Corporate Governance, Business Ethics, 2019-2020 Edition MA. ELENITA BALATBAT CABRERA BBA MBA CPA CMA PRESENTLY: ‘Academic and Business Consultant President and CEO, CLA Consultancy and Training Center, Inc. FORMERLY: ‘Vice Chairman and Examiner, Professional Regulatory Board of Accountancy World Bank Consultant Dean, College of Business Administration, Lyceum University of the Philippines CPA Review Director & Reviewer, Professional Review and Training Center, Inc. Professor of Accounting & Finance, University of the East, Far Eastem University, ‘Do La Salle University, Centro Escolar University, St. Scholastica’s College Audit Staff, SGV and Co., CPAs GILBERT ANTHONY B. CABRERA BBA MBA CPA PRESENTLY: : Vice President - Risk and Finance, Global Insurance Brokerage, USA. FORMERLY: : ‘Chief Financial Officer, Food Retail Conglomerate, USA. Senior Auditor, SGV and Co., CPAs Accounting Instructor Liniversity of Maryland, Robert Smith Schoo! of Business University of the East, ManilaPhilippine Copyright, 2019 by MA. ELENITA BALATBAT CABRERA GILAD BOBYA. CABRERA Any copy of this book not bearing the signature of the author(s) shall be considered as proceeding from an illegal source. The Internet addresses listed in the text were accurate at the time of publication, The inclusion of a website does not indicate endorsement by the authors or GIC Enterprises & Co, Ine. and they do not guarantee the accuracy of information | presented ai these sites. ALL RIGHTS RESERVED ISBN; 978-621-416-073-0 Published & Printed by: GIC ENTERPRISES & CO., INC. ‘National Book Development Board Registered 2017 C. M. Recto Avenue, Manila PhilippinesAbout the Authors Ma. Elenita B. Cabrera BBA MBA CPA CMA Dean Cabrera graduated Magna Cum Laude from the University of the East with a degree of Bachelor of Business Administration, major in Accounting and was one of the topnotchers when she passed the CPA Licensure Board Examination. She earned her Master in Business Administration major in Financial Management from the University of the Philippines and is a candidate for Doctor of Education at the University of the East. She.is a holder of a Certificate in Management Accounting from the Institute of Certified Management Accountants of Victoria, Australia. Dean Cabrera worked with SGV & Co. as Staff Auditor. She taught Financial Accounting, Financial Management, Management Advisory Services, Auditing Theory and Practice in various colleges and universities and authored books in these subjects. She previously held the position of Dean of the College of Business Administration at the Lyceum of the Philippines University. A former Vice Chairman of the Professional Regulatory Board of Accountancy, she was the BOA representative to the Financial Reporting Standards Council (FRSC), Philippine Interpretations Committee (PIC) and Auditing and Assurance Standards Council (AASC). She served as the Chairman of the PRC CPE Couneil for Accountancy and Chairman of the CHED Technical Committee for Accountancy Education. She was a World Bank Project Consultant on the creation of an Accounting Oversight Board in the Philippines. She was a recipient of the Philippine Institute of Certified Public Accountants (PICPA) awards as Outstanding CPA in Education, Honorary Life Membership, Distinguished Accountancy Author and 2018 Accountancy Hall of Fame. Gilbert Anthony B. Cabrera BBA MBA CPA Gilbert received his bachelor's degree in Accountancy from the University of the East, Cum Laude. He oblained a Master in Business Administration degree with concentrations on Intemational Finance and Accounting from the University of Maryland, College Park, Robert H. Smith School of Business. A certified public accountant, he has public accounting experience with SGV & Co. (Emst and Young Member Firm) and teaching experience with the University of the East, Manila and University of Maryland, Robert H. Smith School of Business. Presently; he is ~ Vice-President, Risk and Finance, of Global Insurance Brokerage in California, USA. An active member of the Association of Filipino Finance Managers in California, he is also a former Board Member of Bay Area Red Cross.Preface The business environment continues to change in dramatic ways and university graduates Joining the corporate world or entering the accountancy profession, whether it be in the public practice sector, management accounting practice, intemal audit or accounting information system management, must be prepared for a high standard of responsibilty. This textbook on Corporate Governance, Business Ethics, Risk Management and Internal Control, aims to equip its readers the basic knowledge, skills and perspective that are necessary in facing this Challenge. Having a solid understanding of fundamental business, its governance, risk management, ethical practices and intemal contral will become even more important in a world of advancing technology. While businesses in different industry have strikingly different characteristics, most have some fundamental characteristics in common. A fundamental widely accepted mode! of business consists of govemance, objectives, strategies, business processes, risks, controls and reporting. This book is organized to provide authoritative, practical and contemporary content as follows: Unit |- Corporate Governance This unit descrites corporate govemance and the partes involved in it It discusses the structure that specifies the distribution of rights and responsibilities among different participants in a corporation. It also spells out the rules and procedures for making decisions on corporate affairs. Unit Il - Business Ethics This unit discusses the various forms of unethical business practices. It also articulates how to institutionize integrity in ell aspects of business process and how business with integrity enjoys competitive advantage in both government and private transactions. Unit Ill - Risk Management This unit emphasizes the nature, forms and basic management of risks related to business. Unit IV - Internal Control: A Vital Too! in Managing Risk This unit articulates the nature, scope, elements and importance of internal control. It also covers extensive discussion of what how fraud can be prevented, detected and reduced if not fully eliminated in an enterprise. The end of chapter materials have been thoroughly chosen and streamlined to be much more user friendly. Special thanks to our families for their continued support and encouragement, £22. g.8.8.Preface UNIT Chapter Chapter Chapter Chapter UNIT Chapter Chapter Chapter Chapter Chapter Chapter 0 Contents in Brief CORPORATE GOVERNANCE INTRODUCTION TO CORPORATE GOVERNANCE CORPORATE GOVERNANCE RESPONSIBILITIES AND ACCOUNTABILITIES SECURITIES AND EXCHANGE (SEC) COMMISSION CODE OF CORPORATE GOVERNANCE SEC CODE OF CORPORATE GOVERNANCE, CONTINUED BUSINESS ETHICS INTRODUCTION TO ETHICS BUSINESS ETHICS COMMON UNETHICAL PRACTICES OF BUSINESS ESTABLISHMENTS ETHICAL DILEMMA ADVOCACY AGAINST CORRUPTION INITIATIVES TO IMPR OVE AND REDUCE coRRUPTION ESS ane 26 76 93 103 109 121 128 146UNIT i Chapter Chapter 12 UNIT Iv Chapter 13 Chapter 14 Chapter 15 Chapter 16 Chapter 17 Appendices Appendix A Appendix B Appendix C Appendix =D Appendix © Appendix F Appendix G References INTRODUCTION TO RISK MANAGEMENT RISK MANAGEMENT PRACTICAL INSIGHTS IN REDUCING AND MANAGING BUSINESS RISKS INTERNAL CONTROL: A VITAL TOOL IN MANAGING RISK OVERVIEW OF INTERNAL CONTROL, FRAUD-AND ERROR ERRORS AND IRREGULARITIES IN THE TRANSACTION CYCLES OF THE BUSINESS ENTITY INTERNAL CONTROL AFFECTING ASSETS INTERNAL CONTROL AFFECTING LIABILITIES: AND EQUITY Code of Ethics for Professional Teachers International Standards for the Professional Practice of Internal Auditing International Standards of Ethical Conduct for Practitioners of Management Accounting Code of Business Conduct and Ethics of a Telecommunications Company Code of Business Conduct and Ethics of a Manufacturing Company Code of Business Conduct and Ethics of a Commercial Bank ‘ Partial List of Organizations who are actively Participating in the “Integrity Initiative” ‘Campaign against Corruption Wi 162 163 180 195 196 217 232 244 264 273 281 283 287 293 303 307 311w Contents Preface I CORPORATE GOVERNANCE Chapter 1 INTRODUCTION TO CORPORATE GOVERNANCE UNIT Expected Learning Outcomes What is Governance? Characteristics of Good Governance Corporate Governance: A Overview Purpose of Corporate Governance Objectives of Corporate Governance Basic Principles of Effective Corporate Governance illustrative Application of the Basic Principles of Corporate Governance and Best Practice Recommendations Review Questions 2 CORPORATE GOVERNANCE RESPONSIBILITIES AND ACCOUNTABILITIES Expected Learning Outcomes Chapter Introduction Relationship between Shareholders / Owners and Other Stakeholders Parties involved in Corporate Governance Their Respective Broad Role and Specific Responsibilities ° Shareholders * Board of Directors © Non-Executive or Independent Directors © Management © © Audit Committees + Regulators Board of Accountancy ° External Audit © Internal Audit Review Questions NaaueW w ©SECURITIES AND EXCHANGE COMMISSION (SEC) CODE OF CORPORATE GOVERNANCE Expected Learning Outcomes The Board's Governance Responsibilities Principles 1 to7 Disclosure and Transparency Principles 8 10 11 Internal Control System and Risk Management Framework Principle 12 Cultivating a Synergies Relationship with Shareholders Principle 13 Duties to Stakeholders Principles 14 t0 16 Introduction The Code of Corporate Governance Objective Approach Organization Recommendation Explanations Coverage Definition of Terms The Board's Governance Responsibilities Establishing a Competent Board Establishing Clear Roles and Responsibilities of the Board Establishing Board Committees Fostering Commitment Reinforcing Board Independence ‘Assessing Board Performance Strengthening Board Ethics Enhancing Company Disclosure Policies and Procedure Strengthening the External Auditor's Independence and Improving Review Questions and Exercises 26 28 28 29 29 29 29 29 29 30 30 30 30 30 30 30 31 31 31 34 34 34 39 49 37 59 65 67 68 7 "4 26vi Chapter UNIT Chapter SEC CODE OF CORPORAT! £ GOVERNANCE, CONTINUED Expected Learning Outcomes Increasing Focus on Non-Financial and Sustainability Reporting / Promoting a Comprehensive and Cost-efficient ‘Access to Relevant Information Serengthening the Internal Control System and Enterprise Risk Management Framework Cultivating a Synergic Relationship with ‘Shareholders Respecting Rights of Stockholders and Effective Redress for Violation of Stakeholder's Rights Encouraging Employees Participation Encouraging Sustainability and Social Responsibility Review Questions Il BUSINESS ETHICS INTRODUCTION TO ETHICS Expected Learning Outcomes Introduction Characteristics and Values Associated with Ethical Behavior Why is Ethical Behavior Necess ary? Why do People Act Unethically? i Categories of Ethical Principle The Need for Professional Ethics Review Questions 76 7 B 94 95 96 98 8 100 102 76 93 4Chapter 6 BUSINESS ETHICS Expected Learning Outcomes Basic Concept of Business Ethics Purposes of Business Ethics Main Purpose Special Purpose , Scope and Impact of Business Ethics Economic Impact Social Impact Environmental Impact Impact on Business Managers Ethical Challenges in Today's World Review Questions Chapter. 7 COMMON UNETHICAL PRACTICES OF BUSINESS ESTABLISHMENTS Common Unethical Practices of Business Establishments, Misrepresentation and Over Persuasion Direct Misrepresentation Deceptive packaging Misbranding or mislabeling False or misleading advertisement Adulteration Weight understatement Measurensent understatement Quantity understatement Indirect Misrepresentation Caveat emptor Deliberate withholding of information Passive deception Over Persuasion Corporate Ethies Unethical Practices of Corporate Management Board of Directors Executive Officers and Lower Level Managers Some Unethical Practices of Employees Review Questions 103 104 104 104 104 105 106 106 106 106 107 108 109 110 110 110 10 110 110 ww i WW 2 M12, 112 112 M2 113 113 13 113 114 17 19 vil 103, 109vill 8 ETHICAL DILEMMA Chapter Expected Learning Outcomes 1, Introduction ee Resolving Ethical Dilemmas 122 ‘Mlustrative Case: Resolving an Ethical Dilemma 122 Ethical Issue 18 Who is Affected and How is each Affected 123 Bert's Available Alternatives 124 Consequences of Each Alternative 124 Appropriate Action Bs Review Questions and Exercises 126 Chapter. 