Wn BAT OW beeen2019-2020 Filion MA. ELENITA BALATBAT CABRERA BBA MGA CPA ChA PRESENTLY: Academic and Business Conpuaant Presidentand CEO, CLA Consuttancy and Tmining Canter, the. FORMERLY Vice Crairman and Examiner, Amfeasiona) Raguictory Board of Accountancy World Bank Consultant Bean, College of Business Adminesirabon, Lyceum University of the Pritipgives (CPA Riwnew Gerector & Reviewer Profeational Review and Fraining Canter, inc Professor of Aoocumting & Finance. Unwersty of fre East Far Eastem University, De Le Sele Univenety, Coote Ecoles University, St Scholastica’ Collage: Audi, Staff, SGV and Co, CPAs GILBERT ANTHONY B. CABRERA BBA MBA CPA PRESENTLY: ‘Vice President - Risk and Finance, Globaf insurance Bmkerage, USA. FORMERLY. Chief Financial Officer, Food Retail Gonglomeraia, USA, ‘ Senior Auditor, SGV and Co, Cas | Unieersity Sot Myra, oBeed Sinieh J ‘Sthoot of Business ‘University of the Bast, MagliaContents in Brief UNIT I CORPORATE GOVERNANCE Chapter 1 OISTRODECTION TO CORPORATE GOVERNANCE CORMIRATE GOVERSANC FE RESPONSIIILITIES ASD ACCOUNT AHILINIES if 2 3 Chaprer 2 SECURITIES Who EXE WASGE EO COMMISSIONS CONE OF CORPORATE GOVERNANCE I Chapeer 40 SF cope ‘OF CORPORATE GOVERNANCE, CONTINE EDD 7 UNIT 1 BUSINESS ETHICS Chapter § INTRODUCTION TOF THICS, a Chapter 6 BUSINESS ETHICS 103 Chapter 7 COMMON UNETHICAL PRACTICES OF BUSINESS ESTABLISHMENTS 19 Chapter 8 ETIICAL DILEMMA In Cheaper 9 apyacacy AGAINST CORRUPTION 28 Chapter 19 INITIATIVES FO IMPROVE AL SINESS ETHICS AND REDUCE CORRUPTION (46UNIT m Chapter WN Chapter 12 UNIT Iv Chapter 13 Chapter 14 Chapter AS Chapter \6 Chapters 17 Appendices Appendix A Appendix B Appendix = C Appendix D Appendix © Appendix F Appendix 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 IRI TRANSACTION CYCLES OF THE BUSINESS ENTITY INTERNAL CONTROL AFFECTING ASSETS INTERNAL LIABILIT NTROL AFFECTING 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 Telecommunications Company Code of Business Conduct and Ethics of a Manufacturing Company Code of Business Conduct and Ethics ofa Commercial Bank Partial List of Organizations who are actively Participating in the “Integrity Initiative” Campaign against Corruption ul 162 163 180 273 281Contents Preface UNIT I CORPORATE GOVERNANCE TRODUCTION TO CORPORATE Cheyer GOVERNANCE 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 Mlustrative Application of the Basic Principles of Corporate Governance and Best Practice Recommendations Review Questions Chapter 2 CORPORATE GOVERNANCE RESPONSIBILITIES AND ACCOUNTABILITIES Expected Learning Outcomes Introduction Relationship between Shareholders / Owners and Other Stakeholders Parties invalved in ‘Corporate Governance Their Respective Broad Rale and Speci Responsibilities Specie ° Shareholders Board of Directors Non-Executive or Independent Directors Management Audit Commitiees Regulators Board of Ace ‘Ount< External Audit many Internal Audie Review Questions waa 1S 16 17 9 19 19 20 21 2 243 SECURITIES AND EXCHANGE COMMISSION (SEC) CODE OF CORPORATE GOVERNANCE Expected Learning Outcomes The Board's Governance Responsibilities Principles 1 to 7 Disclosure and Transparency Principles 8 to 11 Imernal Control System and Risk Management Framework Principle 12 Cultivating a Synergies Relationship with Shareholders Principle 13 Duties to Stakeholders Principles 14 10 16 Introduction The Code of Corporate Governance Objective Approach Organization Recommendation Explanations Coverage Definition of Terms The Bourd’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 28 28 29 29 29 29 29 29 30 30 30 30 30 30 31 31 31 34. 34, 39 49 37 39 65 67 68 7 74 26we 4 SEC CODE OF CORPORATE GOVERNANCE, Chaprer CONTINUED Expected Learning ‘Outcomes 16 Increasing Focus on Non-Financial and Sustainability Reporting 77 Promoting a Comprehensive and Cost-efficfent Access to Relevant Information 78 Strengthening the Internal Control System and Enterprise Risk Management Fr ramework 78 Cultivating a Synergic Relationship with Shareholders 83 Respecting Rights of Stockholders and Effective Redress for Violation of Stakeholder's Rights 87 Encouraging Employees Participation 88 Encouraging Sustainability and Social Responsibility 90 Review Questions 91 UNIT Tl BUSINESS ETHICS Chapter 5S INTRODUCTION TO ETHICS Expected Learning Outcomes Introduction . Characteristics and Valu i 95 acer es Associated with Ethical Why is Ethical Behavior Ne 1 Ces: 96 Why do People det Unethically > ba Categories of Ethical Principie 98 The Need for Professional Ethic 39 Review Questions ‘00 102Chapter 6 BUSI iS ETHICS Expected Learning Outcomes Basic Concept of Business Ethics Purposes of Business Ethics Main Purpose Special Purpose Scope and Impact of Business Ethics Ervironmemtal Impact dmpact on Business Managers Ethical Challenges in Today's World Review Questions Chapter 7 COMMON UNETHICAL PRACTICES OF BUSINESS ESTABLISHMENTS Expected Learning Outcomes Common Unethical Practices of Business Establishments Misrepresentation and Over Persuasion Direct Misrepresentation Deceptive packaging Misbranding or mislabeling False or misteading advertisement Adulteration Weight understatement Measurement understatement Quantity understatement Indirect Misrepresentation Caveat emptor Deliberate withholding of information Passive deception Over Persuasion Corporate Ethics Unethical Practices of Corporate Management Board of Directors Executive Officers und Lower Level Managers Some Unethical Practices of Employees Review Questions 109 110 110 110 110 110 110 Mt M1 Wd 112 112 M2 M2 M12 113 113 113 3 114 7 119 wit 109will Chapter Chapter 9 ETHICAL DILEMMA Expected Learning Outcomes Introduction Resolving Ethical Dilemmas Hiustrative Case Resolving Ethical issue Who is Affected and How ts wach Affected Bert's Available Alternatives Consequences of Each Alternative Appropriate Action an Ethical Dilemma Review Questions and Exercises ADVOCACY AGAINST CORRUPTION Expected Learning Outcomes What is Corruption” What does Corruption Look Like? Why and how does a Person Become Corrupt? ML Effects of Corruption Characteristics of Corruption The Philippine Corruption Report Judicial System Police Public Services Land Administration Tax Administration Customs Administration Public Procurement Natural Resources Prevention of Corruption Clear Business Process Policy an Gifts and Entertainment Declaration of Conflict of Interest Convenient Corruption Reporting System Efforts to Curb Corruption Throw Vigilance of Civil Society 8h Legislation Review Questions 128 129 130 131 131 133 137 137 138 138 139 139 140 140 141 141 141 laz 142 laz 142 143 las 121 128ik Chapter 10 ; apt INITIATIVES TO IMPROVE BUSINESS ETHICS D REDUCE CORRUPTION 146 Expected Learning Outcomes 146 Introduction 147 The Imegrity Initiative Campaign 1a7 Corporate Values 148 Need for a Code of Conduct 149 The Unified Code of Conduct for Business 150 Top Management 150 Human Resources 150 Sales and Marketing 150 Finance and Accounting "5 Procurement it Logistics 152 Implementation and Monitoring 12 Bishops- Businessmen's Conference Philippines ~ Code of Ethics for the Philippine Business 153 Survey of Laws Advocating Business Ethics 159 Review Questions 160 UNIT IM INTRODUCTION TO RISK MANAGEMENT 162 Chapter Il RISK MANAGEMENT ° 163 Expected Learning Outcomes 163 Introduction 164 Risk Management Defined 164 Basic 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 UL. Risks Associated with Manufacturing, Trading and Service Concerns 170 WL Risk Associated with Financial Institutions \71 Potential Risk