CHAPTER 1  It also means that enough information is

provided and that it is provided in easily

Governance
understandable forms and media.
 A process whereby elements in society
wield power, authority, and influence and
enact policies and decisions concerning Responsiveness
public life and social upliftment.
 Institutions and processes try to serve the
 The process of decision-making and the
needs all stakeholders within a reasonable
process by which decisions are implemented
timeframe.
(or not implemented) through the exercise of
power or authority by leaders of the country Consensus Oriented
and/or organizations.
 Requires mediation of the different interests
Characteristics of Good Governance in society to reach a broad consensus on
what is in the best interest of the whole
PARTICIPATION community and how this can be achieved.
RULE OF LAW  Also requires a broad and long term
ACCOUNTABILITY
GOOD perspective on what is needed for
TRANSPARENCY GOVERNANCE sustainable human development and how to
EFFECTIVENESS achieve the goals of such development.
RESPONSIVENESS AND EFFICIENCY
S Equity and Inclusiveness
CONSENSUS ORIENTED EQUITY AND INCLUSIVENESS  Ensures that all its members feel that they
have a stake in it and do not feel excluded
from the mainstream of society.
Participation
Effectiveness and Efficiency
 Cornerstone of good governance
 Means that processes and institutions
 Could be either direct or through legitimate
produce results that meets the needs of the
institutions or representatives.
society while making the best use of
 Means freedom of association and
resources at their disposal,
expression on one hand and an organized
civil society on the other hand.  Also covers the sustainable use of natural
resources and the protection of environment
Rule of Law
Accountability
 Good governance requires fair legal
 An organization or institution is accountable
frameworks that are enforced impartially.
to those who will be affected by its decisions
Impartial enforcement of laws requires an
or actions.
independent judiciary and an impartial and
incorruptible police force. Corporate Governance
Transparency  Defined as the system of rules, practices,
and processes by which business
 That decisions taken and their enforcement
corporations are directed and controlled.
are done in a manner that follows rules and
regulations.  Involves balancing the interests of a
company’s many stakeholders, such as
 Information is freely available and directly
shareholders, management, customers,
accessible to those who will be affected by
suppliers, financers, government and
such decisions and their enforcement.
community.
Corporate Governance Structure 1. Transparency and Full Disclosure
- Is the board telling us what is going on?
 Specifies the distribution of rights and
2. Accountability
responsibilities among different participants
- Is the board taking responsibility?
in the corporation, such as the board,
managers, shareholders, and other
stakeholders and spells out the rules and
procedures for making decisions on
corporate affairs.
 Provides structure through which objectives
are set and the means of attaining those
objectives and monitoring performance.
Purpose of Corporate Governance
 To facilitate effective, entrepreneurial and
prudent management that can deliver long-
term success of the company.
 To enhance shareholder’s value and protect
the interest of other stakeholders by
improving the corporate performance and
accountability.
Objectives of Corporate Governance
1. Fair and Equitable Treatment of
Shareholders
- All shareholders deserve equitable
treatment and this equity is safeguarded
by good governance structure in any
organization
2. Self-assessment
- Business establishments with a strong
corporate governance system are better
able to limit their exposure to regulatory
risk and fines.
3. Increase shareholders’ wealth
- Firms with strong corporate governance
structure are seen to have higher
valuation attached to their shares by
businessmen.
- Good corporate governance induces
investors to decide to invest in a
company.
4. Transparency and full disclosure
- Aims at ensuring a higher degree of
transparency in an organization by
encouraging full disclosure of
transactions in company accounts.
Basic Principles of Good Governance
 CHAPTER 2
INTRODUCTION
 It is important to recognize that good
corporate governance is based on principles
underpinned by consensus and continually
developing notions of good practice.
 There are no absolute rules which must be
adopted by all organizations.
 "There is no simple universal formula for
good governance".
 Instead emphasis is many localities, has
been to encourage organizations to give
appropriate attention to the principles and
adopt approaches which are tailored to the
specific needs of an organization at a given
point in time.
RELATIONSHIP BETWEEN
SHAREHOLDERS/OWNER(S) AND OTHER
STAKEHOLDERS
 Governance starts with the
shareholders/owners delegating
responsibilities through an elected board
of directors to management and, in turn, to
operating units with oversight and assistance
from internal auditors.
 The board of directors and its audit
committee oversee management and, in
that role, are expected to protect the
shareholders' rights.
 Management can influence who sits on the
board and the audit committee as well as
other governance controls that might be put
into place.
 In return for the responsibilities (and power)
given to management and the board,
governance demands accountability back
through the system to the shareholders.
 Companies also have responsibilities to
other stakeholders. Stakeholders can be
anyone who is influenced, whether directly
or indirectly, by the actions of a company.
 Management and the board have
responsibilities to act within the laws of
society and to meet various requirements of
creditors, employees and the stakeholders.
 A broad group of stakeholders has an
interest in the quality of corporate
governance because it has a relationship to
economic performance and the quality of
financial reporting.
While shareholders / owners delegate
responsibilities to various parties within the
corporation, they also require accountability as to
how well the resources that have been entrusted to
management and the board have been used.
For example, the owners want accountability on
such things as:
 Financial performance
 Financial transparency financial
statements that are clear with full disclosure
and that reflect the underlying economics of
the company.
 Stewardship, including how well the
company protects and manages the resources
entrusted to it.
 Quality of internal control
 Composition of the board of directors and
the nature of its activities, including
information on how well management
incentive systems are aligned with the
shareholders' best interests.
The owners want disclosures from management
that are accurate and objectively verifiable.
From a financial reporting perspective, it is
management's responsibility to:
  Choose which accounting principles best leadership.
portray the economic substance of company  Assuming responsibility
transactions. for the business
 Implement a system of internal control that relationship with CEO
including his or her
assures completeness and accuracy in appointment, succession,
financial reporting. performance
 Ensure that the financial statements contain remuneration and
accurate and complete disclosure. dismissal.
2. Performance
PARTIES INVOLVED IN CORPORATE  Ensuring the
GOVERNANCE: THEIR RESPECTIVE organization's long term
BROAD ROLE AND SPECIFIC viability and enhancing
RESPONSIBILITIES the financial position.
implementation of
 Corporate governance and financial  Formulating and
reporting reliability are receiving overseeing corporate
considerable attention from a number of strategy.
parties including regulators, standard setting  Approving the plan,
bodies, the accounting profession, budget and corporate
policies. Agreeing key
lawmakers and financial statement users.
performance indicators
(KPIs)
Party Overview of Responsibilities
 Monitoring/assessing
1. Broad Role: assessment, performance
Shareholders Provide effective of the organization, the
oversight through election of board itself,
board members, approval of management and major
major initiatives such as buying projects.
or selling stock, annual reports  Overseeing the risk
on management compensation, management framework
from the board. and monitoring business
2. Board of Broad Role: risks. Monitoring
Directors The major representative of developments in the
stockholders to ensure that the industry and the
organization is run according to operating environment.
the organization's charter and 3. Compliance / Legal
that there is proper Conformance
accountability.  Understanding and
protecting the
Specific activities include organization's financial
among others: position..
1. Overall Operations  Requiring and
 Establishing the monitoring legal and
organization's vision, regulatory compliance
mission, values and including compliance
ethical standards. with accounting
 Delegating an standards, unfair trading
appropriate level of legislations,
authority to occupational health and
management. safety and
 Demonstrating environmental standards.
  Approving annual
financial reports, annual
reports and other public
documents / sensitive
reports.
3. Non- Broad Role:
Executive or The same as the broad role of
Independent the entire board of directors.
Directors
Specific activities include
among others:
 to understand the
organization, its
business, its operating
environment and its
financial position,
 to apply expertise and
skills in the
organization's best
interests,
 to assist management to
keep performance
objectives at the top of
its agenda
4. Broad Role:
Management Operations and accountability.
Manage the organization
effectively, provide accurate
and timely reports to
shareholders and other
stakeholders.
Specific activities include
among others:
 recommend the strategic
direction and translate
the strategic plan into
the operations of the
business
 manage the company's
human, physical and
financial resources to
achieve the
organization's objectives
- run the business
 assume day to day
responsibility for the
organization's
conformance with
relevant laws and
regulations and its
compliance framework
 develop, implement and
manage the
organization's risk
management and
internal control
frameworks
5. Audit Broad Role:
Committees Provide oversight of the internal
of the Board and external audit function and
of Directors the process of preparing the
annual financial statements as
well as public reports on
internal control.
Specific activities include
among others:
 Selecting the external
audit firm
 Approving any non-
audit work performed by
the audit firm
 Selecting and / or
approving the
appointment of the Chief
Audit Executive
(Internal Auditor)
 Reviewing and
approving the scope and
budget of the internal
audit function
6. Regulators Broad Role:
