ACCTG 9 –CHAPTER 3

 Code of Corporate Governance - The Philippine Securities and Exchange Commission (SEC), a
principal player in matters of corporate governance, issued Memorandum Circular No. 2, Series
of 2002. Aims to promote corporate governance reforms that will raise investor confidence,
develop the capital market and help achieve high sustained growth for the corporate sector and
the economy.

 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.

 Nomination Committee - Whose function is to review and evaluate the qualifications of all
persons nominated to the Board.

 Compensation or Remuneration Committee - Whose task is to establish a formal and transparent

procedure for developing a policy on executive remuneration.

 Corporate Secretary - Who must be a Filipino and an officer of the corporation.

 Stockholders Rights
1. Voting right
2. Pre-emptive right
3. Power of inspection
4. Right to information
5. Right to dividends and;
6. Appraisal right among others

 Disclosure - Is a vital and dominant theme in the Code.

 Board of Directors (BOD) - The body of elected or appointed by shareholders who jointly
oversee the activities and the overall managerial and operational aspects of the corporation.

 Chief Executive Officer (CEO) - Usually the singular organizational position that is principally
accountable in carrying out strategic policies and procedure as established by the board of
directors.

 Typical Responsibilities of a CEO

1. Support to the Board
2. Delivery of Program, Product and Service (PPS)
 3. Financial, Risk and Tax Management
4. Human Capital Management
5. Public Relations (PR)

 Support to 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.

 Delivery of Program, Product and Service (PPS) - Administer design, marketing, promotion,
delivery and quality of programs, products and services.

 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 Relations (PR) - Pledge that the organization and its mission, programs and initiatives,
products and services are consistently presented in strong and physically visible manner to the
community.

 Chief Financial Officer (CFO) - Has a number of responsibilities within the corporation that are
essential in providing a strong financial foundation for a growing and expanding business.

 Implements Internal Control - Include the effective administration of cash flow and overhead
expenses, establishing credit policies for customers and working with major vendors to attain
more favorable payment terms.

 Supervises Major Impact Projects - Outside of implementing and monitoring company controls
relating finance, an effective CFO will also handles and supervises those projects that require
significant quantitative and qualitative interpretations and analysis.

 Develops Relations with Financing Sources - Institute good working relationships with the 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 member of the management

team of some emergent companies.

 Drives Major Strategic Issues - Include the hatching of the company acquisition strategy which in
the end would help fuel and boost the company's additional growth.

 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 - CFO is the nucleus in an organization with many connections.

 Objective Referee - CFO needs to demonstrate impartiality, such as when advising the CEO or
the board of directors on accounting matters.

 Shareholders - Collective term of a group of people considered as the owners of corporation.

 Dividend - Share ownership gives the owner with the right to a share of the income of the
company.

 Vote - An important right and responsibility of shareholders.

 Auditors - One of the most important institution of governance the job of which is to help ensure
that firms are run efficiently by keeping public records are accurate, adhering standards of
reporting for public purposes.

 Legal Environment - Is derived partly from the general political climate in a country. It has three
distinct dimensions namely, the domestic laws of home country, the domestic laws of each of
foreign markets, and international law in general.

 Markets - Considered the most important institution of corporate governance.

 Three Central and Important Points of the term Markets

1. The firm's product market
2. Capital market
3. The managerial labor market

 Good Internal Decision-Making - Make the firm react well to product market changes, economize
on capital, or makes sure good managers come, stay, and perform.

 Product Markets - Considered as the most feared disciplinarian by managers; it is a simple "no
product, no firm" thing.
 Capital Markets - Also favor those who have good track records in terms of governance.

 Labor Market - Is also important variable in selecting the "right" people for positions in the
company.

 External Environment - Create major threats or in some cases precursor of openings and
possibilities for an organization. It also offers the model, the thrust and the most essential variable
that shapes an organization.

 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 also the 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 - Any new development may render an organization's processes and
systems obsolete if it is not quick to adapt to the new changes.

 Social Environment - Comprises the general behavior of the society and the ethical leanings of
the individuals responsible for the functioning and eventual long-term existence of the
organization.

 Anti-Takeover Defenses - Refers to defensive means or tactics that companies use to challenge a
lurking merger of two or more businesses into one.

 "Flip-in" - Allows existing shareholders to purchase more shares at a discount in order to dilute
the value of the shares.

 "Flip-over" - Allow the shareholders to purchase the bidder's shares at a discount.

 "Debt façade" - A ploy wherein a company takes on plenty of debts to make it unappealing, as a
bidder would be answerable for those debts once he will become shareholder.

 "Debenture sheltering" - Business issues bonds that will have to be redeemed at a higher price in
the future.
 Personal Liability of Officers and Directors
1. Issues involving misappropriation
2. Issues involving nondisclosure of conflict of interest
3. Issues on loyalty
4. Issues on non-separation of personal and business concerns
5. Issues on prudence

 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.

 Ordinary Shares - These are standard shares with no special rights or restrictions.

 Preference Shares - These shares are typically carry a right that 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 - The term given which refers to a majority that is a way beyond the ordinary
majority.

 Shareholder Voting Agreement - A legal contract among shareholders of a corporation involving

voting of shares. The agreement frequently covers how members of the Board of Directors are to
be selected and may covers major corporate events such as mergers and acquisition.

 Venture Capitalist - Often expects a shareholder voting agreement to be executed in connection

with their investment in a start-up company.

 Corporation Code of the Philippines - Does not prohibit a shareholder voting agreements as long
as they relate to issues upon which shareholders can vote and it does not have any malicious
intention or any violation on any agency regulation which governs corporate operation.

 Shareholders-Management Agreement - This agreement will only be relevant, of course, if the

corporate structure is being used.