Treatments 172 Areas of Risk Management 13 Risk Management Framework 174 Steps in the Risk Management Process 175 Review Questions 178SIGHTS IN REDUCING AND CTICAL INSIGHTS IN RE Chapter 12 PRANAGING BUSINESS RISKS 180 Expected Learning Outcomes ad Understand the Nature of Risk 181 Idemify: and Prioritize Risks 181 Consider the Acceptable Level of Risk 183 Understand Why Risks Become Reality 183 Apply a Simple Risk Management Process 184 Risk Assessment and Analysis 184 Risk Management and Control 185 Avoiding and Mitigating Risks 186 Create a Positive Climate for Managing Risk 186 Overcoming the Fear of Risk 187 Comrolling and Monitoring Emerprise-wide Risk 187 Practical Considerations in Managing and Reducing Financial Risk 188 Impraving Profitability 188 Assessment of Market and Exit Barries 189 Break-even Analysis 189 Controlling Casts 190 Practical Techniques to Improve Profitability 191 Avoiding Pisfalls 192 Review Questions and Exercises 194 UNIT IW INTERNAL CONTROL: AVIT, ‘AL TOOL IN MANAGING RISK 195 Chapter 13 OVI OVERVIEW OF INTERNAL CONTROL 196 Expected Learning Qutcumes 196 Nature and Purpose of Internal Ct Internal Control System Defined ‘ontrot 197 Elemenis of Internat Conirol 197 4 Control Environment 198 8. Entty 's Risk Assessment Process 198 Information System, includir 198 Processes, Relevant to Fi ling the Business and Coma eke to Financial Reporting 2 Control Activities 203 ~ Monitoring of Controls 205 210 Review Questions and Exercises 21Chapter Chapter is FRAUD AND ERROR Expected Learning Outcomes Introduction Types of Misstatements Misstatements arising from Misappropriation of Assets Msstatements 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 of 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 232 233 233 233 235 235 236 237 237 237 239 232Chapter Chapter 16 7 RNAL CONTROL AFFECTING ASSETS omes INTE! Expected Learning Oute Internal Control aver Cash Tran el s Potential Misstatements ~ nn re ‘Pr * ments ie is Ms — rs Potential Misstatements ~ ” ¢ inancial Investments mat Control over Financia’ ] . ae otential Misstatements — Financial Investments bles Internal Control over Receiva’ ; Sources and Nature of Notes Receivable Internal Contral of Accounl Control Environment . Poremial Misstatements ~ Revenue / Receivables Internat Contral aver Notes Receivable M4 244 245 246 248 249 250 251 251 1s Receivable and Revenue 251 252 252 254 Internal Control over Inventories and Cost of Goods Sold 255 Sources and Nature of Inventories and Cost of Goods Sold Potential Misstatements ~ Inventory / Cost of Goods Sold Internal Control over Property, Plant and Equipment Potential Misstatements — Investments in Property, Plant and Equipment Review Questions and Exercises INTERNAL CONTROL AFFECTING LIABILITIES AND EQUITY Expected Learning Outcomes Internal Control over Ay Potential Misste on eanle fate mn ~ Intermut Control over Otho, Denn Payable Internal Contral aver Debt Authorization by the ; @ Board, nee an Independent Thats ‘aymenis of Be 7 Internal Controi were Beitd Noi a jes Pe Internat Cantrot one Fauity “ee Control of Share Con’, Con es Boo oe cepted Transactions by the ‘Pendent Registrar and Stock T; Intern; er Dividengy Agent 1al Control oy Exercises Directors e Review Quesions ang 258 256 257 259 265 266 267 267 268 268 268 269 269 269 270 271Appendices Appendix Appendix Appendix Appendix Appendix Appendix Appendix References 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 273 281 283 287 293 303 307 3 xlil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 princi canbe oppheg Principles of good corporate governanceCHAPTER 1 INTRODUCTION TO CORPORATE GOVERNANCE WHAT IS GOVERNANCE? Generally, (governance refers to a process whereby elements in society wield wer, 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, norms, 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 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 gorporate governance, international governance, national governance and focal 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: ° Participation Rule of Law Accountability a“ Transparency — 9000, EMectiveness & Govemuece Efficiency Respomiveness Equity & inclusiveness Consensus4 Chapter | _ 7 These characteristics are briefly described as follows: Participation Rule of Law Responsiveness Participation by both men and women 1s a key cornerstone of good governance. Participation could be either direct or through legitimate institutions oF representatives. It js important to point out 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 deeds to be informed and Organized. This means freedom of association ang expression on one hand and an organized civil society on the other hand. Good governance requires fair legal frameworks that are enforced impartially. It also cequires full protecnon 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 decisions taken and thee enforcement are done in a manner that follows rules and regulations. It means that information is freely available and directly accessible to these who will be affected by such decisions and their enforcement. It also means that gnough information is provided and that it is provided in easily understandable forms and media. Good governance requires that institutions and processes try to serve the needs 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. I also requires a broad and long-term perspective oat is needed for ae of eh development how (© achieve the 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 __ 3 Bquity & Ensures that all its members feel that they have a stake in it Inclusiveness and do not feel oxeluded from the mamstream 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 &bifficiency produce results that meet the needs of sogiety while making the best use of resources attheir 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 to the public and to their institutional stakeholders. Who is accountable to whom varies depending on whether 1 decisions or acfions taken are intemal 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 (Garporaregovernanc? is defined as the system_of rules, practices and processes, by. which business corporations are.directed and controlted. It basically involves balancing the interests of company’s many. stakeholders,.such as shareholders, Management, customers, suppliers, financiers, government and the community: Corporate governance is.a topic that has received growing attention i i in Fecent years as policy makers and others become more mee Be ie Contribution good corporate governance makes to financial market stability and sconomic grow a ae Bovernance is all about controlling one’s business 8o is relevant, and indeed vital, for all organizations, whatever size6 Chapter} - — =, The corporate governance structure specifies the distribution of rights ang responsibilities among different participants in the corporation, such as the board, managers, shareholders, and other stakeholders, and spells out the ules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the objectives are set and the means of attaining those objectives and monitoring performance. PURPOSE OF CORPORATE GOVERNANCE The purpose of corporate governance is to facilitate effective, entrepreneurial gnd 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. It is also about what the board of directors of a company does, how it sets the values of the business firm. OBJECTIVES OF CORPORATE GOVERNANCE The following are the basiclobjectivesiof corporatelgovernance? |. Fair and Equitable Treatment of Shareholders A corporate governance structure ensures equitable and fair treatment of all shareholders of the company. In some organizations, a group of high- 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 @ good: governance structure in any organization. 