Set accounting and auditing
a. Board of standards dictating underlying
Accountancy financial reporting and auditing
concepts; set the expectations of
audit quality and accounting
quality.
Specific activities include
among others:
 Conducting CPA
Licensure Board
Examinations
 Approving accounting
principles
 Approving auditing
standards
 Interpreting previously
issued standards
implementing quality
control processes to
ensure audit quality
  Educating members on
audit and accounting
requirements
Broad Role:
b. Securities Ensure the accuracy, timeliness
and Exchange and fairness of public reporting
Commission of financial and other
information for public
companies.
Specific activities include
among others:
 Reviewing filings with
the SEC
 Interacting with the
Financial Reporting
Standards Council in
setting accounting
standards
 Specifying
independence standards
required of auditors that
report on public
financial statements
 Identify corporate
frauds, investigate
causes, and suggest
remedial actions
7. External Broad Role:
Auditors Perform audits of company
financial statements to ensure
that the statements are free of
material misstatements
including misstatements that
may be due to fraud.
Specific activities include
among others:
 Audit of public company
financial statements
 Audits of nonpublic
company financial
statements
 Other services such as
tax or consulting
8. Internal Broad Role:
Auditors Perform audits of companies for
compliance with company
policies and laws, audits to
evaluate the efficiency of
operations, and periodic
evaluation and tests of controls.
Specific activities include
among others:
 Reporting results and
analyses to management
(including operational
management) and audit
committees
 Evaluating internal
controls
SUMMARY OF THE KEY PRINCIPLES OF
EFFECTIVE CORPORATE GOVERNANCE
In summary, the key/core governance
principles related to Board and Management
include:
 The board's fundamental objective should be
to build long-term sustainable growth in
shareholder value for the corporation.
 Successful corporate governance depends
upon successful management of the
company, as management has the primary
responsibility for creating a culture of
performance with integrity and ethical
behavior.
 Effective corporate governance should be
integrated with the company's business
strategy and not viewed as simply a
compliance obligation.
 Transparency is a critical element of
effective corporate governance, and
companies should make regular efforts to
ensure that they have sound disclosure
policies and practices.
 Independence and objectivity are necessary
attributes of board members; however,
companies must also strike the right balance
in the appointment of independent and
nonindependent directors to ensure an
appropriate range and mix of expertise,
diversity, and knowledge on the board.
CORPORATE GOVERNANCE AND ITS
RELATIONSHIP TO EXTERNAL AUDIT
 Effective governance is important to the
conduct of an audit for one very simple
reason
 Companies with effective corporate
governance are less likely to experience
fraud and are therefore less risky to audit.
 The auditor is in a much better position to
provide a quality audit when governance
mechanisms, such as the board and the
audit committee, adhere to and embrace
fundamental principles of effective
governance.
 However, in organizations where
governance is not well developed or is
heavily influenced by management, the
auditor may decide that the risk of fraud is
unduly high and that audit firm is going to
have to bear too much responsibility for
assuring reliable financial reporting.
 In essence, ineffective corporate
governance increases fraud risk to an
extent that at some point the client is not
auditable from a risk-mitigation standpoint.
 While the possibility of fraud and the
associated need for effective corporate
governance are of utmost importance to
the external auditor, management also
seeks to provide reasonable assurance that
the financial statements are free from
material misstatements from either fraud
or errors.
 CHAPTER 3
INTRODUCTION
1. The Code of Corporate Governance is
intended to raise the corporate
governance standards of Philippine
corporations to a level at par with its
regional and global counterparts.
2. Will adopt the “comply or explain”
approach. This approach combines
voluntary compliance with mandatory
disclosure. Companies do not have to
comply with the Code, but they must state in
their annual corporate governance reports
whether they comply with the Code
provisions, identify any areas of
noncompliance, and explain the reasons for
non-compliance.
3. The Code is arranged as follows: Principles,
Recommendations and Explanations.
Principles - can be considered as high-level
statements of corporate governance good
practice and are applicable to all companies.
4. Recommendations
 are objective criteria that are
intended to identify the specific
features of corporate governance
good practice that are recommended
for companies operating according to
the Code.
 When a Recommendation is not
complied with, the company must
disclose and describe this non-
compliance, and explain how the
overall Principle is being achieved.
Alternatives
 To a Recommendation may be
justified circumstances if good
governance can be achieved by other
means.
 The alternative should be consistent
with the overall Principle.
Descriptions and explanations should
be written in plain language and in a
clear, complete, objective and
precise manner, so that shareholders
and other stakeholders can assess the
company's governance framework.
5. Explanations
 Strive to provide companies with
additional information on the
recommended best practice.
 This Code does not, in any way,
prescribe a “one size fits all”
framework.
 It is designed to allow boards some
flexibility in establishing their
corporate governance arrangements.
6. Code of Corporate Governance for publicly
listed companies
 First of a series of Codes that intended to
cover all types of corporations in the
Philippines under supervision of the Securities
and Exchange Commission (SEC).
7. Definition of Terms
 Corporate Governance
 The system of stewardship and control to
guide organizations in fulfilling their long-
term economic, moral, legal and social
obligations toward their stakeholders.
 Its purpose is to maximize the
organization’s long- term success, creating
sustainable value for its shareholders,
stakeholder and the nation.
 Board of Directors
 The governing body elected by the
stockholders that exercises the corporate
powers of a corporation, conducts all its
business & control its properties.
 Management
 A group of executives given the authority
by the Board of Directors to implement the
policies it has laid down in the conduct of
the business of the corporation.
 Independent Director
  A person who is independent of
management and the controlling
shareholder, and is free from any business
which could materially interfere w/ his
exercise of independent judgment in
carrying out his responsibilities as a
director.
 Executive Director
 A director who has executive
responsibility of day- to-day operations of
a part or the whole of the organization.
 Non-Executive Director
 A director who has no executive
responsibility and doesn’t perform any
work related to the operations of the
corporation.
 Conglomerate
 A group of corporations that has
diversified business activities in varied
industries, whereby the operations of such
businesses are controlled and managed by
a parent corporate entity.
 Internal Control
 A process designed and effected by the
board of directors, senior management, and
all levels of personnel to provide
reasonable assurance on the achievement
of objectives through efficient & effective
operations.
 Reliable, complete and timely financial
and management information
Principle 1
 The company should be headed by a
competent, working board to foster the
long-term success of the corporation, and
to sustain its competitiveness and
profitability in a manner consistent with its
corporate objectives and the long-term best
interests of its shareholders and other
stakeholders.
Recommendation 1.1
 The Board should be composed of directors
with a collective working knowledge,
experience or expertise that is relevant to
the company’s industry/sector
 The Board should always ensure that it has
an appropriate mix of competence and
expertise and that its members remain
qualified for their positions individually
and collectively, to enable it to fulfill its
roles and responsibilities and respond to the
needs of the organization based on the
evolving business environment and strategic
direction..
 Competence - can be determined from the
collective knowledge, experience and
expertise of each director that is relevant to
the industry/sector that the company is in.
Recommendation 1.2
 The Board should be composed of a
majority of non-executive directors who
possess the necessary qualifications to
effectively participate and help secure
objective, independent judgment on
corporate affairs and to substantiate
proper checks and balances.
 Reason: The right combination of non-
executive directors (NEDs), which
include independent directors (IDs) and
executive directors (EDs), ensures that
no director or small group of directors
can dominate the decision-making
process.
 A board composed of a majority of
NEDs assures protection of the
company’s interest over the interest of
the individual shareholders.
Recommendation 1.3
 The Company should provide in its Board
Charter and Manual on Corporate
Governance a policy on the training of
directors, including an orientation
program for first-time directors and
relevant annual continuing training for
all directors.
  Reason: aim to promote effective board
performance and continuing qualification of
the directors in carrying-out their duties and
responsibilities.
 orientation program for first-time
directors - 8 hrs
- this ensures that new members are
appropriately apprised of their
duties and responsibilities, before
beginning their directorships.
 annual continuing training – 4hrs
- Makes certain that the directors are
continuously informed of the
developments in the business and
regulatory environments, including
emerging risks relevant to the
company.
Recommendation 1.4: (pg. 36)
 The Board should have a policy on board
diversity.
Recommendation 1.5: (pg. 36)
 The Board should ensure that it is assisted in
its duties by a Corporate Secretary, who
should be a separate individual from the
Compliance Officer.
 The Corporate Secretary should not be
member of the Board of Directors and
should annually attend a training on
corporate governance.
Duties of Corporate Secretary
 Assists the Board and the
board committees in the conduct
of their meetings.
 Safe keeps and preserves the integrity of
the minutes of the meetings of the Board and
its committees, as well as other official
records of the corporation.
 Performs required administrative functions
