decision
making process

Systems of formal authority, regulated

flows, work constellations, and ad hoc
decision processes

Horizontal decentralization Administrative division of labor

Systems of formal authority, regulated

flows, work constellations, and ad hoc
decision processes

ORGANIZATIONAL RELATIONSHIPS
Work Design
Work can be combined in various forms. Decisions on the methods of groupings will
consider:
● The need for coordination
● The identification of clearly defined divisions of work
● Economy
● The process of managing activities

2-9
● Avoiding conflict, and
 ● The design of work organization which takes account of the nature of staff
employed, their interests and job satisfaction

Formal
● Line - vertical flow of authority
● Functional - between specialists in advisory positions and line management
teams
● Staff - personal assistants to senior members

Span of Control
● Nature of organization, complexity of work, range of responsibilities
● Ability and personal qualities e.g. capacity of manager
● Time available to spend with subordinates
● Ability of training of subordinates
● Effectiveness of coordination, communication, control systems
● Physical location of subordinates
People and Organizational Relationships

People – Organisational Relationships

Classification of objectives

Task and element functions

Division of work and grouping of people

Centralisation and decentralisation

Principles of organisation

Span of control and scalar chain

Formal organisational relationships

Line and staff organisation

Project teams and matrix organisation

Maintain the balance of the socio-technical system and effectiveness of the organisation as a whole

FACTORS AFFECTING ORGANIZATIONAL STRUCTURE SELECTION IN

MULTINATIONAL CORPORATIONS
 The organization structure of the business environment is an approach that helps and
guides in organizing the employees of the organization into a structured and organized pattern
for better coordination and communication. The structure in a multinational company defined
the architecture of the business competence functional relationship and management function.
It helps in reducing confusion in the business environment and also supports in carrying out
the business environment and also supports in carrying out the business function smoothly
and efficiently. The organization structure is affected by various internal and external factors
which are also known as the organizational environment since organization works around
these factors and the environment (Baumueller, 2007).
2-10
The organization environment consists of all those factors that influence the
organizational working and thus can also influence the organizational structure since in each
country and geographical areas the organizational environment would change. The external
organizational environment that would influence the organizational structure is the economic,
political and legal, socio-economic, technological and natural factors. All these factors of
organizational external environment affects the selection of organizational structure since
organizational structure which the organization chooses directly or indirectly would be affected
by the changes in the factors (Baumeller, 2007).
The external factors that affect the organizational structure are the economic factor
which provides information about the market size and the competitor’s strategy and the
manner in which the organization should be structured to meet the company’s objectives. The
demand and supply for the product or service along with the wages and salary structure is
also affected by various political and legal factors and should be in accordance with the norms
and policies of the government. The company should plan the organizational structure in
accordance with the rules and policies of the country and should not avoid the rules as it might
create consequences in the future.
The company also has to pay due importance to the various socio-economic factors
and the psychographic and demographic factors as all the factors have direct impact on the
organizational structure. The company should keep into consideration the culture, values and
beliefs of the society and accordingly plan for the structure in order to meet out the objectives.
Technological factor is again one of the influential factors while selecting the organizational
structure for a multinational organization.
Technology has quickened the communication flow from one level of organizational
structure to another which has influenced the organizational structure to another which has
influenced the organizational structure in a large way. Technology has also reduced the
human resource requirements in multinational companies which has thus, directly affected the
organizational structure since how many numbers of employees required or hierarchy required
is based on the amount of work and the task that would be performed by those employees.
Technology has increased the efficiency of the organization by helping the organization to
more accurately and easily (Jeannet & Hennessey, 2005).
The natural environment by which the multinational companies surround also influence
their organizational structure since multinational companies operate at different geographical
locations which have differences in the timings, whether conditions and does not match with
the subsidiary operating in another country which thus, becomes a crucial point at the time of
selection of organizational structure (Baumueller, 2007).

2-11
The employee’s culture, environment, language, values, etc. should be considered, so
as to avoid the impact on the organizational structure. The organizational structure is further
affected by the size and the nature of the company. The internal factors also play a very
important role and affect the organizational structure (Moran, Harris & Moran, 2007).
The internal factors like the size of the company have a great impact on the
organizational structure. The size of the company can be defined by the geographic and
product range of the company. The company size can be defined as the area of operation that
is the region covered by the company. The size helps the company in choosing the optimum
organizational structure in order to conduct the business operations effectively and efficiently.
The company needs to go for an effective organizational structure to reach its desired goals
and objectives (Moran, Harris & Moran, 2007).
The company’s product range and services also has a direct impact on the
organizational structure of the company. The company has to select the best organizational
structure to handle the operations related to the products and its range as well as the services
properly.The company has to plan for various departments and units in order to carry out the
business operations in an appropriate manner and has to select the best organizational
structure for proper coordination and communication among the various branches (Moran,
Harris & Moran, 2007).
Apart from these factors one of the factors that influence the selection of organizational
structure by multinational companies are their strategy. The strategy that the company is using
should be an indicator of which organizational structure to adopt since with each of the different
strategies there is a specific organizational structure that should be followed to accomplish the
task with more efficiency. There are different types of strategies that multinational companies
can adopt while launching the product in the new or the old market that includes the
differentiation strategy, cost leadership strategy, focus strategy etc. It is quite a fact that each
of these strategies could influence the organizational structure of the organization since the
implementation of these strategies would be done in different manner. As per their plans,
company could use any of the strategies to achieve its goals (Baumueller, 2007).

2-12
REGULATION
Regulation is the administrative process of writing and passing laws that, to a certain
extent, restrain some fundamental rights of businesses. It can be distinguished from principal
legislation by elected legislative body. Regulation can take many forms: legal restrictions
promulgated by a government authority, self-regulation by an industry in which the type of
business belongs such as through a trade association, social regulation, and market
regulation. One can consider regulation as actions of imposing sanctions or penalties to the
extent permitted by law.

AREAS OF GOVERNMENT REGULATION OF BUSINESS

RELEVANT TO THE EXISTENCE OF BUSINESS
The State Will Take Charge of Economic Activity
A centrally planned economy is one where all major economic decisions are under the
control of the government. This type of economy is typically associated with socialist and
communist ideals, and was first attempted in the Soviet Union in the early 20th century. In
contrast to a free market or capitalist economy, a centrally planned economy does not allow
the supply and demand of the market to define prices, wages, or the production of goods.
The theory behind a centrally planned economy begins with the idea that the market
is not a measure of what is best for the country. Subject to whim, trend, and a myriad of
opinions, the free market can slow or even impede the goals of a central government. By
having the state run the economy, the government is totally able to enact the programs,
schemes, and plans deemed as best for the country by the leaders.
Most modern economies include a mix of centrally planned and free market behavior.
While the government may control certain areas of economy, much of the market runs at the
impulse of the people. In such an economy, a person has the right to start a private business,
thanks to the free market, but may have to pay business taxes and charge a sales tax based
on the centrally planned aspects.
Advantages of Planned Economy
A. Driven for Collective Benefits. Government decided economies can be proposed to
serve communal rather than individual needs. Following that system, rewards, and
other benefits are to be distributed according to the price that the state credits to the
service performed. A planned economy eradicated the individual profit motives as the
 driving force of production and rested it in the hands of government planners to
determine the appropriate production of different sets of goods.

Government can exploit land, labor, and capital to provide land, labor, and capital to
provide the economic purposes of the state. Consumer demand can be contained in
favor of bigge capital ventures for economic advancement in a preferred blueprint. The
state can come building a heavy industry at once in an underdeveloped economy
without waiting years for capital to accumulate through the expansion, and without
reliance on external financing. This was the case of Soviet Union during the 1930s
when the government mandated the share of GNP dedicated to private consumption
from 80% to 50%. As a result, the Soviet Union experienced gigantic growth in heavy
industries.

B. Economies of Scale. A government run economy would endeavor to replace a number

of firms with a single firm for the whole economy. This makes the business the sole
beneficiary on the advantage of single market, arbitrary pricing and unilateral product
offering.

C. Inherently Protected. Government planned economy is not subject to major downside

of market economies and market-oriented mixed economies. A planned economy,
theoretically, does not suffer from business cycles; it does not experience a crisis of
overproduction. From the modern perspective, it does not result in asset bubbles and
massive misallocations of resources such as the South-Sea bubble in Britain, the dot-
com bubble of the late 1990s or the housing bubble of the mid-2000s.

Another facet is that a centrally mapped economy can offer public goods, which would
not have been available at all, or might require explicit government provision. In a
planned economy, government planners would apportion state resources en route for
public goods and state projects.

D. Stability. When the government is in charge, long-term ventures can be made without
fear of a market downward spiral which can easily lead to abandonment of a project.
This is especially important where returns are risky, in some advanced economies,
one of the examples would be running a prison which decisions vary and are
dependent from one administration to another. In developing countries like the
Philippines, construction of roads for toll fees is another example in which the
government has to control or to certain extent should bleed-out investment money to
 give private investors the assurance in terms of protective government policies. Proof
of this is the decision of the Supreme Court of the Philippines favoring the incremental
charges (be it tax or plain increase) made by NLEX and SLEX.

Disadvantages of Planned Economic Activity

A. Inefficient Use of Resources. Critics of planned economies are pushing the idea that
planners cannot detect consumer preferences, shortages, and surpluses within the
ideal level of accuracy and therefore cannot efficiently coordinate production. From the
modern viewpoint, production shortage or surplus is proof of a mismatch between
supply and demand, a clear and convincing evidence of wastage in terms of
government resources.

Surpluses magnify the waste of labor and materials that could have been to more
pressing needs of society. Critics of central planning assert that an economy prevents
long-term surpluses because the operation of supply and don causes the price to go
down when supply begins going beyond demand, telling producers to stop production
or face losses. A scenario that liberates resources to be applied to satisfy short-term
shortages of other commodities, as determined by rising prices as demand begins
exceeding supply.

It is argued that this "invisible hand" prevents long-term shortages and surpluses and
permits efficiency at optimum level in satisfying the needs and wants of consumers
People against planned economy argue that since in a planned economy prices are
not permitted to float freely, there is no accurate mechanism to determine what is being
produced in unnecessarily large amounts and what is being produced in insufficient
amounts. They argue that efficiency is best attained through a market economy where
individual producers each make their own production decisions based on their own
profit motive.

B. Restraint of Democracy in Trade. Given that central planning overcame its built-in
inhibitions of incentives and innovation, it would nevertheless be unable to maximize
economic democracy and self-management, which some believes are concepts that
are more rationally consistent, reliable and just than ordinary ideas of economic
freedom.

As Robin Hahnel explains, "Combined with a more democratic political system, and
redone to closer approximate a best case version, centrally planned economies no
 doubt would have performed better. But they could never have delivered economic self
management, they would always have been slow to innovate as apathy and frustration
took their inevitable toll, and they would always have been susceptible to growing
inequities and inefficiencies as the effects of differential economic power grew. Under
central planning neither planners, managers, nor workers had incentives to promote
the social economic interest. Nor did impeding markets for final goods to the planning
system enfranchise consumers in meaningful ways. But central planning would have
been incompatible with economic democracy even if it had overcome its information
and incentive liabilities. And the truth is that it survived as long as it did only because
it was propped up by unprecedented totalitarian political power." Without economic
democracy there can be troubles with the flow of knowledge.

Imposition of Legal and Administrative Barriers

Based on research the following are the identified and recurring legal administrative
barriers to entrepreneurship common to ASEAN countries (Adapted " Administrative Barriers
to Entrepreneurship by Elena Suhir):

A. Disproportionate Licensing and Regulatory Requirements. The regulator licensing

barriers are perennial in today's system whereby one must obtain approval from the authorities
to embark on even the smallest tasks. While it is true that some Asian governments are vocal
in their support and praise for the open and free market system, the business people appear
to have to seek permission from the government at every step of operations.

The entrepreneurially "permissive'' climate characterized by profuse over regulation

continues to inflict injuries and losses on entrepreneurial activity across all sectors of the
economy. When entrepreneurs attempt to seek legal redress to register, they soon discover a
different level of hurdles: some choose to pay bribes, keep prices artificially low and force
competitors out of business.

Some entrepreneurs lobby the government for redress, but governments rarely act
against the abuser(s). The weak rule-of-law mechanisms do not punish corruption, it helps
propagate it and rather only serve to reinforce the administrative barriers. Sometimes
government officials refuse to cooperate with the entrepreneurs, leaving the informal sector
as the only way to do business in a semi-official, shadow environment. The common pattern
of conducting business by SMEs in some Asian countries and in the Philippines, in particular,
trivially consists of three options for the entrepreneur: (1) enter the informal sector by paying
bribes each step of the way, (2) secure and utilize "connections" in government, and/or (3)
obtain a government position and abuse the system of authority to one's benefit.

B. Excessive, Complex, and Arbitrary Taxation. The taxation system can sometimes
be complex, subject to abuse by government officials (and businesses), and appears to
change frequently. The net effect of an excessive, abusive, and arbitrary system of taxation is
that SMEs find it virtually impossible to conform to all the laws and tax regulations, making the
informal initiative and creative legal deviations the only chance to survive in the market. Tax
can sometimes is the major reason of capital flight that hurts the overall economy.

C. Inadequate Banking System and Poor Banking Practices. Inadequate banking

system can also impose impossible demands on entrepreneurs. Issues involving timeframes,
and terms of credit for repayments are sometimes prohibitive, collateral is difficult to provide,
and finding a guarantor to help secure a loan is very difficult. However, we cannot blame this
banking practice considering that one of the underlying reasons also for the poor banking
practices is the high risk of delinquency or bad loans. This problem though is not much of a
case in the Philippines as our banking system is functioning well and at level enough to
become a good complement for economic progress. There is one issue left however that
needs to be addressed and that is access to capital especially to micro, small and medium
scale enterprises (MSMEs).