2. Self-Assessment Corporate governance enables firms to assess their behavior and actions before they are scrutinized by regulatory agencies. Business establishments with a strong corporate governance system are better able to limit exposure to regulatory-risks and fines. An active and independent can successfully point out deficiencies or loopholes in the company operations and help:solve issues internally on a timely basis.Introduction to Corporate Governance_7 3. Increase Shareholders’ Wealth Another corporate governance’s main objective is to protect the long. term interests of the shareholders. Firms with strong corporate governance 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 aims al ensuring @ higher“ degree of transparency in an organization by encouraging full disclosure of transactions in the company accounts, BASIC PRINCIPLES OF EFFECTIVE CORPORATE GOVERNANCE 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. Ti engl AEC SBOE EONSTORNS oe threefold as presented low: ‘Transparency and Full Disclosure Js the board telling us what is going on? Corporate Control | the Qoard doing the riaht thina?,& Chapter! _ - a ions indicate a firm's conformance and itive answers to the following questions in ‘ osislance with the basic principles of good corporate governance A. Transparency and Full Disclosure ® Does the board meet the information needs of investment communities? «Does it safeguard integrity in financial 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, knowledgdiand 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 hike tisk? Does it encourage enlianeéd performance? Does it recognize and Mande, is Does it remunerate fairly ‘and wedi? Does it recognize the ‘legitimate interests of stakeholders? Are conflicts of interest avoided such that the organization's bes! interests prevail at allitimes? vwvwvyYIntroduction to Corporate Governance 9 ILLUSTRATIVE APPLICATION OF THE BASIC PRINCIPLES OF CORPORATE GOVERNANCE AND BEST PRACT ICE RECOMMENDATIONS Principles of Good Corporaie Governance Best Practice Recommendations 1. A company should lay solid foundation for management and oversight. It should fecognize and publish the respective roles, and responsibilities of board and management. 2. Structure the board to add value. Have a board of an effective composition, size and ‘commitment to adequately discharge its responsibilities and duties. Promote ethical and responsible decision- making, Actively promote ethical and tesponsible decision-making 1-a. Formalize and disclose the functions _ to the board and those delegated to management. Za. Aboard should have independent girectors, 2-b. The soles of chairperson and chief executive officer should not be exercised by the same individual. 2-b, The board should establish a nomination committee 3a. Establish a code of conduct to guide the directors, the chief executive officer (or equivalent), the chief financial officer (or salen and any other key executives as © The practices necessary to maintain confidence in the Company's integrity, and * — The responsibility and accountability of individuals for10 Chapter | 4. Safeguard integrity in financial reporting. Have a structure to independently verify and safeguard the integrity of the company's financial reporting. 4-a_ Require the chief executive of (or equivalenl) and the chief financial officer (or equivalent) to state in writing to the board that the company’s 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. 4-0. 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. Make timely and balanced disclosure. Promote timely and balanced disclosure of all material matters concerning the company. 5-a. Establish written policies and procedures designed to ensure compliance with IFRS, 5-b. Listing Rule disclosure requirements. ‘and to ensure accountability at a senior management level for compliance. of shareholders and ‘exercise of those 6-a. Design and disclose a communications strategy to promote effectiveIntroduction to Corporate Governance _| | na) 74 ‘board or appropriate board 7 Recognize and manage risk. Establish a T-a. The bo ejahlish policies on ‘sound system of risk oversight and or ne enagemenl management and intemal control 2a. The chief executive officer (OF equivalent) and the chief financial officer (ot equivalent) should state to the board in writing that: «The statement given in integrity of financial statements) is founded on a sound system of tak management and internal compliance and control implements the poticies adopted by the board; and * The company’s risk management and internal compliance and control system is operating efficiently in all material respects. Ba. Disclose the process lor performance: evaluation of the board, its committees and individual directors, and key executives. '_—_—_—|____plans approved by shareholders. | 9. Remunerale fairly and responsibly. Ensure 9a. Provide disclosure in relation to the that the level and composition of ‘company's remuneration policies to temuneration is sufficient and reasonable enable investors to understand: and that its relationship to corporate and * ©The costs and benefits of those individual performance is defined policies; and ¢ The link between remuneration paid to directors and key ‘executives and corporate performance. 9-b, The board should establish a femuneration committee. $-c. Clearly distinguish the structure of non- ‘executive director's remuneration from that of executives. 9-4. Ensure that payment of equity-based ‘executive remuneration is made in accordance with thresholds set in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CHAPTER 2 CORPORATE GOVERNANCE RESPONSIBILITIES AND ACCOUNTABILITIES 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 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 nt the freedom to drive their organization forward and to exercise that freedom within a framework of effective accountability.7 mies —~ ~~~ —___ Corporate Governance Responulbllit® amed Accouneatil RELATIONSHIP BE: Ris) AND ET Wi ERS | OWNE! OTHER STAKEHOLDERS SHAREHOLDE! ionship ber and other wept MP between the shareholders * owners, management }olders in a corporation 1s shown below Public Corporation Governance starts with the sharcholders/owners 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 a com Management and the board have responsibilities to act within the laws of secie, and to mect various requirements of creditors, employees and the stakehol dee18 Chapter 2 |A broad group of stakeholders has an interest in the quality of eorporaiy governance because it has a relationship to economic performance and the quality of financial reporting. For example, it 16 likely that man; employees have significant funds invested in pension plans. Those pension plans are designed to protect the financial interests of those employees in their retirement. We Use the word society in the diagram to indicate those broad interests, In a similar fashion, employees and creditors have a vested interest in the organization and how Wt is governed. Regulators are a response to society's wishes (0 ensure that organizations, in their pursuit of returns for thei owners, act responsibly and operate in compliance with relevant laws. While shareholders / owners delegate