Recommendation 1.6: (pg. 38)
 The Board should ensure that it is assisted in
its duties by a Compliance Officer, who
should have a rank of Senior Vice President
or an equivalent position with adequate stature
and authority in the corporation.
 The Compliance Officer should not be a
member of the Board of Directors and
should annually attend a training on
corporate governance.
Duties of Compliance Officer
 Ensures the integrity and
accuracy of all documentary
submissions to regulators
 Appears before the SEC when summoned
in relation to compliance with this Code
 Identifies possible areas of compliance
issues and works towards the resolution of
the same
PRINCIPLE 2
 The fiduciary roles, responsibilities and
accountabilities of the Board as provided
under the law, the company’s articles and
by-laws, and other legal pronouncements
and guidelines should be clearly made
known to all directors as well as to
stockholders and other stakeholders.
Recommendation 2.1 (pg. 39)
 The Board members should act on a fully
informed basis, in good faith, with due
diligence and care, and in the best interest of
the company and all shareholders.
 There are two key elements of the fiduciary
duty of board members:
 The Duty of Care
 The Duty of Loyalty
Recommendation 2.2 (pg.39)
 The Board should oversee the development
of and approve the company’s business
objectives and strategy, and monitor their
implementation, in order to sustain the
company’s long-term viability and
strength.
Recommendation 2.3 (pg. 40)
 The Board should be headed by a competent
and
qualified Chairperson.
Roles of the Chairman
 Guarantees that the Board receives
accurate, timely, relevant, insightful, concise,
and clear information to enable it to make
sound decisions
  Ensures that the Board sufficiently
challenges and inquires on reports submitted
and representations made by Management
 Assures the availability of proper
orientation for
first-time directors and continuing training
opportunities for all directors
Recommendation 2.4 (pg. 41)
 The Board should be responsible for
ensuring and adopting an effective
succession planning program for directors,
key officers and management to ensure
growth and a continued increase in the
shareholders’ value.
 This should include adopting a policy on
the retirement age for directors and key
officers as part of management succession
and to promote dynamism in the
corporation.
Recommendation 2.5 (pg. 41)
 The Board should align the remuneration
of key officers and board members with the
long-term interests of the company. In
doing so, it should formulate and adopt a
policy specifying the relationship between
remuneration and performance.
 Further, no director should participate in
discussions or deliberations involving his
own remuneration.
Recommendation 2.6 (pg. 42)
 The Board should have and disclose in its
Manual on Corporate Governance a
formal and transparent board nomination
and election policy that should include how
it accepts nominations from minority
shareholders and reviews nominated
candidates.
 The policy should also include an
assessment of the effectiveness of the
Board’s processes and procedures in the
nomination, election, or replacement of a
director.
 In addition, its process of identifying the
quality of directors should be aligned with
the strategic direction of the company.
Includes the qualifications and grounds for
disqualification of a director.
Recommendation 2.7
 The Board should have the overall
responsibility in ensuring that there is a
group-wide policy and system governing
related party transactions (RPTs) and
other unusual or infrequently occurring
transactions, particularly those which pass
certain thresholds of materiality.
 Reason: Ensuring the integrity of related
party transactions is an important fiduciary
duty of the director. It is the Board’s role to
initiate policies and measures geared
towards prevention of abuse and promotion
of transparency, and in compliance with
applicable laws and regulations to protect
the interest of all shareholders
 Suggestions for the content of the RPT
Policy
- Definition of related parties;
- Coverage of RPT policy; •
- Guidelines in ensuring arm’s-length
terms;
- Identification and prevention or
management of potential or actual
conflicts of interest which arise;
- Adoption of materiality thresholds;
- Internal limits for individual and
aggregate exposures;
- Whistle-blowing mechanisms, and
- Restitution of losses and other
remedies for abusive RPTs
 The company is given the discretion to set
their materiality threshold at a level where
omission or misstatement of the transaction
could pose a significant risk to the company
and influence its economic decision.
Recommendation 2.8
 The Board should be primarily responsible
for approving the selection and assessing the
performance of the Management led by the
Chief Executive Officer (CEO), and control
functions led by their respective heads
(Chief Risk Officer, Chief Compliance
Officer, and Chief Audit Executive).
Recommendation 2.9
  The Board should establish an effective
performance management framework that
will ensure that the Management, including
the Chief Executive Officer, and personnel’s
performance is at par with the standards set
by the Board and Senior Management.
Recommendation 2.10
 The Board should oversee that an
appropriate internal control system is in
place, including setting up a mechanism for
monitoring and managing potential conflicts
of interest of Management, board members,
and shareholders. The Board should also
approve the Internal Audit Charter.
Recommendation 2.11
 the Board should oversee that a sound
enterprise risk management (ERM)
framework is in place to effectively identify,
monitor, assess and manage key business
risks.
 The risk management framework should
guide the Board in identifying units/business
lines and enterprise-level risk exposures, as
well as the effectiveness of risk management
strategies.
Recommendation 2.12
 The Board should have a Board Charter
that formalizes and clearly states its roles,
responsibilities and accountabilities in
carrying out its fiduciary duties.
 The Board Charter should serve as a guide
to the directors in the performance of their
functions and should be publicly available
and posted on the company’s website
Principle 3
 Board committees should be set up to
the extent possible to support the
effective performance of the Board’s
functions, particularly with respect to
audit, risk management, related party
transactions, and other key corporate
governance concerns, such as nomination
and remuneration. The composition,
functions and responsibilities of all
committees established should be
contained in a publicly available
Committee Charter.
Recommendation 3.1
 The Board should establish board
committees that focus on specific board
functions to aid in the optimal performance
of its roles and responsibilities.
 The establishment of the same, or any other
committees that the company deems
necessary, allows for specialization in issues
and leads to a better management of the
Board’s workload.
 The type of board committees to be
established by a company would depend on
its size, risk profile and complexity of
operations.
Recommendation 3.2
 Establish an Audit Committee to enhance
its oversight capability over the company’s
financial reporting, internal control system,
internal and external audit processes, and
compliance with applicable laws and
regulations.
 Audit Committee has the following duties
and responsibilities:
a. Recommends the approval the Internal
Audit Charter (IA Charter), which
formally defines the role of Internal
Audit and the audit plan as well as
oversees the implementation of the IA
Charter;
b. Oversees the Internal Audit Department,
and recommends the appointment and/or
grounds for approval of an internal audit
head or Chief Audit Executive (CAE).
c. Reviews and monitors Management’s
responsiveness to the Internal Auditor’s
findings and recommendations;
Recommendation 3.3
 The Board should establish a Corporate
Governance Committee that should be
tasked to assist the Board in the performance
of its corporate governance responsibilities,
 including the functions that were formerly
assigned to a Nomination and Remuneration
Committee.
 should be composed of at least three
members, all of whom should be
independent directors, including the
Chairman.
 duties and functions:
a. Oversees the implementation of the
corporate governance framework and
periodically reviews the said framework
to ensure that it remains appropriate in
light of material changes to the
corporation’s size, complexity and
business strategy, as well as its business
and regulatory environments;
b. Oversees the periodic performance
evaluation of the Board and its
committees as well as executive
management, and conducts an annual
self-evaluation of its performance;
c. Ensures that the results of the Board
evaluation are shared, discussed, and that
concrete action plans are developed and
implemented to address the identified
areas for improvement;
Recommendation 3.4 (pg. 53)
 Subject to a corporation’s size, risk profile
and complexity of operations, the Board
should establish a separate Board Risk
Oversight Committee (BROC) that should
be responsible for the oversight of a
company’s Enterprise Risk Management
system to ensure its functionality and
effectiveness.
 The BROC should be composed of at least
three members, the majority of whom
should be independent directors, including
the Chairman.
 The Chairman should not be the Chairman
of the Board or of any other committee. At
least one member of the committee must
have relevant thorough knowledge and
experience on risk and risk management.
Duties of BROC
 Advises the Board on its risk
appetite levels and risk tolerance limits
 Reports to the Board on a regular basis, or
as deemed necessary, the company’s material
risk exposures, the actions taken to reduce the
risks, and recommends further action or plans,
as necessary
 Assesses the probability of each identified
risk becoming a reality and estimates its
possible significant financial impact
and likelihood of occurrence.
Recommendation 3.5 (pg. 55)
 Subject to a corporation’s size, risk profile
and complexity of operations, the Board
should establish a Related Party
Transaction (RPT) Committee.
 which should be tasked with reviewing all
material related party transactions of the
company and should be composed of at least
three non-executive directors, two of whom
should be independent, including the
Chairman.
Functions of RPT Committee
 Ensures that transactions with
related parties, including write-off of
exposures are subject to a periodic
independent review or audit process
 Oversees the implementation of the system
for identifying, monitoring, measuring,
controlling, and reporting RPTs, including a
periodic review of RPT policies and
procedures
 Reports to the Board of Directors on a
regular basis, the status and aggregate