9 ADVOCACY AGAINST CORRUPTION Expected Learning Outeomes 128 What is Corruption? — - 129 What does Corruption Look Like? 130 Why and how does a Person Become Corrupt? 131 IU Effects of Corruption 131 Characteristics of Corruption 133 The Philippine Corruption Report 137 sudicial System 137 Police 8 Public Services B Land Administration 5 Tax Adminisiration be Customs Administration fe Public Procurement Pid Natural Resources Be Prevention of Corruption ie Clear Business Process = ia sole on Gifts and Entertainment ie aration of Conflict of inte 2 : rest Convenient Corruption Reporti re Efforts to Curb Corruption Throwek paeeeh Y Vigilance of Civil Sociery 48" Legislation Ia 143 Review Questions 145Chapter 10 INITIATIVES TO IMPROVE BUSINESS ETHICS AND REDUCE CORRUPTION ide Expected Learning Outcomes 146 Introduction 147 The Iniegrity Initiative Campaign 147 Corporate Values isa Need for a Code of Conduct 149 The Unified Code of Conduci for Business 150 ~ Top Management 1350 Human Resources 130 Sales and Marketing 150 Finance and Accounting et Procurement ' Logistics (52 Implementation and Monitoring 152 Bishops-Businessmen's Conference Philippines — Code of Ethics for the Philippine Business 153 Survey of Laws Advocating Business Ethics 159 Review Questions 160 UNIT III INTRODUCTION TO RISK MANAGEMENT . 162 Chapter 11 RISK MANAGEMENT 163 Expected Learning Outcomes 163 Introduction 164 Risk Management Defined 164, Basie Principles of Risk Management 165 Process of Risk Management 165 Elements of Risk Management 166 Relevant Risk Terminologies 167 1. Risk Associated with Investments 167 Il. Risks Associated with Manufacturing, Trading and Service Concerns 170 il. Risk Associated with Financial institutions 171 Potential Risk Treatments 172 Areas of Risk Management 1B Risk Management Framework 174 Steps in the Risk Management Process 175 Review Questions 128x CAL INSIGHTS IN REDUCING AND PRACTI Chapter 12 ?P ING BUSINESS RISKS MANAG g Outcomes sh Expected Learnin, Understand the ees ; rdentify and Prioritize Risks Gatto the Acceptable Level of Risk Understand Why Risks Become Reality Apply a Simple Risk Management Process Risk Assessment and Analysis Risk Management and Corurot ‘Avoiding and Mitigating Risks Create a Positive Climate for Managing Risk Overcoming the Fear of Risk Controlling and Monitoring Enterprise-wide Risk Practical Considerations in Managing and Reducing Financial Risk Improving Profitability Assessinent of Market and Exit Barries Break-even Analysis Controlling Costs Practical Techniques to Improve Profitability Avoiding Pitfalls Review Questions and Exercises UNIT IV INTERNAL CONTROL: ‘ A VITAL TOOL IN MANAGING RISK Chapter 13 OVERVIEW OF INTERNAL CONTROL, Expected Learning Outcumes Nature and Purpose of Internal Control Internal Control System Defined Elements of Internat Control A. Coniral Environment B. Entity's Risk Assessment Process C._ Information System, including the Business Processes, Relevant to Financial Reporting and Communication D. Control Activities E. Monitoring of Contrals Review Questions and Exercises 180 180 181 181 183 183 184 184 185 186 186 187 187 188 188 189 189 190 191 192 194 195 196 196 197 197 198 198 198 203 205 210 2ulChapter Chapter 4 15 FRAUD AND ERROR Expected Learning Outeomes ‘Introduction Types of Misstatements Misstatemenis arising from Misappropriation of Assets Misslatements arising from Fraudulent Financial Reporting The Fraud Triangle Incentives or Pressure to Commit Fraud Opportunities to Commit Fraud Rationalizing the Fraud Risk Factors arising from Misappropriation uf Assets Risk Factors arising from Fraudulent Financial Reporting Responsibility for the Prevention and Detection of Fraud ¢ Review Questions and Exercises ERRORS AND IRREGULARITIES IN THE TRANSACTION CYCLES OF THE BUSINESS ENTITY Expected Learning Outcomes Sales and Collections Cycle ‘Errors in Recording Sales Collections Transactions Frauds in sales and Collections Acquisition and Payments Cycle ‘Errors in the Acquisitions and Payments Cycle Frauds in the Acquisitions and Payments Cycle Payroll and Personnel Cycle Errors Frauds involving Payroll Review Questions and Exercises 217 218 218 218 219 219 220 220 221 223 224 226 227 232 233 233 233 235 235 236 237 237 237 239 xi 217 232xii Chapter 16 INTERNAL CONTROL AFFECTING ASSETS Expected Learning Outcomes 244 ‘omtrol over Cash Transactions 245 ee Misstatements — Cash Receipts 246 Potential Misstatements — Cash Disbursements 248 Internal Control over Financial Investments 249 Potential Misstatements — Financial Investments 250 Internal Control over Receivables 251 ‘Sources and Nature of Notes Receivable 251 Internal Control of Accounts Receivable and Revenue 251 Control Environment 252 Potential Misstatements — Revenue / Receivables 252 Internal Control over Notes Receivable 254 Internal Control over Inventories and Cost of Goods Sold 255 Sources and Nature of Inventories and Cost of Goods Sold 255 Potential Misstatements — Inventory / Cost of Goods Sold 256 Internal Conirol over Property, Plant and Equipment 257 Potential Misstaremenus ~ Investments in Property, Plant and Equipment 259 Review Questions and Exercises 260 Chapter’ 17 INTERNAL CONTROL AFFECTING LIABILITIES AND EQUITY 264 Expected Learning Outcomes 264 Internal Control over Avcounis Payable 265 Potential Misstatements ~ Accounts Payable 266 dmernal Control over Other Debts 267 Internal Control over Debt Authorization by the Board of Directors 267 Use of an Independent Trustee 268 uw, mares Payments of Boards and Notes Payable 268 trol over Owners’ Equity 268 Internal Control on Equity 269 & ey a Shore Capital Transactions by the Independent Regis a a Ta a “gistrar and Stock Transfer Agent 269 ternal Control over Dividends 270 Review Questions and Exercises ail 244Appendices Appendix Appendix Appendix Appendix Appendix Appendix Appendix References G ‘Code of Ethics for Professional Teachers International Standards for the Professional Practice of Internal Auditing International Standards of Ethical Conduct for Practitioners of Management Accounting, Code of Business Conduct and Ethics ot'a Telecommunications Company Code of Business Conduct and Ethics ofa Manufacturing Company Code of Business Conduct and Ethics of a Commercial Bank Partial List of Organizations who are actively Participating in the “Integrity Initiative” Campaign against Corruption 273 281 283 287 293 303 aditUNITI CORPORATE GOVERNANCE Chapter 1 Introduction to Corporate Governance Corporate Governance Responsibilities and Accountabilities Securities and Exchange Commission (SEC) Code of Corporate Governance SEC Code of Corporate Governance, ContinuedChapter INTRODUCTION TO CORPORATE GOVERNANCE Expected Learning Outcomes After studying the chapter, you should be able to... 1. 2 Describe what governance involves Enumerate the different contexts in which governance can be applied Name and explain the characteristics of good governance Explain the meaning, purpose and objectives of corporate governance . Know and describe the principles of effective corporate governance Understand how the principles of aoe p good corporate governance QU syCHAPTER 1 INTRODUCTION TO CORPORATE GOVERNANCE WHAT IS GOVERNANCE? Generally, governance Téfers t5"a process whereby elements in Society Wisld It comprises all the processes of governing — whether undertaken by the government of a country, by a market or by a network — over a social system and whether through the laws, noims, power or language of an organized society. Governance therefore (or not implemented) through the exercise of power or authority by leaders of the country and / or organizations. Governance can be used in several contexts such as corporate governance, international governance, national governance and local. governance. The focus of this book is on Corporate Governance. CHARACTERISTICS OF GOOD GOVERNANCE Whatever context good governance is used, the following major characteristics should be present: Rule of Law a | "T pecountabilty a Transparency = govenvance ZN “Responsiveness auity 8 Incusveness | Consensus _ Oriented4 Chapter 1 These characteristics Participation Rule of Law Transparency Responsiveness Consensus Oriented are briefly described as follows: articipation could be either direct or itimate institutions or representatives. It is Hee ‘p point cout that representative democracy does not necessarily “mean that the concern of the most vulnerable in society would not be taken into consideration in decision making. Participation needs to be informed and organized. This means 0 sociation and expression on one hand and an organized civil society on the other hand. Good governance i s that are It also requires full protection of human rights, particularly those of minorities. Impartial enforcement of laws requires an independent judiciary and an impartial and incorruptible police force. Transparency means that decisionsytaken and their . enforcement at and regulations. It means’ that information is freely available and directly accessible’ to those who will be affected by such decisions and their enforcement. It also means that enough information is provided and that it.is provided in easily understandable forms and media. Good governance requires that institutions and am timeframe. Good governance requirestimediation of the different ‘to reach a broad consensus on what is~ interests in society canbe achieved) It also requires a broad and long-term perspective on what is needed for sustainable human development and ‘how to achieve the goals of such development, This can only result from an understanding of the historical, cultural and social contexts of a given society or community.Introduction to Corporate Governance 5 Sgulty & "Ensures that all its members feel that they have a stake in it, Inclusiveness and do not feel excluded from the mainstream of society. This requires all groups, but particularly the most vulnerable, have opportunities to improve or maintain their well being. Effectiveness Good governance means that processes and institutions Efficiency produce results that meet the needs of society while making the best use of resources at their disposal. The concept of efficiency in the context of good governance £ also covers the sustainable use of natural resources and the protection of the environment. Accountability Accountability is a key requirement of good governance. Not only governmental institutions but also the private sector and civil society organizations must be"accountable . Who is accountable to whom varies depending on whether decisions or actions taken are internal or external to an organization or institution. In general, an organization or an institution is accountable to those who will be affected by its decisions or actions. Accountability cannot be- enforced without transparency and the rule of law. CORPORATE GOVERNANCE: AN OVERVIEW Corporate governance |. It basically involves balancing the interests of a company’s many si olders, such as shareholders, management, customers, suppliers financiers, government and the community. Corporate governance is a topic that has received growing attention in the public in recent years as policy makers and others become more aware of the contribution good corporate governance makes to financial market stability and economic growth. Good corporate governance is all about controlling one’s business and so is relevant, and indeed vital, for all organizations, whatever size or structure.6 Chapter - re specifies the distribution of rights and pants in the corporation, such as the board, keholders, and spells out the rules and Mairs. By doing this, it also set and the means of The corporate governance structure | responsibilities among different partici managers, shareholders, and other stal procedures for making decisions on corporate @ provides the structure through which the objectives are attaining those objectives and monitoring performance, PURPOSE OF CORPORATE GOVERNANCE ‘The purpose of corporate governance i simple terms, the fundamental aim ol corporate governance is to enhance shareholders’ value and protect the interests of other stakeholders by improving lity. It is also about what the board of the corporate performance and accountabil u directors of a company does, how it sets the values of the business firm. OBJECTIVES OF CORPORATE GOVERNANCE ‘The following are the basic objectives of corporate governance: L. Fair and Equitable Treatment of Shareholders A corporate governance structure @nsures equitable land fair treatmentiof some organizations, a group of hig! net-worth individual and institutions who have a substantial proportion of their’ portfolios invested in the company, remain active through occupation of top-level positions that enable them to guard their interest. However, all shareholders deserve equitable treatment and this equity is safeguarded by a good governance structure in any organization. 