responsibilities to various parties within the corporation, they alse 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 arc » aligned with the shareholders’ best interests. Thefowners want disclosures from management that are accurate and objectively verifiable. For instance, management has a responsibility to provide financial reports, and in some cases, reports on internal control effectiveness. Management hasalways 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 disclosure,19 abilities Corporate Governance Responsibitttes and Accowm en ———_Letporate Governance Responsi ° PARTIES INVOLVED IN CO TE GOVERNANCE: ‘THEIR RESPE CORPORA’ ‘CTIVE BROAD ROLE AND SPECIFIC RESPONSIBILITIES ing ‘orpora citi receiv! Corporate | governance and financial reporting elit ae considerable attention from a number of parties including reg! accour nancial sta! ing bodies, the nting profession, lawmakers and fi ‘users, Overview of Responsibilities Sieh — Sear Provide elfective oversight through election of board members, ! or selling stock, annual Senses fea epresenl the tative of stockholders to ensure that Boose ne according lo the organization's charter and that there is proper accountability. Specific activities include among others. ' vei ‘© 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 relationship with CEO including his or her appointment, succession, performance * Overseeing aspects of the employment of the ‘management team including management remuneration, performance and succession planning «Recommending auditors and new to shareholders. directors Ensuring effective communication with ‘ shareholders other stakeholders, © Crisis: Appointment of the CEO and ooer 2 2 Performance : = Ensuring the organization's iong term viability ang, enhancing the financial position. © Formulating and overseeing implementation of fale strategy. £ haproing the plan, budget and corporate policies, © — Agreeing key performance indicators (KPIs) © — Monitoring / assessing assessment, performance of the organization, the board itself, management ang major projects. . Overseeing the risk management framework and monitoring business risks. ‘© — Monitoring developments in the industry and the operating environment. . ; © Oversight of the and 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, untair trading legislations, occupational health and safety and environmental standards. — Approving annual financial reports, annual reports exists and is operating as expected Executive or | Bioad Role, ‘and other public documents / sensitive reports. | © — Ensuring an effective system of internal controls ‘The same as the broad role of the entire board of directors Specific activi © — tounderstand the organization, its business, its Operating environment and its financial position, © — toapply expertise and skills in the organization's best interests, © — toassist management to keep performance Objectives at the top of its agenda,rovernance Responsibilities and Accoumtabsiiiey —Y4 Corporat 0 ‘¢ tounderstand that his/her role is not to act as auditor. nor to act a8 a member ofthe management too, © torespect the collective, cabinet nature of the board's decisions, 1 © to prepare for and attend board meetings, | 2 10 Seek information on a timely basis to ensure that | he/she is in a position to contribute to the j discussion when a matter comes betore the board, | ‘of alert the chairman in advance to the need for further information in relation to a particular matter, ! and [eto ask appropriate questions relative to operations, Bee, ‘| Operations and accountability, Manage the organization ceflectively, provide accurate and teely reports o shareholders and other stakeholders ‘Specific activities include among others. © recommend the strategic direction and translate the strategic plan into the operations of the business ‘© manage the company's human, physical and financial ‘resources lo achieve the organization's objectives — tun the business + assume day to day responsibility for the organizations | \ conformance with relevant laws and regulations and its | compliance framework | ‘© develop, implement and manage the organization's risk ‘management and internal control frameworks | | develop, implement and update policies and procedures | be ater! to relevant trends in the industry and the | oe organization's operating environment rowde information to the board ‘cl as conduit between the board and the organization sate aan and cer pots hal meet puke ements.22_Chapter 2 ee % Audit Committees of the | Broad Role: ae ne Board of Directors ] Provide oversight of the internal and external audit function the process of preparing the annual financial statements, os neh | 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 extemal auditor and advising the board (and management} on specific actions that should be taken 6. Regus at Broad Role: a. Board ‘Accou Set accounting and auditing standards dictating underlying manch {nancial repring and auiingconoapt, se he expectatonso ~\ audit quality and accounting quality. Spoctescibties / Conducting CPA Licensure Board Examinations a 2 | 2 i Interpreting previously issued standards implementing quality control processes to ensure audit quality Educating members on audit and accounting requirementsb. Securities and Exchange Commission Corporate Governance Responsibilities and Accountabilities 23 Broad Role: Ensure the accuracy, timeliness and faimess of public Feporting of financial and other information for public companies. ‘Specific activities include among others: © — Reviewing filings with the SEC © Interacting with the Financial Reporting Standards Council in setting accounting standards © — Specifying independence standards required of auditors thal report on public financial statements: + © Identify corporate frauds, investigate causes, and _ | Suggest remedial actions : 7 External Auditors "] Broad Role: Perform audits of company financial statements to ensure that the statements are free of material misstatements including misstatements that may be due to fraud. & tivities rs: * — Audit of public company financial statements * — Audits of nonpublic company financial statements * _ Other services such as tax or consulting [8 intemal 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. ic activi hers * — Reporting results and analyses to management (including operational Management) and audit commitiees 2 Evaluating internal controlsSECURITIES AND EXCH IAN COMMISSION (SEC) CODE oF CORPORATE GOVERNANCE Expected Learning Outcomes After studying the chapter, you should be able to. 1. Understand the need for the Code of Governance for publicly-isted 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 « =Principies * 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 Know how the directors can shaw full commitment to the company 8. Understand how independence and objectivity of the board can be feinforced and enhanced, ®. Describe how the performance and effectiveness of the board ca” De assessed. QU ges | _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 10, 2016, the Securities and Exchange Commission approved the Code of Corporate Governance for publicly-listed companies. Its goal is to help GSmpanies develop and sustain an ethical corporate culture and keep abreast with recent developments in corporate governance. One of its salient provisions is fof 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 isin its {implementation and monitoring (compliance. 