exposures to each related party, as well as the
total amount of exposures to all related parties
Recommendation 3.6 (pg. 57)
 All established committees should be
required to have Committee Charters
stating in plain terms their respective
purposes, memberships, structures, operations,
reporting processes, resources and other
relevant information.
 The Charters should provide the standards
for evaluating the performance of the
Committees. It should also be fully disclosed
on the company’s website.
Principle 4
  To show full commitment to the
company, the directors should devote the
time and attention necessary to properly
and effectively perform their duties and
responsibilities, including sufficient time
to be familiar with the corporation’s
business.
Recommendation 4.1 (pg. 58)
 The directors should attend and actively
participate in all meetings of the Board,
Committees, and Shareholders in person or
through tele-
/videoconferencing conducted in accordance
with the rules and regulations of the
Commission, except when justifiable causes,
such as, illness, death in the immediate
family and serious accidents, prevent them
from doing so.
 In Board and Committee meetings, the
director should review meeting materials
and if called for, ask the necessary
questions or seek clarifications and
explanations.
The absence of a director in more than
fifty percent (50%) of all regular and
special meetings of the Board during
his/her incumbency is a ground for
disqualification in the succeeding election.
Recommendation 4.2
 The non-executive directors of the Board
should concurrently serve as directors to a
maximum of five publicly listed
companies to ensure that they have
sufficient time to fully prepare for meetings,
challenge Management’s proposals/views,
and oversee the long-term strategy of the
company.
Recommendation 4.3
 director should notify the Board where
he/she is an incumbent director before
accepting a directorship in another company
 Reason: it is important that a director
notifies his/her incumbent Board before
accepting a directorship in another company
for the company to be able to assess if
his/her present responsibilities and
commitment to the company will be affected
and if the director can still adequately
provide what is expected of him/her.
Principle 5
 The Board should endeavor to
exercise objective and independent
judgment on all corporate affairs.
Recommendation 5.1
 The Board should have at least three
independent directors, or such number as
to constitute at least one-third of the
members of the Board, whichever is
higher.
 Reason: to ensure the exercise of
independent judgment on corporate affairs
and proper oversight of managerial
performance, including prevention of
conflict of interests and balancing of
competing demands of the corporation.
Recommendation 5.2
 The Board should ensure that its
independent directors possess the
necessary qualifications and none of the
disqualifications for an independent
director to hold the position.
 Characteristics of independent
director page 60
Recommendation 5.3
 The Board’s independent directors
should serve for a maximum
cumulative term of nine years. After
which, the independent director should
be perpetually barred from reelection as
such in the same company, but may
continue to qualify for nomination and
election as a non-independent director.
 If a company wants to retain an
independent director who has served for
 nine years, the Board should provide
meritorious justification/s and seek
shareholders’ approval during the annual
shareholders’ meeting.
 Reason: Service in a board for a long
duration may impair a director’s ability
to act independently and objectively
Recommendation 5.4
 The positions of Chairman of the Board
and Chief Executive Officer should be held
by separate individuals and each should
have clearly defined responsibilities.
 Reason: To avoid conflict or a split board
and to foster an appropriate balance of
power, increased accountability and better
capacity for independent decision-making
 The CEO has the following roles and
responsibilities, among others:
a. Determines the corporation’s strategic
direction and formulates and implements its
strategic plan on the direction of the
business;
b. Communicates and implements the
corporation’s vision, mission, values and
overall strategy and promotes any
organization or stakeholder change in
relation to the same;
c. Oversees the operations of the corporation
and manages human and financial resources
in accordance with the strategic plan;
d. Has a good working knowledge of the
corporation’s industry and market and keeps
up-to-date with its core business purpose;
e. Directs, evaluates and guides the work of the
key officers of the corporation;
f. Manages the corporation’s resources
prudently and ensures a proper balance of
the same;
g. Provides the Board with timely information
and interfaces between the Board and the
employees;
h. Builds the corporate culture and motivates
the employees of the corporation; and
i. Serves as the link between internal
operations and external stakeholders.
The roles and responsibilities of the Chairman are
provided under Recommendation 2.3.
Recommendation 5.5
 The Board should designate a lead director
among the independent directors if the
Chairman of the Board is not independent,
including if the positions of the Chairman
of the Board and Chief Executive Officer
are held by one person.
 In cases where the Chairman is not
independent and where the roles of Chair
and CEO are combined, putting in place
proper mechanisms ensures independent
views and perspectives. More importantly, it
avoids the abuse of power and authority, and
potential conflict of interest.
 The functions of the lead director include,
among others, the following:
a. Serves as an intermediary between the
Chairman and the other directors when
necessary;
b. Convenes and chairs meetings of the non-
executive directors; and
c. Contributes to the performance evaluation of
the Chairman, as required.
Recommendation 5.6
A director with a material interest in any
transaction affecting the corporation should
abstain from taking part in the deliberations
for the same.
 fundamental principle to be observed is that
a director does not use his position to profit
or gain some benefit or advantage for his
himself and/or his/her related interests.
Recommendation 5.7
 The non-executive directors (NEDs)
should have separate periodic meetings
with the external auditor and heads of the
internal audit, compliance and risk
functions, without any executive directors
present to ensure that proper checks and
balances are in place within the corporation.
The meetings should be chaired by the lead
independent director.
 NEDs are expected to scrutinize
Management’s performance, particularly in
meeting the companies’ goals and
objectives. Further, it is their role to satisfy
 themselves on the integrity of the
corporation’s internal control and
effectiveness of the risk management
systems. This role can be better performed
by the NEDs if they are provided access to
the external auditor and heads of the internal
audit, compliance and risk functions, as well
as to other key officers of the company
without any executive directors present. The
lead independent director should lead and
preside over the meeting.
Principle 6
 The best measure of the Board’s
effectiveness is through an assessment
process. The Board should regularly carry
out evaluations to appraise its performance
as a body, and assess whether it possesses
the right mix of backgrounds and
competencies.
Recommendation 6.1
 The Board should conduct an annual self-
assessment of its performance, including the
performance of the Chairman, individual
members and committees. Every three years,
the assessment should be supported by an
external facilitator.
 Reason: Board assessment helps the
directors to thoroughly review their
performance and understand their roles and
responsibilities.
Principle 7
 : Members of the Board are duty-bound
to apply high ethical standards, taking into
account the interests of all stakeholders.
Recommendation 7.1
 The Board should adopt a Code of Business
Conduct and Ethics, which would provide
standards for professional and ethical
behavior, as well as articulate acceptable and
unacceptable conduct and practices in
internal and external dealings.
 The Code should be properly disseminated
to the Board, senior management and
employees. It should also be disclosed and
made available to the public through the
company website.
Recommendation 7.2T
 he Board should ensure the proper and
efficient implementation and monitoring of
compliance with the Code of Business
Conduct and Ethics and internal policies.
 The Board has the primary duty to make
sure that the internal controls are in place to
ensure the company’s compliance with the
Code of Business Conduct and Ethics and its
internal policies and procedures.
Principle 8
DISCLOSURE AND TRANSPARENCY
 The company should establish corporate
disclosure policies and procedures that are
practical and in accordance with best
practices and regulatory expectations.
Recommendation 8.1
 The Board should establish corporate
disclosure policies and procedures to ensure
a comprehensive, accurate, reliable and
timely report to shareholders and other
stakeholders that gives a fair and complete
picture of a company’s financial condition,
results and business operations.
 Explanation: Setting up clear policies and
procedures on corporate disclosure that
comply with the disclosure requirement as
provided in Rule 68 of the Securities
Regulation Code (SRC), Philippine Stock
Exchange Listing and Disclosure Rules, and
other regulations such as those required by
the Bangko Sentral ng Pilipinas, is essential
for comprehensive and timely reporting.
Recommendation 8.2
 The Company should have a policy
requiring all directors and officers to
disclose/report to the company any dealings
 in the company’s shares within three
business days.
 Explanation: It is emphasized that the
policy is on internal disclosure to the
company of any dealings by the director in
company shares.
Recommendation 8.3
The Board should fully disclose all relevant
and material information on individual
board members and key executives to
evaluate their experience and qualifications,
and assess any potential conflicts of interest
that might affect their judgment.
Recommendation 8.5
The company should disclose its policies
governing Related Party Transactions
(RPTs) and other unusual or infrequently
occurring transactions in their Manual on
Corporate Governance. The material or
significant RPTs reviewed and approved
during the year should be disclosed in its
Annual Corporate Governance Report.
Recommendation 8.4
 The company should provide a clear
disclosure of its policies and procedure for
setting Board and executive
remuneration, as well as the level and mix
of the same in the Annual Corporate
Governance Report.