2. Self-Assessment Corporate governance enables’ firms to assess their behavior and actions” e r Business establishments with a strong corporate governance system are better able to limit exposure to regulatory risks and fines. An active and independent board can successfully point out deficiencies or loopholes in the company operations and help solve issues internally on a timely basis.a Introduction to Corporate Governance 7. 3. Increase Shareholders? Wealth cer enassorerances main ijeiie is to protect the longs > Firms with strong corporate overnanc h ; ae structure are seen to have higher valuation attached to their shares by businessmen. This only reflects the positive perception that good corporate governance induces potential investors to decide to invest ina company 4. Transparency and Full Disclosure Good corporate governance aimsijatiiensuringsiashighensdegree sof ency by encouraging full disclosure of transactions in the company accounts. BASIC PRINCIPLES OF EFFECTIVE CORPORATE GOVERNANCE Effective corporate governance is and includes both strategic and operational risk management. It is concerned in both the long-term earning potential as well as actual short-term earnings and holds directors accountable for their stewardship of the business. ‘The basic principles of effective corporate governance are threefold as presented below: Transparency and Full Disclosure Is the board telling us what is going on? Accountability Is the board taking responsiailty? Good and Effective Governance Corporate Control {s the boat doina the right thing? | Ce ee‘ons indicate a firm’s conformance and Positive answers to the following que: compliance with the basic principles of good corporate governance: ‘Transparency and Full Disclosure © Does the board meet the information needs of investment communitie: Does it safeguard integrity in finaneial reporting? Does the board have sound disclosure policies and practices? > Does it make timely and balanced disclosure? > Can an outsider meaningfully analyze the organization's actions and performance? B. Accountability Does the board clarify its role and that of management? > Does it promote objective, ethical and responsible decision making? > Does it lay solid foundations for management oversight? > Does the composition mix of board membership ensure an appropriate range and mix of expertise, diversity, knowledge and added value? > Is the organization’s senior official committed to widely accepted standards of correct and proper behavior? C. Corporate Control ¢ Has the board built long-term sustainable growth in shareholders? value for the corporation? * Does it create an environment to take risk? > Does it encourage enhanced performance? > Does it recognize and manage risk? > Does it remunerate fairly and responsibly? > Dogs it.recognize the legitimate interests of stakeholders? > Are conflicts of interest avoided such that the organization's best interests prevail at all times?Introduction to Corporate Governance _ 9 ILLUSTRATIVE APPLICATION OF THE BASIC PRINCIPLES OF CORPORATE GOVERNANCE AND BEST PRACTICE RECOMMENDATIONS, Principles of Good Corporate Governance Best Practice Recommendations 1. Acompany should lay solid foundation for menagement and oversight. It should recognize and publish the respective roles and responsibilities of board and management. {-a, Formalize and disclose the functions reserved lo the board and those delegated to management 2. Structure the board to add value, Have a . board of an effective composition, size and commitment to adequately discharge its responsibiities and duties. , 2a, Aboard should have independent directors. 2b. The roles of chairperson and chief executive officer should not be exercised by the same individuel. 2b. The board should establish a nomination committee 3. Promote ethical and responsible decision- making, Actively promote ethical and responsible decision-making, 3a, Establish a code of conduct to guide the directors, the chief executive officer (or equivalent), the chief financial officer (or equivalent) and any other key executives asto: «The practices necessary to maintain confidence in the company's integrity; and © The responsibilty and accountability of individuals for reporting and investigating reports of unethical practices 3b, Disclose the policy concerning trading in, company securities by directors, officers and employees.10 Chapter t 4. Safeguard integrity in financial reporting. Have a structure to independently verify ‘and safeguard the integrity of the ‘company's financial reporting, 4a. Require the chief executive of (or equivalent) and the chief financial officer (ar equivalent) to state in writing to the board that the company's financial reports presenta true and fair view, in all material respects, of the company's financial condition and operational results and are in accordance with relevant accounting standards. 4-b. The board should establish an audit commitiee. 4-6, Structure the audit committee so that it consists of: © Only non-executive or independent directors; An independent chairperson, who is not chairperson of the board; and * Atleast three (3) members. 5. Make timely and balanced disclosure. 5-a, Establish written policies and Promote timely and balanced disclosure of procedures designed to ensure all material matters concerning the compliance with IFRS. company. 5-b. Listing Rule disclosure requirements and to ensure accountability at a senior management level for compliance. 6. Respect the rights of shareholders and facilitate. the effective exercise of those fights. 6-a. Design and disclose a communications strategy to promote effective communication with shareholders and encourage effective participation at general meetings. Request the external auditor to attend the annual general meeting and be available to answer shareholder questions about the audit. Bb.Introduction to Corporate Governance _ | 7. Recognize and manage risk. Eslabi lablish a ‘sound system of risk oversight and Management and internal control. T-a. The board or appropriate board commiltee should establish policies on tisk oversight and management. The chief executive officer (or equivalent) and the chief financial officer (or equivalent) should stale to the board in writing that: © The statement given in accordance with best practice recommendation 4-a (the integrity of financial statements) is founded on a sound system of risk management and internal compliance and control which implements the policies adopted by the board; and © The company's risk management and intemal compliance and cconiral system is operating efficiently in all material respects. 2a. Encourage enhanced performance. Faily review and actively encourage enhanced board and management effectiveness. Be . Disclose the process for performance evaluation ofthe board, its committees and individual directors, end key executives. Remunerate fail and responsibly. Ensure that the level and composition of remuneration is sificient and reasonable and that its relationship to corporate end individual performance is defined. 9-a, Provide disclosure in relation to the company's remuneration policies to enable investors to undérstand: * The casts and benefits of those policies; and «The link between remuneration paid to directors and key executives and corporate performance. &b. The board should establish a remuneration committee. 9-c. Clearly distinguish the structure of non- executive director's remuneration from that of executives. 9-d, Ensure that payment of equity-based executive remuneration is made in accordance with thresholds set in plans approved by shareholders.12_Chapter | 70. Recognize the legitimate interests of stakeholders. Recognize legal and other . Establish and disclose a code of we ‘conduct to guide compliance with legal and other obligations to legitimate obligations to all legitimate stakeholders. sence, REVIEW QUESTIONS Questions Ts 2. What does governance mean? Explain whether the following statement is true or false. “Governance is exercised only by the government of a country”. Explain how governance can be used in the following contexts and give appropriate examples: a. national governance b. local governance ¢. corporate governance d. international governance Explain briefly the cight (8) basic characteristics of good governance. ‘Transparency and accountability are synonymous. Explain whether the statement is correct or not. Explain whether the following statement is true or false. usually results to effectiveness and: efficiency”. “Responsiveness Define corporate governance. What does corporate governance structure involve? State the purpose of corporate governance. . Explain the basie objectives of corporate governance. - Explain the three basic principles of effective corporate governance.Introduction to Corporate Governance 13 Multiple Choice Questions lL. The basic principle of “transparency and full disclosure” for effective Corporate governance responds positively to the following questions except. as b. Does the board of directors safeguard integrity in financial reporting? Does the board meet the information needs of investment communities? € Can an outsider meaningfully analyze the firm’s actions and performance? d. Has the board -built long-term sustainable growth in shareholders’ value for the corporation? The basic principle of “accountability” for effective governance answers the following questions positively, except a. Does the board recognize and manage risk? b. Does the board lay solid foundations for management oversight? c, Does the’ composition mix of board membership ensure an appropriate range and risk of expertise diversity, knowledge added value? d. Does the board promote objective, ethical and responsible decision making? “Transparency and full disclosure” principle advocates the following except . | a. Sound disclosure policies and practices b. Solid foundations for management oversight c. Meeting the information needs of investment communities d. Safeguards integrity in financial reporting ‘The ‘rights of shareholders can be effectively upheld through the following measures except : a. By establishing an audit committee ao b. By designing and disclosing a communications strategy to promote affective communication with shareholders. c. By encouraging active participation at general meetings. d, By requiring the external auditor to attend the annual general meeting and to answer questions about the audit.14 Chapter 1 3. al