3 The SEC Code of Corporate Governance is published in this bdok, not only to acquaint readers Particularly future professionals and businessmen of these rules and regulations but also to serveias:reference and guidelinés to currently existing publicly-listed corporations.Principle 2: Principle 4: Principle 5: Principle 6: as_ corer ® oF CORPORATE GOVERNANCE FOR COPE UBLIC LY-LISTED COMPANIES The company should be headed by a competent, working board to foster the long-term suecess of the corporation, and to sustain its competitiveness and. profitability ina mannor consistent with its corponite obyectives ‘and the long-term best interests of its shareholders and other stakeholders. The fiduciary roles, fesponsibilities 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. 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 concerms, such ‘as nomination and remuneration. The composition, functions and responsibilities of all committees established should be contained in a publicly available Committee C! harter, Torshow full commitment to the company, thé 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. The Board should endeavor to exercise objective and independent judgment on all corporate affairs. The best measure of the Board's effectiveness is through an assessment process. The Board should regularly carry out ‘evaluations to appraise: its performancefas a body, and assess whether 4 2 com _— the right mix of backgrounds and Members of the Board are + . te | @uty-bourid to apply high ethical standards, taking into account the interests ofall ciellish co; i ; The company should establ is porate di principle 8: e ures that are practical and in accordance ind practices and regulatory expectations. With bes closure Policies a » The company should éstablish standards for the Principle 9: selection of an external auditor, and exercise effective ne of the same to strengthen the external auditor's in, depend and enhance audit quality. ce 10; The company should ensure that material and Feportable none Prec financial and sustainability issues are disclosed, on 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 heve a strong and effective internal control system and enterprise risk management framework. ‘ ? SHARE HOTS A SYNERGIC RELATIONSHIP WITH t Principle 13: The company should treat all shareholders fairly and equitably, oo Tecognize, protect dnd facilitate the exercise of their Principle 11:30_ Chapter $e DUTIES TO STAKEHOLDERS iple 14; The rights of stakeholders established by law, by contractual Prisco! relations and through voluntary commitments must be respected. Where stakeholders’ rights and/or interests are at stake, stakeholders should have the opportunity to obtain prompteffective 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 processes, 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 @6detofCorporate Governanee is intended to raise the corporate overnance standards of Philippine corporations to a level at par with its regional and global counterparts. 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 will adopt the ®éomplyNer explain approach. This approach combines Woluntary compliance) with mandatory disclosure. Companies‘do not have to comply with the Code, but they must state in 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. TheCode is arranged as follows: Princi i Se s: Principles, Recommendations and Explanations. The (Prineipleg) can be considered as (high-level statements of corporate ‘ ind are applicable to all companies, spol, paces ®SEC Code of C i ‘ive criteria th; (Recommendations; are object that are * ident) the specific features of corporate governance ene to that are recommended for companies operating econ Pe Code, Alternatives to a Recommendation may tye jar g particular circumstances if good governance can be achiever (” “other means, When a Recommendation is not complied with, company must disclose and describe this noft-compliance,” he explain how the overall Principle is being achieved. Tie alternative should be consistent with the overall Principle Descriptions and explanations should be written in plain language and a clear complete, objective and precise manner, so that shareholders and other stakeholders can assess the company's governance framework ME Covernance 54 5. The Explanations strive to provide companies with additional information on the recommended best practice) This Code does notj 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 Seppeniestand financial institutions would generally be expected to follow most of the Code’s provisions: Smalterscompanies) may decide that the costs of some of the provisions outweigh the benefits, or are less relevant in their case. Hence, the Prineiplalbr is considered in the application of its provisions. 6. The Codeiof Corporate Governance for publicly listed companies & 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, ‘egal and social obligations towards theirstakeholders. Corporate governance is a System of direction, feedback and control using regulations, performance standards and ethical guidelines 10 hold the Board and senior management accountable for ensuring ethical behavior - reconciling long-term ustomer. satisfaction with shareholder value — to the benefit of all stakeholders and society.Zz i — —~ is is to Let ly A the} organization's log ‘en —— | i i¢ for its term ing sustainable valu shareholders, stakeho era oS, \ creat 5 o nation nd ff Directors — the: governing Board of Nhat exercises the corporate powers ft by stockho! th tall ts business and control8its properieg SF a comorain: | co . } Man ent — a group of executives given the authori Board of Directors tolimplement the policies it has |, conduct of the business of the corporation, the My by aid down in ie dent director — a person who is inde Indepement and the controlling shardholder, ands free tran any business Or other relationship which could, or could reasonabi, be ived to, materially interfere with his exercise of in judgment in carrying out his responsibilitiesas a director. * Ekecutive director ~ a director who has executive responsibilty of day-to-day operations.of a part or the whole Of the organization. : é Non-executive director — a director who has no executive nsibility and does not perform any work related to the operations of the corporation. ' . Conglomerate }- abgroup 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. 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 andy timely financial and ‘managenfent information; and compliance with applicable laws, regulations, and the Sreanization’s policies and procedures. Organization Lfor Econ ic Co-operation and Development__SEC Code of Corporate Governance 33 ee Enterprise Risk Management ~ a process, effected by an entity’ Board of Directors, management and other personnel, applied. _ strategy setting and across the enterprise that is designed to identity potential events that may affect the entity, manage risks to be withie 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 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. 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. 