 Reason: Disclosure of remuneration policies
and procedure enables investors to
understand the link between the
remuneration paid to directors and key
management personnel and the company’s
performance.
Recommendation 8.6
 The company should make a full, fair,
accurate and timely disclosure to the
public of every material fact or event that
occurs, particularly on the acquisition or
disposal of significant assets, which could
adversely affect the viability or the interest
of its shareholders and other stakeholders.
 should appoint an independent party to
evaluate the fairness of the transaction price
on the acquisition or disposal of assets to
ensures the protection of the rights of
shareholders.
Recommendation 8.7
 The company’s corporate governance
policies, programs and procedures should be
contained in its Manual on Corporate
Governance, which should be submitted to
the regulators and posted on the company’s
website.
 Reasons: To ensure the better protection of
shareholders and other stakeholders’ rights
and transparency.
Principle 9
STRENGTHENING THE EXTERNAL
AUDITOR’S INDEPENDENCE AND
IMPROVING AUDIT QUALITY
 The company should establish standards for
the appropriate selection of an external
auditor, and exercise effective oversight of
the same to strengthen the external auditor’s
independence and enhance audit quality
Recommendation 9.1
 The Audit Committee should have a robust
process for approving and recommending
the appointment, reappointment, removal,
and fees of the external auditor.
Recommendation 9.2
 The Audit Committee Charter should
include the Audit Committee’s
responsibility on assessing the integrity and
independence of external auditors and
exercising effective oversight to review and
monitor the external auditor’s independence
and objectivity and the effectiveness of the
audit process, taking into consideration
relevant Philippine professional and
regulatory requirements.
Principle 10
INCREASING FOCUS ON NON-FINANCIAL
AND SUSTAINABILITY REPORTING
  The company should ensure that the
material and reportable non-financial and
sustainability issues are disclosed
Recommendation 9.3
 The company should disclose the nature of
non-audit services performed by its external
auditor in the Annual Report to deal with
the potential conflict of interest. The Audit
Committee should be alert for any potential
conflict of interest situations, given the
guidelines or policies on non-audit services,
which could be viewed as impairing the
external auditor's objectivity.
Principle 11
PROMOTING A COMPREHENSIVE AND
COST-EFFICIENT ACCESS TO RELEVANT
INFORMATION
 The company should maintain
comprehensive and cost-efficient
communication channel for disseminating
relevant information. This channel is crucial
for informed decision-making by investors,
stakeholders and other interested users.
Recommendation 11.1
 The company should include media and
analysts’ briefings as channels of
communication to ensure the timely and
accurate dissemination of public, material
and relevant information to its shareholders
and other investors.
INTERNAL CONTROL SYSTEM AND
RISK MANAGEMENT FRAMEWORK
Principle 12
STRENGTHENING THE INTERNAL
CONTROL SYSTEM AND ENTERPRISE
RISK MANAGEMENT FRAMEWORK
 To ensure the integrity, transparency and
proper governance in the conduct of its
affairs, the company should have a strong
and effective internal control system and
enterprise risk management framework
 To ensure the integrity, transparency and
proper governance in the conduct of its
affairs, the company should have a strong
and effective internal control system and
enterprise risk management framework.
Recommendation 12.1
 The Company should have an adequate and
effective internal control system and an
enterprise risk management framework
in the conduct of its business, taking into
account its size, risk profile and complexity
of operations.
 Explanation: Moreover, an effective
enterprise risk management framework
typically includes such activities as the
identification, sourcing, measurement,
evaluation, mitigation and monitoring of
risk.
Recommendation 12.2
a
 The Company should have in place an
independent internal audit function that
provides an independent and objective
assurance, and consulting services
designed to add value and improve the
company's operations.
 Explanation: Functions of the internal
audit, among others. Page 79-80
Recommendation 12.3
 Subject to a company’s size, risk profile and
complexity of operations, it should have a
qualified Chief Audit Executive (CAE)
appointed by the Board.
 Shall oversee and be responsible for the
internal audit activity of the organization,
including that portion that is outsourced to a
third party service provider.
 Responsibilities of the CAE
- Periodically reviews the internal
audit charter and presents it to senior
management and the Board Audit
Committee for approval;
- Establishes a risk-based internal
audit plan, including policies and
procedures, to determine the
 priorities of the internal audit
activity, consistent with the
organization’s goals;
- Communicates the internal audit
activity’s plans, resource
requirements and impact of resource
limitations, as well as significant
interim changes, to senior
management and the Audit
Committee for review and approval;
Recommendation 12.4
 Subject to its size, risk profile and
complexity of operations, the company
should have a separate risk management
function to identify, assess and monitor key
risk exposures.
 risk management function involves the
following activities
- Defining a risk management
strategy;
- Identifying and analyzing key risks
exposure relating to economic,
environmental, social and
governance (EESG) factors and the
achievement of the organization’s
strategic objectives;
- Evaluating and categorizing each
identified risk using the company’s
predefined risk categories and
parameters;
Recommendation 12.5
 the company should have a Chief Risk
Officer (CRO), who is the ultimate
champion of Enterprise Risk Management
(ERM) and has adequate authority, stature,
resources and support to fulfill his/her
responsibilities, subject to a company’s size,
risk profile and complexity of operations.
 CRO has the following functions:
- Supervises the entire ERM process
and spearheads the development,
implementation, maintenance and
continuous improvement of ERM
processes and documentation;
- Communicates the top risks and the
status of implementation of risk
management strategies and action
plans to the Board Risk Oversight
Committee;
- Collaborates with the CEO in
updating and making
recommendations to the Board Risk
Oversight Committee;
CULTIVATING A SYNERGIC
RELATIONSHIP WITH SHAREHOLDERS
Principle 13
PROMOTING SHAREHOLDER RIGHTS
 The company should treat all shareholders
fairly and equitably, and also recognize,
protect and facilitate the exercise of their
rights.
Recommendation 13.1
 The Board should ensure that basic
shareholder rights are disclosed in the
Manual on Corporate Governance and on
the company’s website.
 Shareholders’ rights relate to the
following:
 Pre-emptive rights;
 Dividend policies;
 Right to propose the holding of meetings
and to include agenda items ahead of the
scheduled Annual and Special
Shareholders’ Meeting;
 Right to nominate candidates to the
Board of Directors;
 Nomination process; and
 Voting procedures that would govern the
Annual and Special Shareholders’
Meeting.
 The right to propose the holding of meetings
and items for inclusion in the agenda is
given to all shareholders, including minority
and foreign shareholders. To prevent the
abuse of this right, companies may require
that the proposal be made by shareholders
holding a specified percentage of shares or
voting rights.
Recommendation 13.2
 The Board should encourage active
shareholder participation by sending the
Notice of Annual and Special Shareholders’
Meeting with sufficient and relevant
information at least 28 days before the
meeting.
 Reason: sending the Notice in a timely
manner allows shareholders to plan their
participation in the meetings.
Recommendation 13.3
 The Board should encourage active
shareholder participation by making the
result of the votes taken during the most
recent Annual or Special Shareholders’
Meeting publicly available the next working
day. In addition, the Minutes of the Annual
and Special Shareholders’ Meeting should
be available on the company website within
five business days from the end of the
meeting.
 Explanation: Minutes of Meeting include
the following matters in page 85
Recommendation 13.4
 The Board should make available, at the
option of a shareholder, an alternative
dispute mechanism to resolve intra-
corporate disputes in an amicable and
effective manner. This should be included in
the company’s Manual on Corporate
Governance.
 Explanation: It is important for the
shareholders to be well-informed of the
company’s processes and procedures when
seeking to redress the violation of their
rights.
Recommendation 13.5
 The Board should establish an Investor
Relations Office (IRO) to ensure constant
engagement with its shareholders. The IRO
should be present at every shareholders’
meeting.
 Explanation: Setting up an avenue to
receive feedback, complaints and queries
from shareholders assure their active
participation with regard to activities and
policies of the company.
DUTIES TO STAKEHOLDERS
Principle 14
RESPECTING RIGHTS OF STAKEHOLDERS
AND EFFECTIVE REDRESS FOR
VIOLATION OF STAKEHOLDER’S RIGHTS
 The rights of stakeholders established by
law, by contractual relations and through
voluntary commitments must be respected.
 Where stakeholders’ rights and/or interests
are at stake, stakeholders should have the
opportunity to obtain prompt effective
redress for the violation of their rights.
Recommendation 14.2
 the Board should establish clear policies and
programs to provide a mechanism on the fair
treatment and protection of stakeholders.
Recommendation 14.1
The Board should identify the company’s
various stakeholders and promote
cooperation between them and the company
in creating wealth, growth and
sustainability.
Recommendation 14.3
 The Board should adopt a transparent
framework and process that allow
stakeholders to communicate with the
company and to obtain redress for the
violation of their rights.
 Explanation:This can be done through
stakeholder engagement touchpoints in the
company, such as the Investor Relations
Office, Office of the Corporate Secretary,
Customer Relations Office, and Corporate
Communications Group.
Principle 15
ENCOURAGING EMPLOYEES’ handle whistleblowing concerns. The Board
PARTICIPATION should be conscientious in establishing the
framework, as well as in supervising and
 A mechanism for employee participation ensuring its enforcement.
should be developed to create a symbiotic
environment, realize the company’s goals
and participate in its corporate governance Principle 16
processes.
ENCOURAGING SUSTAINABILITY AND
Recommendation 15.1 SOCIAL RESPONSIBILITY

