CORPORTE GOVERNANCE AND BUSINESS ETHICS

Concept of Corporate Governance

Definition

Corporate governance is the framework for managing and directing businesses. The governance
of companies is the responsibility of the boards of directors.

The notion of corporate governance of corporations can signify many things depending on the
lens through which it is seen. Corporate governance is typically thought of from an economic
standpoint as protecting the interests of shareholders. (Garzon Castrillon, Manuel Alfonso, The
Concept of Corporate Governance. vol. 25, no. 2, 2021).

Angel Curria, in his preface for the G20/OECD Principles of Corporate Governance supposed
that, the purpose of corporate governance is to help build an environment of trust,
transparency and accountability necessary for fostering long-term investment, financial stability
and business integrity, thereby supporting stronger growth and more inclusive societies. (Curria
Angel, 2015)

Three Types of Corporate Governance Mechanisms

If a company wishes to identify and achieve its strategic objectives, it must have effective
corporate governance. A corporate governance system comprises checks, regulations, and
directives that help a corporation achieve its goals while simultaneously meeting the demands
of its stakeholders. A corporate governance system frequently consists of a variety of different
procedures.

Internal Mechanism

The foremost sets of controls for a corporation come from its internal mechanisms. These
controls monitor the progress and activities of the organization and take corrective actions
when the business goes off track. Maintaining the corporation's larger internal control fabric,
they serve the internal objectives of the corporation and its internal stakeholders, including
employees, managers, and owners. These objectives include smooth operations, clearly
defined reporting lines and performance measurement systems. Internal mechanisms include
oversight of management, independent internal audits, structure of the board of directors
into levels of responsibility, segregation of control and policy development.

External Mechanism

External control mechanisms are controlled by those outside an organization and serve the
objectives of entities such as regulators, governments, trade unions and financial institutions.
These objectives include adequate debt management and legal compliance. External
mechanisms are often imposed on organizations by external stakeholders in the forms of
union contracts or regulatory guidelines. External organizations, such as industry associations,
may suggest guidelines for best practices, and businesses can choose to follow these
guidelines or ignore them. Typically, companies report the status and compliance of external
corporate governance mechanisms to external stakeholders.

Independent Audit

An independent external audit of a corporation’s financial statements is part of the overall

corporate governance structure. An audit of the company's financial statements serves
internal and external stakeholders at the same time. An audited financial statement and the
accompanying auditor’s report helps investors, employees, shareholders, and regulators
determine the financial performance of the corporation. This exercise gives a broad, but
limited, view of the organization’s internal working mechanisms and future outlook.

Small Business Relevance

Corporate governance has relevance in the small business world as well. Internal mechanisms
of corporate governance may not be implemented on a noticeable scale by a small business,
but the functions can be applied to many small businesses nevertheless. Business owners
make strategic decisions about how workers will do their duties, and they monitor their
performance; this is an internal control mechanism -- part of business governance. Likewise, if
a business requests a loan from a bank, it must respond to that bank’s demands to comply
with liens and agreement terms -- an external control mechanism. If the business is a
partnership, a partner might demand an audit to place reliance on the profit figures provided
-- another form of external control.

What is the stakeholder theory of corporate governance?

The impact of corporate activities on all discernible stakeholders of the firm is the main
emphasis of the stakeholder theory of corporate governance. According to this notion, each
stakeholder's interests should be taken into account by corporate managers (officers and
directors) during the governance process. This includes making attempts to lessen or manage
stakeholder interest conflicts. It focuses on the interests of any third party that relies on the
corporation in some way beyond the usual members of the corporation (officers, directors, and
shareholders).

Internal and external stakeholders are the two main categories of stakeholders.
 Internal Stakeholders - Are the corporate directors and employees, who are actually
involved in corporate governance process.
 External Stakeholders - May include creditors, auditors, customers, suppliers,
government agencies, and the community at large.
Despite not being part in the process directly, some stakeholders have an impact. The idea that
all stakeholders interact with the corporation in some way with the hope or expectation that
the corporation will provide the kind of value requested or expected is essential to the
stakeholder theory. Dividends, pay, bonuses, extra orders, new jobs, tax income, and other
advantages might be among the rewards.

Stakeholder management contributes to corporate governance by helping to handle the

multiple and often conflicting stakes held by the complex networks of groups that surround any
company.

The 4 Principles of Corporate Governance

The Principles are intended to help policymakers evaluate and improve the legal, regulatory,
and institutional framework for corporate governance, with a view to support economic
efficiency, sustainable growth and financial stability.