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.34 Chapter 3 THE BOARD'S GOVERNANCE RESPONSIBILITIES 1. ESTABLISHING A COMPETENT D Principe The company should be headed by a competent, working board to foster the long-term success of the corporation, and to > with is Competitiveness and profitability in a manner consistent holders ° corporate objectives and the long-term best interests of its share 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 remain 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, * experience and expertise of each director that is relevant 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 Buide its activities, effectively monitoring management's performance and supervising the Proper implementation of the same. In this regard, the Board sets qualification standards 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 8 Recommendation 12 3S Board posed of a majority of no . - should be com| of a maj n-executive ¢; Mg possess the necessary qualifications to effectively parte help secure objective, independent judgment on corporate affairs and substantiate proper: checks and balances. S to Explanation he right combination of non-executive directors (NEDs| . The eth dependet directors (IDs) and executive directa. ee igures that no director or small group of directors can dominate the decision-making process. Further, a board composed of a majority of 'NEDs assures protection ‘of the company’s interest over the interestof 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 aim to promote effective board performanee and continuing qualification of the directors in carrying-out their duties and responsibilities. It is suggested that the orientation program for first-time directors, in any company, be for at least eight hours, while the annual continuing training be for at least four hours. All directors should be property oriented upon joining the board. TV ensures that new Tnembers 5 » spriiely apprised of theit duties or responsibilities, before beginning their directorships. The orient program covers SEC-mandated topics on corporate governance: Og introduction to the company’s business, Articles of IncorPO TS of ihe Code of Conduct. It should be able to meet the specific36 Chapter 3 company and the individual directors and aid any new director in effectively performing his or her functions. The annual continuing training program, on the other hand, makes certain thatthe directors are ‘continuously informed of the developments Jin the business and regulatory environments) including emerging risks relevant to the company. It involves courses on corporate governance matters relevant to the company, including audit, internal controls, risk. Management, sustainability and strategy. It is encouraged that companies assess their own training and development needs in determining the coverage of their continuing training program. Recommendation 1.4 The Board shoutd have a policy on board diversity. Explanation Having a board diversity policy is a move to avoid groupthink and ensure that optimal decision-making is achieved. A board diversity policy is not limited to gender diversity. It also includes diversity in age, ethnicity, culture, skills, competence and knowledge. On gender diversity policy, a good example is to increase the number of female 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 Gir. The Corporate Secretary should not be a member of the Board rectors and should annually attend ini Sivonen ly 4 training on corporate Explanation Corporate Seeretarylis primaril 7 ly responsible to the corporation and Ss acto and not to the Chairman Or President of the Company n among others, the following duties and responsibilities: a. : a 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 n committee mectings and the annual board calendar, and assigt) chairs of the Board and its committees to set agen das toe the meetings; ose . Safekeeps and preserves the integrity of the minutes of the meetin, of the Board and its committees, as well ag other official records or. 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 arise; . Works fairly and objectively with the Board, Management and stockfiolders 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, prevent hinvher 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 fhe SEC,~e__Lnupter 3 Recommendation 1.6 The Board should ensure that it is assisted in sts duties by a Compliance Officer, who should have a rank of Senior Vice President or an equivalent position with adequate stature and authority in the corporation. The ompliange Offies should not be a member of the Board of Directors and should annually attend a training on corporate governance. Explanation The Compliance Officer is a member of the company’s management team in charge of the compliance function. Similar to the Corporate Secretary, he/she is primarily liable to the corporation and its shareholders, and not to the Chairman or President of the company 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; ¢. (Reports the matter to the Board if violations are found and recommends the imposition of appropriate disciplinary action; d. Ensures the integrity and accuracy of all documentary submissions to regulators; “e. Appears before the SEC when summoned in relati i with this Cose 'n relation to compliance f Collaborates with other departments to i ( f : Properly address compliance issues, which may be Subject to investigation; , & Identifies possible areas of compli i work: resolution tthe same, pliance issues and '$ towards the—a SI ode of Corporate Govemane, h. Ensures the attendance of board me ” relevant trainings; and bers and key Officers. to i, Performs such other duties and responsibilit by the SEC. SSS may be provides 2 Ri AND RESPONS _ Principle The fiduciary roles, responsibilities and accountabilities of the Boand as ' provided under the law, the company’s articles and by-laws, and other legal pronouncements and gitidelines should be clearly made known to all directors as well as to shareholders and other stakeholders. Recommendation 2.1 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 compaiy and all shareholders, Explanation There are two'key elements-of the fiduciary duty of board imembets: the duty of care and the duty of loyalty. The duty of care requites board members to act on a fully informed basis, in good faith, with due diligence and care. The duty of loyalty is also of central importance: the board member should act in the interest of the company and all its shareholders, 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 ihe . company’s business objectives and strategy, and monitor ity implementation, in order to sustain the company’s long-term and strength.ao Chapter 3 Explanation According to the OECD, the Board should review and guide corporate Strategy, “major plans ‘of action, risk management policies ang Procedures, annual budgets and business plans; set_ performance objectives; monitor implementation and corporate performance, and ‘oversee major capital expenditures, acquisitions and divestitures. Sound Strategic policies and objectives translate to the company s proper identification and prioritization of its goals and guidance on how best to achieve them, This creates optimal value to the corporation. Recommendation 2,3 ‘The Board should be headed by a gomipetentiand qualified: Chairpersony 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 contentioussissues 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; ©. Assures the availability of proper orientation for first-time directors and continuing training opportunities for all directors; and Makes sure that Performance of the Board is ev: i Ul a year and discussed/followed up on. ‘aluated at least once in______ SEC Code of Corporate Governance Seat _ Recommendation 24 d should be responsible for ensuring and adopting an . Te Bon planning program for directors, key officers and mune to ensure growth and