Professional Documents
Culture Documents
WHAT IS GOVERNANCE?
Generally, governance refers to a process whereby elements in society wield power, authority
and influence and enact policies and decisions concerning public life and social upliftment. 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, power or language of an organized
society. Governance therefore means the process of decision-making and the process by which decisions
are implemented (or not) through the exercise of power or authority by leaders of the country and/or
organizations.
Whatever context good governance is used, the following major characteristics should be
present:
Rule of Law – good governance requires fair legal frameworks that are enforced impartially. It also
requires full protection of human rights, particularly those of minorities.
Transparency – it means that decisions taken and their enforcement are done in a manner that follows
rules and regulations.
Responsiveness – good governance requires that institutions and processes try to serve the needs of all
stakeholders within a reasonable timeframe.
Consensus Oriented–good governance requires mediation of the different interests in society to reach a
broad consensus on what is in the best interest of the whole community and how this can be 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.
Equity and Inclusiveness – ensures that all its members feel that they have a stake in it and do not feel
excluded from the mainstream of society.
Effectiveness and Efficiency – it means that processes and institutions 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 – 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
accountableto those who will be affected by its decisions or actions. Accountability cannot be enforced
without transparency and the rule of law.
Corporate Governance is defined as the system of rules, practices and processes by which business
corporations are directed and controlled. It basically involves balancing the interests of a company’s
many stakeholders, such as shareholders, management, customers, suppliers, financiers, government
and the community.
Good corporate governance is all about controlling one’s business and so is relevant, and indeed vital,
for all organizations whatever size or structure. The corporate governance structure specifies the
distribution of rights and responsibilities among different participants in the corporation, such as the
board, managers, shareholders, and other stakeholders, and spells out the rules and procedures for
making decisions on corporate affairs.
PURPOSE OF CORPORATE GOVERNANCE
The purpose of corporate is to facilitate effective, entrepreneurial and prudent management that can
deliver long-term success of the company. In simple terms, the fundamental aim of corporate
governance is to enhance shareholders’ value and protect the interests of other stakeholders by
improving the corporate performance and accountability.
Effective corporate governance is transparent, protects the rights of shareholders 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:
2. Structure the board to add value. Have a 2-a. A board should have independent directors.
board of an effective composition, size and 2-b. The roles of chairperson and chief executive
commitment to adequately discharge its officer should not be exercised by the same
responsibilities and duties. individual.
2-b. The board should establish a nomination
committee.
3. Promote ethical and responsible decision- 3-a. Establish a code of conduct to guide the
making. Actively promote ethical and directors, the chief executive officer (or
responsible decision-making. equivalent), the chief financial officer (or
equivalent) and any other key executives as to:
The practices necessary to maintain
confidence in the company’s integrity; and
The responsibility and accountability of
individuals for reporting and investigating
reports of unethical practices.
3-b. Disclose the policy concerning trading in
company securities by directors, officers and
employees.
4. Safeguard integrity in financial reporting. 4-a. Require the chief executive of (or equivalent)
Have a structure to independently verify and the chief financial officer (or equivalent) to
and safeguard the integrity of the state in writing to the board that the company’s
company’s financial reporting. financial reports present a 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
committee.
4-c. Structure the audit committee so that it
consists of :
Only non-executive or independent
directors;
An independent chairperson, who is not
chairperson; and
At least three (3) members.
5. Make timely and balanced disclosure. 5-a. Establish written policies and procedures
Promote timely and balanced disclosure of designed to ensure compliance with IFRS.
all material matters concerning the 5-b. Listing Rule disclosure requirements and to
company. ensure accountability at a senior management
level for compliance.
6. Respect the rights of shareholders and 6-a. Design and disclose a communications
facilitate the effective exercise of those strategy to promote effective communication with
rights. shareholders and encourage effective participation
at general meetings.
6-b. Request the external auditor to attend the
annual general meeting and be available to answer
shareholder questions about the audit.
7. Recognize and manage risk. Establish a 7-a. The board or appropriate board committee
sound system of risk oversight and should establish policies on risk oversight and
management and internal control. management.