reporting, the business firm should do To safeguard integrity in finanei the following except a. Establish an audit committee . b, Request the external auditor to attend the annual general meeting ©. Disclose the functions reserved to the board and those delegated to management : d. Disclose the policy concerning trading in company securities by directors, officers and employees. To encourage enhanced performance by the board and management, itis recommended that the following should be adopted except fa, Disclosure of the process for performance evaluation of the board, its committees, individual directors and by executives. b, A remuneration committee c. Distinguish between non-executive director’s remuneration’ from that of executives, d: Establish policies on risks oversight and management The characteristic of good governance where fair legal framework are enforced impartially is a. Participation b. Rule of Law ce. Equity d, AccountabilityCORPORATE GOVERNANCE RESPONSIBILITIES AND ACCOUNTABILITIES Expected Learning Outcomes After studying the chapter, you should be able to... 1. Explain the relevance of good governance to both large publicly-listed companies and SMEs 2. Know the relationship between shareholders or owners and other stakeholders 3. Identify the parties involved in Corporate Governance 4. Describe the respective broad rate and specific responsibilities of the different parties in a corporate setting LUGSCHAPTER 2 CORPORATE GOVERNANCE RESPONSIBILITIES AND ACCOUNTABILITIES INTRODUCTION Many of the characteristics of good governance described in Chapter | are relevant to both SME's and large listed public companies. As an organization grows in size and influence, these issues become increasingly important. However, it is also important to recognize that good corporate governance Is based on principles underpinned by consensus and continually developing notions of good practice. There are no absolute rules which must be adopted by all organizations. "There is no simple universal formula for good governance”. Instead emphasis is many localities, has been to encourage organizations to give appropriate attention to the principles and adopt approaches which are tailored to the specific needs of an organization at a given point in time. When corporate governance is discussed, it is often spoken of in terms of a company's corporate governance framework. The key elements within an effective governance framework, and the issues relating to each element, are set out on the following pages and are relevant to organizations large and small, in both the private and the public sectors. The table provides a useful structure for any company to consider its own approach to corporate governance and the matters which may assist it to achieve its strategic objectives. Many of the matters listed may not be directly relevant in all situations and some may not, in particular circumstances, be within the board's control, but it provides a useful context in which any organization can consider its governance needs so that they might be most appropriately addressed. The essence of any system of good corporate governance is to allow the board and management the freedom to drive their organization forward and to exercise that freedom within a framework of effective accountability.spunsibilities und clecounabilities 17 RELATIONSHIP BETWEEN SH! ce Rie AND OTHER STAREROLD rae SE AREHOLDERS / OWNER(S) The relationship between the shareholders / owners, management and other stakeholders in a corporation is shown below. Public Corporation Stakeholders Board of Shareholders 7 Directors Owners Executive External Delegate Management Have Auditors Sharcholders / Owners > Responsibilities | [— Operational ||| Accountabilties, [Regulators Management internal Society and Auditors Others Governance st through an elected board of directors to management and, in tum, to operating units with oversight and assistance from internal auditors. The board of directors and its audit committee oversee management and, in that role, are expected to protect the shareholders’ rights However, it is important to recognize that management is part of the governance framework; management can influence who sits on the board and the audit committee as well as other governance controls that might be put into place. In return for the responsibilities (and power) given to management and the board, governance demands accountability back through the system to the shareholders However, the accountabilities do not extend only to the shareholders. Companies also have responsibilities to other stakeholders. Stakeholders can be anyone who is influenced, whether directly or indirectly, by the actions of a company. Management and the board have responsibilities to act within the laws of society and to meet various requirements of creditors, employees and the stakeholders.1S_ Caspeer 2 A broad group of stakeholders has an interest in the quality of comorate governance because it has a relationship to economic performance and the quality of financial reporting. For example, itis likely that many employees hen significant finds invested in pension plans. Those pension plans are designe ie protect the financial interests of those employees in their retirement. We use the word society in the diagram to indicate those broad interests. Ina similar fashion, employees and creditors have a vested interest in the organization and how it is governed. Regulators are a response to sociefy’s wishes to. ensure that organizations. in their pursuit of retums for their owners, act responsibly and operate in compliance with relevant laws. While shareholders / owners delegate responsibilities to various parties within the corporation, they also require accountability as to how well the resources ‘that have been entrusted to management and the board have been used. For example, the owners want accountability on such things as: © Financial performance * Financial ransparency — financial statements that are clear with full disclosure and that reflect the underlying economics of the company. © Stewardship, including how well the company protects and manages the resources entrusted to it. * Quality of internal control * Composition of the board of directors and the nature of its activities, including information on how well management incentive systems are aligned with the shareholders’ best interests. ‘The owners want disclosures from management that are accurate and objectively verifiable. For instance, management has a respensibility to provide financial reports, and in some cases, reports on internal control effectiveness. Management bas always had the primary responsibility for the accuracy and completeness of an organization's financial statements. From a financial Teporting perspective, it is management's responsibility to: * Choose which accounting principles best Portray the economic substance of company transactions. © Implement a system of internal contro! that assures completeness and accuracy in financial reporting. ¢ Ensure that the financial statements contain accurate and complete disclosure.Corporate Governance Responsibilities and Accountabilities 19 PARTIES INVOLVED IN CORPORATE GOVERNANCE: THEIR RESPECTIVE BROAD ROLE AND SPECIFIC RESPONSIBILITIES Corporate governance and financial reporting reliability are receiving considerable attention from a number of parties including regulators, standard setting bodies, the accounting profession, lawmakers and financial statement users. Party” Overview of Responsibilities 1. Shareholders’ Broad Role: ‘approval of ritgjor initiatives such as buying or selling stock, annual feports on management compensation, from the board. . Board of Directors | Broad Role: ‘The major representative:of stockholders to ensure that the organization is run acooraing to the organization's charter and that there is proper accountability. ‘Specific activities include among others: Overall Operations «Establishing the organization's vision, mission, values and ethical standards, © Delegating an appropriate level of authority to management © — Demonstrating leadership. ¢_Assuming responsibilty for the business telationship with CEO including his or her ‘appointment, succession, performance ‘ remuneration and dismissal. © Overseeing aspects of the employment of the management team including management temuneration, performance and succession planning. = Recommending auditors and new directors to shareholders. «Ensuring effective communication with shareholders other stakeholders. © Crisis management. * Appointment of the CFO and corporate secretary.20 Chapter? 2, Performance 4. Ensuring the organization's long term viability and enhancing the financial position , Formulating and overseeing Implementation of rate strategy. i Annoy the ma, budgel and corporate policies. Agreeing key performance indicators (KPIs) Monitoring / assessing assessment, performance of the organization, the board itself, management and major projects. Hi the risk management framework and monitoring business risks, ‘© Monitoring developments in the industry and the operating environment. a © Oversight of the and organization, including its control and accountabilily systems. © Approving and monitoring the progress of major expenditure, capital management and sitions and divestitures. 3. Compliance / Legal Conformance © Understanding and protecting the organization's financial position. Requiring and monitoring legal and regulatory compliance ineluding compliance with accounting standards, unfair trading legislations, occupational health and safety and environmental standards. © Approving annual financial reports, annual reports and other public docurnents / sensitive reports. ‘« Ensuring an effective system of internal controls exists and is operating as expected, 3. Non-Executive or Independent Directors Broad Role; The same as the broad role of the entire board of directors & include among others: * to understand the organization, its business, its Operating environment and its financial Position, * to apply expertise and skills in the organization's best interests, * — loassist management to keep performance objectives at the top of its agenda,Corporate Governance Responsibilities and Accountabilities 21 © to understand that his/her role is not to act as auditor, nor to act as a member of the management team, i ‘© lorespect the collective, cabinet nature of the board's decisions, © to prepare for and altend board meetings, © to'seek information on a timely basis to ensure that helshe is in a position to contribute to the discussion when a matter comes before the board, or alert the chairman in advance to the need for further information in relation to a particular matter, and e _ to.ask appropriate questions relative to operations. 