CHAPTER 3- INTERNAL AND EXTERNAL INSTITUTIONS AND INFLUENCES OF

CORPORATE GOVERNANCE

Lesson Objectives
At the end of this lesson, the students should be able to:
1. Explain the corporate governance in the Philippines;
2. Define board of directors, CFO and CEO;
3. Identify the external environment of corporate governance; and
4. Explain the corporate protection within legal boundaries.

CORPORATE GOVERNANCE IN THE PHILIPPINES

1. The Audit Committee, whose responsibility is to inculcate in the minds of the board
members the importance of a sound system of internal control and the Board’s
oversight responsibility;
2. The Nomination Committee, whose function is to review and evaluate the
qualification of all persons nominated to the Board; and

3. The Compensation or Remuneration Committee, whose task to establish a formal

and transparent procedure for developing a policy on executive remuneration.

INTERNAL FOUNDATION OF CORPORATE GOVERNANCE

BOARD OF DIRECTORS
 A board of directors is a body of elected of appointed by shareholders who jointly
oversee the activities and the overall managerial and operational aspects of the
corporation. The said activities determined by the powers, duties, and
responsibilities delegated to it or granted by an authority which can be from the
shareholders and / or from the by – laws itself.
Authority and Responsibility and Purpose of the Board of Directors
 The most important responsibility of the board of directors is to protect the
resources entrusted to them by the shareholders’ and make sure the latter receive
a decent return on their investment
Structure and Makeup of the Board of Directors
 The board is made up of individual men and woman, the directors who are elected
by the shareholders.
Committees on the Board of Directors
 The board of director’s responsibilities includes the institution of the audit and
compensation committees. The audit committee is responsible in making sure that
the company’s financial statements and reports are reasonably accurate and use
fair estimates in accordance with the applicable financial reporting standards.

Ownership Structure and Its Impact on the Board of Directors

 The particular ownership structure of a corporation has a huge impact on the
efficiency and effectiveness of the board of directors to govern.
CHIEF EXECUTIVE OFFER CEO

 The Chief Executive Officer (CEO) is usually the

singular organizational position that is principally
accountable in carrying out the strategic policies
and procedure as established by the board of
directors.

The typical responsibilities of a CEO are as follows:

Support the Board

  One of the responsibilities of the CEO is to supports operations and administration
of board by giving information and advice to board members CEO should be
serving as the crossing point between board and staff, supporting whatever the
Board’s evaluation of chief executive as well as evaluation of other high ranking
people in organization.
Delivery of Program, Product and Services (PPS)
 Administer design, marketing promotion, delivery and quality of programs products
and services. The CEO is expected to be the brand bearer.
Financial Risk and Tax Management
 Recommends yearly budget for board’s approval and cautiously manages
organization’s resources within the bounds of budget guidelines.
Human Capital Management
 Efficiently manages the human capital of the organization based on sanctioned
personnel policies and procedures that fully conform to current laws, regulations
and standards both local and international.

Public Relation (PR)

 It is also a job of the CEO to package and build a positive image of the company
to its relevant shareholder.
CHIEF FINANCIAL OFFICER (CFO)
 For much privately held business, the decisions to hire a
chief financial officer (CFO) are often a difficult decision.
Beyond the issue of whether the company can afford a
high-calibre financial professional, many business
owners are often confused over just what it is that CFO
does or should do.

The following are some of the critical areas which an effective

CFO will work on in discharging his functions:
Implements Internal Control
  A CFO will be the one responsible for conveying the important financial controls to
a company.
Supervises Major Impact Projects
 A CFO might also carry out a meticulous analysis of a company’s future capital
investment requirements as prerequisite in securing additional financing.
Develops Relations with Financing Sources
 One of the most important responsibilities of an effective CFO is to institute good
working relationships with banks and other financial institutions that may impact
on the company’s ability to finance its operations.
Advisor to Management

 An effective CFO is also an important of the management team of some emergent

companies.
Drives Major Strategic Issues

 A good CFO can also be expected to take part in important role attending some
major strategic issues that will have an impact on the company’s long term future.

Risk Manager
 The CFO is on the best position to foresee risk considering that they have this rare
perspective on how the company operates.
Relationship Role
 More often CFO is the nucleus in an organization with many connections. CFO
serves the bridge between these a variety of parties within the organizations.
Objective Referee
 CFOs are not valued by board of directors or audit committees on attributes or
tendencies of boosting financial figures with sacrificed transparency.
SHAREHOLDERS
Shareholders Right and Responsibilities
  Share ownership gives the owner with the right to a share of the income of the
company called dividend and a right to a share of net proceeds on the sale during
liquidation of the company.
 They must ensure that the obligation to provide information to shareholders does
not detract from the company’s ability to complete in its marketplace.
 They must ensure that their right to attempt to influence the company does not
translate into behaviour that will paralyze and detrimental to the company.