 The Board should establish policies,  the company should be socially responsible
programs and procedures that encourage in all its dealings with the communities
employees to actively participate in the where it operates. It should ensure that its
realization of the company’s goals and in its interactions serve its environment and
governance. stakeholders in a positive and progressive
 The establishment of policies and manner that is fully supportive of its
programs covering, among others, the comprehensive and balanced development
following: (1) health, safety and welfare
(1) health, safety and welfare;
(2) training and development; and Recommendation 16.1:
(3) reward/compensation for employees
 The company should recognize and place an
Recommendation 15.2 importance on the interdependence between
business and society, and promote a
 The Board should set the tone and make a
mutually beneficial relationship that allows
stand against corrupt practices by adopting
the company to grow its business, while
an anti-corruption policy and program in its
contributing to the advancement of the
Code of Conduct.
society where it operates.
 Reason: to mitigate corrupt practices such
as, but not limited to, bribery, fraud,
extortion, collusion, conflict of interest and
money laundering.
 encourages employees to report corrupt
practices and outlines procedures on how to
combat, resist and stop these corrupt
practices. Anticorruption programs are more
effective when the Board sets the tone and
leads the company in their execution.

Recommendation 15.3
 The Board should establish a suitable
framework for whistleblowing that allows
employees to freely communicate their
concerns about illegal or unethical
practices, without fear of retaliation and to
have direct access to an independent
member of the Board or a unit created to
 CHAPTER 11
INTRODUCTION
 Without the organization mastering the art of
risk management, effective corporate
governance cannot be obtained.
 Is recognized as one of the most important
competencies needed by the board of
directors of modern organization.
The levels of risk faced by business firm have
increased because of different factors. For
this reason along with the compliance with
legal requirements, top management should
consider adequate knowledge of risk
management.
Risk Management Defined
 Is the process of measuring or assessing risk
and developing strategies to manage it.
 Is a systematic approach in identifying,
analyzing and controlling areas or events with
a potential for causing unwanted change.
 It includes risk planning, assessing risk areas,
developing risk handling options, monitoring
risks and documenting overall risk
management program.
Defined by International Organization of
Standardization (ISO 31000)
 Risk management is the identification,
assessment, and prioritization of risks
followed by coordinated and economical
application of resources to minimize,
monitor and control the probability and/or
impact of unfortunate events and to
maximize the realization of opportunities.
 Risks can come from uncertainty in
financial market, project failures, legal
liabilities, credit risks, accidents, natural
causes and disasters as well as deliberate
attack from adversary or events of
uncertain or unpredictable root-cause.
Basic Principles of Risk Management
The International Organization of
Standardization (ISO)
identifies the basic principle of risk management.
Risk Management should:
1) Create value: benefits received is more than
that of the expenses.
2) Address uncertainty & assumptions
3) Be an integral part of the organizational
process & decision-making
4) Be dynamic, iterative, transparent, tailorable,
& responsive to change
5) Create capability of continual improvement
& enhancement considering the best available
information and human factors.
6) Be systematic, structured & continually or
periodically reassessed
Process of Risk Management
According to the Standard ISO 31000: the
process of risk management consists of several
steps:
1) Establishing the Context. This will involve:
a) Identification of risk in a selected domain
of interest
 Planning the remainder of the process
b) Mapping out the following:
i. The social scope of risk management
ii. The identity & objectives of
stakeholders
iii. The basis upon which risks will be
evaluated.
c) Defining a framework for the activity and
an agenda for identification.
d) Developing an analysis of risks involved
in the process
e) Mitigation or Solution of risks using
available technological, human and
organizational process.
2) Identification
of Potential Risks
 Risk identification can start with the analysis
of the source of problem or with the analysis
of the problem itself. Common risk
identification methods are:
 Objective-based risk
 Scenario-based risk
 Taxanomy-based risk
 Common-risk checking
 Risk charting
3) Risk
Assessment
 Once risks have been identified, their
potential severity of impact and the
probability of occurrence must be assessed.
 The assessment process is critical to make
the best educated decisions in prioritizing the
implementation of the risk management plan.

