CHAPTER 1:

INTRODUCTION TO CORPORATE GOVERNANCE

Governance
- process whereby elements in society wield power, authority and influence and enact policies and
decisions concerning public life and social upliftment.
- process of decision-making and the process by which decisions are implemented (or not) through
the exercise of power or authority by leaders of the country and/or organizations.
- used in several contexts such as corporate governance, international governance, national
governance and local governance.

CHARACTERISTICS OF GOOD GOVERNANCE:

❖ Participation - could either be direct or through legitimate institutions or representatives.
❖ Rule of Law - requires fair legal frameworks that are enforced impartially.
❖ Transparency - decisions taken and their enforcement are done in a manner that follows rules
and regulations.
❖ Responsiveness - requires that institutions and processes try to serve the needs of all
stakeholders within a reasonable timeframe.
❖ Consensus Oriented - requires mediation of the different interests in society to reach a broad
consensus on what is in the best interest of the whole community and how this can be achieved.
❖ 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.
❖ Effectiveness and Efficiency – processes and institutions produce results that meet the needs
of society while making the best use of resources at their disposal.
❖ Accountability - who will be affected by its decisions or actions, cannot be enforced without
transparency and the rule of law.

Corporate Governance
- system of rules, practices and processes by which business corporations are directed and
controlled.
- involves balancing the interests of a company’s many stakeholders, such as shareholders,
management, customers, suppliers, financiers, government and the community.

PURPOSE:
1. To facilitate effective, entrepreneurial and prudent management that can deliver long-term
success of the company.
2. To enhance shareholders’ value and protect the interests of other stakeholders by improving the
corporate performance and accountability.

OBJECTIVES:
1. Fair and Equitable Treatment of Shareholders - ensures equitable and fair treatment of all
shareholders of the company
2. Self-Assessment - enables firms to assess their behavior and actions before they are scrutinized
by regulatory agencies.
3. Increase Shareholders’ Wealth - higher valuation attached to their shares by businessmen.
4. Transparency and Full Disclosure - aims at ensuring a higher degree of transparency in an
organization by encouraging full disclosure of transactions in the company accounts.
Chapter 2: CORPORATE GOVERNANCE RESPONSIBILITIES & ACCOUNTABILITIES

➢ There is no simple universal formula for good governance.

➢ The essence of any system of good governance is to allow the board and management the
freedom to drive their organization forward and to exercise that freedom within a framework of
effective accountability.

PARTIES INVOLVED IN CORPORATE GOVERNANCE:

THEIR RESPECTIVE BROAD ROLE AND SPECIFIC RESPONSIBILITIES

SHAREHOLDERS Provide effective oversight through election of

board members, approval of major initiatives such
as buying or selling stock, annual reports on
management compensation from the board.

BOARD OF DIRECTORS The major representatives of stockholders to

ensure that the organization is run according to
the organization’s charter and that there is proper
accountability.

SPECIFIC ACTIVITIES:
1. Overall Operations
- Establishing the organization's vision,
mission, values and ethical standards.
- Delegating an appropriate level of
authority to management.
- Demonstrating leadership.
- Assuming responsibility for the business
relationship with the CEO including his or
her appointment, succession,
performance remuneration and dismissal.
- Overseeing aspects of the employment of
the management team including
management remuneration, performance
and succession planning.
- Recommending auditors and new
directors to shareholders.
- Ensuring effective communication with
shareholders and other stakeholders.
- Appointment of the CFO and corporate
secretary.
 2. Performance
- Ensuring the organization’s long term
viability and enhancing the financial
position.
- Formulating and overseeing
implementation of corporate strategy.
- Approving the plan, budget and corporate
policies.
- Agreeing key performance indicators
(KPI).
- Monitoring and assessing the
performance of the organization, the
board itself, management and major
projects.
- Overseeing the risk management
framework and monitoring business risks.
- Monitoring developments in the industry
and the operating environment.
- Oversight of the organization, including its
control and accountability systems.
- Approving and monitoring the progress of
major capital expenditure, capital
management and acquisitions and
divestitures.
- Compliance / Legal Conformance
- Understanding and protecting the
organization’s financial position.
- Requiring and monitoring legal and
regulatory compliance including
compliance with accounting standards,
unfair trading legislations, occupational
health and safety and environmental
standards.
- Approving annual financial reports, annual
reports and other public
documents/sensitive reports.
- Ensuring an effective system of internal
controls exists and is operating as
expected.

NON-EXECUTIVE OR INDEPENDENT Similar to the broad role of the entire board of

DIRECTORS directors.
SPECIFIC ACTIVITIES:
- 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.
- To understand that his/her role is not to
act as auditor, nor to act as a member of
the management team.
 - To respect the collective, cabinet nature of
the board’s decisions.
- To prepare for and attend board meetings.
- To seek information on a timely basis to
ensure that he/she is in a position to
contribute to the discussion when a matter
comes before the board, or alert the
chairman in advance to the need for
further information in relation to a
particular matter.
- To ask appropriate questions relative to
operations.

