OBE-Based

Governance,
Business
Ethics, Risk
Management
and Control
A Course Module for Students

Burauen Community College

For Internal Use Only ii

Governance, Business
Ethics, Risk
Management and
Control
A Course Module for Students

Burauen Community College

Written and Designed by

Burauen Community College
Burauen, Leyte
localcollegebcc@gmail.com

ii
 BCC VISION
Burauen Community College shall emerge as the
premier local public educational institution in
Eastern Visayas which is responsive to the needs of
the community, and develops students to meet the
economic, social, and environmental challenges as
active participants in shaping the world of the
future.

BCC MISSION
Burauen Community College offers holistic, and
outcomes-based experiential learning to develop
the youth to be responsible individuals with
integrity and service as agents of equality. It will
serve as a venue for the development of individuals
in the areas of academics, research, community
extension, and innovative technology.

ii
Governance, Business Ethics, Risk
Management and Control
A Course Module for Students

Burauen Community College

© 2021

ALL RIGHTS RESERVED. No part of this publication All rights are reserved. No part of
this publication may be reproduced, stored in a retrieval system or transmitted in
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This module contains information obtained from highly regarded resources. A wide
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For students who want to purchase additional copies of this module, you may
send your request to locallcollegebcc@gmail.com or you may visit the institution
for an in-person request.

iii
 TABLE OF CONTENTS
Preface v

Prelims Corporate Governance

Module 1 Introduction to Corporate Governance

Potential Challenges to Corporate
Governance
Code of Corporate Governance for
Module 2
Publicly-Listed Companies
Prelims Business Ethics
Module 3 Business Ethics
Introduction to Business Ethics
Business and Ethics
Common Unethical Practices of Business
Establishments
Prelims Risk Management
Module 4 Risk Management
The Nature of Risk
Risk Management defined

Practical Guidelines in Reducing and

Managing Business Risks
Prelims Internal Control
Module 5 Internal Control
Overview of Internal Control
Internal Control affecting Assets, Liabilities,
Equity

iv
 Preface

[A preface is an introductory passage written about the module by the

author explaining why the book exists, its subject matter, and its goals.]

v
PART I : PRELIMS
CORPORATE
GOVERNANCE

v
 1 CORPORATE GOVERNANCE

CONTENTS
1.1. Introduction to
Corporate Governance
1.2 Potential Challenges to
Corporate Governance

OUTCOMES
LO1. Recognize the
importance of good
governance and evaluate
the necessary skills
needed in governing and
managing an
organization.

OBJECTIVES
1. Explain the basic
concepts and elements
of good governance;
2. Describe the nature,
elements, and principles
of effective corporate
governance.
3. Evaluate the potential
challenges in corporate
governance.
M
any companies are managed by
directors who do not own the company.
Many problems have arisen due to the
separation of ownership and control, for
example; directors having inadequate skills to
manage their area, or awarding themselves
large bonuses but not meeting targets. Due to
the many problems which have arisen in the
past, corporate governance has been
developed, (Theory of Corporate Governance,
2020). Poor corporate governance, at best,
leads to a company failing to achieve its stated
goals, and, at worst, can lead to the collapse of
the company and significant financial losses for
shareholders. (“What is Corporate Governance?,
2021). The scenario mentioned above is not
new to us because in reality, it really happens.
Mostly, those people who commits fraud in the
organizations are those people who knows the
policies well-enough, or those we can call as
people who has their personal interest in the
company.

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 ABSTRACTION

Introduction

Corporate governance is the system of rules, practices, and processes

by which a firm is directed and controlled. Corporate governance essentially
involves balancing the interests of a company's many stakeholders, such as
shareholders, senior management executives, customers, suppliers,
financiers, the government, and the community. Since corporate governance
also provides the framework for attaining a company's objectives, it
encompasses practically every sphere of management, from action plans and
internal controls to performance measurement and corporate disclosure. On
the other hand, Larcker, D. & Tayer, B. (2016) defines corporate governance
as the collection of control mechanisms that an organization adopts to
prevent or discourage potentially self-interested managers from engaging in
activities harmful to the welfare of shareholders and stakeholders. At a
minimum, the monitoring system consists of a board of directors to oversee
management and an external auditor to express an opinion on the reliability
of financial statements. In most cases, however, governance systems are
influenced by a much broader group of constituents, including owners of the
firm, creditors, labor unions, customers, suppliers, investment analysts, the
media, and regulators.

Introduction To Corporate Governance

According to Cabrera & Cabrera, (2019), “Governance” refers to a
process whereby elements in society wield power, authority and influence
and enact policies and decisions concerning public life and social upliftment.
It comprises all the processes of governing – whether undertaken by the
government of a country, by a market or by a network – over a social system
and whether through the laws, norms, power or language of an organized
society. Governance therefore means the process of decision-making and
the process by which decisions are implemented (or not implemented)
through the exercise of power or authority by leaders of the country and/or
organizations.
Basically, good governance in its generic approach is the efficient,
transparent and equitable delivery of good and services as well as the policy-
making by means of exercising authority. It is good governance that is
required of a democratic platform to avoid corruption, offers rights, the ways
and the capability to create decisions that touch the lives of every individual
and make every organization accountable for what they had decided to do.
Good governance as a principle denotes an approach in administration
that could be applied in internal operations of both public and private sector
organizations. Good governance is receptive to the present and future needs

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of the organization. Here, the decision-making strategies of the organizations
incorporate the principle of good governance so that shareholders’ and
stakeholders’ interests are accounted and assured.