Elements of Risk Management
 In practice, the process of assessing overall
risks can be difficult, and balancing
resources to mitigate between risks with a
high probability of occurrence but lower loss
versus a risk with high loss but lower
probability of occurrence can often be
mishandled.
 Ideal risk management should minimize
spending of manpower or other resources
and at the same time minimizing the
negative effect of risks.
 For the most part, the performance of
assessment methods should consist of the
following elements:
1. identification, characterization, and
assessment of threats
2. assessment of the vulnerability of
critical assets to specific threats
3. determination of the risk
4. identification of ways to reduce those
risks
5. prioritization of risk reduction measures
based on a strategy
6.
Relevant Risk Terminologies
I. Risk Associated with Investments
 The factors usually considered with respect to
investments are:
 Business Risk
 Refers to the uncertainty about the
rate of return caused by the nature
of the business.
 The most frequently discussed causes
of business risk are uncertainty about
the firm’s sales and operating
expenses.
 Business risk is related to sales
volatility as well as to the operating
leverage of the firm caused by fixed
operating expenses.
 Default Risk
 Default risk is related to the
probability that some or all of the
initial investment will not be
returned.
 The degree of default risk is closely
related to the financial condition of
the company issuing the security and
the rank in claims on assets in the
event of default or bankruptcy.
 Financial Risk
 The firm's capital structure or
sources of financing determine
financial risk.
 If the firm is all equity financed,
then any variability in operating
income is passed directly to net
income on an equal percentage basis.
 If the firm is partially financed by
debt that requires fixed interest
payments or by preferred share that
requires fixed preferred dividend
payments, then these fixed charges
introduce financial leverage.
 This leverage causes net income to
vary more than operating income.
 The introduction of financial
leverage causes the firm's lenders
and its stockholders to view their
income streams as having additional
uncertainty.
 As a result of financial leverage,
both investment groups would
increase the risk premiums that they
require for investing in the firm.
 Interest Rate Risk
 Because money has time value,
fluctuations in interest rates will cause
the value of an investment to fluctuate
also.
 Although interest rate risk is most
commonly associated with bond
price movements, rising interest
rates cause bond prices to decline
and declining interest rates cause
bond prices to rise.
 Movements in interest rates affect
almost all investment alternatives.
 Liquidity Risk
 Liquidity risk is associated with the
uncertainty created by the inability
to sell the investment quickly for
cash.
 An investor assumes that the
investment can be sold at the expected
price when future consumption is
 planned. iii. Market Strategy
 As the investor considers the
sale of the investment, he or B. Operations Risk
a) Process Stoppage
she faces two uncertainties:
b) Health and Safety
(1) What price will be received?
c) After Sales Service Failure
(2) How long will it take to sell
d) Environmental
the asset? e) Technological Obsolescence
 The liquidity risk for ordinary f) Integrity
equity shares is more i. Management Fraud
complex. Because they are ii. Employee Fraud
traded on organized and iii. Illegal Acts
active markets, ordinary equity
shares can be sold quickly. C. Financial Risk
a) Interest Rates Volatility
 Management Risk b) Foreign Currency
 Decisions made by a firm's c) Liquidity
management and board of d) Derivative
directors materially affect the e) Viability
risk faced by investors. D. Business Risk
 Areas affected by these decisions
range from product innovation  Regulatory Change
and production methods (business  Reputation
risk) and financing (financial risk)  Political
to acquisitions.  Regulatory and Legal
 Shareholders Relations
 Purchasing Power Risk  Credit Rating
 Purchasing power risk is  Capital Availability
perhaps, more difficult to  Business Interruptions
recognize than the other types of POTENTIAL RISK TREATMENTS
risk.
Techniques to manage the risks:
 It is easy to observe the decline
in the price of a stock or bond,  Risk Avoidance
but it is often more difficult to  This includes performing an activity that could
recognize that the purchasing carry risk.
power of the return you have  Example: Not buying a property or business in
earned on an investment has order not to take on the legal liability that comes
declined (risen) as a result of with it
inflation (deflation).  Risk Reduction
 Or optimization involves reducing the severity
II. Risks Associated with Manufacturing, of the loss or the likelihood of the loss from
Trading and Service Concern occurring
 Example: Outsourcing
A. Market Risk  Risk Sharing
a) Product Risk  Sharing with another party the burden of loss or
i. Complexity the benefit of gain, from a risk, and the measures
ii. Obsolescence to reduce risk.
iii. Research and Development
 Risk Retention
iv. Packaging
 Involves accepting the loss or benefit of gain
v. Delivery of Warranties
b) Competitors Risk from a risk when it occurs.
i. Pricing Strategy  Example: self insurance
ii. Market Share AREAS OF RISK MANAGEMENT
Most commonly encountered areas of risk
management:
1. Enterprise risk management
2. Risk management activities as applied to project
management
3. Risk management for megaprojects
4. Risk management of information technology
5. Risk management techniques in petroleum and
natural gas.
Simplified framework for an enterprise wide risk
management process illustrated in page 173
SEC Requirement Relative to Enterprise Risk
Management of Publicly-listed Corporation
 SEC Code of Governance Recommendations
2.11 and corresponding explanation in page 48.
RISK MANAGEMENT FRAMEWORK (page 174)
 The risk management framework should guide
the Board in identifying units/business lines and
enterprise-level risk exposures, as well as the
effectiveness of risk management strategies.
STEPS IN THE RISK MANAGEMENT PROCESS
To enhance management’s competence in their oversight
role on risk management:
1. Set up a separate risk management committee
chaired by a board member.
2. Ensure that a formal comprehensive risk
management system is in place.
3. Assess whether the formal system possesses the
necessary elements. Page 175
4. Evaluate the effectiveness of the various steps in
the assessment of the comprehensive risks faced
by the business firm.
5. Assess if management has developed and
implemented the suitable risk management
strategies and evaluate their effectiveness.
6. Evaluate if management has designed and
implemented risk management capabilities.
7. Assess management’s efforts to monitor overall
company risk management performance and to
improve continuously the firm’s capabilities
8. See to it that best practices as well as mistakes
are shared by all.
9. Assess regularly the level of sophistication of
the firm’s risk management system.
10. Hire experts when needed.
 CHAPTER 12 Fraud Contract Conditions
Robustness of
PRACTICAL GUIDELINES IN REDUCING Poor Brand
Information
AND MANAGING BUSINESS RISKS Management or
Management
Handling of a Crisis
 Practical Guidelines in Managing and Systems
Inefficient Cash
Reducing Enterprise-wide Risk inherent in Market Changes
Management
business activity is best achieved by
Inadequate
applying the principles and techniques -
Insurance
appropriate to the situation.
STRATEGIC TECHNICAL
UNDERSTAND THE NATURE OF RISK Marketing,
Pricing and Failure of plant or
 The willingness and readiness to take Market Entry equipment
personal and financial risks is a defining Decisions
characteristic of the entrepreneurial Market changes
decision-maker. affecting Accidental or
 Successful businessmen and decision- commercial negligent actions
makers make sure that the risks resulting decisions
from their decisions are measured, Political or
understood and as far as possible eliminated. regulatory -
 Accepting that risks exist is a starting point developments
for the other actions needed, but the most Resource-building
important is to create the right climate for and resource
risk management. -
allocation
decisions
IDENTIFY AND PRIORITIZE RISKS
OPERATIONAL
 Identification of significant risks both within Product or design
and outside the organization is crucial and failure, including
allows to make informed decisions. This failure to maintain
makes it easier to avoid unnecessary supply
surprises. Client failure
 Consider the human factor into account.
People behave differently and inconsistently
when making decisions involving risk. Breakdown in
 Risk surrounds and continues to be with us.
labor relations
A former British prime minister once said:
Corporate
"To be alive at all involves some risk."
malpractice
TYPICAL AREAS OF ORGANIZATIONAL Political change
RISK
CONSIDER THE ACCEPTABLE LEVEL OF
FINANCIAL COMMERCIAL
RISK
Accounting Loss of Key
Decisions & Personnel & Tacit  As earlier mentioned, the usual first step is
Practices Knowledge to determine the nature and extent of the
Failure to Comply risks the business will accept.
with Legal  There is also an opportunity cost associated
Treasury Risks
Regulations or with risk: avoiding a risk may mean
Codes of Practice avoiding a potentially big opportunity.
UNDERSTAND WHY RISKS BECOME  If you plot the ability to control a risk
REALITY against its potential impact, you can decide
on actions either to exercise greater control
Five most significant types of risk catalyst are as over the risk or to mitigate its potential
follows: impact.