7-b. The chief executive (or equivalent) and the
chief financial officer (or equivalent) should state
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
internal compliance and control system is
operating efficiently in all material
respects.
8. Encouraged enhanced performance. Fairly 8-a. Disclose the process for performance
review and actively encourage enhanced evaluation of the board, its committees and
board and management effectiveness. individual directors, and key executives.
9. Remunerate fairly and responsibly. Ensure 9-a. Provide disclosure in relation to the
that the level and composition of company’s remuneration policies to enable
remuneration is sufficient and reasonable investors to understand:
and that its relationship to corporate and The costs and benefits of those policies;
individual performance is defined. and
The link between remuneration paid to
directors and key executives and
corporate performance.
9-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.
10. Recognize the legitimate interests of 10-a. Establish and disclose a code of conduct to
stakeholders. Recognize legal and other guide compliance with legal and other obligations
obligations to all legitimate stakeholders. to legitimate stakeholders.
Chapter 2: CORPORATE GOVERNANCE RESPONSIBILITIES AND ACCOUNTABILITIES
1. Explain the relevance of good governance to both large publicly-listed companied 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.
INTRODUCTION
Many of the characteristics of good governance described in Chapter 1 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 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 in many localities has been to encourage organizations to give appropriateattention to the
principles and adopt approaches which are tailored to the specific needs of an organization at a given
point in time.
The essence of any system of good 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.
Shareholders /
Board of Directors Owners
Delegate Have
Executive External
Management Auditors
Shareholder
s
Accountabilities
Internal Auditors
Society and Others
Governance starts with the shareholders/owner delegating responsibilities through an elected board of
directors to management and, in turn, 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 the
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.
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 transparency – 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.
Management has always had the primary responsibility for the accuracy and completeness of an
organization’s financial statements. From a financial reporting perspective, it is management’s
responsibility to:
Choose which accounting principles best portray the economic substance of company
transactions.
Implement a system of internal control that assures completeness and accuracy in financial
reporting.
Ensure that the financial statements contain accurate and complete.
PARTIES INVOLVED IN CORPORATE GOVERNANCE: THEIR RESPECTIVE BROAD ROLE AND SPECIFIC
RESPONSIBILITIES
1. Overall Operations
Establishing the organizations vision, mission, values
and ethical standards.
Delegating an appropriate level of authority to
management
Demonstrating leadership
Assuming responsibility for the business relationship
with CEO including his or her appointment, succession,
performance remuneration and dismissal.
Overseeing aspects of the employment of the
management team including management
remuneration, performance and succession planning.
Recommending auditors and new directors to
shareholders.
Ensuring effective communicating with shareholders
other stakeholders
Crisis management
Appointment of the CFO and corporate secretary.
2. Performance
Ensuring the organization’s long term viability and
enhancing the financial position.
Formulating and overseeing implementation of
corporate strategy.
Approving the plan, budget and corporate policies.
Agreeing key performance indicators (KPIs)
Monitoring/assessing assessment, performance of the
organization, the board itself, management and major
projects.
Overseeing the risk management framework and
monitoring business risks.
Monitoring developments in the industry and the
operating environment.
Oversight of the organization, including its control and
accountability systems.
Approving and monitoring the progress of major capital
expenditure, capital management and acquisitions and
divestitures.
3. Compliance / Legal Conformance
Understanding and protecting the organization’s
financial position.
Requiring and monitoring legal and regulatory
compliance including compliance with accounting
standards, unfair trading legislations, occupational
health and safety and environmental standards.
Approving annual financial reports, annual reports and
other public documents / sensitive reports.
Ensuring an effective system of internal controls exists
and is operating as expected.
1. Understand the need for the Code of Governance for publicly-listed companies.
2. Know the Sixteen (16) 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
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 reinforced and enhanced.
9. Describe how the performance and effectiveness of the board can be assessed.
SEC CODE OF CORPORATE GOVERNANCE FOR PUBLICLY-LISTED COMPANIES (“CG Code for PLC’s)
Securities and Exchange Commission SEC MC No. 19, Series of 2016
On November 10, 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.
