CHAPTER 4 LEGAL, REGULATORY AND POLITICAL ISSUES

Appreciation

A corporation is an entity created by law, as discussed in Chapter 1. Company law dictates how it is created or
incorporated. Laws are considered conduct approved and enforced by a government of a particular country.
Society cannot function effectively if there is no basis or a mechanism that regulates the interaction between its
citizenry. The law is also a mechanism that protects people's fundamental rights, establishes order, resolves
disputes, and sets standards. Business law (or commercial law) is a body of law that deals with corporate contracts,
manufacture or sale of goods and services, employment, labor relations, and many others. Knowledge of the law is
essential in running organizations that are socially responsible and governed well.

Regulation

"One primary consequence of CSR and corporate governance activities is the impact on the financial
performance of the company. For a organization like us, we are expected to produce positive EBIT, good return o
equity and assets, plus an attractive EPS in accordance with the law. In the conduct of business, it's always a
challenge to be utopic in complying with all legal, regulatory, fiscal, and even tax rules. We take a balance by
adapting the ethical theory of Utilitarianism which holds that the most ethical choice is the one that w produce the
greatest good for the greatest number. We also manage to take will up the proactive strategy by being fully aware
of our social responsibilities, and actively supporting and participating various efforts by keeping abreast with the
evolving global and local initiatives." profit-oriented

Mr. Ulysses King

Chief Financial Officer

Omnicom Media Group-Philippines

Regulation is defined as a legal system that controls and regulates the business activities of a certain country. As
discussed previously, corporations are legal entities that have similar rights accorded to that of a person. A
corporation is allowed to perform functions that humans make, like engaging in business activity (e.g., signing
contracts, owning properties, negotiating terms of engagement, and others).

Legislation and regulation on CSR and Corporate governance can sometimes overlap because both concepts deal
with normative business conduct, and both have similar requirements. Corporate governance deals with external
regulation (legal) and internal control of the corporation through legal means by its board of directors. In contrast,
CSR deals with an internal commitment of a company to behave ethically and satisfy the needs of its various
stakeholders. CSR can influence corporate governance structures, as can be seen with the growing nonfinancial
assessments or "soft" governance systems in corporations today. CSR is a voluntary initiative in the West for which
no legislation has been made into law.

The Rationale for Regulation

The study of economics describes how societies produce and consume goods and services. Milton Friedman,
considered by many to be the foremost economist of the twentieth century, suggested that more money infused
in an economic system lessens the degree of government involvement. Friedman was a staunch advocate of free
markets because he believes that free markets raise the standard of living and not from central planning by the
government (Hetzel, 2007),

Free Market - Considered a basic form of capitalism (monetary goods and services are owned by private individuals
and companies), a free market is an economic system that restricts government intervention in the economy. This
concept means that private businesses are based on supply and demand, and the less the government is involved
in the economy, the better off businesses will be. Transactions in a free market are made privately between buyers
and sellers. A pure free-market economy does not exist because markets are, to some degree, constrained by
regulation that seeks to protect the players in the market and the general public, such as foreign exchange rates,
price controls, quotas, documentation requirements, consumer rights, and labor relations.

Apart from public safety and welfare, there is also a need to protect industries. Without regulation, any individual
can enter into the market and disrupt the business environment by unscrupulous practices. Regulations serve to
protect legitimate players with the industry, who have engaged in the business properly and have coordinated
with regulating bodies to ensure legal and lawful operations.

Lastly, regulation is needed to produce revenues for the government to support national economic programs and
policies. Part of what businesses pay (ie., taxes, licenses, and permits) goes to the government agencies that
perform oversight functions.

Laws, Codes, and Regulations

We now discuss the various codes, laws, and regulations that are relevant in the practice of CSR and corporate
governance:

Sarbanes and Oxley Act (SOX) -Although this is an American legislation, it is significant because of increased
financial accountability in auditing (internal and external) and disclosure to protect investors. Strict reforms were
made in 2002 to existing regulations due to the infamous corporate meltdowns (e.g., Enron, Tyco, and Worldcom).
This act influenced how corporations around the world would improve their respective reporting standards. The
financial meltdown in 2008 led to another act passed, the Dodd-Frank Wall Street Reform and Consumer
Protection Act (sometimes referred to as SOX 2), which focused on closer monitoring and regulation of banks.

Organization for Economic Cooperation and Development (OECD)- There are many codes from various
international agencies such as the International Corporate Governance Network (ICGN), and they all revolve
around similar principles of good corporate governance. We shall be focusing on the revised G20/OECD principle
(2015)

Principle 1: Ensuring the basis for an effective corporate governance framework. The corporation should have a
corporate governance framework that promotes transparent and fair markets that abide by the rules of law.

Principle 2: The rights and equitable treatment of shareholders and key ownership functions. The corporate
governance framework should be able to protect and facilitate the exercise of shareholders' rights. It should also
ensure the equitable treatment of shareholders, including minority and foreign shareholders.

Principle 3: Institutional investors, stock markets, and other intermediaries. The corporate governance framework
should provide sound incentives throughout the investment chain and allow stock markets and other
intermediaries to engage and contribute to good corporate governance.

Principle 4: The role of stakeholders in corporate governance. The corporate governance framework should
recognize the rights of all stakeholders and promote active cooperation between corporations and stakeholders in
sustaining financially sound companies.

Principle 5: Disclosure and transparency. The corporate governance framework should ensure timely and accurate
disclosure is made available to investors and the public. This includes the financial situation, performance,
ownership, and governance of the corporation.

Principle 6: The responsibilities of the board. The corporate governance framework should ensure the company's
proper strategic guidance, effective monitoring of management by the board of directors, and the board's
accountability to the company and shareholders.