1. Accountability

Being able to explain every action you make in your business is vital in building confidence
among your stakeholders and shareholders.

Accountability is about more than simply understanding where blame or praise lies once
something happens. Proactively taking steps to own your decisions means discovering risks
and creating solid internal control systems.

A balanced and understandable assessment of your company’s position within its market and
prospects helps you decide on a risk management strategy and make decisions you can take
pride in. You must also determine the best systems for keeping your corporation accountable
to shareholders in a fair, balanced, and understandable way through proper reporting.

Understanding and taking ownership of risks is crucial for the success and future of your
organization.

2. Transparency

Transparency, like accountability, engenders confidence. It lets others know that you have
nothing to hide while improving accountability for the company’s actions.

The company’s willingness to provide clear information to all shareholders and stakeholders
regarding its performance plays a significant role in any decision. Informed decision-making is
only possible with systems that provide accurate and reliable information.
In this way, transparent processes allow you to make informed and powerful decisions
promptly. In today’s data-driven world, technologies can collect and support data
visualization from almost any source. This data helps form the bedrock for strategies to tackle
current and future challenges.

3. Fairness

Good corporate governance requires equal treatment of all shareholders within each share
class. Many countries such as the United States and the United Kingdom require this.

Fairness is as much about ethics as good business sense. Unequal treatment leads to a lack of
support and interest in your company. No one wants to invest in a company that treats some
better than others.

4. Responsibility

In total, these principles require wielding your power responsibly. It’s difficult to display
favoritism, take unnecessary risks, and act unethically or against the best interest of
shareholders and stakeholders when your company is transparent, fair, and accountable.

You’re responsible and accountable for your actions. Poor performance has consequences.
This is reflected in everything from the media to share prices. Failing to lead in an informed
and reasonable manner hurts your corporation at every level.

4 Ps of Corporate Governance
Corporate governance is a complex beast. Even those of us who have built their careers in fields
where governance is a necessity might not fully understand everything it encompasses. That’s
why many governance experts break it down into four simple words: People, Purpose, Process,
and Performance.

These are the Four Ps of Corporate Governance, the guiding philosophies behind why
governance exists and how it operates. Let’s have a look at exactly what each of the Ps means.

People

People come first in the Four Ps because people exist on every side of the business equation.
They are the founders, the board, the stakeholder and consumer and impartial observer.
People are the organisers who determine a purpose to work towards, develop a consistent
process to achieve it, evaluate their performance outcomes, and use those outcomes to grow
themselves and others as people. It’s cyclical, yes, but it has to start with people.
Purpose

Purpose is the next step. Every piece of governance exists for a purpose and to achieve a
purpose. The ‘for’ is the guiding principles of the organization. Their mission statement. Every
one of their policies and projects should exist to further this agenda. The ‘achieve’ is the small
step on the road to completing that large goal. It might seem pointless to type up minutes for a
meeting that felt irrelevant, but those minutes and all the other governance from that meeting
contribute to making the business effective at achieving it’s stated purpose.

Process

Governance is the process by which people achieve their company’s purpose, and that process
is developed by analysing performance. Processes are refined over time in order to consistently
achieve their purpose, and it’s always smart to take a critical eye to your governance processes.
Can they be streamlined? Are they efficiently achieving their purpose? It takes work to make
your processes function, but once they do you will quickly see how they can help your company
grow.

Performance

Performance analysis is a key skill in any industry. The ability to look at the results of a process
and determine whether it was successful (or successful enough), and then apply those findings
to the rest of your organisation, is one of the primary functions of the governance process.
Using these results to develop personal skills, both your own and your coworkers’, is how the
Four Ps cycle revolves endlessly. So take a critical eye to your governance: is it performing?

EXPECTATIONS OF SHARHOLDER

In order to understand the expectations of the stakeholders one needs to understand the
connection between vision, mission & Strategy with regard to the stakeholder expectations.

1. Vision - is the preferred picture where an organization wants to be in future. This is

something in mind and through visualization entity is assuming itself to that position
2. Mission - tells the purpose & reason for the existence of the entity. Through this, we try
to achieve your Vision by writing our mission statement
3. Strategy - is the direction of the organization for the future. As the company have
written down its mission statement therefore we need to design a plan should be in line
with the mission & the stakeholder’s expectations
4. Stakeholders - are the one, who can affect or can be by the entity based upon their
power & interest.
Typical inputs needed for the Stakeholder Expectations Definition Process include the
following:

 Initial Customer Expectations: These are the needs, goals, objectives, desires,
capabilities, and other constraints that are received from the customer for the product
within the product layer.
 Other Stakeholder Expectations: These are the expectations of key stakeholders other
than the customer.
 Customer Flow-down Requirements: These are any requirements that are being flowed
down or allocated from a higher level (i.e., parent requirements). They are helpful in
establishing the expectations of the customer at this layer.