D. Lack of Government's Commitment to Reduce Administrative Barriers. A good mass

within the business community and even those outside of business recognizes that the
governments are doing little to reduce administrative barriers impeding investment and trade.
Some entrepreneurs are even silently blaming the governments for having little and poor
understanding of the importance of addressing these problems.

Given the preceding paragraph, one can contend that something needs the
government to maximize the benefits of a free market. As a result, the informal sector
continues to grow and the income the governments would have otherwise collected is lost.
This lost money could have been used to spend for baci services that are expected from the
government.

REGULATIONS RELEVANT TO THE CONDUCT OF BUSINESS

The government has set many business regulations in place to protect employees'
rights, protect the environment and hold corporations accountable for the amount of power
they have in this business-driven society. Some of these regulations stand out more
significantly than the others because of their relevance to every employee. consumer and
society in general.

Advertising
Laws pertaining to marketing and advertising set in motion by the regulatory authority
exist to protect consumers and keep companies honest about their products. Every business
is required to comply with the advertising laws and could face lawsuits for violation. advertising
laws are made up of dozens of tidbits under three main requirements: advertising must be
truthful and non-misleading; businesses need to be able to back up claims made in
advertisements at any time; and advertisements must be fair to competitors and consumers.
Additionally, in compliance with the packaging and labeling requirements, all product labels
must include information about the product, such as nutrition, size, and distribution and
manufacturing information.

Employment and Labor

Among the ever-changing regulations in business are employment laws. These laws
pertain to minimum wages, benefits, safety and health compliance. working conditions, equal
employment opportunity, and privacy regulations cover the largest area of subjects of all the
business regulations. Several employment regulations stand out as the heavy hitters among
the others. The Department of Labor and Employment (DOLE) through the Regional Tripartite
Wages and Productivity Board (RTWPB) set the minimum wage for workers in the Philippines..
There are also several required benefits, including unemployment insurance, workers'
compensation and employee social security assistance which is mandatory and applicable
generally to all employees.

Environmental
The carbon footprint of businesses on the environment is regulated by the Department
of Environment and Natural Resources (DENR). The DENR enforces environmental laws
passed by the government. This is done through frequent inspection and environmental audit.
The Environmental Management Bureau (EMB) and other offices and bureau exist to help
businesses small and large alike achieve environmental compliance, and should serve as a
resource more than an enforcer.

Privacy
Sensitive formation is usually collected from employees and customers during hiring
and business transactions, and business transactions, and privacy laws prevent businesses
from disclosing this information freely. Information collected can include social security
number, address, name, health conditions, credit card and bank numbers and personal
history. Not only do various laws exist to keep businesses from spreading this information, but
people can sue companies for disclosing sensitive information.

Safety and Health

The safety and health laws ensures that employers provide safe and sanitary work
environments through frequent inspections and a grading scale. A company must meet
specific standards in order to stay in business. These regulations have changed frequently
throughout the years alongside the changing sanitary and workplace standards. In
accordance with legal provisions, employers must provide hazard-free workplaces, avoiding
employee physical harm and death, through incorporating these in procedures manual.

POLITICAL ENVIRONMENT OF BUSINESS

Regardless of how attractive the economic prospects of a particular country or regions
are, doing business there might prove to be financially devastating if the host government
imposes heavy financial consequential penalties on a company. An unanticipated event in the
political arena will also lead to the loss of revenue assets resulting from policy change.

The political environment in which the firm operates will have a significant impact on a
company's international operating activities. The greater the level of involvement of the
company in a foreign markets, the greater the need to monitor the political climate of the
countries where the business is conducted since this political climate will affect among others
the marketability of the company's product, the inflow of investments and more importantly
valuation of share price.

Changes in government more often result in changes in policy and attitudes towards
foreign business. Bearing in mind that a foreign company operates in a host country at the
discretion of the government concerned, the government can either encourage foreign
activities by offering attractive opportunities and incentives for investment and trade, or
discourage its activities by imposing disincentives and restrictions such as unfriendly stricter
regulations and import quotas, etc. An exporter that is continuously aware and in-touch of
shifts in government attitude, need to be able to adapt export operation strategies accordingly.

Almost all governments today have an active participation in their countries’

economies. Although evident to a greater or lesser extent in most countries, government
ownership of economic activities is still customary in the former centrally planned economies,
as well as in certain developing countries which lack a sufficiently well- developed private
sector to support a free market system.

One of the primary concerns to an investor should be the stability of the target country's
political environment. A loss of confidence in this respect could lead to a company having to
reduce its operations or to withdraw altogether. One or me surest indicators of political
instability is a frequent change in regime. Although a change in government need not be
accompanied by violence, it is often a precursor of change in policy towards business,
particularly international business. Such a development could impact harshly on a firms' long-
term international commitment.

Reflected in a government's attitudes and policies towards foreign business are its
ideas about how to best promote national interest in the light of the country's economic and
political resources and objectives. Foreign products and investment seen to be vital to the
growth and development of the economy often receive favorable treatment from the
government in the form of reduced tax, exemption from quotas, and other incentives. On the
other hand, products classified by a government to be luxury, non-essential, undesirable, or a
threat to local industry are frequently subjected to a variety of import restrictions such as
quotas and tariffs.

CORPORATE SOCIAL RESPONSIBILITY AND ORGANIZATIONS

Corporate social responsibility (CSR) can be defined as the "economic, legal, ethical,
and discretionary expectations that society has of organizations at a given point in time"
(Carroll and Buchholtz 2003). The concept of corporate social responsibility means that
organizations have moral, ethical, and philanthropic responsibilities in addition to their
responsibilities to earn a fair return for investe the corporation suggests that its primary, if not
sole, responsibility is to its owners, or stockholders. However, CSR requires organizations to
adopt a broader view of its responsibilities that includes not only stockholders, but many other
constituencies as well, including employees, suppliers, customers, the local community,, local,
and national governments, environmental groups, and other special interest groups.
Collectively, the various groups affected by the actions of an organization are called
“stakeholders”.

Corporate social responsibility is related to but not identical with business ethics. While
CSR encompasses the economic, legal, ethical, and discretionary responsibilities of
organizations, business ethics usually focuses on the moral judgements and behavior of
individuals and groups within organizations. Thus, the sturdy of business ethics may be
regarded as a component of the larger study of corporate social responsibility.

Carroll and Buchholtz's four-part definition of CSR makes explicit the multi-faceted
nature of social responsibility. The economic responsibilities cited in the definition refer to
society's expectation that organizations will produce goods and services that are needed and
desired by customers and sell those goods and services at a reasonable price. Organizations
are expected to be efficient, profitable, and to keep shareholder interests in mind. The legal
responsibilities relate to the expectation that organizations will comply with the laws set down
by society to govern competition in the marketplace. Organizations have thousands of legal
responsibilities governing almost every aspect of their operations, including consumer and
product laws, environmental laws, and employment laws. The ethical responsibilities concern
societal expectations that go beyond the law, such as the expectation that organizations will
conduct their affairs in a fair and just way. This means that organizations are expected to do
more than just comply with the law, but also make proactive efforts to anticipate and meet the
norms of society even if those norms are not formally enacted in law.

Corporate social responsibility is a complex topic. There is no question that the legal,
ethical, and discretionary expectations placed on businesses are greater than ever before.
Few companies totally disregard social issues and problems. Most purport to pursue not only
the goal of increased revenues and profits, but also the goal of community and societal
betterment.

Research suggests that those corporations that develop a reputation as being socially
responsive and ethical enjoy higher levels of performance. However, the ultimate motivation
for corporations to practice social responsibility should not be a financial motivation alone, but
rather inclusive of moral and ethical dimension.

CONTEMPORARY SOCIAL ISSUES

Corporations deal with various social issues and problems, both directly related to their
operation and not. It would not be possible to satisfactorily describe all of the social issues
faced by business. This section will just briefly discuss three contemporary issues that are of
major concern: the environment, global issues, and technology issues.

ENVIRONMENTAL ISSUES
 Corporations have long been criticized and even lambasted by some pressure groups
for their negative effect on the natural environment in terms of wasting natural resources and
contributing to environmental problems such as pollution and global warming. The use of fossil
fuels, which according to some has long been obsolete, is thought to contribute to global
warming, and there is both governmental and societal pressure on corporations to adhere to
stricter environmental standards and to voluntarily change production processes in order to
do less harm to the environment. Other issues related to the natural environment include
irresponsible disposal of waste, deforestation, and land degradation. It is likely that corporate
responsibilities in this area will increase in the coming years.

GLOBAL ISSUES

Corporations increasingly operate in a global environment. The globalization of

business appears to be an irreversible trend, but there are many opponents to it. Critics
suggest that globalization leads to the exploitation of developing nations' workers, destruction
of the environment, and increased human rights abuses. They also argue that globalization
primarily benefits the wealthy and widens the gap between the rich and the poor. Proponents
of globalization on the other hand argue that open markets lead to increased standards of
living for everyone, higher wages for workers worldwide, and economic development in
impoverished nations. Many large corporations are multinational in scope and will continue to
face legal, social, and ethical issues brought on by the increasing globalization of business.

Whether one is an opponent or proponent of globalization, it does not change the fact
that corporations operating globally face daunting social issues. Perhaps the most pressing
issue is that of labor standards in different countries around the world. Many corporations have
been stung by revelations that their plants around the world were "sweatshops" and/or
employed very young children. This problem is complex because societal standards and
expectations regarding working conditions and the employment of children vary significantly
around the world. Corporations must decide which one is the good and responsible option;
adopting the standards of the countries in which they are operating or imposing a common
standard world-wide. A related issue is that of safety conditions in plants around the world.

Another issue in global business is the issue of marketing goods and services in the
international marketplace. Some U.S. companies, for example, have marketed products in
other countries after the products were banned in the United States. An example is the "magic
sugar” which is already banned in the U.S. and yet we can still find it here in the Philippines
as sweetener used by sidewalk vendors, typical example of a wrong product that falls into
wrong hands.

Dumping is also another delicate issue in globalization. Secondary products or variants

are sold to foreign countries at the price chokingly low for the host country businessmen to
compete thereby killing local industry. Chicken is just one example wherein the best parts (e.g.
breast, thigh and drumstick) were sold at origin country like US at price high enough to cover
cost with a very decent profit for the whole chicken. The secondary parts (e.g. backs and
wings) are exported to Africa at price so low for locals to compete.

TECHNOLOGICAL ISSUES

Another contemporary social issue relates to technology and its effect on society. For
example, the Internet has opened up many new avenues for marketing goods and services,
but has also opened up the possibility of abuse by corporations. Issues of privacy and the
security of confidential information must be addressed. Biotechnology companies face
questions related to the use of embryonic stem cells, genetic engineering, and cloning. The
marriage of science and technology has a very serious implications, this union must not be
given "blank check" otherwise it can do limitless things. As our technological capabilities
continue to advance, from prolonging life, manipulation of global food production to keeping
us on hook with tech things, it is likely that the responsibilities of corporations in this area will
increase dramatically. All of these issues have far-reaching societal and ethical implications.

ETHICAL BEHAVIOR IN THE ENTERPRISE

Paying attention to ethics makes good business sense. This can create goodwill for
the corporation and enhance the chances of success. Meeting its obligations and treating
customers, suppliers, employee, and other stakeholders fairly is a sure shot investment of a
brighter future the company in the long-run.

When we hear the word ethical, several ideas come to mind, most notably good versus
bad and right versus wrong. These are the six foundation of trust upon which ethical business
practice is built:

Character
 Character drives what we do when no one is looking. Each person has the ability to
build, change, or even destroy his or her own character. We can build our character through
the way we live by thinking good thoughts and performing good acts.

Ethics

Ethics refers to a set of rules that describes what is acceptable conduct in society.
Ethics serve as a guide to moral daily living and helps corporation judge whether such behavior
can be justified.

Integrity

To have integrity is to be honest and sincere. Integrity is defined as adhering to a moral

code in daily decision making. Integrity put simply, when people and businesses possess
integrity, it means they can be trusted.

Laws

The law is a series of rules and regulations designed to express the needs of the
people. Laws frequently provide us with a sense of right and wrong and guide our behavior. It
is worth noting that an illegal act can be ethical. One of the most famous examples is Martin
Luther King, Jr.'s violation of the law on marches and sit-ins during the fight against
segregation.

Morals

Morals are a set of rules or mode of conduct on which society is based. Certain moral
elements are universal, such as the laws forbidding homicide and the basic duties of doing
good and furthering the well-being of others. Morals and ethics are very similar both pertain to
society's ideas of right and wrong.

Values

Values are defined as the acts, customs, and institutions that a group of regard in a
favorable way. people
 Many professions and corporations have developed codes of ethics to address their
unique business situations. By developing a code of ethics, an organization makes it clear that
corporations, employees, and members themselves cannot claim ignorance as a defense for
unethical conduct. In general, the proper role of corporate management in promoting business
ethics involves clarifying and enforcing expectations, listening to and respecting diverse views
on various issues, acting consistently over time, and creating an atmosphere free from
harassment and inequality.

In the wake of corporate scandals that cost employees and investors billions of dollars,
the US federal government passed legislation that requires publicly-registered corporations to
have a corporate code of ethics. While Sarbanes-Oxley Act of 2002 (SOX) does not guarantee
the elimination of unethical practices, it does provide a way to legally address such behavior.
Companies that have made a bona fide effort to prevent unethical and illegal behavior are
likely to receive less severe punishment.

Many corporate ethical standards fail because they are too vague and general and
give no specific directives. Codes of ethics must be specific enough to convey the intended
conduct. However, they must avoid being so prescriptive that a literal interpretation becomes
an excuse for noncompliance. Also, codes must be general enough to avoid encouraging
defensive management, where an employee becomes unable to act and make decisions
fearing that any action will be unethical.