a continued increase in the shareholders’ value. ‘This should include adopting policy on the retirement age for directors and key officers as. part of management succession and to 7 dynamism in the corporation. promot Explanation ‘The wansferof company leadership to highly competent and quatities The af secession PANE ss the Bowes rreponsibility to implement a process to appoint competent, professional, honest and highly motivated management officers who can add value to the company. A good succession plan is linked to the documented roles and responsibilities for each position, and should start in objectively 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 @lignsthesremumération of key officers and board members with the long-termuimterests/ofithe company. In doing so. it should formulate an pt a policy specifying the elationship between Femuneration and performance. Further, no director should participate in discussions 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 i measures to prevent conflicts of interest. Remuneration policies ° ® sound risk culture in which risk-taking behavior is , TheyM2 Chapter 3 of th also encourage employees to act in the long-term anterest of he company as a whole, rather than for themselves of thelt het new only Moreover, it is good practice for the Board to formu a irae) a policy specifying the relationship between femul performance, which includes specific financial and nan _“ to measure performance and set specific provisions for file of the corporation significant influence on the overall risk pro! Key considerations in determining proper compensation Incluie the following: (1) the level of remuneration 18 commense oan responsibilities of the role, (2) 10 director should partic res ee ‘on his remuneration; and (3) remuneration pay out sched i sensitive to fisk outcomes over a multi-year horizon Tl internal For employees in control functions (og, risk. contin ear inien audit), their remuneration 1s determined independent 0 any 1 line being overseen, and performance measures are based principal 7 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 nomjnation, election, or replacement of a director. In addition, is process Of identifying the quility of directors should be itligned with the strategic direction of the cdmpany. Explanation It is the: Board's responsibility to develop a policy on board nomination, which iscontained in the company's Manual on Corporate Governance. ite policy should encourage shareholders’ participation by including rocedureés on how the Board accepts nominati inori sevtotee Tre voliey pt minations from minority 6 ai ould also promote t Board's nomination and election process, Iransparency of theSEC Code of Corporate Govern ance ” The nomination and election process also includes th evaluation of the qualifications of all persons nominated to the Won syring whether candidates. (1) possess the kaowledge, stith, experience, and particularly in the case of non-executive director, independence of mind given their responsibilities to the Board and. in light of the entity's business and risk profile: (2) have @ record of integrity and good repute; (3) have sufficient time to carry out their responsibilities, and (4) have the ability to promote a smooth interaction between board members, A good practice is the use of professional search firms of external sources when searching for candidates to the Board, 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 as 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 Securities 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 bank, quasi-bank, trust company, investment house or as an affiliated person of any of them; 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 oF administrative body of competent jurisdiction from: (a) acting as underwriter, broker, dealer, investment adviser, principal distributor, mutual fund dealer, futures commission merchant, commodity trading advisor, oF 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 © the capacities mentioned in sub- hs (b) above, oF tas paragraphs (a) and (b) : willfully violating the laws that govern securities and banking Activities,44 Chapter 3 p The disqualification should also apply if (a) such person is the subject of an order of the SEC, BSP of any court or administrative body denying, revoking or suspending any registration, license or Permit issued to him under the Corporation Code, Securities Regulation Code or any other law administered by the SEC or BSP, or under any rule or regulation issued by the Commission or BSP; (b) such person has otherwise been, restrained to engage in any activity involving securities and ban ne i (c) such person is the subject of an effective order of a sel regu atory organization suspending or expelling him from mem! . mes Participation or association with ‘1 member or participant of Organization; 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, violati i u is, violations or misconduct enumerated previously; " Other grounds as the SEC may provide.“ crporatw Governaney _4§ dn ackiition. the following may be grounds for lemporary Hisqualifics ion of a director: a. Absence in more than fifty percent (50%) of all regutar and speciat d. meetings of the Board during his incumbeney, oF any 12-month period during the said incumbency. unless the absence \s due to illness, death in the immediate family or serious acculent The disqualification should apply Por purposes of the succeed ing election; Dismissal or termination for cause as director of any publicly-tisted 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 hiniself from any involvement in the cause that gave rise to his dismissal or termination, 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 If any 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 fai ss 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 ©C Code of Corporate Governance 4 Explanation In is the responsibility of the Board to appoint a competent ma team at all times, mon itor and assess the performance eet management team based on established performance standards ih the consistent with the company’s strategic objectives, and cond regular review of the company’s policies with the management tear, in Ihe selection process, fit and proper standards are to be applied on k 2 personnel and due consideration is given to integrity, technical expertice and experience in the institution's business, cither 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 menibers. and shareholders. The Board should also approve the Internal Audit Charter. Explanation on oem In the performance of the Board's oversight responsibility, the ition el control mechanisms may include overseeing the implemen an the key contro! functions, such as risk managemen!- compli Licies resource Polele Aint A - ermal audit, and reviewing the corporation's humanM8 Chapter 3 Ses Conflict of interest situations, compensation program for employees an Management succession plan. Recommendation 2.11 The Board should oversee that a sound enterprise Fi eet and (ERM) framework is in place to effectively identify, a ework should manage key business risks. The risk management id enterprise-level guide the Board in identifying units/business lines and Q management risk exposures, as well as the effectiveness of ris! strategies, Explanation i icy i ion's corporate Risk management policy is part and parcel of a corporation s © 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 ides the di finctions, It guides the directo i rs on how to discharge their the Boor TheBest Ga standards for evaluating the performance of ofthe Chaimae arter also contains the roles and responsibilities %SEC Code of Comporate Governance —4y principle jittees should be set up to the extent possible Lo support the Bord co es shot ae Board's functions, particulary wih respect effective widit, Fish management, related party transactions, and other key to audit, corporate Bi » concerns, such as nomination and remunerat overnance CONES: ke The postion functions and responsibilities of all committees oo + amptishedd should be contained 10 9 publicly avatlable Committee ‘Charter, Recommendation 3. 