Principle 1: The Company should be headed by a competent, working board to foster the long-term
success of the corporation, 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.
Principle 2: 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 stockholders and
other stakeholders.
Principle 3: 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 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.
Principle 4: 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 corporation’s business.
Principle 5: The Board should endeavor to exercise objective and independent judgment on all
corporate affairs.
Principle 6: The best measure of the Board’s effectiveness is through an assessment process. The
Board should regularly carry out evaluations to appraise its performance as a body, and
assess whether it possesses the right mix of backgrounds and competencies.
Principle 7: Members of the Board are duty-bound to apply high ethical standards, taking into
account the interests of all stakeholders.
Principle 8: The company should establish corporate disclosure policies and procedures that are
practical and in accordance with best practices and regulatory expectations.
Principle 9: The Company should establish standards for the appropriate selection of an external
auditor, and exercise effective oversight of the same to strengthen the external
auditor’s independence and enhance audit quality.
Principle 10: The Company should ensure that material and reportable non-financial and
sustainability issues are disclosed.
Principle 11: The Company should maintain a comprehensive and cost-efficient communication
channel 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: To ensure the integrity, transparency and proper governance in the conduct of its
affairs, the company should have a strong and effective internal control system and
enterprise risk management framework.
Principle 13: The Company should treat all shareholders fairly and equitably, and also recognize,
protect and facilitate the exercise of their rights.
DUTIES TO STAKEHOLDERS
Principle 14: The rights of stakeholders established by law, by contractual relations and through
voluntary commitments must be respected. Where stakeholders’ rights and/or
interests are at stake, stakeholders should have the opportunity to obtain prompt
effective redress for the violation of their rights.
Principle 15: A mechanism for employee participation should be developed to create a symbiotic
environment, realize the company’s goals and participate in its corporate governance
process.
Principle 16: The Company should be socially responsible in all its dealings 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 with its regional and global counterparts.
2. The Code will adopt the “comply and explain” approach. This approach combines voluntary
compliance with mandatory disclosure.
3. The Code is arranged as follows: Principles, Recommendations and Explanations. The Principles
can be considered as high-level statements of corporate governance good practice, and are
applicable to all companies.
4. The Recommendations are objective criteria that are intended to identify the specific features of
corporate governance good practice that are recommended for companies operating according
to the Code. Alternatives to a Recommendation may be justified in particular circumstances 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 alternative 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.
5. 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.
6. 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).
7. Definition of Terms:
Corporate Governance – the system of stewardship and control to guide organizations
in fulfilling their long-term economic, moral, legal and social obligations towards their
stakeholders.
Board of Directors – the governing body elected by the stockholders the exercises the
corporate powers of a corporation, conducts all its business and control its properties.
Management – a group of executives given the authority by the Board of Directors to
implement the policies or has laid down in the conduct of the business of the
corporation.
Independent Director – a person who is independent of management and the
controlling shareholder, and is free from any business or other relationship which could,
or could reasonably 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.
Non-executive director – a director who has no executive responsibility and does not
perform any work related to the operations of the corporation.
Conglomerate – a group of corporations that has diversified business activities in
various industries, whereby the operations of such businesses are controlled and
managed by a parent corporate entity.
Internal control – a process designed and effected by the board of directors, senior
management, and all levels of personnel to provide reasonable assurance on the
achievement of objectives 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.
Enterprise Risk Management – a process, effected by an entity’s Board of Directors,
management and other personnel, applied in the 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 the company; the company’s directors; officers;
shareholders and related interest (DOSRI), and their close family members as well, as
well as corresponding persons on affiliate companies. This shall also include such other
persons or juridical entity whose interests may pose a potential conflict with the
interest of the company.
Related Party Transactions – a transfer of resources, services or obligations between a
reporting entity and a related party, regardless of whether a price is charged. It should
be interpreted broadly to include not only 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.