Shareholders Ability to Change the Board

 Shareholders who are dissatisfied with how the directors are running the
corporation may remove the directors of refused to re-elect them. In practice, this
may be a difficult course to take, particularly where the shares of the corporation
are widely held.

EXTERNAL ENVIRONMENT OF CORPORATE GOVERNANCE

AUDITORS
 One of the most important external institutions in
governance is the independent auditors. Their job is to
help to ensure that firms are run efficiently by keeping
public records accurate, adhering standards of
reporting for public purposes and taxes paid properly
and on time.

LEGAL ENVIRONMENT

 Some contend that it is the market that can really press

real governance considering that it is a variable
independent from anybody.

Legal environment has three distinct dimensions:

 The domestic laws of home country

 The domestic laws of each of foreign markets
 International law in general

MARKETS

 Market are considered the most important institution of corporate governance.

There are three central and important points of the term markets, these are:

 The firm’s product market

 Capital market,
 The managerial labor market
OTHER EXTERNAL FACTORS
External Environment may create major threats or in some cases precursor of openings
and possibilities for an organizations.
Political Environment
 The politics of a country or region that an organization is functioning affects the
policies and benefits that an organization derives from a system. It is major pool
from which the human resource of an organization is selected from and hence it is
likely to shape an organization both internally and
externally.
Technological Environment
 This becomes even more relevant in case of
businesses that rely heavily on technology and are
technologically sensitive.
Social Environment
 Social Environment is practically the ecosystem within which organizations thrive,
then enabling atmosphere in which business is situated into.

CORPORATE PROTECTION WITHIN LEGAL BOUNDARIES

ANTI – TAKEOVER DEFENSES

 Anti – takeover tactics come in my different forms and appearances. Technical

languages such as “shark repellent” and poison pill” are used to described the
defensive means or tactics that companies use to challenge
ADVANTAGE OF ANTI-TAKEOVER DEFENSES

1. Anti-takeover tactics are positive when a company has the sense to

believe that its stock has a higher market price than reflected and thus
may become the target for a takeover.
 2. Anti-takeover tactics are good when the predator company’s purpose is to acquire
the company and then use it for not good purposes which would not benefit the
constituent companies.

3. Short term poison pills may help businesses go through difficult financial
periods when they could be defenseless targets.

DISADVANTAGE OF ANTI-TAKEOVER DEFENSES

1. It will prevent a genuinely good purpose or aim. Anti- takeover tactics are
good when the predator company’s purpose is to acquire the company and
then use it for good purposes which would benefit the constituent companies.
2. Anti-takeover tactics are sometimes used to embed management and prevent
shareholders from selling their stock and maximizing its price.
3. Board members, who are already in their comfort zone, sometimes hide behind
poison pills to retain their position.
LIABILITY ISSUES AND INDEMNIFICATION OF OFFICERS
 Liability can accrue for officers and directors when they cause financial and
nonfinancial harm to the corporation, or when they act solely on their own behalf
which is detrimental to the corporation, this can be in a form of
commission of a crime and other wrongful acts.

Personal Liability of Officers and Directors

The following are issues that may subject officers and

directors to personal liability:

 Issues involving misappropriation

 Issues involving nondisclosure of conflict of Interest
 Issues on loyalty
 Issues on non-separation of personal and business
concerns
  Issues on prudence

Indemnification of Officers and Directors

 Indemnification of officers and directors refers to the act of the reimbursing officers
and directors for expenses incurred, liabilities accrued, and amounts paid in
defending claims brought to them for actions taken on behalf of the corporation.
Director’s and Officer’s Insurance
 Corporation are allowed to purchase insurance to cover matters resulting from acts
taken by officers and directors. This insurance the corporation purchase for the
corporation itself in general.
SHAREHOLDERS’ IMPOSABLE LIMITATIONS
THROUGH CLASSES OF STOCK
A company may have many different types of shares that come with different conditions
and rights.
There are four main types of shares:
Ordinary Shares
 Ordinary shareholders are the last to be paid
if the company is wound up.

Preference Shares

 These shares typically carry a right gives the

holder preferential treatment when annual
dividends are distributed to shareholders.