The potential for unethical behavior in business is everywhere. Several factors

however contribute to how real administrators can act ethically. Establishing an ethical
standard for business conduct involves more than a written policy. The most compelling
support for an ethical standard is adherence to and enforcement of that standard by those
who institute it, and by those for whom it is written. More than briefings and policies handed
out to every single employee, our behavior, practice, and deeds are the foundation for creating
an ethical standard and making it stick.

ROLE OF THE STATE AND ITS IMPACT ON BUSINESS ORGANIZATIONS

Some sectors have criticized that the government regulatory parameters on the
economy is restrictively futile on some extent considering that, often, it not only lacks teeth but
also has some features that obstructs the full capability of the enterprise in terms of maximizing
wealth. Others mock that some countries claiming to be free market economy are not actually
free market at all, with so much regulation. At present, some of the most continuing debates
in economics are actually focused on the role of government

The importance of private ownership is perfectly consistent with what people believed
about personal freedom. People and the business sector believed in limiting the government's
authority over the economic pursuits of individuals, including its role in the overall kingdom of
economics. Most people believed that private ownership of business is more ideal than
government ownership to achieve the best economic outcomes. They further believed that
government should be where it is, and that is on regulatory aspects, except for some critical
industries.

In spite of this "leave us alone" attitude of business sector most people still want the
government to perform certain important tasks in the economy more importantly on regulation,
and our legal system provides a very sound fundamental structure which creates an
atmosphere suited for this business environment. Below are some of the important
involvements of the government which highlights its functions on regulation and protection of
the general public:

ROLE OF GOVERNMENT IN BUSINESS

The private sector is the chief economic force of every country, but it needs
government regulation. The government's role in business is as old as the country itself; the
Constitution gives the government the power to regulate some commerce. Though the
government's role has increased over time, the business community still enjoys considerable
freedom. However, the government still exercises its authority several ways.

Consumer Protection

The government's role in business includes protecting the consumer or customer.

When a vendor fails to honor the guarantee, the purchaser has recourse in the law. Likewise,
when a product causes harm to an individual, the courts may hold the vendor or manufacturer
responsible. Labeling is another requirement the government imposes on marketers. Many
foods, for example, must display nutritional content on the packaging. The government has
been making advances in consumer rights for decades. Nonetheless, the consumer
movement still needs considerable development to protect the public. Other manifestations of
this protection are as follows:
a. Businesses need the court system for protecting property rights, enforcing contracts, and
resolving commercial disputes.

b. Governments protect consumers from businesses. For example, businesses need to secure
the approval first from the government whenever there a proposed merger or other business
combinations to make the industry less competitive which ultimately means too liberalized
price setting at the disadvantage of consumers.

C. Government hears and corrects consumers' complaint about business fraud and put into
effect recalls of substandard and dangerous products.

d. Government controls private companies' actions to protect public health and safety. An
example is the control effort of the Food and Drug Administration (FDA) banning harmful drugs
and medicines. Although the agency is showing less interest on some food supplements that
may not imminently endangering the health of but are having some false claims with no proof
of its efficacy. Some of these food supplement companies are actually in the business of
having textuals and orals capitalizing the public's confusion through the use of tricky
placements of words and lines.

Contract Enforcement

Businesses deal with other businesses. These contracts may be complex, such as
mergers, or they may be as simple as a warranty on supplies purchased. Companies bring
one another to court just as individuals do. An oral agreement can constitute a contract, but
usually only a written agreement is provable. If one party fails or refuses to meet its obligation
under a contract, a company will turn to the government's legal system for enforcement.

Employee Protection

Many agencies work to protect the rights of employees. This rights covers the
following: regular employment, probationary employment, minimum employable age,
prohibition against stipulation of marriage, anti-sexual harassment law and many others.

The minimum wage law is another good example of government involvement which
mutually beneficial to both the management and labor, since this would set a hard minimum
benchmarks of compensation across all industries. In addition, government set laws on
pensions for both public and private employees while they are still in the mainstream workforce
of industries.
Environmental Protection

When a marketing transaction impacts a third party besides the marketer and
purchaser the effect is called an "externality." The third party is often the environment. Thus,
it is the government's role to regulate industry and thereby protect the public from
environmental externalities Whether the government is effective in this role is a matter of much
discussion.

Because people have become more and more concerned about the environmental
impact of industries, the government through legislative branch some laws the pure intent of
which is to protect the environment Famous of these law the "Clean Air Act which has become
the epicenter of troubles for businesses in selling motorcycles with 2-stroke engine in mid
2000s This law was also the start of downhill for government contractors dealing garbage
disposal via incinerator, a process not allowed in principle by this law.

Investor Protection
Government mandates that companies make financial information. pub thereby
protecting the rights of investors and facilitating further investment. This generally done
through Wings with the Securities and Exchange Commission Whether government regulation
has been adequate is a matter of much debate especially in countries with advanced
economies.

The government certainly has the hand on what it wants the country to be perceived
in the outside world it is a heaven and earth difference when you do business in Singapore
compared Cuba or US and Venezuela for that matter Business atmosphere and investment
protocol of these countries differ with each other Textbooks would tell us that the following
issues are the specifics a government needs to address well if its country wants to be
considered business as well as investor friendly.

· Starting a Business
It should be easy for anyone to start a business in a particular country. It should be counted
in days of weeks only under ideal settings, not months.

· Licenses
Requirements pertaining to permits and licenses should be more simplified.
 · Employing Workers
It has to be in an environment where Fair Labor Practices thrives but not to the point where
workers are overly pampered. Pampered labor scares off investors.

· Getting Credit
Facilities should be present as far as financing Banking water and financial institutions should
be healthy to easily obtain credit for business

· Protecting investors
There should also be a clear and functioning government policy that protects investor's money
One of this can be a government guarantee or an arrangement where the government has to
invest a certain proportion of the

Page 2-26

project This will make the other party feel secure that certainly the government will not have
any upcoming policy that would hit the project’s future.

· Paying Taxes
Tax system should not be in a way that is discouraging to investors in terms of incentives and
disincentives.

· Export Policy
With globalization already dictating, a country should be should be more liberal in its policy on
the entry and exit of goods.

Permission
Most businesses need to register with a government to operate Corporations, need
dates and other forms of businesses, such as limited liability companies or partnerships, need
other forms of registration. The function of this registration is usually to define the fact the
owners of the company have it limited there to the amount they have invested in that particular
organization. Registration also allows the government to monitor companies to execute its
other functions in the business world.

Legitimate businesses need permission from governments to operate and corporations

need a charter from the government. Businesses need various registration licenses, and
permits from local governments a well as from different agencies and bureaus.
Taxation
Governments at all levels tax businesses, and the resulting revenue collected is an
important part of government budget. Some revenue hated at the corporate then taxed as
personal income when distributed as dividends. This is in no way inappropriate, since it
balances the tax burden between the company and individual and allows the government to
tax more equitably.

ROLE OF GOVERNMENT POLICY

Government policies can also promote businesses. For example, tax holidays for those
foreign companies in the Economic Zone (ECOZONE) under the administration in the
Philippine Economic Zone Author Another(PEZA). Another is the tax benefit the government
is giving to board of investment (BOI) registered companies. At present, BPOs because our
government set policies to make it work. Of course, these companies are getting quality
services at a relatively low-cost.

Governments provide certain service-such as national defense, administration of

justice, education, environmental protection, public works, and highways. The aforementioned
services are viewed as better suited for the government than private

Page 2-27
businesses although government certainly needs help on the delivery of these services from
private enterprises. Government also takes care of requirements beyond the re of market
forces. When market is behaving like a "dead horse" wherein it is low irresponsive no matter
how hard it is hammered by private initiative, government comes to the rescue. Efforts like
bailout, provision for insurance to people who lose their jo pulling out money for trainings for
alternative livelihood (TESDA, for example), and o Initiatives are examples of efforts to lessen
the adverse impact when business revere takes place. Government comes to the rescue also
in times wherein prices are so ng high that it is already hard to survive by the public. Rescue
in the form of subsidies on certain commodity to diminish its impact on people's pocket, NFA
rice distribution of lesser price is example of this effort. Back then, before the liberalization of
oil industry there was this Oil Price Stabilization Fund (OPSF) the purpose of which is to absorb
at a certain level the increase in petroleum products for pump prices for the general public to
be lesser than the real market price.
PRESSURE GROUPS

A pressure group is an organized group that seeks to influence not only government
policy but also private enterprises operating policy. These groups are also concerned in the
protection and advancement a particular cause interest. They may promote a specific issue
and raise it up as commercial or political agenda or they may have higher general ideological
objectives in mind when they do some campaign for their cause.

The following are the types of pressure groups which can become variables to consider in
laying down platform of governance not only in government but also in private enterprises.

ECONOMIC PRESSURE GROUPS

Giant Private Corporations (the Giant Connection)

Many large industrial corporations have clout in government policies. These

corporations need to ensure that their interests are protected since large government contract
are often at stake. The relative size and power of these companies can sometimes rival to that
of the government and therefore, bring massive influence on political and economic decisions
which affect a variety of business activities. With size and power, there is this implication of
lobbying certain laws and regulations, putting pressure on their once political beneficiaries
who are now in position and to certain degree, do some maneuvers to outdo their competitor
through the use of "special connections". It will now be a million peso question on whether
corporations with good governance play the game of these companies.

Page 2-28

Professional Organizations
This is a powerful group bound by the common interests of its members. The Philippine
Institute of Certified Public Accountants (PICPA), the Philippine Medie Association (PMA) and
the integrated Bar of the Philippines (IAP) are prime examples the Philippines where history's
turning points are sometimes defined where the mile stands, the Philippine Military Academy
Alumni Association Inc. and the Association Generals and Flag Officers Inc. (AGFO) are
important pressure groups. The Philippine through the body called the Judicial and Bar Council
(c) plays an important role in the selection and nomination of justices this body is also an
important source of opinion

Trade Associations
Association of businesses with common interest to protect to is the simplest description
of a trade association. The number of business and trade associations at present is more
apparent than ever before. The increase in government's initiative and other progressive laws
has prompted an increase in business representation from this group. As new regulatory
bureaus and bodies that are put into place, good number companies have found the need to
react to the new policies rather than having an input into helping to formulate those policies.
They are more on a defensive mode rather than being active in crafting those policies which
affects them. This business groups have seen the need to organize as essential if they are to
influence the formation of policies not only in government but also in private enterprise
Chamber of commerce, business clubs, and other commercial associations like the
Association of Hospital Owners which made a hard stand on the implementation of the
cheaper medicines law, are classifiable under this group.

Trade Unions
One of things that greatly influence the corporate governance principles and
government policies in Philippine setting is in the area of labor and management. It such a
pretty delicate issue that companies are willing to hire the best consultants when it comes to
legalities about labor. In the Philippines, we have several clusters of unions that can have
pressure on governmental policies and companies philosophy and governance. one of which
is Partido ng Manggagawa (PM), Associated Labor Union-Trade Union Congress of the
Philippines (ALU-TUCP) is another and many others that are working for the protection of the
labor sector.

Labor groups certainly have influence on policies considering the vast sector that it
covers. This sector can be considered as the common denominator of all business endeavors
and its collapse or a mere and simple disorder will definitely send a strong regional message
that a country is not safe for long-term investment. Those in-charge of governance therefore
should take into account seriously this pressure group. We need to understand that at the
worst scenario of a labor strike, it can cause financial pain to the business enterprise and it
can also affect the corporate reputation among others.

Page 2-29
PUBLIC PRESSURE GROUPS
These are groups that represent a cluster of the public on certain issues. The
development in public pressure groups can be partially explained by a change in attitudes
towards some of the government policies. The public have turned to pressure groups since
they are visibly vocal on issues that pat the hearts of certain individuals. These Individuals
have the belief that these pressure groups might be triumphant in changing what they believed
unacceptable, the most obvious present issue would be environmental and climate change
issues. Example of groups with advocacies on environment are the Haribon Foundation in
local setting while there is Greenpeace in the international level. In the area of consumer
protection Consumer and Oil Price Watch 12 one good example of these pressure groups.
While the giant companies are se individualistic pressure groups, that is they are concerned
only on their well-being, these groups represent the interests of the public in general.

SECTORAL PRESSURE GROUPS

Sectoral pressure group refers to groups which work to protect and advance the
interest of specific social groups in a certain society. At times they are crossbreed of political
groups. Typical example, in the Philippine setting, is the Gabriela which is for women and
children specifically on promoting equal opportunity for women. In recent years, the civil rights
movement and the right of equality for women have been brought to the forefront by this
particular pressure group.

The urban poor groups are also other groups to be reckoned with in policy setting since
this sector has numbers to put on the table especially during election time. They are voting
block that can make or break an official. The third sex is also another sector worthy to be
looked upon most especially that this group are now given wide recognition in our society. The
gays and lesbians are now slowly expanding its mass which will make some politicians and
policy makers think twice before talking about things which might be against what this sector
believes in.

RELIGIOUS/ATTITUDE PRESSURE GROUPS

These are the fast growing group in the Philippines with regards to putting pressure on
government. They are considered as one of the most powerful groups. They share universal
beliefs and objectives on one issue and they believe that their major role, aside from endorsing
a politician and lobbying Congress, is to mobilize support in the country for what they believe
in and to support for political office those who share their beliefs

Few of the most prominent groups in the Philippines are the Catholic Church in general led by
the Cardinals, Iglesia Ni Cristo (INC) of Bro. Eduardo Manalo, ElI Shaddai of Bro. Mike
Velarde, Jesus is Lord Movement of Bro. Eddie Villanueva, Kingdom of Jesus Christ of Pastor
Apollo Quiboloy, and Ang Dating Daan of Bro. Elly Soriano, It is said that

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only one of the above organizations practiced block voting Nevertheless, M endorsement or a
"blessing from the leader of any of these groups would certainly have an impact on our political
leader way of formulating the decisions

The Gunless Society another attitude pressure group pushing for the gun ban because
this group believes that gun promotes and fuels violence, more often crimes directly
associated to gun, and most importantly, gun endangers Me This advocacy can certainly have
impact on policies regarding ownership of gun in the Philippines considering that it carries a
high social stake. Couples for Christ and other Profile Organizations are group that are putting
pressure on the government and other political decision makers on policies relating to health
and life. One of the most controversial legislation relating to health of women and life is the
Reproductive Health Bill. Profile advocates believed that the law has more anti-life and anti-
health feature rather than being prolife and health.