4, Management Broad Rol O Manage the organization ‘offectvely; provide accurate and timely reports to shareholders and other stakeholders. Specific activities include among other recommend the strategic direction and translate the strategic plan into the operations of the business manage the company’s human, physical and financial resources to achieve the organization's objectives — run the business assume day to day responsibly for the organization's conformance with relevant laws and regulations anid its compliance framework davelop, implement and manage the organization's risk management and internal contol fremeworks ' develop, implement and update polices and procedures be elert to relevant trends in the industry and the organization's operating environment provide information to the board got as conduit between the board and the organization developing financial and other reports that meet public, stakeholder and regulatory requirements.22_ Chapter 2 5. Audit Commitiees of the Board of Directors Broad Role: id the process of préparing the annual financial statements as well as public reports on internal control Specific activities include among others: © — Selecting the external audit firm © Approving any non-audit work performed by the audit firm * — Selecting and / or approving the appointment of the Chief Audit Executive (Internal Auditor) * — Reviewing and approving the scope and budget of the internal audit function ‘© Discussing audit findings with internal auditor and external auditor and advising the board (and management) on specific actions that should be taken 6 Regulators a. Board of ‘Accountaricy Broad Role: ting underlying financial reporting and auditing concepts; set the ‘expectations of audit quality and accounting quality, fic act Iclude among others: * Conducting CPA Licensure Board Examinations * Approving accounting principles * Approving auditing standards * Interpreting previously issued Standards implementing quality control processes to ensure audit quality . Educating members on audit and accounting requirements ;>. Seourltion and | Exchange Commission Corporate Gavernance Responsibilithes and Accounnabllities 2% Broad Rolo; financial and other information for pubis compa Specific activities include among others; + Reviewing flings with the SEC + Interacting with the Financial Reporting Standards Couneil in seting accounting standards + Speclying independence standards required of auditors thal report on public financial statements + Idantly corporate frauds, investigate causes, and suggest remedial actions 7. External Auditors 13d Role: statements are free of material misstatement misstatements that may be due to fraud, ‘Specific activities include among others: * Audit of public company financial statements ‘© Audits of nonpublic company financial statements Other services such as tax or consulting 8. Internal Auditors Broad Role: Perform audits of companies for compliance With company policies and laws, audits to evaluate the efficiency of operations, and periodic evaluation and tests of controls. ‘Specific activities include among others: # Reporting results and analyses to management (including operational management) and audit committees * _ Evavating internal controls24. Chapter 2 REVIEW QUESTIONS Questions 1. v we 8. 9. “Small business enterprises do not need good governance Do you agree? Explain. Does good governance require absolute rules that must be adopted by all organizations? What is the essence of any system of corporate governance? Where does the board of directors derive its authority? To whom is the board of directors accountable? ‘On what aspects do shareholders demand accountability from the board of directors? What is management's responsibility as far.as financial reporting is concemed? Describe the broad role of the shareholders in a corporation. Describe the broad role of the Board of Directors. 10. What are the specific activities of the board of directors? Multiple Choice Questions 1, Approving annual financial reports and other public documents “are specific responsibilities of a. Management b. Board of directors c. Shareholders d. Employeeswe Corporate Governance Responsibilities and Accountabilities 25 Providing oversight of the internal and external audit function, the Process of preparing the annual financial statements and public reports on internal control are the responsibility of a. Board of directors b. Chief executive officer c. Chief financial officer 4d. Audit committee of the board of directors Who is responsible for ensuring the accuracy, timeliness of public reporting of financial and other information for public companies? a. External auditors- b. Seéurities and exchange commission c. Shareholders d. Board of Accountancy Who performs audit of companies for compliance with company policies and laws, audits efficiency of operations and periodic evaluation and tests of controls? a, External auditors b. Internal auditors cc, Commission on audit d. Chief accountant An independent director is expected to a. Apply expertise and skills in the corporations best interest b. Asset management to keep performance objectives at the top of its agenda c. Respect the collective, cabinet nature of the board's decision d. Act as conduit between the board and the organization~~ SECURITIES AND EXCHANGE COMMISSION (SEC) CODE OF CORPORATE GOVERNANCE Expected Learning Outcomes After studying the chapter, you should be able to... 1. Understand the need for the Gode of Governance for publicly-listed companies. - 2. Know the sixteen (18) governance responsibilities of the Board of Directors of publicly-listed companies. 3. Explain the meaning of "comply and explain" approach. 4. Describe the three aspects of the Code, namely * Principles * Recommendations * Explanations 5. Know what constitutes a competent board and how can it be established. 6. Understand the composition, functions and responsibilities of the board committees that can be established such as the * Audit Committee * Corporate Governance Committee * Board Risk Oversight Committee * Related Party Transaction Committee 7. Know how the directors can show full commitment to the company 8. Understand how independence and Objectivity of the board can be teinforced and enhanced. 8. Describe how the performance and effectiveness of the board can be assessed, RamsCHAPTER 3 SEC CODE OF CORPORATE GOVERNANCE FOR PUBLICLY-LISTED COMPANIES (“CG Code for PLCs”) Securities and Exchange Commission SEC MC No, 19, Series of 2016 * On November'110:2016;'the Securities and Exchange Commission approved the Code of Corporate Governance for publicly-listed companies. Its goal is to help companies develop and sustain an ethical corporate culture and keep abreast with recent developments in corporate governance. One of its salient provisions is for publicly-listed companies to establish a code of business conduct and submit a new manual on Corporate Governance that would “provide standards for professional and ethical behavior as well as articulate acceptable and unacceptable conduct and practices”. The Board of Directors is required to implement the code and make sure that management and employees comply with the internal policies set. While many companies have already developed their Code of Business Conduct and Ethics, the real challenge is in its implementation and monitoring compliance. The SEC Code of Corporate Governance is published in this book, not only to acquaint readers particularly future professionals and businessmen of these rules and regulations but also to serve as reference and guidelines to currently existing publicly-listed corporations. (Source: www.sec.gov.ph)28 Chapter 3 _ es GOVERNANCE FOK SORPORA CODE OF PUBLICLY-LISTED COM PANIES Principle 1: Principle 2: Prineiple 3: Principle 4: Principle 5: Principle 6: Principle 7: working, board ‘The company shoutdbesheaded by-mcompetents Wire tit long-term success of the corporation, and to sustain to foster th beasts its competitiveness and profitability in a manner consistent its corporate objectives and the long-term best interests of its shareholders and other stakeholders, sponsibilities and accountabilities of the i a *s artic! id by~ Board as provided under the law, the company’s articles and by- laws, and other legal pronouncements and guidelines @hould:be» to all directors as well as to stockholders The cl and other stakeholders, to Board committe assibl support the effective performance of the Board’s functions, particularly with respect to audit, risk management, related party transactions, and other key corporate governance concerns, such as nomination and remuneration. The composition, functions and responsibilities of all committees established should be contained in a publicly available Committee Charter, To show full commitment to the company, the directors should devote the time and attention necessary to properly and effectively perform their duties and responsibilities, including sufficient time to be familiar with the corpora The Board should cndeavor to exercise objective and independent judgment on all corporate affairs, The best measure of the Board's effectiveness is through an cclauesement poner _ The Board should regularly carry out evaluations 10 appraise its performance as a body, and assess whether it possesses the right mix of backgrounds and competencies, Members of the Board are diity-bound to apply high ethical standards, taking into account the interests of all stakeholders.SEC Code of Corporate Governance _29 OSURE AND TRANSPARENCY Principle 8: The company policies and Procedures that are practical and in accordance with best Practices and regulatory expectations. Principle 9: The company ‘or, and exercise effective oversight of the same to strengthen the external auditor's independence and enhance audit quality. Principlel0: The company should eiisiifé)that material and reportable non- financial and sustainability issues are Principle 11: The company s| ita i i for disseminating relevant information. This channel is crucial for informed decision- making by investors, stakeholders and other Interested users. INTERNAL CONTROL SYSTEM AND RISK MANAGEMENT FRAMEWORK Principle 12: Tovensure'the integrity, transparency and proper governance in the conduct of its affairs, the company should heve a strong and effective internal control system and enterprise risk management framework. CULTIVATING A SYNERGIC RELATIONSHIP WITH SHAREHOLDERS We ad pany 3 , eon pe ae ne oeeresognize, protect aad failiate the exercise of Ihe rights.30_ Chapter 3 DUTIES TO STAKEHOLDERS blished by law, by contractual Principle 14: The fights of stakeholders estal a relations and through voluntary commitments must be rights and/or interests are at Where stakeholders’ 1 a id have the opportunity to obtain stake, stakeholders shoul tuni their rights. prompt effective redress for the violation of | Principle 15: A oped to create a symbiotic environment, realize the company’s goals and participate in its corporate governance processes. Principle 16: The companyrshould:be:socially:responsible in al its deslings with the communities where it operates. It should ensure that its interactions serve its environment and stakeholders in a positive and progressive manner that is fully supportive of its comprehensive and balanced development. INTRODUCTION 1. The Code of Corporate Governance is intended to raise the corporate governance standards of Philippine corporations to a level at par Write onal eandaQiobl scoUerpes The latest G20/OECD1 Principles of Corporate Governance and the Association of Southeast Asian Nations Corporate Governance Scorecard were used as key reference materials in the drafting of this Code. 2. The Code fh. This approach combines voluntary compliance with mandatory disclosure. Companies do not have to comply with the Code, but they must state ip their annual corporate governance reports whether they comply with the Code provisions, identify any areas of non- compliance, and explain the reasons for non-compliance. 