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 i 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 phat ng should establish an Audit Committe to enhance its oversight system, internal the company's financial reporting, internal control applcebin cml and external audit processes, and compliance wit at least three and regulations. The committee should be composed Of Majority of wh ppropriately qualified non-executive directors, U ‘ cra OF whom, including the Chairman, should be independent. AP of the committee must have relevant background,$0 Chaprer 3 knowledge, skills, and finance. The ‘shairman of the B and/or experience in the areas of necoueting. andiing Chairman of the Audit Committee should not ne Joard or of any other committees Explanation The “Audit Commitico 1s responsible for overseeing the | venir Management in establishing and mamtaining an adequate. stems and efficient internal control framework. It ensures winding reporting. Processes are designed to provide assurance In ae aternal policres, monitoring compliance with laws, regulations and internal Pole efficiency and effectiveness of operations, and safeguarding The Audit Committee has the following duties and responsibilities, among others: a. Recommends the approval the Internal Audit Charter (1A Charter), which formally defines the role of Internal Audit and the audit plan as well as oversees the implementation of the IA Charter, z Through the Internal Audit (A) 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; ®- Oversees the Internal Audit Department, and recommends the Appointment and/or grounds for approval of an internal audit head or ct Audit Executive (CAE). The Audit Committee should also ee the terms and conditions for outsourcing internal audit @., Establishes and identifies the ing li rting | it toenable hin ta property nine 8 line of the Internal Auditor y is duties and responsibilities. F t + he should, directly report to the Audit Committee, "k Reviews and monitors Management's responsiveness to the | wraditor’s findings and recommendations; ‘mernal Prior to the commencement of the audit, discusses with the External Auditor the nature, scope and expenses of the audit, and ensures the ‘coordination if more than one audit firm is involved in the activity to secure proper coverage and minimize duplication of efforts; 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 conporation’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 & threat to his independence}. The non-audit work, if allowed, should be disclosed in. the corporation's Annual Report and ‘Annual Corporate Governance Report; Reviews and approves the Interim and Annual Financial Statements before their submission to the Board, with particular focus on the following matters: © Any changes in accounting policies and practices e Areas where a significant amount of judgment has been exercised Significant adjustments resulting from the audit Going concern assumptions Compliance with accounting standards Compliance with tax, legal and regulatory requirements esee Reviews the disposition of the recommendations in the External Auditor's management letter, 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; Coordinates, monitors and facilitates compliance with laws, tules and regulations; ~~ Ai defined | under the Code of Ethics for Professional AccountantsLor ‘ecommend, Temoval and feo 2h, Boast the appointment, reappointment: Commie! Fes of the External Auditor, duly accredited by the mission, who undertakes an independent audit of the wapatition, and provides an objective assurance on the manner by ch the financial statements should be prepared and presented fo the stockholders; and In case the company does not have a Board Risk Oversight Committee wunior Related Party Transactions Committee, performs the functions of said committees as provided under Recommendatrons 3.4 and 3.5. ‘The Audit Committee meets with the Board at least every quarter without the presence of the CEO o other management team members, and periodically meets with the head of the internal audit. Recommendation 3.3 The Board should establish a Corporate Governance Committee that should be tasked to assist the Board in the performance of its corporate responsibilities, including the functions that were formerly assigned to a Nomination and Remuneration Committee. It should be of at least three members, all of whom should be independent directors, including the Chairman. Explanation The Corporate Governance Committee (CG Committee) is tasked with ensuring compliance with and proper observance of corporate governance principles and practices. It has the following duties and functions, among others: a. Oversees the implementation of the plen ; corporate governance Ramework i Periodically reviews the said framework to ensure that li « remai ne bya in light of material changes to the business and regulatory Prey and ied Strategy, as well as itsSEC Code of Corporate Governance $3 the results of the Board evaluation are \d that concrete action plans are ileveloped es address the identified areas for improvement, Ensures that discussed, 4% implemented to d. Recommends continuing education/training programs for directors, gssignment of tasks/projects to board committees, succession plan for the board members and senior officers, and remuneration packages for corporate and individual performance, Adopts corporate governance policies and ensures that these are reviewed and updated regularly, and consistently implemented in form and substance, {, Proposes and plans relevant trainings for the members of the Board, g. Determines the nomination and election process for the company’s directors and has the special duty of defining the general profile of board members that the company may need and ensuring appropriale knowledge, competencies and — expertise that complement the existing skills of the Board; and h. Establishes a formal and transparent procedure to develop a policy for determining the remuneration of directors and officers that is consistent with the corporation's culture and strategy as well as the business environment in which it operates. The establishment of a Corporate Governance Committee does not preclude companies from establishing separate Remuneration or Nomination Committees, if they deem necessary. Recommendation 3.4 Subject to a corporation's size, risk profile and complexity of pela the Board should establish a separate Board Risk Oversight company's (BROC) that should be responsible for the oversight of a functi on lity Merprise Risk Management system to ensure its least three an effectiveness, The BROC should be composed of at den hea a nesmaleety of wyors should be independent Chairman of the Beard Chairman. The Chairman should not be the or of any other committee. At least one member of the committee experience on risk and risk manager thorough knowledge and