Chapter 5: INTRODUCTION TO ETHICS
1. Define Ethics.
2. Enumerate and describe the basic characteristics and values associated with ethical behavior.
3. Appreciate why ethical behavior in personal, professional and business dealings is necessary.
4. Understand the reasons why people act unethically.
5. Give and explain the categories of ethical principles.
6. Give and describe the ethical principles related to:
a. Personal ethics
b. Professional ethics
c. Business ethics
7. Explain why professional ethics is important and why a code of conduct should be adopted.
INTRODUCTION TO ETHICS
Introduction
Ethics can be defined broadly as a set of moral principles or values that govern the actions and decisions
of an individual or group. While personal ethics vary from individual to individual at any point in time,
most people within a society are able to agree about what is considered ethical and unethical behavior.
In fact, a society passes laws that define what its citizens consider to be the more extreme forms of
unethical behavior.
Each of us has such a set of values, although we may or may not have considered them explicitly.
Philosophers, religious organizations, and other groups have defined various ways ideal sets of moral
principles or values. Examples of prescribed sets of moral principles or values at the implementation
level include laws and regulations, church doctrine, code of business ethics for professional groups such
as CPAs, and codes of conduct within individual organizations.
It is common for people to differ in their moral principles or values. Even if two people agree on the
ethical principles that determine ethical behavior, it is unlikely that they will agree on the relative
importance of each principle. These differences result from all of our life experiences. Parents,
teachers, friends and employers are known to influence our values, but so do television, team sports,
life successes and failures, and thousands of other experiences.
Be principled, honorable, upright, and courageous and act on convictions; do not be two-faced
or unscrupulous, or adopt an end-justifies-the means philosophy that ignores principles.
Honesty
Be truthful, sincere, forthright, straightforward, frank, and candid; do not cheat, steal, lie,
deceive or act deviously.
Be worthy of trust, keep promises, full commitments abide by the spirit as well as the letter of
an agreement; do not interpret agreements in an unreasonably technical or legalistic manner in order to
rationalize non-compliance or create excuses and justification for breaking commitments.
Be faithful and loyal to family, friends, employers, client and country; do not use or disclose
information learned in confidence; in a professional context, safeguard the influences and conflicts of
interest.
Be fair and open-minded, be willing to admit error and, where appropriate, change positions
and beliefs, demonstrate a commitment to justice, the equal treatment of individuals, and tolerance for
acceptance of diversity; do not overreach or take advantage of another’s mistakes or diversities.
Be caring, kind, compassionate; share, be giving, be of service to others; help those in need and
avoid harming others.
Demonstrate respect for human dignity, privacy, and the right to self-determination of all
people; be courteous, prompt, and decent; provide others with the information they need to make
informed decisions about their own lives; do not patronize, embarrass, or demean.
Responsible Citizenship
Obey just laws; if a law is unjust, openly protest it; exercise all democratic rights and privileged
responsibly by participation (voting and expressing informed views) social consciousness, and public
service; when in a position of leadership or authority, openly respect and honor democratic processes of
decision-making, avoid unnecessary secrecy or concealment of information, and assure that others have
all the information they need to make intelligent choices and exercise their rights.
Pursuit of Excellence
Pursue excellence in all matters; in meeting your personal and professional responsibilities, be
diligent, reliable, industrious and committed; perform all tasks to the best of your ability, develop and
maintain a high degree of competence, be well informed and well prepared; do not be content with
mediocrity; do not “win at any cost”.
Accountability
Be accountable; accept responsibility for decisions, for the foreseeable consequences of actions
and inactions, and for setting an example for others.
Ethical behavior is necessary for a society to function in an orderly manner. It can be argued that ethics
is the glue that holds a society together. The need for ethics in society I sufficiently important that many
commonly held ethical values are incorporated into laws. A considerable portion of the ethical values of
a society cannot be incorporated into laws because of the judgmental nature of certain values. Looking
at the honesty principle, it is practical to have laws that deal with cheating, stealing, lying, or deceiving
others. It is far more difficult to establish meaningful laws that deal with many aspects of principles
such as integrity, loyalty and pursuit of excellence. That does not imply that these principles are less
important for an orderly society. Business decisions influence employees, customers, suppliers, and
competitors, while company operations affect communities, governments and the environment.