3. The Code is arranged as follows: Principles, Recommendations and Explanations, THe Principles can be considered as high-level statements of corporate governance id i applicable to all companies. eae neti, anh aeSEC Code of Corporate Governance _31 The Recommendations are objective criteria that are intended tae ify the specific features of corporate governance good practice ea are recommended for companies operating according to the le. Alternatives to a Recommendation may be justified in Particular cireumstances if good governance can be achieved by Other means. When a Recommendation is not complied with, the company must disclose and describe this non-compliance, and explain how the overall Principle is being achieved. The altornative should be consistent with the overall Principle. Descriptions and explanations should be written in’ plain language and in a clear, complete, objective and precise manner, so that shareholders and other stakeholders can assess the company's governance framework. The Explanations strive to provide companies with additional information on the recommended best practice. This Code does not, in any way, prescribe a “one size fits all” framework. It is designed to allow boards some flexibility in establishing their corporate governance arrangements. Larger . companies and financial institutions would generally be expected to follow most of the Code’s provisions. Smaller companies may decide that the costs of some of the provisions outweigh the benefits, or are less relevant in their case. Hence, the Principle of Proportionality is considered in the application of its provisions. ‘The Code of Corporate Governance for publicly listed companies is the first of a series of Codes that is intended to cover all types of corporations in the Philippines under supervision of the Securities and Exchange Commission (SEC). _ Definition of Terms: Corporate Governance — ions towards their stakeholders, Bt legal and s« Corporate governance isa system of direction, feedback and control sain regulations, performance standards and ethical guidelines to Pe ihe Board and senior management accountable. for ensuring veteal behavior ~ reconciling long-term customer satisfaction with thetpolder value —t0 the benefit ofall stakeholders and society.32_ Chapter 3 Its purpose is to maximize the organization’s long-term noes creating sustainable value for its shareholders, stakeholders and the nation. Board of Directors - thesgoverningsbodyselected by tie the corporate powers Of a corporation, stockholders that exercises 0 . conducts all its business and controls its properties. Management — a ‘group of executives given the authority . Board of Directors to implement the p conduct of the business of the corporation. Independent director — a i Ider, and is free from any business or other relationship which could, or could reasonably be perceived to, materially interfere with his exercise of independent judgment in carrying out his responsibilities as a director. Executive director — a director who has’executive responsibility of day-to-day operations of a part or the whole of the organization. xecutive director — a director who has’ no’ executive and does not perform any work related to the operations of the corporation. Conglomerate — @ group of corporations that has diversified business activities in varied industries, whereby the operations of such businesses are controlled and Internal control — a\process designed and effected by the board Bi Shae ate anasto le reasonable assurance on the eset t o obj through efficient and effective operations; reliable, complete and timely financial and management information; and compliance with applicable laws, regulations, and the organization’s policies and procedures. No for Economic Co-operation and. DevelopmentSEC Code of Corporate Governance 33 Enterprise Risk Management — ‘Board of Directors, management and other personnel, applied in strategy setting and across the enterprise that is designed to identify Potential events that may affect the entity, manage risks to be within its risk appetite, and provide reasonable assurance regarding the achievement of entity objectives” Related Party — Shall cover the company’s subsidiaries, as well as affiliates and any party (including their subsidiaries, affiliates and special purpose entities), that the company exerts direct or indirect control over or that exerts direct or iridirect control over the company; the company’s directors; officers; shareholders and related interests (DOSRI), and their close family members, as well as corresponding persons in affiliated companies. This shall also include such other person or juridical entity whose interest may pose a potential conflict with the interest of the company. Related Party Transactions — 4 transfer of resources, services or i , regardless of whether a price is charged. It should be interpreted broadly to include not only transactions that are entered into with related parties, but also outstanding transactions that are entered into with an unrelated party that subsequently becomes a related party. Stakeholders - any/individual) organization or society at large who can either affect and/or be affected by the company’s strategies, policies, business decisions ‘and operations, in general. This includes, among others, customers, creditors, employees, suppliers, investors, as well as the government and community in which it operates. __ 7 Committee of Sponsoring Organizations of the Tread way Commission (coso Framework)34 Chapter 3 THE BOARD'S GOVERNANCE RESPONSIBILITIES 1. ESTABLISHING A COMP! 'T BOARD Principle and to sustain its competitiveness and profitability in a manner consistent with its corporate objectives and the long-term best interests of its shareholders and other stakeholders. . Recommendation 1.1 The Board should be composed of directors with a collective working knowledge, experience or expertise that is relevant to the company’s industry/sector) The Board should always ensure that it has an appropriate mix of competence and expertise and that its members temain qualified for their positions individually and collectively, to enable it to fulfill its roles and responsibilities and respond to the needs of the organization based on the evolving business environment and strategic direction. . Explanation Competence can be determined from the collective knowledge, evant to the industry/sector that the company is in. A Board with the necessary knowledge, experience and expertise can properly perform its task of overseeing management and governance of the corporation, formulating the corporation’s vision, mission, strategic -objectives, policies and procedures that would guide its activities, effectively monitoring management's performance and supervising the proper imple tation of the same. In this regard, for its members to facilitate the selection of potential nominees for board seats, and to serve as a benchmark for the evaluation of its performance.SEC Code of Corporate Governance _38 Recommendation 1,2 The Board sl wa Possess the necessary qualifications to effectively participate and \elp secure objective, independent judgment on corporate affairs and to substantiate proper checks and balances. Explanation The right combination of non-executive directors (NEDs), which include independent directors (IDs) and executive directors (EDs), cs tt tr slr ss in s. Further, a board composed of a majority of NEDs SS jee EIN gO the individual shareholders. The company determines the qualifications of the NEDs that enable them to effectively participate in the deliberations of the Board and carry out their roles and responsibilities. Recommendation 1.3 ‘The Company should provide in its Board Charter and Manual on Corporate Governance a policy on the training of directors, including an orientation program for first-time “directors and relevant annual continuing training for all directors. Explanation The orientation program for first-time directors and relevant annual continuing training for all directors is sugges ie orien! program for first-time directors, in any compan hours) while the annual continuing training be for at least four hours. [All directors should be properly oriented upon joining the board. This cnsures that new members are appropriately apprised of their duties and responsibilities, before beginning their directorships. The orientation program covers SEC-mandated (opics on corporate governance and an jon to the company’s business, Articles of Incorporation, and introducti Cade of Conduct. It should be able to meet the specific needs of the36 Chapter 3 any new director in individual di nd ai company and the individual directors effectively performing his or her functions. other hand, makes raining program, ati certain that the directors are continuously informed f' the es a in the business and regulatory environments, ineludi iw ents relevant to the company. It involves courses on oo or 0 rls 1K matters relevant to the company, including audit, ine eat a i management, sustainability and st , It ¥ nda Ih companies assess their own training | and develop! ea determining the coverage of their continuing training program. The annual continuing t Recommendation 1.4 The Board should have a policy on board diversity. Explanation Having a board diversity policy d. A board diversity Italso includes diversity in age, owledge. On gender he number of female policy is not limited to gender diversity. ethnicity, culture, skills, competence and kn diversity. policy, a good example is to increase tl directors, including female independent directors. Recommendation 1.5 The Board should ensure that it is assisted in its duties by a Corporate Secretary, who should be a separate individual from the Compliance Officer. The Corporate Secretary should not be a member of the Board of Directors and should annually attend a training on corporate governance. Explanation The Corporate Secretary is primarily responsible to the ‘corporation and its shareholders, i . Se auntie a. Assists the Board and the board committees in the conduct of their meetings, including preparing an annual schedule of Board andSEC Code of Corporate Governance 37 committee meetings and the annual board calendar, and assisting the chairs of the Board and its committees to set agendas for those meetings; Safekeeps and preserves the integrity of the minutes of the meetings of the Board and its committees, as well as other official records of the corporation; Keeps abreast on relevant laws, regulations, all governance issuances, relevant industry developments and operations of the corporation, and advises the Board and the Chairman on all relevant issues as they ari Works fairly and objectively with the Board, Management and stockholders and contributes to the flow of information between the Board and management, the Board and its committees, and the Board and its stakeholders, including shareholders; Advises on the establishment of board committees and their terms of reference; Informs members of the Board, in accordance with the by-laws, of the agenda of their meetings at least five working days in advance, and ensures that the members have before them accurate information that will enable them to arrive at intelligent decisions on matters that require their approval; ‘Attends all Board meetings, except when justifiable causes, such as illness, death in the immediate family and serious accidents, provent him/her from doing so; Performs required administrative functions; Oversees the drafting of the by-laws and ensures that they conform with regulatory requirements, and Performs such other duties and responsibilities as may be provided by the SEC.oe. Chapter 3 Reeommendation 1.6 Explanat . The Compliance Officer is a member of the company’s management ‘The Board should ensure that it is assisted in its duties by a Compliance Officer, who should have a rank of Senior Vie = i iti ith adequate stature an equivalent position with tl Te ee compar OF the corporation. The Compliance Officer shou! a Board of Directors and should annually attend a training on corporate governance. n team in charge of the’ compliance function, Similar to the Corporate Secretary, Is He/she has, among others, the following duties and responsibilities: a. Ensures proper onboarding of new directors (i.e., orientation on the company’s business, charter, articles of incorporation and by-laws, among others); b. Monitors, reviews, evaluates and ensures the compliance by the corporation, its officers and directors with the relevant laws, this Code, rules and regulations and all governance issuances of regulatory agencies; 9 Reports the matter to the Board if violations are found and recommends the imposition of appropriate disciplinary action; Ensures the integrity and accuracy of all documentary submissions to regulators; Bs ¢. Appears before the SEC when summoned in relation to compli: with this Code; compliance f. Collaborates with other departments to Properly address