GOVERNMENTAL UNITS PRESSURE GROUP

The level of maturity of the system of administration and the development government
agenda in the last two decades, and the enormity of the sums of money involved, has led to
an expanded role being played by the local government as administrative arms of the national
government This has led to a greater degree of freedom and power for the local government
units (LGUs). This freedom and power gives rise to the lobbying power of LGU which is
sometimes left unbalance in favor of LGU with stronger connections. It has now become
ordinary for provinces and individual cities to have their own permanent future or at least a
dose contact in the national level or a Malacanang in particular for them to be at the beat of
decision making so that they e can represent their beliefs and stands with speed, effectiveness
and proper timing as the need arise. For so obvious reason the LGUS wish to be as near as
possible to this ultimate source of revenue to put in a bid for extra resources for local projects
and development.
INCOME AND WEALTH DISTRIBUTION
Income distribution is defined in economics descriptively as how nation's total economy
is dispersed amongst its population. Income distribution has always been an essential concern
of economic theory and economic policy. Classical economists such as Adam Smith, Thomas
Malthus and David Ricardo were mainly concerned with income distribution, that is, the
distribution of income between the main factors of production, land labor and capital. Modern
economists have also tackled this issue, but have been more concerned with the distribution
of income across individuals and households. Important theoretical and policy concerns
include the relationship between income and economic growth.

Distribution of wealth a comparison of the wealth of various members or in differ from

the distribution of income that it looks at the distribution of ownership of the asset in a society,
rather than the current income of members of that society. Defining the two important
economic terms would easily lead us to one very important economic issue which owners of
big corporations should consider and should not just be indifferent about, the economic
inequality.

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MAJOR CAUSES OF ECONOMIC INEQUALITY

There are many causes of economic inequality, the following are some of them both from the
basic to global perspective and from the micro and macro standpoint:

Culture and Religion

Culture and religion also catches some notion that this two play a role in creating inequality
by either encouraging or discouraging wealth-acquiring behavior. In many countries
individuals belonging to certain racial and ethnic minorities like the natives are more likely to
be poor than others. Attributed causes to this include cultural differences amongst different
races, educational achievement gap and racism, and in some instances cultural values and
religiosity level.

On the level of religiosity, as students in history in particular we can make simple profile of
countries that gone through strict religious policies of colonizers compared to the ones that
are colonized by liberal countries. Philippines, Puerto Rico, Peru, Brazil and Other South
American countries are relatively poorer compared to their counterparts like Singapore,
Australia, Hong Kong and India. The first group are colonized by either Spain or Portugal
which more on occupation with religion as front, the second group is colonized by England
which motive-wise more on expansion of empire as well extension Of economic activities,
Study history to understand why inclusive growth is hard to attain because the vested
interests deemed it to be that way by undermining institutions. Creative destruction did not
wield its maximum benefit because the status quo was protected.

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Development

According to Simon Kuznets, levels of economic inequality are in large part the result of
stages of development. Kuznets points out that countries with low levels of development
have relatively equal distributions of wealth. As a country develops, it acquires more capital,
which leads to the owners of this capital having more wealth and income and introducing
inequality. This inequality is obviously attributable to the dominance of the wealthy faction.

Domestically for the first time we have 10 richest men in the Philippines that made it to the
global list of richest persons, their total business connections accounted for one third (1/3) of
the Philippines' Gross Domestic Product. Certainly, this phenomenon could never have
happened had they been in Somalia or in any country forming pact of the "Horn of Africa."
Development exponentially favors those who have access to capital because they are the
most prepared and eventually lever further the situation to their advantage. However,
Kuznets suggest that, through various possible redistribution mechanisms such as social
welfare programs, more developed countries will move back to lower levels of inequality.

Diversity of Choices

Diversity of choices within a society often contributes to economic inequality. When

confronted with the choice between working harder to earn more money or enjoying more
leisure time, equally capable individuals with identical earning potential often have different
choices. This leads to economic inequality even in an environment where perfect equality
and abilities exist. The swap between work and leisure is important specifically in the supply
side of the labor market in labor economics.

Individuals in a society often have different levels of risk absorption capability. When equally-
able individuals undertake risky activities with the potential of large payoffs, such as starting
new businesses, some ventures succeed and some fail.

Education

One of the most important factors contributing to inequality is variation in individuals' access
to education. Education, especially in an area where there is a high demand for workers,
creates high wages for those with education. As a result, those who are unable to afford an
education, or choose not to pursue optional education, generally receive much lower wages.
Many economists believe that a major reason the world has experienced increasing levels of
inequality is an increase in the demand for highly skilled workers in high-tech industries.
They believe that this has resulted in an increase in wages for those with education but has
not increased the wages of those without education leading to greater inequality.

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Globalization

Globalization is a progression by which the worlds are unified into a single society and
function. It has been asserted that globalization supports productivity, cultural mix and cash
flow into the developing countries; however, there are some drawbacks of globalization that
should not be overlooked: unemployment, social degeneration and difficulty of competition.

Of all the three mentioned, the two (2) are apparently the contributors of the inequality. First,
there is a new demand now; one should be able to ride the advances of time to be able to
stay in circulation. In globalization, when one stop learning it more likely that he will be out of
job. Emphasis on efficiency to compete globally now is taking its toll on manpower. The
more companies strive for efficiency, the more they invest on technology and the lesser
people involved in the production of goods and services.

The final significant effect of globalization is the difficulty of competition. With globalization,
trade between the countries dissolves any limit that was used to be the protection of inferior
economy. This state of enterprises has prepared the ground to be in continuous competition
with not only national competitors but also international competitors. The main effects of this
hard competition is in business, since underdeveloped countries choose to use foreign
capital for their improvement and in the process disposes the equality and stability instead.

Inflation

Some economists have theorized that high inflation, caused by a country's monetary policy,
can contribute to economic inequality. This theory argues that inflation of the money supply
is a coercive measure that favors those who already have an earning capacity, disfavoring
those on fixed income or with savings, thus aggravating inequality. They cite examples of
correlation between inflation and inequality and noted that inflation can be caused
independently by "printing money", suggesting causation of inequality by inflation.

Additional viewpoint point in inflation as source of inequality is on savings and investment on

productive activities. The poorer and the lower income individuals keep or save their money
with a promise of minimal income approximately 2% per annum, the rich ones invest their
money on productive activities with income within the neighborhood of 10% to 17% after all
enjoyable expenses, if the inflation rate is at 4% keeping and saving is not a good choice.
This would explain why for generations now people are complaining that the rich become
richer and the poor becomes poorer.

Labor Market

One of the major causes of economic inequality in modern market economies is the
determination of wages by the market. Inequality is rooted from the differences in the supply
and demand for different types of work. In an ideal world, workers' wages will not be
controlled by the labor and by the employer but rather dictated by the market.

2-34
The demand side of labor (employers) cannot afford to offer a price below what market is
offering, otherwise it will be in danger of going understaffed or worse will have the lowest
class of workforce in terms of quality.

There are ongoing serious coordination between the industry and the government with
regard to college course offerings. Regulation, can be an antidote, regulate course to be
offered by academic institutions to better fit the demand than leaving the professionals with
no choice after graduation but becoming prey to the demand side (employer). Take the case
of the nursing and teaching professions in Philippines where every year tens of thousands
are being produced. Evidence of the fact that they do not have enough hospitals to employ
them so they could practice their professions. Also, the licensed teachers ended up as
domestic helpers in neighboring countries like Hong kong and Singapore.

It is expected that there will be many discomforting comments on this issue. Some people on
streets will even turn to an instant economist and would say that these professionals are
looking forward to working abroad and in turn help their family in particular and the country in
general. They are the "new heroes." However, we need to consider the following provoking
realities: first, this export labor policy has long been overdue for a complete change. It is true
that they remit foreign currencies to the county but we notice that policies of these advance
countries are changing. They now impose some restrictions in terms of remittances and they
also allow family migration which is a danger sign as far as flow of money.

Second, the jobs that they are giving to us are mostly the ones they do not like to do; jobs
that are giving them problems which we can easily offer solution because we have no
choice. We solve their problem and have the money we earned add more spin to their
economy.

This is not the economic policy (labor export policy) being used by advance countries today
or in the past. Japan, South Korea, Germany and the U.S. are not complete believers on this
policy. We need not go far, Chinese people may have no pride on the citizens of the world,
we seldom heard of a Chinese caregiver but look at their economy. When everything is said
it boils down to policy. Full productivity employed domestically is still better "we should have
our jars filled first before give some waters to our neighbors." Koreans got out only after they
became top 11 economy in the world'

Wealth Condensation

Wealth condensation is a theoretical process by which, under certain conditions newly-

created wealth concentrates in the possession of already-wealthy individuals or entities.
According to this theory, those who already hold wealth have the means to invest in new
sources of creating wealth or to otherwise leverage the accumulation of wealth, thus are the
beneficiaries of the new wealth. Over time, wealth condensation can significantly contribute
to the persistence of inequality within society.

2-35

Savings from the upper-income groups tend to accumulate much faster than saving from the
lower-income groups. Upper-income groups can save a significant portion of their incomes.
On the other hand, lower-income groups barely make enough to cover their consumptions,
hence only capable of saving a fraction of their incomes or even none. Assuming both
groups earn the same yield rate on their savings, the peso-return on upper-income groups'
savings are much greater than the lower-income groups' savings because upper-income
groups have a much larger base.

Related to wealth condensation are the effects of inter-generational inequality. The rich tend
to provide their offspring with better education, increasing their chances of achieving a
higher income. Furthermore, the wealthy often leave their offspring with a hefty inheritance,
jump-starting the process of wealth condensation for the next generation. However, it has
been contended by some sociologists such as Charies Murray that this has little effect on
one's long-term outcome and that innate ability is by far the best determinant of one's
lifetime outcome.

In short, those who already have more money to begin with are the ones who have greater
capabilities to earn more by capitalizing on their assets. Their huge resources base give
them the buffer on the impact of inflation.

---------- End of Chapter 2 ----------

CHAPTER 3

The Phone Business: Then & Now

For several decades until late 1990s, it would take many months and even years before one
could get a telephone line installed. At that time, those really in need of the service and can
afford the price resort to buying telephone lines from lucky ones who have phones but may no
longer need them. Then, the Philippine Long Distance Telephone Co (PLDT) had a virtual
monopoly in the voice business and until the early 1990s, the company controlled 95 percent
of the voice market with the balance divided among small rural telephone companies.

In a move to deregulate the telecommunication industry, the administration of Pres. Fidel

Ramos issued Executive Order (EO) No. 109 in 1994. Otherwise known as the "Service Area
Scheme (SAS)”, the EO aimed to bring basic telephone services to rural areas of the country
and fast-track the roll-out of the landline networks by the various telecommunication
companies. Likewise, the Public Telecommunications Policy Act of 1995 (R.A. 7925) was
enacted in 1995 thereby setting the policy for competition and liberalization of the
telecommunications sector. It opened up the paging and value-added services business but
continued regulating the rates for local exchange carriers, international long distance and the
mobile telephone business, "unless there is sufficient competition."

Among those that participated in the SAS were PLDT which had a nationwide franchise;
Bayantel which was awarded the Metro Manila and Bicol areas; Digitel which was awarded
the Central Luzon areas; Eastern Telecoms, Northern Luzon; Isla Communications, Visayas;
Piltel and Philcom, Mindanao; Globe, Luzon and Metro Manila; and Bell Telecoms, Metro
Manila and outlying areas. While the implementation of EO 109 was generally assessed as a
success, the 1998 Asian financial crisis and the advent of mobile phone technologies resulted
to mergers among the SAS participants. Currently with nationwide operations, only PLDT,
Digitel and Globe are left competing in the lucrative cellphone and internet business.

As if history is bound to repeat itself in terms of having virtual monopoly of the

telecommunications industry in the Philippines, PLDT and Digitel negotiated a share swap
deal whereby PLDT (which already owns Smart and Talk N' Text) would own 51.55% of Digitel
(which owns Sun). If the deal pushes through, the PLDT and Digitel merger will hold 70%
market share of the mobile telecommunication business and 84% of the radio frequency
spectrum in the country. Will the merger be good for all of us? If it cannot be avoided, what
can be done? by: EdZee http://xicowner.jefmart.com

Now: PLDT to Buy into Digitel By Paolo Montecillo Philippine Daily Inquirer, Mar. 29,
2011

Manila, Philippines-Philippine Long Distance Telephone Co. has confirmed rumors that it will
acquire a majority stake in Digitel Telecommunications Philippines Inc., operator of mobile
network Sun Cellular, from the Gokongwei family.

The PLDT group, which already operates three mobile brands Smart, Talk N' Text and Red
Mobile will gain an extra 15 million subscribers with the acquisition for a total of about 60
million users. This will give it a commanding lead in the telecom sector, with seven out of every
10 mobile subscribers being in the PLDT network. Its next biggest rival, Globe Telecom, has
just over 25 million subscribers.

"Though this initiative alters the country's telecom landscape, we expect competition within
the industry to remain very robust given that other operators, including new entrants, are
formidable and well-funded," PLDT chairman Manuel Pangilinan said in a statement.