1. The person’s ethical standards are different from those of society as a whole, or;
2. The person chooses to act selfishly.
Fair competition
Global as well as domestic justice
Social responsibility
Concern for environment
To understand the importance of a Code of Ethics to professionals, one must understand the nature of a
profession as opposed to other vocations. There is no universally accepted definition of what
constitutes a profession; yet, for generations, certain types of activities have been recognized as
professions while others have not.
All the recognized professions have several common characteristics. The most important of these
characteristics are:
Business ethics refers to standards of moral conduct, behavior and judgment in business. It involves
making the moral and right decisions while engaging in such business activities as manufacturing and
selling a product and providing a service to customers. Business ethics is an area of corporate
responsibility where businesses are legally bound and socially obligated to conduct business in an ethical
manner. Business ethics is based on the personal values and standards of each person engaged in
business.
Main Purpose
The main purpose of business ethics is to help business and would-be business to determine what
business practices are right and what are wrong.
Special Purpose
There are other purposes which are corollary to the main purpose. These purposes include the
following;
1. To make businessmen realize that they cannot employ double standards to the actions of other
people and to their own actions.
2. To show businessmen that common practices which they have thought to be right because they
see other businessmen doing it, are really wrong.
3. To serve as a standard or ideal upon which business conduct should be based.
Business ethics is based on the personal values and standards of each person engaged in business. Since
individual values differ, what is ethical or unethical in making profit also varies from person to person.
There is still no uniform standards of right and wrong from which all business ay base their actions. The
businessman who provides fair business competition is the most likely to observe the business ethical
rules of conduct, behavior, and judgment.
Economic Impact
A business has an economic impact on society through the wages it pays to its employees, the
materials that it buys from their suppliers and the prices it charges its customers.
Social Impact
The social impact of corporate governance contributes to the ethical climate of society. If
businesses offer bribes to secure work or other benefits, engage in accounting fraud or breach
regulatory and legal limitations on their operations, the ethics of society suffer. In addition to a
deteriorating ethical environment, such as corruption may unfairly raise the price of goods for
consumers or the quality of the product or service compromised.
Environmental Impact
The concepts and principles for the ethical conduct in business are relegated to the managers of the
business enterprise. Thus, although the manager is expected to act in the best interest of the business,
he cannot be expected to at in a manner that is contrary to the law or to his conscience.
Acknowledge that his role is to serve the business enterprise and the community;
Avoid all abuses of executive power for personal gain, advantage or prestige;
Reveal the fact to his superior whenever his personal business of financial interests conflicts
with those of the company;
Be actively concerned with the difficulties and problems of subordinates, treat them fairly and
by example, lead them effectively, assuring to all the right of reasonable access and appeal to
superiors;
Recognize that his subordinates have a right to information on matter affecting them, and make
provision for its prompt communication unless such communication is likely to undermine the
security and efficiency of the business;
Fully evaluate the likely effects on employees and the community of the business plans for the
future before taking a final decision and
Cooperate with his colleagues and not attempt to secure personal advantage at their expense.
Chapter 7: COMMON UNETHICAL PRACTICES OF BUSINESS ESTABLISHMENTS
Misrepresentation may be classified into two types: direct misrepresentation and indirect
misrepresentation.
Deceptive packaging. Deceptive packaging takes many forms and is of many types. One type is
the practice of placing the product in containers of exaggerated sizes and misleading shapes to
give a false impression of its actual contents.
Misbranding or Mislabeling. Is the practice of making false statements on the label of a product
or making its container similar to a well-known product for the purpose of deceiving the
customer as to the quality and/or quantity of a product being sold.
False or Misleading Advertising. Advertising serves a useful purpose if it conveys the right
information. However, advertising does not always tell the “whole truth and nothing but the
truth” if it greatly exaggerates the virtues of a product and tells only half of the truth or else
sings praises to its non-existent virtues. If advertising does not provide a useful service anymore
to the customers, it can become the agent of misrepresentation.