Understand Stakeholder Expectations

 Thoroughly understanding the customer and other key stakeholders’ expectations for
the project/product is important. It provides the foundation upon which all other
systems work depends. It helps ensure that all parties are on the same page and that
the product being provided will satisfy the customer.
 Through interviews/discussions, surveys, marketing groups, e-mails, a Statement of
Work (SOW), an initial set of customer requirements, or some other means,
stakeholders specify what is desired as an end state or as an item to be produced and
put bounds on the achievement of the goals.

EXPECTATIONS OF SHARHOLDER

Stakeholders Expectations
1. Shareholders  A fair and steady rate of returns (dividends) on
investment
 Increase in the future earning of the company
 Increase in the market capitalization of investment
2. Employees  Recognition of service by providing fair renumeration as
also incentives
 Stability of employment
 Help improve standard of living
3. Customers  Provide quality goods or services at a fair price and on a
fair terms
 Restraint from restrictive practices or unfair practices
4. Competitors  Restraint from adopting any strategy to elbow
competitors out with unfair or restrictive practices or
through violation of competition law norms
5. Creditors  Ability to pay the principal and interest as per contract
obligations
6. Government  Behave as a responsible and good corporate citizen
  Non-evasion of taxes and dues to the government
 Involvement in social cause e.g. charities, donations, etc.
7. Community  Growth in employment generation to secure good local
employment
 Protection of environment
8. Public at large  To hold the Board accountable for:
- Limiting senior executives compensation
- Full environmental protection
- Avoidance of fraud within the company
- Caring for employees

FIVE GOLDEN RULES OF CORPORATE GOVERANCE

1. An honest or ethical business culture and morality of organizational behavior

In various corporate settings, it is now clear that there is a correlation between the level of
trust and loyalty among employees and between staff and management and the
perception of ethics that permeates an organization. One comes to the conclusion that
trust and loyalty have a substantial impact on how effectively and efficiently a business
can be run, and the concomitant cost of control systems needed.

2. A clear goal, and purpose, taking account of the interests of, and agreed by, all the key
stakeholders

Any firm should make it a top priority to get all interested parties on board with its vision
and mission so that they can support rather than oppose the achievement/alignment of its
goals. Problems are likely to occur if others are unaware of, misunderstand, or disagree
with the board's aim, no matter how good or even honorable the board may feel it is.

3. A practical strategic plan to achieve the business’s Goal, recognizing the market
opportunities and pressures, and the strengths and weaknesses of the resources
available

In order for management to efficiently run the company and make necessary adjustments
to the strategy, it is necessary to establish an organization that can carry out the strategy,
achieve the goal, and establish a control and reporting role.

4. An organization that is appropriately structured and adequately resourced, in terms of

people, skills, processes, assets and finance, to deliver the chosen strategy.
 To achieve maximum organizational effectiveness, routine dialogue with all stakeholder
groups can be done to assess how effective the chosen shape and style are and where and
how it needs modification. As long as this is performed as part of the ongoing strategy
process, it can only contribute to the success of the business in achieving its goals.

In this approach, we can be sure that we have a shared objective that the majority of
stakeholders support, a clear plan for achieving it, and a strong organizational capability to
carry out the plan.

5. Trustworthy and reliable reporting systems to provide accountability and transparency

to the stakeholders who have an interest in the business.

Corporate communications or the reporting system are crucial for the smooth operation
of the business, specifically for delivering the organization's strategy and goals and not
just to maintain the public image of the company.

Corporate Social Responsibility

There are various definitions of Corporate Social Responsibility, some which are:

A management concept whereby companies integrate social and environmental concerns in

their business operations and interactions with their stakeholders.(United Nations Industrial
Development Organization (UNIDO))

The idea that a company should play a positive role in the community and consider the
environmental and social impact of business decisions. It is closely linked to sustainability −
creating economic, social, and environmental value – and ESG, which stands for Environmental,
Social, and Governance. All three focus on non-financial factors that companies, large and
small, should consider when making business decisions. (Business Development Bank of Canada
(BDC))

The idea that a business has a responsibility to the society that exists around it (Sustainable
Business Strategy Online Course)

In the book Management , 12th edition by John R. Chermerhorn Jr, CSR is defined as:

The obligation of an organization to serve the interests of society in addition to its own
interests.
CSR can involve a broad scope of approaches and initiatives—everything from sustainable
practices to community involvement. Customers increasingly expect responsible behavior from
companies they do business with. Firms that embrace corporate social responsibility are
typically organized in a manner that empowers them to be and act in a socially responsible way
to have a positive impact on the world.