PLDT will issue P69.2 billion worth of new shares, at P2,500 each, as a form of payment for
the 51.5% stake in Digitel to Gokongwei holding firm JG Summit Holdings. Digitel is also
expected to conduct a tender offer for the 48% of Digitel shares still held by minority
stockholders. At P1.60 per share, this exercise will bring the total acquisition cost to P74.1
billion.

TV5-GMA7 Deal 'Final' By End-2012, Says MVP By Katherine Visconti, Rappler.com

Manila, Philippines (UPDATED) - The much-discussed merger between the 2nd and 3rd
largest television stations, GMA-7 and TV-5 may be completed before the end of the year,
according to TV5 chair Manuel Pangilinan.

At the sidelines of a PLDT annual stockholders meeting on June 14, Pangilinan said, would
say certainly within the year we should be able to create an agreement but... that agreement
will be subject to a number of conditions... for closing."

There are a number of issues that need to be addressed for this deal to push through: an
agreement on price, share size, and other deal details between the camps of GMA Network
Inc. and Pangilinan-led TV5; and a go-signal from the government, which regulates the media
industry. On the first issue, Pangilinan said, "We are in discussions with GMA-7... Nothing has
been finalized... Discussions are moving positively. There is a desire to come to terms." He
also highlighted that there are "positive vibes" between the two camps. "There are still a lot of
issues to be discussed-due diligence, warranties, etc.-but you could sense that there are
positive vibes on both sides," he said.

When asked how much the deal price would be, he replied, "we have a price already, there is
a range. It's below P100 billion." Pangilinan said discussions started before his trip to the U.S.
He was among the businessmen who joined President Aquino's recent overseas trip.
Pangilinan was also in San Francisco to launch TV5 International.

Government Nod

He also stressed that government's nod is needed to close the transaction. "To close,
conditions precedent must be satisfied, there are conditions required on their side, on our
side." "After that, we have to give them money and they will give us the shares. On the approval
of the government, we don't know how long that will take or it they will approve it," he said.
Fears of industry monopoly may be raised, but Pangilinan shrugged it off and said, "there are
many TV stations."

Roller-coaster

The recent reports on a GMA7-TVS deal first erupted in December 2011. Officials from both
camps have since made vague, even contrasting, statements. At one point, a GMA owner was
quoted naming a spectacular deal price of P200 billion.

GMA-7, the trade name of GMA Network Inc., is controlled by the Duavit, Gozon and Jimenez
families. Network chair Felipe Gozon and president Gilberto Duavit have separately confirmed
in the past that valuation remains the sticky issue. Pangilinan had said he has always been
interested in GMA-7. Before his group acquired TV5 in 2009, he offered to acquire a controlling
stake in GMA-7, but finances and timing of the offers got in the way. The rumors on this 3rd
effort to forge an agreement have largely been beneficial to the GMA-7 camp, Despite its net
income plummeting 39% in 2011, then another 27% drop in the first quarter 2012, the
Pangilinan buy-in talks have boosted the share price of GMA-7, which is a listed firm in the
Philippine Stock Exchange. With a higher share price, GMA-7 stockholders can command a
higher deal price, in effect, making the transaction more expensive for Pangilinan's group.
INTRODUCTION

The foundation of good corporate governance is the intellectual honesty of directors and senior
management. This intellectual honesty is expressed by acting in the best interests of the
incapacitated company. The corporation, on formation, is a juridical person, but it is absolutely
incapacitated until its directors are appointed and the board in turn delegates to management
the implementation of its collective decisions.

It is the quality of governance that is important and not the quantity. Mindless compliance with
a set of rules is not good governance. Good governance connotes acting with responsibility,
accountability, fairness and transparency. Transparency has a withering effect on misconduct
and is absolutely critical in communicating to stakeholders any decisions of the board. In this
context, transparency demands that the communications consist of substance over form and
contain positive and negative aspects, if any.

A company needs the right people, team and processes. The right team making up the board
must determine a common understanding of the purpose of the company, the values that drive
its business and who are the important stakeholders. The board must also identify the
sustainability issues which are pertinent to the business of the company.

The board needs to adopt the inclusive approach to governance. This means that the board,
in its decision-making process, needs to take account of the legitimate interests and
expectations of the stakeholders linked to the company.

Management must communicate with the particular groupings of stakeholders. Now that
sustainability has become the moral and economic imperative of the 21st century, governance,
strategy and sustainability have become inseparable.

Long-term strategy must follow consideration by the board of directors on these five aspects:
financial, human, social, environmental and technology. Reports to stakeholders must
integrate the impacts of the company's business on a community, economically, socially and
environmentally.

While it is the duty of directors to take risk for reward, directors must ensure that they apply
the principles of good governance when taking risks for reward. Good governance attracts
capital while poor governance will repel capital. Capital has become a scarce resource in a
flat, borderless world, where with the click of a mouse, capital can leave a market and destroy
it.

CORPORATE GOVERNANCE IN THE PHILIPPINES

Long before the collapse of Enron and WorldCom, the Philippines had its own share of
corporate scandals like BW Resources Corporation, whose share prices hit record highs and
then collapsed in 1999. These scandals brought down the stock market's image and
weakened private investor confidence. The scandals have their roots in management's desire
to project a false picture of performance, with the aim of driving up the value of the corporation
in a competitive global market.

Corporate governance is needed to make corporate managements more accountable, and

their auditors more rigorous. But good governance requires fair legal frameworks that should
be enforced impartially. The Philippine Securities and Exchange Commission (SEC), a
principal player in matters of corporate governance, issued Memorandum Circular No. 2,
Series of 2002, otherwise known as the Code of Corporate Governance, under SEC
Resolution No. 135, dated Apr. 4, 2002. The code is now effective and must be followed under
pain of penalty.

The Code aims to promote corporate governance reforms that will raise investor confidence,
develop the capital market and help achieve high sustained growth for the corporate sector
and the economy. The code applies to: (1) corporations whose securities are registered or
listed, (2) corporations who are grantees of permits/licenses and secondary franchises from
the Commission, (3) public companies and (4) branches or subsidiaries of foreign corporations
operating in the Philippines whose securities are registered or listed. Some of the code's
salient features are as follows:

The code prescribes that the Board of Directors shall primarily be responsible for the
governance of the corporation. The Board should establish the corporation's vision and
mission, strategic objectives, policies and procedures that guide and direct the activities of the
company, and the mechanism for monitoring management's performance.

The Board shall also constitute committees in aid of good corporate governance such as:

1. The Audit Committee, whose responsibility is to inculcate in the minds of the Board
members the importance of a sound system of internal control and the Board's oversight
responsibility:

2. The Nomination Committee, whose function is to review and evaluate the qualifications of
all persons nominated to the Board; and

3. The Compensation or Remuneration Committee, whose task is to establish a formal and

transparent procedure for developing a policy on executive remuneration.

The code also emphasizes the importance of the work of the Corporate Secretary, who
must be a Filipino and an officer of the corporation. He should work and deal fairly and
objectively with all the constituencies of the corporation.

In order for the Board Members to fulfil their responsibilities, they should be provided
with complete, adequate and timely information prior to Board meetings on an on-going basis.
The Board is primarily accountable to the shareholders, and Management is primarily
accountable to the Board. The Board, through the Audit Committee, shall recommend to the
stockholders a duly accredited external auditor who shall undertake an independent audit and
shall provide an objective assurance on the way in which financial statements are prepared
and presented. The external auditor should be rotated every five (5) years or earlier or the
handling partner should be changed.
The following stockholders rights should be respected: (1) voting right; (2) preemptive right;
(3) power of inspection; (4) right to information; (5) right to dividends and (6) appraisal right
among others. The management may establish a performance evaluation system to measure
the performance of the Board and top-level management of the corporation.

Disclosure is a vital and dominant theme in the Code. The more transparent the
internal workings of the company and cash flows, the more difficult it will be for management
and controlling shareholders to misappropriate or mismanage company assets.

Corporations shall promulgate and adopt their corporate governance rules and
principles in accordance with the Code. Rules shall be in manual form, available as reference
by the directors and submitted to the SEC. Any corporation who fails to adopt a manual of
corporate governance shall be penalized P100,000 after due notice and a hearing. All
corporations affected by this Code shall submit their manual by July 1, 2002 to be effective
Jan. 1, 2003.

Corporate Governance In PLDT (Excerpts)

PLDT is committed to the highest standards of corporate governance as articulated in our

Articles of Incorporation, By-Laws, Manual on Corporate Governance (CG Manual), Code of
Business Conduct and Ethics (Code of Ethics), and pertinent laws, rules and regulations.

As a publicly-listed Philippine corporation, PLDT is covered by corporate governance rules

and regulations of the Philippine Securities and Exchange Commission (Philippine SEC) and
the Philippine Stock Exchange (PSE). At the same time, PLDT voluntarily complies with the
corporate governance standards of the United States since its American Depositary Shares
are listed and trade The New York Stock Exchange (NYSE). PLDT as an associated company
of First Pacific Company Ltd (First Pacific), which is listed in the Hong Kong Stock Exchange,
also looks to the corporate governance standards of Hong Kong for guidance and
benchmarking purposes.
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PLDT continues to benchmark against recognized international best practices and monitor
developments in corporate governance in order to elevate the Company's CG structures,
processes, and practices to global standards. Most importantly, it endeavors to venture
beyond compliance and promote an ethical corporate culture guided by the principles of
accountability, integrity, fairness, and transparency.

INTERNAL FOUNDATION OF CORPORATE GOVERNANCE

BOARD OF DIRECTORS
 A board of directors is a body of elected or appointed by shareholders who jointly
oversee the activities and the overall managerial and operational aspects of the corporation.
The said activities are determined by the powers, duties, and responsibilities delegated to it
or granted by an authority which can be from the shareholders and/or from the by-laws itself.

A mere mention of the phrase "board of directors" to the average investor, will probably
imagine the images of nicely dressed men and women in a well-set room converged on a
round mahogany table, bringing corporate folders with them, smiling amiably. This is fully
reasonable considering that many annual reports prominently feature glossy photographs of
just such a sight. However, if we ask the average investor to explain the main responsibilities
of the board of directors only very few will be able to give you a good and definitive answer.

Authority and Responsibility and Purpose of the Board of Directors

The most important responsibility of the board of directors is to protect the resources
entrusted to them by the shareholders and make sure the latter receive a decent return on
their investment. In some European countries, the sentiment is much different; many directors
there feel that it is their primary responsibility to protect the employees of a company first, the
shareholders second. In these social, political and business climates, corporate profitability is
subordinate to that of the needs of employees.

The board of directors is the top governing authority within the management structure
at any publicly listed company. It is the board's job to select, evaluate, and approve appropriate
compensation for the company's chief executive officer (CEO), assess the attractiveness
dividend payment scheme and its amount, recommend stock splits, oversee share
reacquisition programs, approve the company's financial statements reports and other
financial highlights, and recommend or in some instances discourage acquisitions and
mergers.
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Structure and Makeup of the Board of Directors

The board is made up of individual men and women, the “directors” who are elected
by the shareholders. Many companies work on a rotating system so that only a fraction of the
directors are up for election each year, this makes it much more difficult for a complete board
change to take place due to a hostile takeover. In fact this system if purposely employed as a
device as one of the tactics under anti-takeover defenses. In most cases, directors either 1.)
have a vested interest in the company, 2) work in the upper management of the company, or
3.) are independent from the company but are known for their business abilities.
Committees on the Board of Directors

The board of director's responsibilities includes the institution of the audit and
compensation committees. The audit committee is responsible in making sure that the
company's financial statements and reports are reasonably accurate and use fair estimates in
accordance with the applicable financial reporting standards. The board members select, hire,
and work with an outside auditing firm. The firm is the entity that actually does the auditing
and assurance services. The compensation committee places the base compensation, stock
option awards, and incentive bonuses for the company's executives, including the CEO. In
recent years, many board of directors have come under fire for allowing executive salaries to
reach at an unchecked levels.

Ownership Structure and Its Impact on the Board of Directors

The particular ownership structure of a corporation has a huge impact on the efficiency
and effectiveness of the board of directors to govern. In a company where a large, single
shareholder exists, that entity or individual investor can effectively control the corporation. If
the director has a trouble, he can appeal things to the controlling shareholder. In a company
where no controlling shareholder exists, the directors should act as if one did exist and attempt
to protect this imaginary entity at all times, even to the extent of firing the CEO, making
changes to the structure that are unpopular with management, or turning down acquisitions
due to cost consideration

In a relatively few number of companies, investment of one person can account as

much as 50% to 67% or even more. In the this case, the controlling shareholder can also serve
as the CEO and/or Chairman of the Board, being the supermajority. In this case, a director is
completely at the will of the owner and has no enough muscle to override the majority
stockholder's decisions.

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CHIEF EXECUTIVE OFFICER (CEO)

The Chief Executive Officer (CEO) is usually the singular organizational position that
is principally accountable in carrying out the strategic policies and procedure established by
the board of directors. In this case, the chief executive officer (CEO) is directly under the board
of directors, and thus presents its reports and output to board. It is the responsibility of the
chief executive officer to bring into line the company, internally and externally, with their long-
term vision. The central part duty of a CEO is to make possible to engage business outside of
the company while directing employees, managers and other executive officers towards a
central objective. A CEO must have balance of internal and external initiatives to put together
a sustainable organization. The typical responsibilities of a CEO are as follows:

Support to the Board

One of the responsibilities of the CEO is to supports operations and administration of
board by giving information and advice to board members. CEO should be serving as the
crossing point between board and staff, supporting whatever the Board's evaluation of chief
executive as well as evaluation of other high ranking people in organization.

Delivery of Program, Product and Service (PPS)

Administer design, marketing, promotion, delivery and quality of programs, products
and services. The CEO is expected to be the brand bearer. For example, John Francis Welch
Jr. of GE (1981-2001) and the late, Steve Jobs of Apple and many other CEOs are considered
as the icons of their respective companies.