MANAGEMENT Operations and accountability. Manage the

organization effectively; provide accurate and
timely reports to shareholders and other
stakeholders.
SPECIFIC ACTIVITIES:
- 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.
- Develop, implement and update policies
and procedures
- Be alert to relevant trends in the industry
and the organization's operating
environment
- Provide information to the board.
- Act as conduit between the board and the
organization
- Developing financial and other reports
that meet public, stakeholder and
regulatory requirements.
 AUDIT COMMITTEES OF THE BOARD OF
DIRECTORS
6. REGULATORS
a. Board of Accountancy
b. Securities and Exchange Commission
Provide oversight of the internal and external audit
function and the process of preparing the annual
financial statements as well as public reports on
internal control
SPECIFIC ACTIVITIES:
- Selecting the external audit firm.
- Approving any non-audit work performed
by the audit firm.
- Selecting and / or approving appointment
of the Chief Audit Executive (Internal
Auditor).
- Reviewing and approving the scope and
budget of the internal audit function.
- Discussing audit findings with internal
auditor and external auditor and advising
the board (and management) on specific
actions that should be taken.
a. Set accounting and auditing standards
dictating underlying financial reporting and
auditing concepts; set the expectations of
audit quality and accounting quality.
SPECIFIC ACTIVITIES:
- 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.
b. Ensure the accuracy, timeliness and
fairness of public reporting of financial and
other information for public companies.
SPECIFIC ACTIVITIES:
- 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

EXTERNAL AUDITORS Perform audits of company financial statements to

ensure that the statements are free of material
misstatements that may be due to fraud.
SPECIFIC ACTIVITIES:
- Audit of public company financial
statements.
- Audits of non-public company financial
statements.
- Other services such as tax or consulting.

INTERNAL AUDITORS Perform audits of company for compliance with

company policies and
laws, audits to evaluate the efficiency of
operations and periodic
evaluation and tests of controls.
SPECIFIC ACTIVITIES:
- Reporting results and analyses to
management (including operational
management) and audit committees.
- Evaluating internal controls

CHAPTER 3&4: SEC CODE OF CORPORATE GOVERNANCE

● SEC MC No. 19, Series of 2016
● Approved on November 10, 2016
● Goal is to help companies develop and sustain an ethical corporate culture and keep abreast with
recent developments in corporate governance.
● Establish a code of business conduct and submit a new manual on Corporate Governance that
would “provide standards for professional and ethical behavior as well as articulate, acceptable
and unacceptable conduct and practices.”

THE BOARD’S GOVERNANCE RESPONSIBILITIES

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.
 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 stockholders and other stakeholders.
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.
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.
Principle 5:
The Board should endeavor to exercise objective and independent judgment on all corporate
affairs.
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.
Principle 7:
Members of the Board are duty-bound to apply high ethical standards, taking into account the interests of
all stakeholders.

DISCLOSURE AND TRANSPARENCY:

Principle 8:
The company should establish corporate disclosure policies and procedures that are practical
and in accordance with best practices and regulatory expectations.
Principle 9:
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.
Principle 10:
The Company should ensure that material and reportable non-financial and sustainability issues
are disclosed.
Principle 11:
The Company should maintain a 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.

INTERNAL CONTROL SYSTEM AND RISK MANAGEMENT FRAMEWORK:

Principle 12:
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.
 CULTIVATING A SYNERGIC RELATIONSHIP WITH SHAREHOLDERS:
Principle 13:
The Company should treat all shareholders fairly and equitably, and also recognize, protect and
facilitate the exercise of their rights.

DUTIES TO STAKEHOLDERS:
Principle 14:
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.
Principle 15:
A mechanism for employee participation should be developed to create a symbiotic environment,
realize the company’s goals and participate in its corporate governance process.
Principle 16:
The Company should be socially responsible in all its dealings with the communities where it
operates. It should ensure that its interactions serve its environment and stakeholders in a positive and
progressive manner that is fully supportive of its comprehensive and balanced development.

INTRODUCTION:
1. The Code is intended to raise the corporate governance standards of Philippine corporations to a
level at par with its regional and global counterparts.
2. The Code will adopt the “comply and explain” approach.
3. The Code is arranged as follows: Principles, Recommendations and Explanations
4. The 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.
5. The 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. Hence, the Principle of
Proportionality is considered in the application of its provisions.
6. The Code of Corporate Governance for publicly-listed companies is the first of a series of Codes
that is intended to cover all types of corporations in the Philippines under supervision of the
Securities and Exchange Commission (SEC).

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 towards their stakeholders.
❖ Board of Directors – the governing body elected by the stockholders exercises the corporate
powers of a corporation, conducts all its business and controls its properties.
❖ Management – a group of executives given the authority by the Board of Directors to implement
the policies or 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 or other relationship which could, or could reasonably
perceived to, materially interfere with 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 does not perform
any work related to the operations of the corporation.
❖ Conglomerate – a group of corporations that has diversified business activities in various
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 and effective operations; reliable, complete and timely financial and
management information; and compliance with applicable laws, regulations, and the
organization’s policies and procedures.
❖ Enterprise Risk Management – a process, effected by an entity’s Board of Directors,
management and other personnel, applied in the strategy setting and across the enterprise that is
designed to identify potential events that may affect the entity, manage risks to be within its risk
appetite, and provide reasonable assurance regarding the achievement of entity objectives.
❖ Related Party – shall cover the company’s subsidiaries as well as affiliates and any party
(including their subsidiaries, affiliates and special purpose entities), that the company exerts
direct or indirect control over the company; the company’s directors; officers; shareholders and
related interest (DOSRI), and their close family members as well, corresponding persons on
affiliate companies. This shall also include such other persons or juridical entity whose interests
may pose a potential conflict with the interest of the company.
❖ Related Party Transactions – a transfer of resources, services or obligations between a
reporting entity and a related party, regardless of whether a price is charged. It should be
interpreted broadly to include not only transactions that are entered into with an unrelated party
that subsequently becomes a related party.
❖ Stakeholders – any individual, organization or society at large who can either affect and/or be
affected by the company’s strategies, policies, business decisions and operations, in general.
This includes, among others, customers, creditors, employees, suppliers, investors, as well as the
government and community in which it operates.