Chapters 3 & 4

SEC CODE OF CORPORATE GOVERNANCE

Memorandum Circular No. 19, Series of 2016

Code of Corporate Governance for Publicly-Listed Companies
(CG Code for PLCs)

PUBLICLY-LISTED COMPANIES – companies whose shares of stocks are listed or can

be bought/sold in the stock market.

STOCK MARKET – collection of markets and exchanges where regular activities of

buying, selling, and issuance of shares of publicly-held companies take place

 Philippine Stock Exchange (You may visit their website to feed your curiosity
about stocks, stock prices, examples of publicly-listed companies, the sector
they belong to, their financial statements, company disclosures, etc.)

PURPOSE OF THE CODE: to promote the development of a strong corporate

governance culture and keep abreast with recent developments in corporate governance

DATE OF EFFECTIVITY: January 1, 2017

NB: The existence of a Code of Business Conduct does not automatically mean
compliance.

“COMPLY OR EXPLAIN” APPROACH – voluntary compliance + mandatory disclosure

- Companies do not have to comply with the Code, but they must (1) state in their
annual corporate governance reports whether they comply with the Code
provisions, (2) identify any areas of non-compliance, and (3) explain the reasons
for non-compliance.

ASPECTS OF THE CODE

1. Principles – high-level statements of corporate governance good practice

2. Recommendations - 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

NB: 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.

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 NB: A company may achieve the principles even without following all
recommendations.

3. Explanations – strive to provide companies with additional information on the

recommended best practice

NB: 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.

NB: The Principle of Proportionality should be considered.

DEFINITIONS (as how these terms were used in this Code)

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

- system of direction, feedback and control using regulations, performance

standards and ethical guidelines to hold the Board and senior management
accountable for ensuring ethical behavior – reconciling long-term customer
satisfaction with shareholder value – to the benefit of all stakeholders and society

- PURPOSE: to maximize the organization’s long-term success, creating

sustainable value for its shareholders, stakeholders and the nation

BOARD OF DIRECTORS – the governing body elected by the stockholders that

exercises the corporate powers of a corporation, conducts all its business and controls
its properties.

NB: The shareholders have the right to elect the Board of Directors.

MANAGEMENT – a group of executives given the authority by the Board of Directors to

implement the policies it has laid down in the conduct of the business of the corporation.

NB: The Board of Directors has the authority over the management.

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 be perceived to, materially interfere with his exercise of independent
judgment in carrying out his responsibilities as a director.

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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

varied industries, whereby the operations of such businesses are controlled and managed
by a parent corporate entity.

 Example: SM Investments Corporation (SM) – holding company of the SM

Group, with interests in retail, property, and banking.
Retail: The SM Store, Supermarket, Hypermarket, Savemore, Waltermart,
Alfamart
Property: SM Prime Holdings, SMDC/SM Development Corporation
Banking/Financial services: BDO, Chinabank

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.

* We’ll cover internal control and risk management after midterms.

ENTERPRISE RISK MANAGEMENT – a process, effected by an entity’s 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.

 REASONABLE ASSURANCE – high but not absolute assurance; recognizes

the possibility of having misstatements

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 indirect 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

 Example: Jollibee Foods Corporation (JFC)

Subsidiaries: Jollibee, Greenwich, Chowking, Mang Inasal, Burger King,
Dunkin Donuts, CBTL, Red Ribbon

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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
related parties, but also outstanding transactions that are entered into with an unrelated
party that subsequently becomes a related party.

 Example: transactions between JFC and Greenwich

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.

 Example: To name a few, the concern of the creditor is the capacity of the
company to pay off its debts. The concern of the investor is the financial status
and the profitability of the company, among others.

This Code consists of 16 principles grouped into 5 sections. To reiterate, principles are
statements of corporate governance good practice.
(NOTE: Memorize the 16 principles.)

1. THE BOARD’S GOVERNANCE RESPONSIBILITIES (7)

P1: Establishing a Competent Board

The company should be headed by a competent, working board

a. to foster the long-term success of the corporation, and
b. 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.