Financial, Risk and Tax Management

Recommends yearly budget for board's approval and cautiously manages
organization's resources within the bounds of budget guidelines. This utilization of resources
may also have other bases such as laws, regulations, and other directives. Housing projects
is one good example for this, wherein there is certain regulation that a developer should set
aside certain percentage for low-cost housing to cater the lower customer class.

Human Capital Management

Efficiently manages the human capital of the organization based on sanctioned
personnel policies and procedures that fully conform to current laws, regulations, and
standards both local and international.
3-10
Public Relations (PR)
Pledge that the organization and its mission, programs and initiatives, products and
services are consistently presented in strong and physically visible manner to the community.
It is also the job of the CEO to package and build a positive image of the company to its
relevant stakeholders.

CHIEF FINANCIAL OFFICER (CFO)

For many privately held businesses, the decision to hire a chief financial officer (CFO)
is often a difficult decision. Beyond the issue of whether the company can afford a high-caliber
financial professional, many business owners are often confused over just what it is that a
CFO does or should do. More than just a glorified accountant or someone whose long service
to the organization has been rewarded with a fancy title, a chief finance officer (CFO) has a
number of responsibilities within the corporation that are essential in providing a strong
financial foundation for a growing and expanding business. The following are some of the
critical areas which an effective CFO will work on in discharging his functions:

Implements Internal Controls

A CFO will be the one responsible for conveying the important financial controls to a
company. These controls features should include the effective administration of cash flow and
overhead expenses, establishing credit policies for customers and working with major vendors
to attain more favorable payment terms, and implementing measures for assessing and
evaluating optimal inventory levels. At a higher level, a CFO should also develop effective
controls that provide supervision against fraudulent activities.

Supervises Major Impact Projects

Outside of implementing and monitoring company controls relating finance, an
effective CFO will also handles and supervises those projects that require significant
quantitative and qualitative interpretations and analysis order to reach at an understanding of
the options that are available. For example, a CFO will take responsibility for developing a
company's annual budget, work together with the business owner and division or department
managers to ensure that the final financial product accurately and objectively projects the real
things. A CFO might also carry out a meticulous analysis of a company's future capital
investment requirements as a prerequisite in securing additional financing.

Develops Relations with Financing Sources

One of the most important responsibilities of an effective CFO is to institute good
working relationships with banks and other financial institutions that may impact on the
company's ability to finance its operations. Specific activities in this area may include regular
meetings with officers at the company's bank to review ongoing operations, discussing
possible future loan transactions, revisiting loan covenants if there is any,
3-11

negotiating more favorable terms for bank lines of credit, and discıussions with private
investors on how additional capital might be invested into the enterprise.

Advisor to Management
An effective CFO is also an important member of the management team of some
emergent companies. Because of his/her financial sharpness and general business
knowledge, a good CFO can facilitate and help the business owners, executives and other top
managers make the substantial connection between a company's operations and its financial
performance that are reflected in financial figures.

Drives Major Strategic Issues

A good CFO can also be expected to take part in important role of attending some
major strategic issues that will have an impact on the company's long-term future. These
issues include the hatching of the company acquisition strategy which in the end would help
fuel and boost the company's additional growth. Keeping an eye on diversification of a
particular product lines, business activities, and portfolio is also part of the CFOs concern. A
CFO would also play a significant role in any endeavor the purpose of which is to seek
investment from the public or financial markets especially in times when the company is having
an initial public offering (IPO).

Risk Manager
The CFO is on the best position to foresee risk considering that they have this rare
perspective on how the company operates. CFOs are close to the internal control system and
financial reports which pass through many operational areas. CFOs are high ranking officers
doing real and actual things in the infantry. Their views are not "tree top", their views are real
and they are in proximity of hard figures that could back their decision.

The CFO's viewpoint on risk can be a helpful source to the board of directors and the
CEO as well as other senior officers as they manage the corporate affairs. The CFO may be
in the best position to anticipate high risk transactions and the adverse consequences of a
changing external environment. This unique capability of CFOs however is only valuable if the
CFO is communicating well with the CEO, the board and the other officer of the organization.

Relationship Role
More often CFO is the nucleus in an organization with many connections. The CFO
will work together with the CEO, the board of directors, the audit committee, the internal
auditor, the external auditor. Strong verbal and written communication skills are indispensable
if the nucleus is to support the connections effectively. CFO serves the bridge between these
a variety of parties within the organization.
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Objective Referee
 CFO needs to demonstrate impartiality, such as when advising the CEO or the board
of directors on accounting matters. The skill to present important financial issues is an
invaluable resource but it should always be in the context that it is being done not to favor
somebody. CFOs are not valued by board of directors or audit committees on attributes or
tendencies of boosting financial figures with sacrificed transparency.

In principle of good corporate governance, boards of directors, audit committees and

CEOs need to understand all sides of a financial accounting or disclosure issues so they can
make an informed and rational decision. The CFO can and should be a trusted adviser in
these matters of financial compliance reporting.

SHAREHOLDERS

Shareholder Rights and Responsibilities

Share ownership carries with it important rights and responsibilities. Share ownership
gives the owner with the right to a share of the income of the company called dividend and a
right to a share of net proceeds on the sale during liquidation of the company. Ownership of a
share in the equity of a company also includes the right to sell or transfer that share without
the need to inform or getting the consent of the other stockholders.
An important right and responsibility of shareholders is to vote. This voting right
includes the right to information about the company and the right to express an opinion on the
company's performance. In most public companies, there is a separation of ownership and
control making it difficult to pursue the rights to information and to provide feedback. While no
one disputes that shareholders own companies, the fact is that management often controls
the company. As long as there is a gap between the objectives of management and the
objectives of owners, there is a risk that management will act in its own self-interest and
possibly to the detriment of the owners. In pursuing the rights to information and influence,
shareholders must keep in mind their responsibilities:

● They must ensure that the obligation to provide information to shareholders does not
detract from the company's ability to compete in its marketplace. The information
should not cost competitiveness.
● They must ensure that their right to attempt to influence the company does not
translate into behavior that will paralyze and detrimental to the company. It should not
spin at a level wherein the principal (shareholders) and agent (officers) will now
becoming adversarial in running the corporation. The rule of the thumb is that
managing a company is not a constant exercise of stockholders' referendum.
3-13

Reviewing the Role of Shareholders

General
The directors and not the shareholders are responsible for the management of the
corporation. However, under the corporate statutes, certain matters are considered so
fundamental that they require the approval of the shareholders. Under the Corporation Code
of the Philippines these matters include:
● Effecting certain merger or reorganizations.
● Selling all or substantially all of the corporation's assets.
 ● Adding or removing any restrictions on the business that the corporation may carry on.
● Changing the corporation's share capital.
● Increasing or decreasing the number of directors or the minimum or maximum
numbers of directors.
● Confirming by-laws.
● Adding or changing restrictions on the issue, transfer or ownership of shares.

Shareholder Ability to Change the Board

Shareholders who are dissatisfied with how the directors are running the corporation
may remove the directors or refuse to re-elect them. In practice, this may be a difficult course
to take, particularly where the shares of the corporation are widely held.

While the corporate decrees require a corporation to provide a list of shareholders to

any shareholder who requests it, thereby enabling shareholders to mount a proxy battle over
the election of directors, many shareholders do not have the time or resources required to
counter a management proposal. The exceptions are large institutional investors who have,
on occasion, made their voices heard at annual meetings or in private meetings with
representatives of a corporation prior to a shareholder meeting. Occasionally, proxy battles do
occur which result in the replacement of the board of directors.

EXTERNAL ENVIRONMENT OF CORPORATE GOVERNANCE

AUDITORS
One of the most important external institutions in governance is the independent
auditors. Their job is to help to ensure that firms are run efficiently by keeping public records
accurate, adhering standards of reporting for public purposes, and taxes paid properly and on
time. Independent auditors analyze and communicate financial information for various entities
such as companies, potential investors, individual clients, government both at the local and
national level. Beyond carrying out the fundamental tasks of attesting the information provided
by management, they may also engage in
3-14
consultancy services which may include, financial and investment planning, information
technology consulting, and limited legal services.

Some independent auditors and public accountants specialize in forensic accounting

investigating and interpreting white-collar crimes such as securities fraud and embezzlement,
bankruptcies and contract disputes, and other complex and possibly criminal financial
transactions, including money laundering by organized criminals. These auditors and
accountant combine their knowledge of accounting and finance with law and investigative
techniques to determine whether a certain corporate activity is illegal. Many auditors and
forensic accountants work closely with law enforcement personnel and lawyers during
investigations and often appear as expert witnesses during trials.

LEGAL ENVIRONMENT
Some contend that it is the market that can really press real governance considering
that it is a variable independent from anybody. There are, however, some limits to this
contention. Markets may be good for some governance tasks, weak for others. Markets may
be good at limiting some types of "skirting," but be less good at limiting "stealing," especially
if the stealing represents a small part of the firm's total value. If a low percentage of a firm's
assets is stolen in relation to forgone market opportunities, the market may not deter the
manager. The manager may never get another job, but that manager will leave rich. Law and
other institutions are more important here than markets. That is, sometimes the non-market
institutions are better, cheaper, and faster at governing the firm than any of the market
constraints.

The legal environment is derived partly from the general political climate in a country.
Legal environment has three distinct dimensions:
1. The domestic laws of home country
2. The domestic laws of each of foreign markets
3. International law in general

MARKETS
Markets are considered the most important institution of corporate governance. There
are three central and important points of the term markets, these are:
1. The firm's product market,
2. Capital market,
3. The managerial labor market.

The above three are important barometers if the firm could survive, grow, expand,
diversify, and lastly, retain a good stock of human capital to manage the company as it battles
the unforgiving arena of competition.
3-15
In seriously considering the effects, some analyst belittle the importance of other
corporate governance institutions, their contention is that, all of the three markets punish
nonstandard firms and reward well performing firms. The contention is correct in response to
the idea that, failure in nonmarket corporate governance variables would necessarily destroy
all firms.

Market imperfections press those charged with governance to make the company
afloat in terms of governance standards, to have their outstanding conduct visible and leave it
to the market to do some natural pickings. Good internal decision- making can make the firm
react well to product market changes, economize on capital, or make sure good managers
come, stay, and perform.

Product markets can be considered as the most feared disciplinarian by managers; It

is a simple "no product, no firm" thing. Capital markets also favor those who have good track
records in terms of governance. Financial institutions do not impose much risk-offsetting
features like higher interest rate, conservative lending, and strict characteristic when they
make some financial arrangement with the company; this is one of the prime benefits of good
CG. A labor market is also important variable in selecting the "right" people for positions in the
company. In competition to haul the right stock of people good governance is always a factor
to be reckoned with, the general pattern is that, people want to be with the desirable
companies to utilize the best skills available in them.

OTHER EXTERNAL FACTORS

 External Environment may create major threats or in some cases precursor of
openings and possibilities for an organization. An organization is directly affected by events
happening in the environment that it is supposed to be functioning in. The external
environment offers the model, the thrust and the most essential variable that shapes an
organization. Any organization that adapts the external environment without difficulty
essentially survives and the ones that do not are the ones that are eliminated in the
competition; it's a plain survival of the fittest. Who can blend into its environment will stay alive.
External environment may effect in any of the following areas.

Political Environment
The politics of a country or region that an organization is functioning affects the policies
and benefits that an organization derives from a system. It is also the major pool from which
the human resource of an organization is selected from and hence it is likely to shape an
organization both internally and externally. Technological Environment Any new development
may render an organization's processes and systems obsolete if it is not quick to adapt to the
new changes. To move forward it is essential to
3-16

keep updating an organization on a reiterative basis. This becomes even more relevant in the
case of businesses that rely heavily on technology and are technologically sensitive.

SOCIAL ENVIRONMENT

Perhaps the most basic is the social environment, which comprises the general
behavior of the society and the ethical leanings of the individuals responsible for the
functioning and eventual long-term existence of the organization. Social environment is
practically the ecosystem within which organizations thrive, then enabling an atmosphere in
which business is situated.

CORPORATE PROTECTION WITHIN LEGAL BOUNDARIES

ANTI-TAKEOVER DEFENSES

Anti-takeover tactics come in many different forms and appearances. Technical

languages such as "shark repellent" and "poison pill" are used to describe the defensive
means or tactics that companies use to challenge a lurking merger of two or more businesses
into one. Another instance wherein anti-takeover defenses will be employed is in case when
there is a hostile takeover, a setting where a business is acquired against the management's
or some of shareholders wishes. Anti-takeover tactics are designed to make a company
unattractive to predators. The following may be done to prevent the unwelcome takeover:
 ● The "flip-in which allows existing shareholders to purchase more shares at a discount
in order to dilute the value of the shares.
● The "flip-over allow the shareholders to purchase the bidder's shares at a discount.
● Acquisition of previous issued stock in the open market (treasury stock).
● Provision such as "One can never be a board member if you are already a board
member of a competitor company”
● Supermajority vote as prerequisite of companies major move like merger,
consolidation or acquisition, issuance of additional stocks and reacquisition of
previously issued stocks.
● A provision in the company's charter or articles of incorporation which allows
shareholders to sell their shares to the bidder for more than the market price.
● The debt façade", a ploy wherein a company takes on plenty of debts to make it
unappealing, as a bidder would be answerable for those debts once he will become
shareholder.
● The "debenture sheltering, business issues bonds that will have to be redeemed at a
higher price in the future.
● The company its employees stock options, high bonuses, and exceptional severance
pay that would hurt the bidder's pocket very much if takeover would take place.

Internal and External Institutions and influences of Corporate Governance | 3-17

● Staggered elections to the board of directors over a number of years. This would mean
that a potential bidder will be “locking horns” with a hostile board of directors until new
elections can be held.

