CONCEPTUAL

FRAMEWORK OF
CORPORATE
GOVERNANCE
PREPARED BY: MS. IDA
Reference: Cabrera, Elenita (Governance, Ethics, Risk Management, and Internal Control)
OVERVIEW

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.
OVERVIEW

There is no single authority regulating corporate governance. Its

principles evolve overtime addressing the needs of the industry
which may vary among jurisdictions. Globalization, the treatment
of investors and major corporate scandals have been major driving
forces behind corporate governance developments.
Course Objectives

After studying this module, you should be able to

● Define and explain the meaning of corporate governance;

● Discuss the implications of the separation of ownership and control;
● Analyze the purposes and objectives of corporate governance;
● Describe the decision authority and incentives of shareholders, boards of
directors, and top management;
● Recognize the impact of organizational culture on the overall control
environment and individual engagement risks and controls;
● Describe and compare the essentials of rules and principles-based approaches to
corporate governance, including the comply or explain principle; and
● Explore the objectives, content, and limitation of various codes of corporate
governance intended to apply to multiple national jurisdictions.
CORPORATE GOVERNANCE
DEFINITION
Corporate governance means to steer an organization.

Governance comes from the Latin word “gubanare” which means

“to steer.”
CORPORATE GOVERNANCE
DEFINITION
● Corporate governance is the system by which businesses are
directed and controlled.
● Corporate governance is the system of stewardship and
control to guide organizations in fulfilling their long-term
economic, moral, legal and social obligations towards their
stakeholders.
CORPORATE GOVERNANCE
DEFINITION
● Corporate governance is a system of direction, feedback and
control using regulations, performance standards and ethical
guidelines to hold the Board and senior management
accountable for ensuring ethical behavior – reconciling
long-term customer satisfaction with shareholder value – to
the benefit of all stakeholders and society.
CORPORATE GOVERNANCE
DEFINITION
● Corporate Governance is about promoting corporate
fairness, transparency and accountability.
● Corporate governance deals with laws, procedures, practices
and implicit rules that determine a company’s ability to take
informed managerial decisions vis-à-vis its claimants - in
particular, its shareholders, creditors, customers, the State and
employees.
CORPORATE GOVERNANCE
DEFINITION
● Corporate governance is a system of organizational control
that defines and establishes the responsibility and
accountability of the major participants in an organization.
● Corporate governance is the road map of an organization in
order to maximize shareholders’ wealth and protect
stakeholders’ interests.
CORPORATE GOVERNANCE
DEFINITION
Based on the previous definitions, corporate governance best fits
in an organization where the following are present:

❏ Separation of ownership and control

❏ Stakeholders who have legitimate interests in the organization
❏ Underlying principles of corporate governance
Separation of Ownership and Control

Corporate governance has partly developed in response to the

issues arising from the corporate structure which separates
ownership and control.

But what determines structure?

Separation of Ownership and Control

Corporate governance has partly developed in response to the

issues arising from the corporate structure which separates
ownership and control.

But what determines structure?

“Structure follows the strategy,” former president of a big water

firm espoused. For example, under transaction costs theory, the
way the company is organized or governed determines its control
over transactions.
Separation of Ownership and Control

The strategy also sets the legal structure of an organization.

Forms of Organization:
● Sole proprietorship
● Partnership
● Corporation
This separation of ownership and control has led to agency
problem since corporation is managed by agents who may not
operate it in the best interest of the shareholders.
Separation of Ownership and Control

Finance theory, the basic assumption is that the primary

objective for companies is shareholders wealth maximization.
Agency theory takes the stance that management is likely to
pursue their own personal interests, rather than act as stewards.
Transactions cost theory considers that managers’ decisions are
limited by the understanding of alternatives that they have, that
managers are opportunistic, that they will organize their
transactions to pursue their own convenience.
Separation of Ownership and Control

Corporate governance counters these conflict by providing a

system that aligns the interest of the owners and managers
and putting in place a system of oversight.
Stakeholders

Stakeholders are persons or groups that have a legitimate interest

in a business's conduct and whose concerns should be addressed as
a matter of principle. A stakeholder can be anyone who has any
type of stake in a business.
There are several ways to classify stakeholders such as by
Proximity, Legitimacy, Claims, Voice, How much affected, How
much affects, Degree of Participation, Engagement, and Public
Knowledge.
Each stakeholder has different claims from the organization.
Which of these conflicting interests are
legitimate?
Stockholder theory (shareholder theory) argues that
shareholders (as principals) own the company. As owners, they
alone have a legitimate claim to influence over the company. It is
the directors’ sole duty to maximize the wealth of the
shareholders.
Which of these conflicting interests are
legitimate?
Stakeholder theory, management has a duty of care, not just to
the owners of the company in terms of maximizing shareholder
value, but also to the wider community of interest, or stakeholders.
Stakeholder theory proposes corporate accountability to a broad
range of stakeholders. In case of conflict of interest, the managers
are responsible to mediate between these different stakeholders’
interest.
 Fernando Zobel De Ayala, President & COO of Ayala
Corporation said,

“We do not work in isolation. [It is] important to support the very
ecosystem that makes us successful.”
Mendelow Matrix

Mendelow classifies stakeholders on a matrix whose axes are

power held and likelihood of showing an interest in the
organization’s activities.