Other Concepts/Terms in Discussing CSR:

1. Stewardship -taking personal responsibility to always respect and protect the interests of
society at large. Through stewardship CSR is put in practice. An example of good
stewardship is the support and use of sustainable practices.

2. Triple Bottom Line - evaluates organizational performance on economic, social and

environmental criteria.

3. 3P’s of organizational performance – Profit, People and Planet

4. Stakeholders – persons, groups, and other organizations directly affected by the behavior of
the organization and that hold a stake in its performance. These include owners or
shareholders, employees, customers, suppliers, business partners, government
representatives, regulators, community members and future generations.

5. Stakeholder Power – the capacity of the stakeholder to positively or negatively affect the
operations of the organization.

6. Demand Legitimacy – indicates he validity and legitimacy of a stakeholder’s interests in the

organization.

7. Issue urgency – indicates the extent to which a stakeholder’s concerns need immediate
attention.

Perspectives on Corporate Social Responsibility

The following are the three (3) different views/perspectives on CSR

1. Classical View

 business should focus on profits.

 In this view, the principal obligation of the management should be to owners and
shareholders.
 linked to the respected economistand Nobel Laureate, Milton Friedman.
  Proponents of this view believe that society’s interests are best served in the long run by
executives who focus on maximizing their firm’s profits.

2. Socioeconomic View

 managers must be concerned with the organization’s effect on the broader social
welfare and not just with corporate profits.
 puts the focus on the triple bottom line of not just financial performance but also social
and environmental performance.
 pursuit by a business will enhance long-run profits, improve public image, make the
organization a more attractive place to work, and help avoid government regulation.

3. Shared Value View

 advocated by Michael Porter and Mark Kramer as an alternative way of thinking.

According to them “The purpose of a corporation must be redefined as creating shared
value, not just profit per se.”
 Approaches business decisions with the understanding that economic and social
progress are interconnected.
 Idea is to seek business advantage by following practices and aligning strategies with
social issues like aging, illiteracy, nutrition, resource conservation, and poverty.
 suggests a virtuous circle in which CSR leads to improved financial performance for the
firm, which in turn leads to a more socially responsible actions in the future.

Types of Corporate Social Responsibility

Corporate social responsibility is traditionally broken into four categories:

1. Environmental Responsibility

This refers to the belief that organizations should behave in as environmentally friendly a
way as possible. It’s one of the most common forms of corporate social responsibility. Some
companies use the term “environmental stewardship” to refer to such initiatives.

Examples on how an organization can embrace environmental responsibility:

 Reducing pollution, greenhouse gas emissions, the use of single-use plastics, water
consumption, and general waste
 Regulating energy consumption by increasing reliance on renewables, sustainable
resources, and recycled or partially recycled materials
 Offsetting negative environmental impact; for example, by planting trees, funding
research, and donating to related causes
2. Ethical Responsibility

It is concerned with ensuring an organization is operating in a fair and ethical manner.

Organizations can do this by practicing ethical behavior through fair treatment of all
stakeholders, including leadership, investors, employees, suppliers, and customers.

Examples on how an organization can embrace, ethical responsibility

 set its own, higher minimum wage if the one mandated by the government doesn’t
constitute a “livable wage.”
 require that products, ingredients, materials, or components be sourced according
to free trade standards.

3. Philanthropic Responsibility

It refers to a business’s aim to actively make the world and society a better place. In
addition to acting as ethically and environmentally friendly as possible, organizations driven
by philanthropic responsibility often dedicate a portion of their earnings. While many firms
donate to charities and nonprofits that align with their guiding missions, others donate to
worthy causes that don’t directly relate to their business. Others go so far as to create their
own charitable trust or organization to give back and have a positive impact on society.

4. Economic Responsibility

It is the practice of a firm backing all of its financial decisions in its commitment to do good
in the areas listed above. The end goal is not to simply maximize profits, but make sure the
business operations positively impact the environment, people, and society.

Benefits of Corporate Social Responsibility

a. Powerful marketing tool, helping a company position itself favorably in the eyes of
consumers, investors, and regulators.
b. Improve employee engagement and satisfaction—key measures that drive retention.
c. force business leaders to examine practices related to how they hire and manage
employees, source products or components, and deliver value to customers which can
often lead to innovative and groundbreaking solutions that help a company act in a more
socially responsible way and increase profits.