In some countries, anti-takeover strategies are illegal or some control to a greater

degree on their use is mandatory In the United States however, it is legal. The recent economic
decline and fear of becoming a prey or an acquisition target by these large opportunistic
corporations who are trying to take advantage of the situation have renewed interest in anti-
takeover tactics in all their forms and substance.

ADVANTAGES OF ANTI-TAKEOVER DEFENSES

1. Anti-takeover tactics are positive when a company has the sense to believe that its stock
has a higher market price than reflected and thus may become the target for a takeover.

2. Anti-takeover tactics are good when the predator company s purpose is to acquire the
company and then use it for not good purposes which would not benefit the constituent
companies eg. load the company being taken over with liabilities, hide the predator company's
corporate inefficiencies, distorting the performance of the acquired companies, and hiding the
corporate inefficiencies of the predator company.

3. Short-term poison pills may help businesses go through difficult financial periods when
they could be defenseless targets.
DISADVANTAGES OF ANTI-TAKEOVER DEFENSES

1. It will prevent a genuinely good takeover purpose or aim. Anti-takeover tactics are good
when the predator company's purpose is to acquire the company and then use. it for good
purposes which would benefit the constituent companies. Examples of these are more
coverage, diversification, strengthening integration and ties.

2. Anti-takeover tactics are sometimes used to embed management and prevent

shareholders from selling their stock and maximizing its price.

3. Board members, who are already in their comfort zone, poison pills to retain their positions
sometimes hide behind.

The following action should be observed in using anti-takeover tactics:

● Check that the use of anti-takeover strategies is legal in the country or jurisdiction in
which the company is operating.
● Thoroughly examine what method would provide the greatest protection without
hurting the company's image and value.
● Avoid tying the company to stock options, lofty bonuses, and special severance pay
for those employees you might later want to fire.

3-18 | Good Governance and Social Responsibility

● Calculate risk associated to debts if you are taking on debts or issuing bonds to make
the company unappealing, make sure that you can handle those debts even if the
economy slides down.
● Consult with partners, directors, lawyers and accountants before initiating anti-
takeover strategies.
● Don't use anti-takeover strategies except when you are sure that it will not backfire
leaving the company at risk and defenseless.

LIABILITY ISSUES AND INDEMNIFICATION OF OFFICERS

Liability can accrue for officers and directors when they cause financial and
nonfinancial harm to the corporation, or when they act solely on their own behalf which is
detrimental to the corporation, this can be in a form of commission of a crime and other
wrongful acts. Certain acts may place an officer or director to personal liability (uninsured),
and other acts, although they would otherwise openly expose them to liability, may be either
compensated by or insured against by the corporation.
Personal liability of Officers and Directors

The following are issues that may subject officers and directors to personal:

● Issues involving misappropriation

● Issues involving nondisclosure of conflict of interest
● Issues on loyalty
● Issues on non-separation of personal and business concerns
● Issues on prudence

Indemnification of Officers and Directors

Indemnification of officers and directors refers to the act of the reimbursing officers and
directors for expenses incurred, liabilities accrued, and amounts paid in defending claims
brought to them for actions taken on behalf of the corporation. Shareholders should recognize
that in the absence of this method of trying to limit the personal ability of officers and directors
for claims brought against them, it will be cult for corporations to find anyone willing to take
such a risky jab of serving as officers or directors.

As a result of this, some corporate bylaws are now containing provisions Regarding
indemnification and insurance for officers and directors. Provisions may vary as where and
when indemnification will apply. Provision for indemnification and race of officers, directors,
and person holding sensitive positions can also be included in the bylaws of the corporation
to have a strong basis as to where, when, and for the related process will be done.

Internal and External Institutions and Influences of Corporate Governance | 3-19

Directors’ and Officers’ Insurance

There are matters that cannot be indemnified under the law or the company not have
the enough resources to indemnify officers and director. In this case appropriate remedy would
be insurance coverage. Corporations are allowed to purchase insurance to cover matters
resulting from acts taken by officers and directors. This insurance coverage is different and
separate from the general ability insurance corporation purchase for the corporation itself in
general. Insurance of this type hurts corporate pocket considering that it is not cheap. The
reasons for the increase of the co are two (2) things first, the cost for directors' and officers’
insurance has gone dramatically due to the inherent risk associated to it (it involves big fishes
in the corporation who can decide big things). Second, the exclusions for coverage have also
increased, insurance companies understandably want to trim down their assumed risk the
lesser specific coverage, the better.

SHAREHOLDERS' IMPOSABLE LIMITATIONS

THROUGH CLASSES OF STOCK

A company may have many different types of shares that come with different
conditions and rights. There are four main types of shares:

Ordinary Shares

These are standard shares with no special rights or restrictions. They have the
potential to give the highest financial gains, but also have the highest risk Ordinary
shareholders are the last to be paid if the company is wound up.

Preference Shares

These shares typically carry a right that gives the holder preferential treatment when
annual dividends are distributed to shareholders. Shares in this category have fixed value,
which means that a shareholder would not benefit from an increase in business' profits
However, usually they have rights to their dividend ahead of ordinary shareholders of the
business that are in trouble. Also, where a business will be liquidated wind up, they are likely
to be read the par/nominal value or liquidating value or shares ahead of ordinary shareholders.

Cumulative Preference Shares

These shares give holders the right that, if a dividend cannot be paid one will be carried
forward to the succeeding years Dividends on cumulative pre shares must be paid, despite
the earning levels of the business.

3-20 | Good Governance and Social Responsibility

Redeemable Shares

These shares come with an agreement that the company can buy them back at a future
date - this can be at a fixed date or at the choice of the business. A company cannot issue
only redeemable shares.

SUPERMAJORITY

Refers to percentage of ownership that is way above the simple majority which is, one
half (%) plus one (1) share of the total shares outstanding. Usually super majority could mean
67% to 90%. Unlike other percentage holding which can only have significant Influence on
corporate affairs, supermajority can have full control on major goings on in the corporation. A
supermajority is often requisite for a company to take certain actions, such as amending the
charter. In some cases, to protect the company from predators, some companies require
supermajorities as anti-takeover measures. For example, a company may require two-thirds
of shareholders to approve a merger or acquisition. Supermajority provisions may be needed
principally to make certain the company's independent survival. This may limit however the
board of directors' elbow of authority, and may even hamper a friendly and rational takeover
that may do more good for the company.

One issue about supermajority is that of the small business owners who often look for "angel"
investors to increase capitalization of the business. As an investor, that carries along with it
the recognition of equity in the business by virtue of their investments. It is fairly normal for
these angel investors to have equity for their investment. They also seek to have some say in
how the company is run to protect their interests. Faced with capital needs, small business
owners often not only give these minority (equity-wise) owners preferential but also provide
them with supermajority voting rights for certain actions that require the owners' consent.

SHAREHOLDER VOTING AGREEMENTS

A shareholder voting agreement is a legal contract among shareholders of a corporation

involving voting of shares. The shareholder voting agreement frequently covers how members
of the Board of Directors are to be selected and occasionally covers major corporate events
such as mergers and acquisitions. Venture capitalists often expect a shareholder voting
agreement to be executed in connection with their investment in a start-up company.

In a shareholder voting agreement, shareholders may choose to pool their votes for a
particular goal. Voting agreements may stipulate that the involved shareholders will cast the
vote their shares collectively or cooperatively. Corporation Code of the Philippines does not
prohibit a shareholder voting agreement as long as they relate to issues upon which
shareholders can vote and it does not have any malicious intention or any violation on any
agency regulation which governs corporate operation.

Internal and External Institutions and influences of Corporate Governance | 13-21

In some advanced countries, the state may require that voting pools follow detailed
procedures and guidelines to be valid. The laws may limit the length of a shareholder
agreement, or may require a copy of the agreement and have it deposited with the corporation.
Violators of the valid agreement may be sued and the court may require voting according to
the agreement otherwise violating votes will disqualified.

SHAREHOLDERS-MANAGEMENT AGREEMENTS

“Together with the company's articles of incorporation which regulates the conducts of
the company, what gives investors their most important contractual protection is the
shareholders' agreement. This agreement will only be relevant, of course, if the corporate
structure is being used. Agreements of this kind are by far the most recommendable system
or method for the protection of shareholders." (Source: Chris Southorn, www.cmck.com). The
main features of a shareholders agreement are:

Board Appointment Rights

It is common for the shareholders' agreement to establish the relative rights of

representation that the shareholders will have on the company's board of directors of the
company. A minority shareholder may seek to have one director on the board in order to be
kept informed of matters discussed at board level. A larger shareholder may seek to appoint
a large number of directors to reflect its proportionate holding of shares at board level. Usually,
the agreement will provide that any director appointed by a shareholder can only be removed
by that party.

Veto Rights

Veto right refers to the right to overturn decisions reached by the board. This process
involves listing of material things that cannot be done without the investors' prior consent and
ratification. These normally range from fundamental matters, such as issuing further shares,
commitment of assets, capital expenditure and so on.

Adoption and Amendment of Business Plans and Budgets

The agreement may provide a process for adopting and amending business plans and
budgets, to ensure that individual shareholders or their appointed directors are properly
represented in that process.

Scope of Business

Although this thing can found in the charter of the corporation, it is common particularly
in a joint venture ora start-up company, for the shareholders' agreement to specify the scope
of the business that the company will conduct, and provide that consent Is required from the
shareholders before the company can change the nature of its business or do some
diversification attempts.
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Intellectual Property Rights
Where shareholder parties are contributing unique and distinct advantage process
such patent, trademark, copyright, or any form of information or competencies to a venture,
the shareholders’ agreement may provide for the ownership and licenses of intellectual
property rights, preserving certain such rights for the parties themselves and others to the
company. This is another common agreement in a joint venture company.

Right to Information
It is extremely important for the investors to monitor performance closely, particularly
to give them an earLy warning if things are starting to go wrong. Accordingly, they will expect
a contractual right to receive regular reports, management accounts, cash flow forecasts and
so on, together with statutory accounts. The investor will also often seek the right to have its
own director appointed to the board. He will expect board meetings to be held regularly and
all material decisions to be made by the board

Warranties from the Management Team

In general terms, these are a series of statements about the company that the investors
would expect to be true and accurate. At a first-stage capital raising, it is unlikely that these
statements will be little more than confirmations: that the team stands behind its business plan;
that the company is clean; and that the team knows of nothing that has been withheld from
investors. However, at subsequent funding rounds, once the company has a track record, the
warranties will extend to the company's general trading affairs. This actually the statement of
management responsibility intended to be given to shareholders and other interested parties
(stakeholders) of the corporation

Strategic Investor Rights

Where a shareholder is looking for more than a return on its investment, the
shareholders' agreement may provide an opportunity to negotiate terms covering secondary
commercial arrangements, such as giving a shareholder or its group first rights of refusal on
certain type of business or contract with the company, or the right to be informed of and to co-
invest in investments to be made by the company.

Restrictions on Transfers of Shares

The investors will be keen to make that the management team they are backing, holds
on to their shares. In certain circumstances, managers will be permitted, through an
agreement, to transfer shares to family or to trusts.

Restrictive Covenants

These will make it clear that, while members of the management are employed
and for a period of time afterwards, they cannot compete with the company or solicit
customers or employees. One would expect these covenants to fit together with restrictive
covenants contained in employment agreements but the covenants in the

Internal and External Institutions and Influences of Corporate Governance | 3-23

shareholders’ agreement will be directly in favor of the investors. It is obviously critical from
the management's perspective that they are comfortable with the covenants are entering into.

Exit Provisions
A shareholding in a private company is by its nature illiquid because there is no
market live and open of the shares. Accordingly, a shareholders’ agreement will very often
include provisions that are intended to encourage or facilitate a realization by the shareholders
of their investments. Once again, this is particularly important for minority shareholders who
are unable to control an exit process.

There are of course many other detailed provisions in an average shareholders’

agreement. It is normally a sophisticated legal document. No business angel, private equity
firm or institutional investor, should invest a substantial amount in any company
without protecting himself with contractual rights in a shareholders' agreement.

BEHAVIORAL MANAGEMENT THEORY

As management research continued in the 20th century, questions began to come up

regarding the interactions and motivations of the individual within organizations. Management
principles developed during the classical period were simply not useful in dealing with many
management situations and could not explain the behavior of individual employees. In short,
classical theory ignored employee motivation and behavior. As a result, the behavioral school
was a natural outgrowth of this revolutionary management experiment.
 The behavioral management theory is often called the human relations movement
because it addresses the human dimension of work. Behavioral theorists believed that a better
understanding of human behavior at work such as motivation, conflict, expectations, and group
dynamics, improved productivity.

The theorists who contributed to this school viewed employees as individuals,

resources, and assets to be developed and worked with - not as machines, as in the past.
Several individuals and experiments contributed to this theory.

ELTON MAYO

Elton Mayo's contributions came as part of the Howthorne studies, a series of

experiments that rigorously applied classical management theory only to reveal its
shortcomings. The Hawthorne experiments consisted of two studies conducted at the
Hawthorne Works of the Western Electric Company in Chicago from 1924 to 1932. The first
study was conducted by a group of engineers seeking to determine the relationship of lighting
levels to worker productivity. Surprisingly enough, they discovered that workers’ productivity
increased as the lighting levels decreased that is, until the

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employees were unable to see what they were doing, after which performance naturally
declined.

A few years later, a second group of experiments began. Harvard researchers Mayo
and F. J. Roethlisberger supervised a group of five women in a bank wiring room. They gave
the women special privileges such as the right to leave their workstations without permission,
take rest periods, enjoy free lunches, and have variations in pay levels and workdays. This
experiment also resulted in significantly increased rates of productivity.