Key players are found in Segment D. The organization’s strategy

must be acceptable to them, at least. An example would be a major
customer. These stakeholders may participate in decision-making.
Mendelow Matrix

Stakeholders in Segment C must be treated with care. They are

capable of moving to Segment D. They should therefore be kept
satisfied. Large institutional shareholders might fall into Segment
C.
Mendelow Matrix

Stakeholders in Segment B do not have great ability to influence

strategy, but their views can be important in influencing more
powerful stakeholders, perhaps by lobbying. They should therefore
be kept informed. Community representatives and charities might
fall into Segment B.

Minimal effort is expended on Segment A. An example might be

a contractor's employees.
Mendelow Matrix

A B

C D
Underlying Principles of Corporate
Governance
Good corporate governance allows company to reap the full benefits of
international and local capital markets, improve investors’ confidence,
reduce cost of capital, and induce stable sources of financing.
However, there is no one size fits all framework of corporate
governance. Rather, it must be principles-based to allow a company
certain degree of flexibility in shaping its own best practices based on
the company’s age, size, complexity, extent of internal operations, and
other factors. Smaller companies may consider the cost and benefit of
implementing certain policies and procedures or decide that those are
less relevant in their case.
According to Teresita J. Herbosa, Chairperson of Securities
and Exchange Commission,

“strong corporate governance is founded on the principles of

fairness, accountability, and transparency.”
Underlying Principles of Corporate
Governance
Fairness means equal treatment. This principle requires that
everyone who has legitimate interest in the company must be taken
into account and their rights and views be respected.
Underlying Principles of Corporate
Governance
Corporate accountability means acceptance of full responsibility
for the powers and authority granted to those charged with
governance and of obligation to explain one’s action in carrying
out its responsibilities. It requires the board to present assessment
of the company’s position and how the company is achieving its
objectives.
Underlying Principles of Corporate
Governance
Transparency means open and clear, timely and accurate
disclosure of relevant information, financial or non-financial, to
shareholders and other stakeholders, as well as not concealing
material information. Transparency reduces the information gap
between directors and stakeholders. It ensures that stakeholders
can have confidence in the decision-making and management
processes of a company. It can come in the form of annual report
or well-documented policies that reader can understand.
Guided by these principles, the SEC adopted the Code of
Corporate Governance for Public Companies and Registered
Issuers (the Code) to promote the developments of a strong
corporate governance culture and keep abreast with recent
developments in corporate governance best practices. The Code is
consistent with the G20/OECD Principles of Corporate
Governance and other internationally recognized corporate
governance principles.
The G20/OECD Principles of Corporate Governance laid down the
six building blocks for a sound corporate governance framework.
1. Ensuring the basis for an effective corporate governance
framework
2. The rights and equitable treatment of shareholders and key
ownership functions
3. Institutional investors, stock markets, and other
intermediaries
The G20/OECD Principles of Corporate Governance laid down the
six building blocks for a sound corporate governance framework.

4. The role of stakeholders

5. Disclosure and transparency
6. The responsibilities of the board
The author submits the principle of shared responsibility and
accountability among shareholders, board directors, and other
stakeholders. Corporate governance is primarily about how the
board steers the company. However, the shareholders have the
power to elect directors and remove them when directors
contravene their duties or act contrary to the principles, values,
and ethics of the company. The shareholders must exert effort and
be held accountable in the long-term value creation for all
shareholders. The shareholders’ role cannot be undermined.
In addition, the interests of the stakeholders create the ecosystem within
which the company operates. Hence, their role is to raise their voices to
the company, and their voices should be heard.

And while corporate governance is a flexible concept, it must always

adhere to principles consistent with the wide interests of stakeholders. In
this manner, each stakeholder’s action is guided by common principles,
which action balances shareholders’ interests.
Finally, it is the view of the author that corporate governance
should address the issues arising from separation of ownership and
control, balancing stakeholders’ interest, and the adoption itself of
corporate governance principles.

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