Cumulative Preference Shares

 These shares give holders the right that, if a dividend cannot be paid one year, it
will be carried forward to the succeeding years.
Redeemable Shares
 These shares come with an agreement that the company can buy them back at a
future date-this can be at a fixed date or at the choice of the business.
SUPERMAJORITY
 This may limit however the board of director’s elbow of authority, and may even
hamper a friendly and rational takeover that may do more good for the company.

SHAREHOLDER VOTING AGREEMENTS

 A shareholder voting agreement is a legal

contract among shareholders of a corporation involving
voting of shares. The shareholders voting agreement
frequently covers how members of the Board of
Directors are to be selected and occasionally covers
major corporate events such as mergers and
acquisitions.

SHAREHOLDERS –MANAGEMENT AGREEMENTS

The main features of a shareholder’s agreement are:
Board Appointment Rights
 It is common for the shareholder’s agreement to establish the relative rights of
representation that the shareholders will have on the company’s board of directors
of the company.
Veto Rights
 Veto right refer to the right to overturn decisions reached by the board. This
process involves listing of material things that cannot be done without the
investors’ prior consent and ratification.
Adoption and amendment of Business Plans and Budgets
  The agreement may provide a process for adopting and amending business plans
and budgets, to ensure those individual shareholders or their appointed directors
are properly represented in that process.
Scope of Business

 It is a common particularly in a joint venture or a start-up company, for the

shareholder’s agreement to specify the scope of the business that the company
will conduct, and provide that consent is required from the shareholders before the
company can change the nature of its business or do some diversification
attempts.

Intellectual Property Rights

 Where shareholder’s parties are contributing unique and

distinct advantage or process such patent, trademark,
copyright, or any form of information or competencies to
a venture, the shareholders’ agreement may provide for
the ownership and licenses of intellectual property rights,
preserving certain such rights for the properties themselves and others to the
company.
Right to Information
 It is extremely important for the investors to monitor performance closely,
particularly to give them an early warning if things are starting to go wrong.
Warranties from the Management Team
 In general terms, these are a series of statements about the company that the
investors would expect to be true and accurate.
Strategic Investors Rights

 Where a shareholder is looking for more than a return on its investment, the
shareholders’ agreement may provide an opportunity to negotiate terms covering
secondary commercial agreements, such as giving a shareholders or its group first
 rights of refusal on certain type of business or contract with the company, or the
right to be informed of and to co-invest in investments to be made by the company.

Restrictions on Transfer of Shares

 The investors will be keen to make sure that the management team they are
backing, holds on to their shares.
Restrictive Covenants
 These will make it clear that, while members of the management are employed
and for a period of time afterwards, they cannot complete with the company or
solicit customers or employees.
Exit Provisions
 A shareholding in a private company is by its nature illiquid because there is no
market live and open of the shares
BEHAVIORAL MANAGEMENT THEORY
 The behavioural management theory is often called the human relations
movement because it addresses the human dimension of work. Behavioural
theorists believed that a better understanding of human behaviour at work such as
motivation, conflict expectation, and group dynamics, improved productivity.
ELTON MAYO

 Elton Mayo’s contributions came as a part of the Hawthorne studies, a series of

experiments that rigorously applied classical management theory only to reveal its
shortcomings. The Hawthorne Works of the Western Electric Company in Chicago
from 1924 to 1932.

ABRAHAM MASLOW
 Abraham Maslow, a practicing psychologist, developed one of the most widely
recognized need theories, a theory of motivation based upon a consideration of
human needs.

His theory of human needs had three assumptions:

 1. Human needs are never completely satisfied.
2. Human behaviour is purposeful and is motivated by the need for satisfaction.
3. Needs can be classified according to a hierarchical structure of importance form
the lowest to highest.

Maslow broke down the needs hierarchy into five specific areas:

 Physiological Needs
 Safety Needs
 Belonging and love needs
 Esteem Needs
 Self-actualization needs

DOUGLAS MCGREGOR
 Douglas McGregor was heavily influenced by both the Hawthorne studies and
Maslow. He believed that two basic kinds of managers exist. The theory X and
Theory Y.
For further discussion, please refer to the link provided: Veto rights
https://www.youtube.com/watch?v=n_3cBWrC5n8
For further discussion, please refer to the link provided: Shareholders agreement
https://www.youtube.com/watch?v=JQYGFiFOFhQ
For further discussion, please refer to the link provided: Abraham Maslow’s Hierarchy of needs
https://www.youtube.com/watch?v=O-4ithG_07Q

Reference: Strategic Management Made Simple By: Felina C. Young