 Board Appointment Rights - It is common for the shareholders' 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 - This refers to the right to overturn the decisions reached by the board of directors.

 Adoption and Amendment of Business Plans and Budgets - The agreement may provide for
adopting and amending business plans and budgets, to ensure that individual shareholders or their
appointed directors are properly represented in that process.

 Scope of Business - Can be found in the charter of the corporation, it is common particularly in a
joint venture or a start-up company.

 Intellectual Property Rights - Where shareholder parties are contributing unique and distinct
advantage or process such patent, trademark, copyrights, or any form of information or
competencies to a venture.

 Right to Information - It is extremely important for the investors to monitor performance closely,
particularly to give them an early warning if the 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 Investor 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 arrangements.

 Restrictions on Transfers of Shares - The investors will be keen to make sure that the
management team they are backing, holds on 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 compete 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.

 Management Principles - Developed during the classical period were simply not useful in dealing
with many management situations and could not explain the behavior of individual employees.

 Classical Theory - Ignored employee motivation and behavior.

 Behavioral School - Is a natural outgrowth of the revolutionary management experiment.

 Behavioral Management Theory - This is often called the human relations movement because it
addresses the human dimension of work.

 Behavioral Theorists - Believed that a better understanding of human behavior at work such as
motivation, conflict, expectations, and group dynamics, improved productivity.

 Elton Mayo - Its contributions came as part of the Hawthorne studies, a series of experiments that
rigorously applied classical management theory only to reveal its shortcomings.

 Hawthorne Experiments - Consisted of two studies conducted at the Hawthorne Works of the
Western Electric Company in Chicago from 1924 to 1932.

 Harvard Researchers, Elton Mayo and F.J. Roethlisberger - Supervised a group of five women in
a bank wiring room and they gave the women special privileges. They also concluded that the
increase in productivity resulted from the supervisory arrangement rather than the changes in
lightning or other associated worker benefits.

 Hawthorne Effect - Describes the special attention researchers give to a study's subjects and the
impact that the attention has on the study's findings.

 Hawthorne Studies - Its general conclusion was that human relations and the social needs of
workers are crucial aspects of business management.

 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.

 Theory of Human Needs - It has three assumptions namely; Human needs are never completely
satisfied and human behavior is purposeful and is motivated by the need for satisfaction.

 Physiological Needs - Maslow grouped all physical needs necessary for maintaining basic human
well-being.
 Safety Needs - These needs include the need for basic security, stability, protection, and freedom
from fear.

 Belonging and Love Needs - Emerges as a primary motivator.

 Esteem Needs - An individual must develop self-confidence and wants to achieve status,
reputation, fame, and glory.

 Self-actualization Needs - Assuming that all previous needs in the hierarchy are satisfied, an
individual feels a need to find himself.

 Maslow's Hierarchy of Needs Theory - It helps managers visualize employee motivation.

 Douglas McGregor - Believed that two basic kinds of managers exist.

 Theory X Manager - Has a negative view of employees and assumes that they are lazy,
untrustworthy, and incapable of assuming responsibility.

 Theory Y Manager - Assumes that employees are not only trustworthy and capable of assuming
responsibility, but also have high levels of motivation.

 Frederick Herzberg - A well-respected American who has contributed greatly to the way in which
managers think about motivation at work.

 "The Motivation to Work" - Herzberg's first published theory in 1959 and put forward a two
factor content theory which is often referred to as a two-need system.

 Hygiene Factors - Can de-motivate or cause dissatisfaction if they are not present, but do not very
often create satisfaction when they are present.

 Motivation Factors - Do motivate or create satisfaction and are rarely the cause of dissatisfaction.

 Dissatisfiers - These are hygiene factors in the sense that they are maintenance factors required to
avoid dissatisfaction and stop workers from being unhappy, but do not create satisfaction in
themselves.

 Two Distinct Human Needs according to Herzberg

1. Physiological Needs
2. Psychological Needs
 Physiological Needs - Avoiding unpleasantness or discomfort and may be fulfilled via money to
buy food and shelter etc.

 Psychological Needs - The need for personal development fulfilled by activities which cause one
to grow.

 Adam and Abraham Concept - Identified by Herzberg

 Adam Concept - Is animal and wants to avoid pain or discomfort.

 Abraham Concept - Is human and needs to go beyond the physical requirements and expand
psychologically too.

 Long Term Motivators - These are the Abraham part of the concept that lead to satisfaction and
are intrinsic to the job itself and the job design.

 Chambermaid - Prefers to receive a note of appreciation for her high standards from a guest than
a carelessly delivered gratuity.

 Job Enrichment - One of the most important ideas that Herzberg postulated based on his findings
of satisfaction. This is the addition of different tasks to a job to provide greater involvement and
interaction with that job.

 Tesco - One of the leading retailers in the UK, recently gained recognition via achieving the
National Business Awards 'Employee of the Year'.

 Dichotomy - Stills intrigues (and baffles) managers.

 Reframing Organization - An organization that become pervasive and dominant, they have also
become harder to understand and manage.

 Structural Approach - It focuses on the architecture of organization - the design of units and
subunits, rules and roles, goals and policies.

 Human Resource Lens - Emphasizes understanding people, their strengths and foibles, reason and
emotion, desires and fears.

 Political View - Sees organizations as competitive arenas of scarce resources, competing

interests, and struggles for power and advantage.

 Symbolic Frame - It focuses on issues of meaning and faith.

 Employee Stock Ownership Plan (ESOP) - A company which wants to set up, creates a trust to
which it makes annual contributions.
 Vesting - Is a process whereby employees become entitled to an increasing percentage of their
accounts over time.