compliance issues, which may be subject to investigation; g- Identifies possible areas of compliance issues and worl resolution of the same; "evenants theEnsures the attendance of board members and key officers to relevant trainings; and Performs such other duties and responsibilities as may be provided by the SEC. 2. ESTABLIS! iG CLEAR ROLES AND RESPONSIBILITIES THE BOARD Principle The fiduciary roles, responsibilities and accountabilities of the Board as provided under the law, the company’s articles and by-laws, and other legal pronouncements and guidelines should be clearly made known to all directors as well as to shareholders and other stakeholders. Recommendation 2.1 The Board members § » wit and in the best interest of the company and all shareholders. Explanation . - There are twolkey elements of the fiduciary duty of board members:the . The duty of care requires board members ‘a: aetrOnInefully informs siti eed fainted diligence and care. The duty of loyalty is also of central importance; the board member ; and not those of the controlling company of the group or any other stakeholder. Recommendation 2.2 The Board should oversee the development of and approve the company’s business objectives and strategy, and monitor their implementation, in order to sustain the company’s long-term viability and strength.40 Chapter 3 Explanation According to the OECD, the Boara'shGulé review and guide corporate set performance ‘on and corporate performance; and acquisitions and divestitures. Sound strategic policies and objectives translate to the companyie, proper identification and prioritization of its goals and guidance on h achieve them. This creates optimal value to the corporation. objectives; monitor implementati oversee major capital expenditures, Recommendation 2.3 The Board should be headed by a competent and qualified Chairperson. Explanation The roles and responsibilities of the Chairman include, among others, the following: a. Makes certain that the meeting agenda focuses on strategic matters, including the overall risk appetite of the corporation, considering the developments in the business and regulatory environments, key governance concerns, and contentious issues that will significantly affect operations; b. Guarantees that the Board receives accurate, timely, relevant, insightful, concise, and clear information to enable it to make sound decisions; ©. Facilitates discussions on key issues by fostering an environment conducive for constructive debate and leveraging on the skills and expertise of individual directors; d. Ensures that the Board sufficiently challenges and inquires on reports submitted and representations made by Management; e. Assures the availability of proper orientation for first-time directors and continuing training Opportunities for all directors: and f. Makes sure that performance of th i t ¢ Board is evaluated at least a year and discussed/followed up on. 7SEC Code of Corporate Governance 41 Recommendation 2.4 ube beats stent be responsible for ensuring and adopting an effective envetieuea aera program for directors, key officers and management Tiel ie ‘owth and a continued increase in the shareholders’ value. is should include adopting a policy on the retirement age for directors ~ key officers as part of management succession and to promote lynamism in the corporation, Explanation The transfer of company leadership to highly competent and qualified individuals is the goal of succession planning. It is the Board's responsibility to implement a process to appoint competent; professional, honest and highly motivated management officers who can add value to the.company. A ‘fesponsibilities/ foreach "position, and should start ri identifying the key knowledge, skills, and abilities required for the position. For any potential candidate identified, a professional development plan is defined to help the individuals prepare for the job (e.g,, training to be taken and cross experience to be achieved). The process is conducted in an impartial manner and aligned with the strategic direction of the organization. Recommendation 2.5 ‘The Board should align the remuneration of key officers and board members with the long-term interests of the company. In doing so, it Should formulate and adopt a policy specifying the relationship between remuneration and performance. Further, no director should participate in Jiscussions or deliberations involving his own remuneration. Explanation Companies are able to attract and retain the services of qualified and competent individuals if the level of remuneration is sufficient, in line with the business and risk strategy, objectives, values and incorporate measures to prevent conflicts of interest. Remuneration policies promote e sound risk culture in which risk-taking behavior is appropriate. Theyay so encourage employees to act in the long-term interest of the company as a whole, rather than for themselves or their business lines only, Moreover, it is good practice for the Board to formulate and adopt a policy specifying the relationship between remuneral ion and performance, which includes specific financial and non-financial metrics to measure performance and set specific provisions for employees with significant influence on the overall risk profile of the corporation. Key considerations in determining proper compensation include the following: (1) the level of remuneration is commensurate to the responsibilities of the role; (2) no director should participate in deciding on his remuneration; and (3) remuneration pay-out schedules should be sensitive to risk outcomes over a multi-year horizon. For employees in contro! functions (e.g., risk, compliance and internal audit), their remuneration is determined independent of any business line being overseen, and performance measures are based principally on the achievement of their objectives so as not to compromise their independence. Recommendation 2.6 The Board should have and disclose in its Manual on Corporate Governance a formal and transparent board nomination and election policy that should include how it accepts nominations from minority shareholders and reviews nominated candidates. The policy should also include an assessment of the effectiveness of the Board’s processes and procedures in the nomination, election, or replacement of a director. In addition, its process of identifying the quality of directors should be aligned with the strategic direction of the company. Explanation It is the Board’s responsibility to develop a policy on board nomination, which is contained in the company’s Manual on Corporate Governance. The policy should encourage shareholders’ participation by including procedures on how the Board accepts nominations from minority shareholders. The policy should also promote transparency of the Board’s nomination and election process.~ SEC Code of Corporate Governance 43 The Homination and election process also includes the review and evaluation of the qualifications of all persons nominated to the Board, including whether candidates: (1) possess the knowledge, skills, experience, and particularly in the case of non-executive directors, independence of mind given their responsibilities to the Board and in light of the entity’s business and risk profile; (2) have a record of integrity and good repute; (3) have sufficient time to carry out their Tesponsibilities; and (4) have the ability to promote a smooth interaction between board members. A good practice is the use of professional ale firms or external sources when searching for candidates to the joard. In addition, the process also includes monitoring the qualifications of the directors. The qualifications and grounds for disqualification are contained in the company’s Manual on Corporate Governance. The following may be considered 2s grounds for the permanent disqualification of a director: a. Any person convicted by final judgment or order by a competent judicial or administrative body of any crime that: (a) involves the purchase or sale of securities, as defined in the Secu ities Regulation Code; (b) arises out of the person’s conduct as an underwriter, broker, dealer, investment adviser, principal, distributor, mutual fund dealer, futures commission merchant, commodity trading advisor, or floor broker; or (c) arises out of his fiduciary relationship with a bank, quasi-bank, trust company, investment house or as an affiliated person of any of them; b. Any person who, by reason of misconduct, after hearing, is permanently enjoined by a final judgment or order of the SEC, Bangko Sentral ng Pilipinas (BSP) or any court or administrative body of competent jurisdiction from: (2) acting as underwriter, broker, dealer, investment adviser, principal distributor, mutual fund dealer, futures commission merchant, commodity trading advisor, or floor broker; (b) acting as director or officer of a bank, quasi-bank, trust company, investment house, or investment company: © engaging in or continuing any conduct or practice in any of the capacities mentioned in sub-paragraphs (a) and (b) above, or willfully violating the laws that govern securities and, banking activities.“4 Chapter 3 f (a) such person is the y court or administrative jon, license or The disqualification should also apply ii subject of an order of the SEC, BSP or an, unt OF body denying, revoking or suspending any registrati permit issued to him under the Corporation Code, Securities Regulation Code or any other law administered by the SEC or BSP, or under any tule or regulation issued by the Commission or BSP; (b) such person has otherwise been restrained to engage in any activity involving securities and banking; or (c) such person is the subject of an effective order of a self-regulatory oreanization suspending or expelling him from membership, participation or association with a member or participant of the rganization; Any person convicted by final judgment or order by a court, or competent administrative body of an offense involving moral turpitude, fraud, embezzlement, theft, estafa, counterfeiting, misappropriation, forgery, bribery, false affirmation, perjury or other fraudulent acts; ‘Any person who has been adjudged by final judgment or order of the SEC, BSP, court, or competent administrative body to have willfully violated, or willfully aided, abetted, counseled, induced or procured the violation of any provision of the Corporation Code, Securities Regulation Code or any other law, rule, regulation or order administered by the SEC or BSP; Any person judicially declared as insolvent, Any person found guilty by final judgment or order of a foreign court or equivalent financial regulatory authority of acts, violations or misconduct similar to any of the acts, violations or misconduct enumerated previously; Conviction by final judgment of an offense punishable by imprisonment for more than six years, or a violation of the Corporation Code committed within five years prior to the date of his election or appointment; and Other grounds as the SEC may provide.SEC Code of Corporate Governance 4g In addition, the following may be grounds for temporary disqualification of a director: a. Absence in more than fifty percent (50%) of all regular and special meetings of the Board during his incumbency, or any 12-month period during the said incumbency, unless the absence is due to illness, death in the immediate family of serious accident. The disqualification should apply for purposes of the succeeding election; b. Dismissal or termination for cause 48 director of any publicly-listed company, public company, registered issuer of securities and holder of a secondary license from the Commission. The disqualification should be in effect until he has cleared himself from any involvement in the cause that gave rise to his dismissal or termination; c. If the beneficial equity ownership of an independent director in the corporation or its subsidiaries and