 Technology
 Organizational Change
 Processes
 People
 External Factors

APPLY A SIMPLE RISK MANAGEMENT

PROCESS

The stages of managing the enterprise-wide risk

Avoiding and mitigating risks
inherent in decisions are simple.
 Start by reducing or eliminating those risks
 First, assess and analyze the risks resulting
that result only in costs: the non-trading
from a decision by systematically
risks.
identifying and quantifying them.
 These can be thought of as the fixed costs of
 Second, consider how best to avoid or
risk and might include property damage
mitigate them.
risks, legal and contractual liabilities and
 Third, in parallel with the second stage, take
business interruption risks.
action to manage control and monitor the
risks.
Create a positive climate for managing risks
A. RISK ASSESSMENT AND ANALYSIS
 Recognizing the need to manage risk is not
enough. The ethos of an organization should
 It is more difficult to assess the risks
recognize and reward behavior that manages
inherent in a business decision than to
risk.
identify them.
 Risks that lead to frequent losses, such as
Overcoming the fear of risk
an increasing incidence of employee-related
problems or difficulties with suppliers, can
 Everyone accepts that taking risks is needed
often be solved using past experience.
to keep ahead of the competition.
 Each category of risk can be mapped in
 Employees need to understand better what
terms of both likely frequency and potential
the real risks are, to share responsibility for
impact, with the potential consequences
the risks being taken and to see risk as an
being ranked on a scale ranging from
opportunity, not a threat.
inconvenient to catastrophic.
C. CONTROLLING & MONITORING
B. RISK MANAGEMENT AND CONTROL
ENTERPRISE -WIDE RISK
 Risk should be actively managed and given
The following questions when answered
a high priority across the whole
truthfully and positively will assist managers in
organization.
deciding how to manage the risks that confront the
 Risk management procedures and
business enterprise.
techniques should be well documented,
clearly communicated, regularly reviewed
 Where are the greatest areas of risk relating
and monitored.
to the most significant strategic decisions?
  What level of risk is acceptable for the
company to bear?
 What are the potentially disclosing events
that could inflict the greatest damage on
your organization?
 What are the risks inherent in the
organization's strategic decisions, and what
is the organization's ability to reduce their
incidence and impact on the business?
 What is the overall level of exposure to risk?
Has this been assessed and is it being
actively monitored?
 What are the costs and benefits of operating
effective risk. management controls?
 What review procedures are in place to
monitor risks?
 Are the risks inherent in strategic decisions
(such as acquiring a new business,
developing a new product or entering a new
market) adequately understood?
PRACTICAL CONSIDERATIONS IN
MANAGING AND REDUCING FINANCIAL
RISK
 Finance is the lifeblood of a business,
heavily influencing strategies and decisions
at every level.
 Profitability, cash flow, long-term
shareholder value and risk all need to be
considered when setting and reviewing
strategy. This section provides practical
guidance about financial decisions and
explains how to:
 improve profitability;
 avoid pitfalls in making financial
decisions;
 reduce financial risk.
Improving Profitability
 Entrepreneurial flair and financial rigour are
as much about attitude as skill.
 Certain skills will ensure that decisions are
focused on commercial success.
A. Variance Analysis
 Interpreting the differences between actual
and planned performance is crucial.
 Variance analysis is used to monitor and
manage the results of past decisions, assess
the current situation and highlight solutions.
B. Assessment of Market Entry and Exit
Barriers
 How easy or difficult it is to either enter or
leave a market is crucial in strategic
decision-making.
 Entry barriers include the need to compete
with businesses that enjoy economies of
scale, or established differentiated products.
C. Break-even Analysis
 The break-even point is when sales cover
costs, where neither a profit nor a loss is
made.
 It is calculated by dividing the costs of the
project by the gross profit at specific dates,
making sure to allow for overhead costs.
D. Controlling Costs
To control costs:
 Focus on the big items of expenditure.
 Be cost aware.
 Maintain a balance between costs and
quality.
 Use budgets for dynamic financial
management.
 Develop a positive attitude to budgeting.
 Eliminate waste.
PRACTICAL TECHNIQUES TO IMPROVE
PROFITABILITY
Some practical techniques to improve profitability:
 Focus decision-making on the most
profitable areas.
 Decide how to treat the least profitable
products.
 Make sure new products enhance overall
profitability.
  Manage development and production  How efficiently is cash managed? Do your
decisions. strategic business decisions take account of
 Set the buying policy. cash considerations, such as the time value
 Consider how to create greater value from of money?
existing customers and products to enhance
profitability.
 Consider how to increase profitability by
managing people.

Avoiding pitfalls

 Many managers have financial

responsibilities and their decisions will often
be influenced by or have an impact on other
parts of the business.
 The following principles will help avoid
flawed financial decision-making.
 Financial Expertise must be widely
Available
 Consider the impact of financial
decisions
 Avoid weak budgetary control
 Understand the impact of cash flow
 Know where the risk lies

Reduce financial risk positive replies to the

following questions would assist top management
to manage financial risk

 Are the most effective and relevant

performance measures in place monitor and
assess the effectiveness of financial
decisions?
 Have you analyzed key business ratios
recently? How useful are your performance
indicators? What are the main issues? Are
you measuring the right things?
 Is there a positive attitude to budgets and
budgeting?
 Does decision-making focus on the most
profitable products and services, or is it
preoccupied with peripheral issues?
 What are the least profitable parts of the
organizations? How will they improved?
 Are market and customer decisions focused
on improving profitability? Too often,
attention if given to non-financial objectives,
such as increasing market share, without
adequately considering the financial risks
and alternatives.