Important Points to Remember

- collective working knowledge, experience, or expertise that is relevant to the

company’s industry or sector
- appropriate mix of competence and expertise
- majority of non-executive directors to help secure objective and independent
judgment on corporate affairs
- relevant annual continuing training for all directors
- policy on board diversity
- assistance by a Corporate Secretary and its duties and responsibilities
- assistance by a Compliance Officer and its duties and responsibilities

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P2: Establishing Clear Roles and Responsibilities of the Board

The fiduciary roles, responsibilities and accountabilities of the Board as provided under
a. the law,
b. the company’s articles and by-laws, and
c. other legal pronouncements and guidelines
should be clearly made known to all directors as well as to stockholders and other
stakeholders.

Important Points to Remember

- how the board members should act: on a fully informed basis, in good faith, with
due diligence and care, and in the best interest of the company and all
shareholders
- 2 key elements of the fiduciary duty of board members
- What is fiduciary duty
- competent and qualified Chairperson
- roles and responsibilities of the Chairman/Chairperson
- succession planning program for directors, key officers, and management
- remuneration of key officers and board members
- formal and transparent board nomination and election policy
- grounds for permanent and for temporary disqualification of a director
- group-wide policy and system governing related party transactions
- primary responsibility for approving the selection and assessing the performance
of the Management
- effective performance management framework
- Board’s oversight responsibility over an appropriate internal control system and a
sound enterprise risk management (ERM) frameworks

P3: Establishing Board Committees

Board committees should be set up to the extent possible to support the effective
performance of the Board’s functions, particularly with respect to
a. audit,
b. risk management,
c. related party transactions, and
d. 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.

Important Points to Remember

- board committees that focus on specific board functions

- Audit Committee and its duties and responsibilities
- Corporate Governance Committee (CG Committee) and its duties and functions
- Board Risk Oversight Committee (BROC) and its duties and responsibilities

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 - Related Party Transaction (RPT) Committee and its functions
- Committee Charters

P4: Fostering Commitment

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.

Important Points to Remember

- presence and active participation in all meetings of the Board, Committees, and
Shareholders
- limit on board directorships

P5: Reinforcing Board Independence

The Board should endeavor to exercise objective and independent judgment on all
corporate affairs.

Important Points to Remember

- minimum number of independent directors

- qualifications, disqualifications, and maximum term of an independent director
- roles and responsibilities of the Chief Executive Officer (CEO)
- lead director and his/her functions
- abstention of a director from participating in meetings on which he/she has a
material interest
- non-executive directors

P6: Assessing Board Performance

The best measure of the Board’s effectiveness is through an assessment process.

The Board should regularly carry out evaluations
a. to appraise its performance as a body, and
b. assess whether it possesses the right mix of backgrounds and competencies.

Important Points to Remember

- self-assessment of performance
- guidelines in determining Board performance

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P7: Strengthening Board Ethics

Members of the Board are duty-bound to apply high ethical standards, taking into account
the interests of all stakeholders.

Important Points to Remember

- adoption of Code of Business Conduct and Ethics

- implementation and monitoring of compliance with the Code

2. DISCLOSURE AND TRANSPARENCY (4)

P8: Enhancing Company Disclosure Policies and Procedures

The company should establish corporate disclosure policies and procedures that are
a. practical and
b. in accordance with best practices and regulatory expectations.

Important Points to Remember

- importance of establishing disclosure policies and procedure

- period to disclose any dealings in the company’s shares
- full disclosure of relevant and material information on individual board members
and key executives
- disclosure of remuneration policies and procedure
- disclosure of policies governing Related Party Transactions (RPTs)
- disclosure of material facts and events
- Manual on Corporate Governance

P9: Strengthening the External Auditor’s Independence and Improving Audit

Quality

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.

Important Points to Remember

- appointment, reappointment, removal, and fees of the external auditor

- Audit Committee Charter
- disclosure of the nature of non-audit services performed by its external auditor

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