Evaluating Corporate Social Performance

Social Responsibility Audit measures an organization’s performance in various areas of social

responsibility. Based on research, the mandatory social reporting improves socially responsible
behavior.
Firm’s range of performance if social responsibility audit is conducted:

COMPLIANCE – acting to avoid adverse consequences – to CONVICTION – acting to create

positive impact.

COMPLIANCE behaviors focus on being profitable and obeying the law; CONVICTION behaviors
focus on doing what is right and contributing to the broader community.

Four (4) Strategies of CSR

Compliance Side

1. Obstructionist Strategy (“Fight social demands”) – tries to avoid and resist pressures for
social responsibility; focuses mainly on economic priorities. Social demands lying outside
the organization’s perceived self-interests are resisted.

Example : Cigarette manufacturers tried to minimize the negative health effects of smoking
for decades until undisputable evidence became available.
2. Defensive Strategy (“Meet legal and market requirements”) – does the minimum legally
required to display social responsibility; focuses on protecting the organization by meeting
minimum legal requirements and responding to competitive market forces.

Example: Mortgage lenders are required to provide certain information to customers

concerning loans they may be receiving. But whereas, some take time to carefully review
everything with customers, others may rush in hopes the customers won’t question the
details.

Conviction Side

3. Accommodative Strategy (“Meet ethical requirements”) – accepts social responsibility and

tries to satisfy society’s basic ethical expectations.

Example: An oil firm may engage in appropriate cleanup activities after a spill occurs and
provide compensation to communities that may have harmed.

4. Proactive Strategy (“Take leadership in social initiatives”) – actively pursues social

responsibility by taking discretionary actions to make things better in the future.

Example: Oil firm makes an investment in technology to prevent oil spills and even invests in
the search for alternative energy sources
 “Take leadership in social initiatives”
Proactive Strategy Meet economic, legal, ethical, and
discretionary responsibilities

“Do minimum ethically required”

Accommodative Strategy Meet economic, legal, and ethical
responsibilities

Defensive Strategy “Do minimum legally

required”
Meet economic and legal
responsibilities

Obstructionist Strategy “Fight social demands”

Meet economic
responsibilities
Commitment to corporate social responsiblity
Figure 1 – Four Strategies of CSR

Corporate Social Responsibility Programs

DBP has strengthened its corporate social responsibility efforts, enabling it to share the benefits of
its continued financal success with disadvantaged sectors of Philippine society.

DBP continues to be at the forefront of carrying out relevant and meaningful programs through its
flagship initiatives in three major areas: education, environment, and an outreach program.

Education

Through the DBP Resources for Inclusive and Sustainable Education (RISE), the Bank sends
indigent but deserving high school graduates to college. Scholarship assistance covers the whole
range of the students’ requirements, including tuition, books, cost of living, and allowances.
The Bank also has existing partnerships with the Department of Education covering equipment and
facilities improvement, as well as provision of school supplies and learning materials for students
and learners among others.

Environment

The DBP Forest Program is a non-credit program that aims to stop denudation and restore the
country’s forest cover through organized collaboration with government and non-government
organizations, state universities and colleges, people’s organizations and other qualified forest
partners.

Outreach

DBP supports community development thru its outreach activities and programs. The Bank extends
assistance to charitable institutions, organizations, and LGUs for projects aimed to augment the
provision of basic social services to select vulnerable groups of society and for calamity and disaster
response.

CSRStatement
As a catalyst for a progressive and poverty-free Philippines, the Development Bank of the
Philippines is committed to upholding its corporate citizenship program through initiatives that
promote the welfare of the Filipino people particularly the underprivileged.
Reference:

https://www.yourarticlelibrary.com/company/stakeholders/expectations-of-stakeholders-
from-a-company/99381

https://www.applied-corporate-governance.com/best-corporate-governance-practice/
importance-of-business-ethics/

Management, 12th Edition, John R. Schermerhorn Jr., John Wiley and Sons

https://www.unido.org/our-focus/advancing-economic-competitiveness/competitive-trade-
capacities-and-corporate-responsibility/corporate-social-responsibility-market-integration/
what-csr

https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/templates-business-guides/
glossary/corporate-governance

Tim Stobierski, Types of Corporate Social Responsibility To be Aware Of

https://online.hbs.edu/blog/post/types-of-corporate-social-responsibility, October 23, 2022

Harvard Business School Online, https://www.youtube.com/watch?v=ZoKihFLCY0s