affiliates exceeds two percent (2%) of its subscribed capital stock. The disqualification from being elected as an independent director is lifted if the limit is later complied with; and d. Ifany of the judgments or orders cited in the-grounds for permanent disqualification has not yet become final. Recommendation 2.7 ‘The Board should have the overall responsibility in ensuring that there is a group-wide policy and system governing related party transactions (RPTs) and other unusual or infrequently occurring transactions, particularly those which pass certain thresholds of materiality. The policy should include the appropriate review and approval of material or significant RPTs, which guarantee fairness and transparency of the transactions. The policy should encompass all entities within the group, taking into account their size, structure, risk profile and complexity of operations. Explanation Ensuring the integrity of related party transactions is an important fiduciary duty of the director. It is the Board’s role to initiate policies and measures geared towards prevention of abuse and promotion of§ 5 ulations t transparency, and in eompliance with applicable laws and 1oG required protect the interest of all shareholders One sn RPTslapproved by Seat 7 p ial or si : ratification by shareholders of material or Other measures include the Board, in accordance with existing laws. Saree end basi ensuring that transactions occur at market Bee B holders. and under conditions that protect the rights of all shareho! - The following are suggestions for the content of the RPT Policy: + Definition of related parties; + Coverage of RPT policy; . Guidelines in ensuring arm’s-length terms; + Identification and prevention or management of potential or actual conflicts of interest which arise; + Adoption of materiality thresholds; * Internal limits for individual and aggregate exposures; + Whistle-blowing mechanisms, and : + Restitution of losses and other remedies for abusive RPTs. In addition, the company is given the discretion to set their materiality threshold at a level where omission or misstatement of the transaction could pose a significant risk to the company and influence its economic decision. The SEC may direct a company to reduce its materiality threshold or amend excluded transactions if the SEC deems that the threshold or exclusion is inappropriate considering the company’s size, risk profile, and risk management systems. Depending on the materiality threshold, approval of management, the RPT Committee, the Board or the shareholders may be required. In cases where the shareholders’ approval is required, it is good practice for interested shareholders to abstain and let the disinterested Parties or majority of the minority shareholders decide. Recommendation 2.8 The Board should be primarily responsible for a iT i | rovin; and assessing the performance of the Moiese ee ne ee fee Oy rnc co) and control functions led by their respective eads (Chief Ris} i i i en i tcer, Chief Compliance Officer, and Chief AuditSEC Code of Corporate Governance 47 Explanation pst the Feaponsbiiy Of the Board to appoint a competent management mmanagennent tenes Monitor and assess the performance of the mane n ae based on established performance standards that are regula wane ae company’s strategic objectives, and conduct a ie iew a the company’s policies with the management team. In © Selection process, fit and proper standards are to be applied on key Personnel and due consideration is given to integrity, technical expertise and experience in the institution’s business, either current or planned Recommendation 2.9 The Board should establish an effective performance management framework ‘that will ensure that the Management, including the Chief Executive Officer, and personnel's performance is at par with the standards set by the Board and Senior Management. Explanation Results of performance evaluation should be linked to other human resource activities such as training, and development, remuneration, and succession planning, These should likewise form part of the assessment of the continuing fitness and propriety of management, including the Chief Executive Officer, and personnel in carrying out their respective duties and responsibilities. Recommendation 2.10 The Board should oversee that an appropriate internal control system is in place, including setting up a mechanism for monitoring and managing potential conflicts of interest of Management, board members, and shareholders. The Board should also approve the Internal Audit Charter. Explanation In the performance of the Board's oversight responsibility, the minimum internal control mechanisms may include overseeing the implementation of the key control functions, such as risk management, compliance and internal audit, and reviewing the corporation’s human resource policies,48 Chapter 3 i loyees and conflict of interest situations, compensation program for employ management succession plan. Recommendation 2.11 ta sound enterprise risk management (ERM) framework is in place to effectively identify, monitor, assess and manage key business risks. The risk management framework should guide the Board in identifying units/business lines and enterpetsscleN risk exposures, as well as the effectiveness of risk management strategies. The Board should oversee that Explanation Risk management policy is part and parcel of a corporation’s corporate strategy. The Board is responsible for defining the company’s level of risk tolerance and providing oversight over its risk management policies and procedures. . Recommendation 2.12 The Board should have a Board Charter that formalizes and clearly states its roles, responsibilities and accountabilities in carrying out its fiduciary duties. The Board Charter should serve as a guide to the directors in the performance of their functions and should be publicly available and posted on the company’s website. Explanation The Board Charter guides the directors on how to discharge their ee eae the standards for evaluating the performance of 1¢ Board. The Board Charter also contains the rol id ibi eiecuene les and responsibilitiesSEC Code of Corporate Governance _A9 3. ESTABLISHING BOARD COMMITT Principle Board committees should be set up to the extent possible to support the effective performance of the Board’s functions, particularly with respect to audit, risk management, related party transactions, and other key eee governance concerns, such as nomination and remuneration. he composition, functions and responsibilities of all committees established should be contained in a publicly available Committee Charter. Recommendation 3.1 ‘The Board should establish board committees that focus on specific board functions to aid in the optimal performance of its roles and responsibilities. Explanation Board committees such as the Audit Committee, Corporate Governance Committee, Board Risk Oversight Committee and Related Party Transaction Committee are necessary to support the Board in the effective performance of its functions. The establishment of the same, or any other committees that the company deems necessary. allows for ‘specialization in issues and leads to a better management of the Board's workload. The type of board committees to be established by a company would depend on its size, risk profile and complexity of operations However, if the committees are not established, the functions of these committees may be carried out by the whole board or by any other committee. Recommendation 3.2 ‘The Board should establish an Audit Committee to enhance its oversight capability over the company’s financial reporting, internal control system, internal and external audit processes, and compliance with applicable laws and regulations. The committee should be composed of at least three appropriately qualified non-executive directors, the majority of whom, including the Chairman, should be independent. All Tr ethe members of the committee must have relevant background,80 Chapter 3 i ii ing, auditin, knowledge, skills, and/or experience in the areas ofancoundlng iting and finance. The Chairman of the Audit Committee s! chairman of the Board or of any other committees. Explanation The Audit Committee is responsible for overseeing ae Sonics management in establishing and maintaining an adequate, effect and efficient internal control framework. It ensures that serene processes are designed to provide assurance in areas including SP ing, monitoring compliance with laws, regulations and ines Policies efficiency and effectiveness of operations, and safeguarding of assets. The Audit Committee has the following duties and responsibilities, among others: a. Recommends the approval the Internal Audit Charter (IA Charter), which formally defines the role of Internal Audit and the audit plan as well as oversees the implementation of the IA Charter; Through the Internal Audit (1A) Department, monitors and evaluates the adequacy and effectiveness of the corporation’s internal control system, integrity of financial reporting, and security of physical and information assets. Well-designed internal control procedures and processes that will provide a system of checks and balances should be in place in order to (a) safeguard the company’s resources and ensure their effective utilization, (b) prevent occurrence of fraud and other irregularities, (c) protect the accuracy and reliability of the company’s financial data, and (d) ensure compliance with applicable laws and regulations; e c. Oversees the Internal Audit Department, and recommends the appointment and/or grounds for approval of an internal audit head or Chief Audit Executive (CAE). The Audit Committee should also approve the terms and conditions for outsourcing internal audit services; Establishes and identifies the reporting li i ic ig line of the Internal Audit to enable him to prorerly fulfill his duties and responsibi _ Fot this purpose, he should directly report to the Audit Committee; :SEC Code of Corporate Governance 51 €. Reviews and mo: " nitors M; a P Auditor's findin; lanagement’s responsiveness to the Internal gs and recommendations; f. Pri halen i commencement of the audit, discusses with the External prope ane Nature, scope and expenses of the audit, and ensures the Per coordination if more than one audit firm is involved in the: activity to secure pro a inn ce efforts; Proper coverage and minimize duplication of 8. Evaluates and determines the non-audit work, if any, of the External Auditor, and periodically reviews the non-audit fees paid to the External Auditor in relation to the total fees paid to him and to the corporation’s overall consultancy expenses, The committee should disallow any non-audit work that will conflict with his duties as an External Auditor or may pose a threat to his independence3. The non-audit work, if allowed, should be disclosed in the corporation’s Annual Report and Annual Corporate Governance Report; h. Reviews and approves the Interim and Annual Financial Statements before their submission to the Board, with particular focus on the following matters: 7 Any change/s in accounting policies and practices ‘Areas where a significant amount of judgment has been exercised Significant adjustments resulting from the audit Going concer assumptions Compliance with accounting standards Compliance with tax, legal and regulatory requirements Reviews the disposition of the recommendations in the External ‘Auditor’s management letter; j. Performs oversight functions over the corporation’s Internal and External Auditors. It ensures the independence of Internal and External Auditors, and that both auditors are given unrestricted access to all records, properties and personnel to enable them to perform their respective audit functions; : k. Coordinates, monitors and facilitates compliance with laws, rules and regulations; "As defined under the Code of Ethics for Professional Accountants