Adulteration. Is the unethical practice of debasing a pure or genuine commodity by imitating or
counterfeiting it, by adding something to increase its bulk or volume, or by substituting an
inferior product for a superior one for the purpose of profit or gain.
Weight understatement or short weighing. In short weighing, the mechanism of the weighing
scale is tampered with or something is unobtrusively attached to it so that the scale registers
more than the actual weight.
Measurement understatement or short measurement. In short measurement, the measuring
stick or standard is shorter than the real length or smaller in volume than the standard.
Quality understatement or short numbering. In this unethical practice, the seller gives the
customer less than the number asked for or paid for.
Caveat emptor is a practice very common among salesmen. Translated, caveat emptor means “let the
buyer beware”. Under this concept, the seller is not obligated to reveal any defect in the product or
service he is selling. It is the responsibility of the customer to determine for himself the defects of the
product.
Deliberate withholding of Information. Following the argument that caveat emptor is unethical, the
deliberate withholding of significant information in a business transaction, is also unethical. No business
transaction is fair where one of the parties does not exactly know what he is giving away or receiving in
return.
Passive deception. Direct misrepresentation gives business a bad name while indirect misrepresentation
or passive deception is not as obvious, it nonetheless contributes to the impression that businessmen
are liars and are out to make a fast buck. Business ignorance is passive deception because the
businessman is unable to provide the customer with the complete information that the latter needs to
make a fair decision.
Over-persuasion. Persuasion is the process of appealing to the emotions of a prospective customer and
urging him to buy an item of merchandise he needs. Persuasion is legitimate and necessary in the
selling of goods if it is done in the interest of a buyer such as persuading him/her to get a hospitalization
insurance policy. The common instances of ever-persuasion include the following:
CORPORATE ETHICS
Practices of corporate management that involve ethical considerations may be classified into two:
practices of the Board of Directors and practices of executive officers. In many cases, the practices may
apply to both categories of corporate management and the only dividing line is in the financial
magnitude and implications of a particular corporate management practice.
1. Plain Graft
Some of the Board of Directors help themselves to the earnings that otherwise would go to
other stockholders. This is done by voting for themselves and the executive officers huge per
diems, large salaries, big bonuses that do not commensurate to the value of their services.
2. Interlocking Directorship
Interlocking directorship is often practiced by a person who holds directorial positions in two or
more corporations that do business with each other. This practice may involve conflict of
interest and can result to disloyal selling.
3. Insider trading
Insider trading occurs when a broker or another person with access to confidential information
uses that information to trade in shares and securities of a corporation, thus giving him an unfair
advantage over the other purchasers of these securities.
4. Negligence of Duty
A more common failure of the members of the Board of Directors than breach of trust is neglect
of duties when they fail to attend board meetings regularly.
Unethical practices that are more common to executive officers and lower level managers are:
1. Conflicts of Interest. A conflict of interest arises when an employee who is duty bound to protect
and promote the interests of his employer violates this obligation by getting himself into a
situation where his decision or actuation is influenced by what he can gain personally from it
rather than what his employer can gain from it.
a. An employee who holds a significant interest or shares of stock of a competitor, supplier,
customer or dealer favors this party to the prejudice of his employer.
b. The employee accepts cash, a gift or a lavish entertainment or a loan from a supplier,
customer, competitor, or contractor. As a result, he therefore cannot act impartially.
c. The employee uses or discloses confidential company information for his or someone else’s
personal gain.
d. The employee engages in the same type of business as his employer.
e. The employee uses for his own benefit a business opportunity in which his employer has or
might be expected to have an interest.
2. Dishonesty. Business ethics is not just limited to business transactions with outside parties. It
also covers employee-employer relationship, especially with respect to an employee’s honesty
as he carries out his assigned duties in the office.
a. Taking office supplies home for personal use.
b. Padding an expense account through the use of fake receipts when claiming
reimbursements.
c. Taking credit for another employee’s idea.