In this case, Mayo and Roethlisberger concluded that the increase in productivity
resulted from the supervisory arrangement rather than the changes in lighting or other
associated worker benefits. Because the experimenters became the primary supervisors of
the employees, the intense interest they displayed for the workers was the basis for the
increased motivation and resulting productivity. Essentially, the experimenters became a part
of the study and influenced its outcome. This is the origin of the term Hawthorne effect, which
describes the special attention researchers give to a study's subjects and the impact that
attention has on the study's findings.

The general conclusion from the Hawthorne studies was that human relations and the
social needs of workers are crucial aspects of business management. This principle of human
motivation helped revolutionize theories and practices of management.

ABRAHAM MASLOW

Abraham Maslow, a practicing psychologist, developed one of the most widely

recognized need theories, a theory of motivation based upon a consideration of human needs.
His theory of human needs had three assumptions:
 1. Human needs are never completely satisfied.
2. Human behavior is purposeful and is motivated by the need for satisfaction.

Needs can be classified according to a hierarchical structure of importance, from the lowest
to highest. Maslow broke down the needs hierarchy into five specific areas:

1. Physiological needs. Maslow grouped all physical needs necessary for maintaining
basic human well-being, such as food and drink, into this category. After the need is
satisfied, however, it is no longer is a motivator.
2. Safety needs. These needs include the need for basic security, stability, protection,
and freedom from fear. A normal state exists for an individual to have all these needs
generally satisfied. Otherwise, they become primary motivators.
3. Belonging and love needs. After the physical and safety needs are satisfied and are
no longer motivators, the need for belonging and love emerges as a

Internal and External Institutions and Influences of Corporate Governance | 3-25

primary motivator. The individual strives to primary motivator establish meaningful
relationships with significant others.

4. Esteem needs. An individual must develop self-confidence and wants to achieve

status, reputation, fame, and glory.
5. Self-actualızation needs. Assuming that all the previous needs in hierarchy are
satisfied, an individual feels a need to find himself.

Maslow's hierarchy of needs theory helped managers visualize employee motivation.

DOUGLAS MCGREGOR

Douglas McGregor was heavily influenced by both the Hawthorne studies and Maslow.
He believed that two basic kinds of managers exist. One type, the Theory X manager, has a
negative view of employees and assumes that they are lazy, untrustworthy, and incapable of
assuming responsibility. On the other hand, the Theory Y manager assumes that employees
are not only trustworthy and capable of assuming responsibility, but also have high levels of
motivation.

An important aspect of McGregor's idea was his belief that managers who hold either
set of assumptions can create self-fulfilling prophecies – that through their behavior, these
managers create situations where subordinates act in ways that confirm the manager's original
expectations.

FREDERICK HERZBERG

Frederick Herzberg was a well-respected American who has contributed greatly to the
way in which managers think about motivation at work. He first published his theory in 1959
in a book entitled ‘The Motivation to Work’ and put forward a two factor content theory which
is often referred to as a two-need system. It is a content theory which explains the factors of
an individual's motivation by identifying their needs and desires, what satisfies their needs and
desires and by establishing the aims that they pursue to satisfy these desires.

Herzberg's original research was undertaken in the offices of engineers and

accountants rather than on the factory floor and involved interviewing over two hundred
employees. His aim was to determine work situations where the subjects were highly
motivated and satisfied rather than where the opposite was true and his research was later
paired with many studies involving a broader sampling of professional people.

In his findings, Herzberg split his factors of motivation into two categories called
hygiene factors and motivation factors. The hygiene factors can de-motivate or cause
dissatisfaction if they are not present, but do not very often create satisfaction when they are
present, however, motivation factors do motivate or create satisfaction and are rarely
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the cause of dissatisfaction. The two types of factors may be listed as follows in order
of

importance:

Hygiene Factors (leading to dissatisfaction):

. Company Policy

. Supervision

.Relationship with Boss

Work Conditions

Salary

Relationship with Peers

Motivators (leading to satisfaction);

Achievement

Recognition

The work itself

Responsibility

Advancement

Growth
The dissatisfiers are hygiene factors in the sense that they are maintenance factors required
to avoid dissatisfaction and stop workers from being unhappy, but do not create satisfaction
in themselves. They can be avoided by using 'hygienic' methods to prevent them.

It is clear from the lists that the factors in each are not actually opposing which means that the
satisfiers are not the opposite of the dissatisfiers. The opposite of satisfaction isn't
dissatisfaction but is 'no satisfaction'. Both lists contain factors that lead to motivation, but to
a differing extent because they fulfill different needs. The hygiene factors have an end which
once fulfilled then cease to be motivating factors while the motivation factors are much more
open-ended and this is why they continue to motivate.

Herzberg also developed the concept that there are two distinct human needs:

Physiological needs: avoiding unpleasantness or discomfort and may be fulfilled via money
to buy food and shelter etc. Psychological needs: the need for personal development fulfilled
by activities which cause one to grow.

He identified this as the Adam and Abraham Concept where Adam is animal and wants to
avoid pain or discomfort, but Abraham is human and needs to go beyond the physical
requirements and expand psychologically too. Herzberg believed that the hygiene factors
causing no satisfaction are not applicable to the task an employee undertakes but are external
to that task. They are the Adam part of the concept where an incentive may be attributed to a
fear of punishment or increase in discomfort or as he phrased it 'A Kick up the Ass' (KITA). He
thought that these did work but only as short term motivators e.g. constantly increasing
someone's salary to motivate them will merely

Internal and External Institutions and Influences of Corporate Governance | 3-27

encourage them to look for the next wage rise and nothing else; however, salary may also be
a de-motivator where the employee perceives it to be too low or low compared to that of their
peers. The long term motivators are the Abraham part of the concept that lead to satisfaction
and are intrinsic to the job itself and the job design. Consider the chambermaid who prefers to
receive a note of appreciation for her high standards from a guest than a carelessly delivered
gratuity.

It is important to understand that the two types of factors are not mutually exclusive and that
management must try to fulfil both types of need for an employee to be truly satisfied with their
job. Once the hygiene factors have been satisfied providing more of them will not create further
motivation but not satisfying them may cause de motivation; unlike the motivation factors
where management may not fulfill all of them but the workers may still feel motivated. Major
companies have recognized this situation when designing their methods of reward and
recognition.

Probably one of the most important ideas that Herzberg postulated based on his findings of
satisfaction is that of 'job enrichment'. This is the addition of different tasks to a job to provide
greater involvement and interaction with that job. It is obviously a continuous management
process:
The job must use the full ability of the employee and provide them with sufficient challenge

Any employee who demonstrates an increasing level of ability should be given

correspondingly increasing levels of responsibility

If a job cannot be designed to use an employee's full ability management should consider
employing someone of lesser skills or perhaps automation of the task. If a person's skills
cannot be used to the full they will experience problems with motivation Most job frustrations
arise from hygiene factors such as frustration due bureaucracy, poor organization, internal
politics or feeling exploited.

Tesco, one of the leading retailers in the UK, recently gained recognition via achieving the
National Business Awards 'Employer of the Year when the judges declared that: "Tesco was
voted Employer of the Year because its solutions were seen to be more holistic". Tesco
recognize how motivated staff who are committed to their work have a positive effect on
company performance. They invest several million pounds each year in training schemes
which are based on Herzberg motivators. For example:

1. New and more open lines of communication between managers and staff 2. Directors and
senior managers spend a week on the shop floor listening to

ideas from customers and staff 3. A scheme exists to spot individual talent and to fast-track
shop floor workers

up the promotional ladder 4. A better understanding of individual employees personal

circumstances

3-28 | Good Governance and Social Responsibility

These initiatives have helped Tesco deliver record growth and sales profits a ustrate how
theory may be used in practice

Over the years, there are criticisms that have arisen, like his sample of employees was not
representative of all workers, but further studies have tended to support fi nes in addition,
some critics have declared that it is natural for people to take cred for satisfaction, but to blame
dissatisfaction on external factors. Every individual is just hat - an Individual and theories of
motivation cannot realistically apply to each single olovee; however, they are useful for
identifying the main ways in which people are motivation. Herzberg and his findings have been
extremely influential in developments Associated with the field of job design and methods of
management to provide job satisfaction and motivation

When Frederick Herzberg researched the sources of employee motivation during the 1950s
and 1960s, he discovered a dichotomy that stills intrigues (and baffies) managers: "the things
that make people satisfied and motivated on the job are different in kind from the things that
make them dissatisfied."
Ask workers what makes them unhappy at work, and you'll hear about an annoying boss, a
low salary, an uncomfortable work space, or stupid rules. Managed badly, environmental
factors make people miserable, and they can certainly be demotivating. But even if managed
brilliantly, they don't motivate anybody to work much harder or smarter. People are motivated,
instead, by interesting work, challenge, and increasing responsibility. These intrinsic factors
answer people's deep-seated need for growth and achievement

Herzberg's work influenced a generation of scholars and managers but his conclusions don't
seem to have fully penetrated the American workplace if the extraordinary attention still paid
to compensation and incentive packages is any indication.

What is the simplest, surest and most direct way of getting someone to do something? Ask?
But if the person responds that he does not want to do it, then that calls for psychological
consultation to determine the reason for such obstinacy. Tell the person? The response shows
that he does not understand you, and now an expert in communication methods has to be
brought in to show you how to get through. Give the person a monetary incentive? I do not
need to remind the reader of the complexity and difficulty involved in setting up and
administering an incentive system. Show the person? This means a costly training program.
We need a simple way.

As a group, these theorists discovered that people worked for inner satisfaction and not
materialistic rewards, shifting the focus to the role of individuals in an organization's
performance

Internal and External Institutions and influences of Corporate Governance 329

REFRAMING ORGANIZATION

As organizations have become pervasive and dominant, they have also become harder to
understand and manage. The result is that managers are often nearly as clueless as the
Dilberts of the world think they are. The consequences of myopic management and leadership
show up every day, sometimes in small and subtle ways, sometimes in organizational
catastrophes. Our basic premise is that a primary cause of managerial failure is faulty thinking
rooted in inadequate ideas.

Managers and those who try to help them too often rely on constricted models that capture
only part of organizational life. Learning multiple perspectives, or frames, is a defense against
thrashing around without a clue about what you are doing or why. Frames serve multiple
functions. They are filters for sorting essence from trivia, maps that aid navigation, and tools
for solving problems and getting things done.

There are four frames which are all rooted in both managerial wisdom and social science
knowledge. The structural approach focuses on the architecture of organization the design of
units and subunits, rules and roles, goals and policies. The human resource lens emphasizes
understanding people, their strengths and foibles, reason and emotion, desires and fears. The
political view sees organizations as competitive arenas of scarce resources, competing
interests, and struggles for power and advantage. Finally, the symbolic frame focuses on
issues of meaning and faith. It puts ritual, ceremony, story, play, and culture at the heart of
organizational life.

Each of the frames is both powerful and coherent. Collectively, they make it possible to
reframe, looking at the same thing from multiple lenses or points of view. When the world
seems hopelessly confusing and nothing is working, reframing is a powerful tool for gaining
clarity, regaining balance, generating new options, and finding strategies that make a
difference.

Enron's reign as history's greatest corporate catastrophe was brief. An even bigger behemoth,
World Com, with assets of more than $100 billion, thundered seven months later, in July 2002.
Stock worth more than $45 a share two years earlier fell to nine cents

Among the possible ways of talking about frames are schemata or schema theory (Fiedler,
1982; Fiske and Dyer, 1985; Lord and Foti, 1986), representations (Frensch and Sternberg,
1991; Lesgold and Lajoie, 1991; Voss, Wolfe, Lawrence, and Engle, 1991), cognitive maps
(Weick and Bougon, 1986), paradigms (Gregory, 1983; Kuhn, 1970), social categorizations
(Cronshaw, 1987), implicit theories (Brief and Downey, 1983), mental models (Senge, 1990),
definitions of the situation and root metaphors. A number of scholars (including Allison, 1971;
Bergquist, 1992; Birnbaum, 1988; Elmore, 1978; Morgan, 1986; Perrow, 1986; Quinn, 1988;
Quinn, Faerman, Thompson, and McGrath, 1996; and Scott, 1981) have made similar
arguments for multi-frame approaches to groups and social collectives

3-30 Good Governance and Social Responsibility

EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)

A company which wants to set up an ESOP creates a trust to which it makes annual
contributions. These contributions are allocated to individual employee accounts within the
trust. A number of different formulas may be used for allocation. The most common is
allocation in proportion to compensation, but formulas allocating stock according to years of
service, some combination of compensation and years of service, and equally, have all been
used. Typically employees might join the plan and begin receiving allocations after completing
one year of service with the company, where any year in which an employee works at least
1,000 hours is counted as a year of service.

The shares of company stock and other plan assets allocated to employees' accounts must
vest before employees are entitled to receive them. Vesting is a process whereby employees
become entitled to an increasing percentage of their accounts over time. Employees receive
the vested portion of their accounts at either termination, disability, death, or retirement. These
distributions may be made in a lump sum or in installments over a period of years. If employees
become disabled or die, they or their beneficiaries receive the vested portion of their ESOP
accounts right away.

In a publicly-traded company, employees may sell their distributed shares on the market. The
form of distribution of a privately held firm can vary, depending on the plan document or all or
substantially owned by the ESOP with by-laws that only authorize company stock to be owned
by employees. But if privately held, the company makes the distribution in stock, it must give
the employees a put option on the stock for 60 days after the distribution. If the employee
chooses not to sell at that time, the company must offer another put option for a second sixty
day period starting one year after the distribution date. After this period the company has no
further obligation to repurchase the shares.

An ESOP company may make an installment distribution provided that it makes the payments
in substantially equal amounts, and over a period to start within one year for a retirement
distribution, within five years for a pre-retirement distribution, and not to exceed five years in
duration in either case. The company must provide adequate security and pay interest to the
ESOP participant on the unpaid balance of an installment distribution.

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