Characteristics and Basic Elements of Good Governance

Whatever context good governance is used, the following major
characteristics should be present:

1. Participation – participation by both men and women is a key

cornerstone of good governance. participation could be either direct or
through legitimate institutions or representatives. It needs to be
informed and organized. This means freedom of association and
expression on one hand and an organized civil society on the other
hand.

2. Rule of Law – good governance requires fair legal framework that are
enforced impartially. It also requires full protection of human rights,
particularly those of minorities. Impartial enforcement of laws requires
an independent judiciary and an impartial and incorruptible police
force.

3. Transparency – it means that decisions taken and their enforcement

are done in a manner that follows rules and regulations. It means that
information is freely available and directly accessibly to those who will
be affected by such decisions and their enforcement. It also means
that enough information is provided and that it is provided in easily
understandable forms and media.

4. Responsiveness – good governance requires that institutions and

processes try to serve the needs all stakeholders within a reasonable
timeframe.

5. Consensus oriented – good governance requires mediation of the

different interests in society to reach a broad consensus on what is the
best interest of the whole community and how this can be achieved. It
also requires a broad and long-term perspective on what is needed for
sustainable human development. This can only result from an
understanding of the historical, cultural and social contexts of a given
society or community.

6. 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. This requires all groups, but particularly the most
vulnerable, have opportunities to improve or maintain their well-being.

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 7. Effectiveness and Efficiency – good governance means that
processes and institutions produce results that meet needs of society
while making the best use of resources at their disposal. The concept
of efficiency in the context of good governance also covers the
sustainable use of natural resources and the protection if the
environment.

8. Accountability – accountability is the key requirement of good

governance. Who is accountable to whom varies depending on whether
decisions or actions taken internal or external to an organization or
institution. In general, an organization or an institution is accountable
to those who will be affected by its decision or actions. Accountability
cannot be enforced without transparency and the rule of law.

An Overview of Corporate Governance

Corporate Governance is defined as the system of rules, practices,
and processes by which business corporations are directed and controlled. It
basically involves balancing the interests of a company’s many stakeholders,
such as shareholders, management, customers, suppliers, financiers,
government and the community. Good corporate governance is all about
controlling one’s business and so is relevant, and indeed vital, for all
organizations, whatever size or structure.
Corporate governance is also a process that aims to apportion
corporate resources in a way that enhances value for all stakeholders. It also
holds those at the controls to account by evaluating their decisions on
transparency, inclusivity, equity and responsibility.
The purpose of corporate governance is to facilitate effective,
entrepreneurial and prudent management that can deliver long-term success
of the company. In simple terms, the fundamental aim of corporate
governance is to enhance shareholder’s value and protect the interest of
other stakeholders by improving the corporate performance and
accountability. It is also about what the board of directors of a company
does, how it sets the values of the business firm.

Objectives of the Corporate Governance

The following are the basic objectives of corporate governance:
1. Fair and Equitable Treatment of Shareholders
2. Self-Assessment
3. Increase Shareholder’s Wealth
4. Transparency and Full Disclosure

Basic Principles of Effective Corporate Governance

Effective corporate governance is transparent, protects the rights of
shareholders and includes both strategic and operational risk management. It
is concerned in both the long-term earning potential as well as actual short-
term earnings and holds directors accountable for their stewardship of the
business.

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 The basic principles of effective corporate governance are threefold;

1. Transparency and Full Disclosure

a. Does the board meet the information needs of investment
communities?
b. Does it safeguard integrity in financial reporting?
c. Does the board have sound disclosure policies and practices?
i. does it make timely and balanced disclosure?
ii. Can an outsider meaningfully analyze the organization’s
actions and performance?

2. Accountability
a. Does the board clarify its role and that of management?
i. Does it promote objective, ethical and responsible
decision making?
ii. Does it lay solid foundations for management oversight?
iii. Does the composition mix of board membership ensure
an appropriate range and mix of expertise, diversity,
knowledge and added value?
iv. Is the organization’s senior official committed to widely
accepted standards of correct and proper behavior?

3. Corporate Control
a. Has the board built long-term sustainable growth in
shareholder’s value for the corporation?
b. Does it create an environment to take risk?
i. Does it encourage enhanced performance?
ii. Does it recognize and manage risk?
iii. Does it renumerate fairly and responsibly?
iv. Does it recognize the legitimate interests of stakeholders?
v. Are conflicts of interest avoided such that the
organization’s best interests prevail at all times?

Basic Elements of Corporate Governance

Corporate Governance refers to the role that company boards or
executive teams plan in leadership and oversight. Corporate governance
requires companies to develop and closely monitor comprehensive and
robust programs and mitigate any number of possible risk factors.
The key principles of good corporate governance differ depending on
the country, industry, regulator and stock exchange. However, most codes of
governance include several major characteristics:

1. Direction – company mission and vision statements stem from the

governance role of business. These statements provide a sense of
purpose and illustrate primary motives for the company’s business
activities.

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2. Oversight – in publicly owned companies, for instance, company
board monitor and evaluate decisions and actions of CEOs and other
executive officers. This ensures that leaders act in the best interest of
shareholders and other stakeholders. In small businesses, executive
teams normally assume this role of preventing too much power falling
to one person. Without a governing board, though, this is more of a
challenge.

3. Stakeholder Relations – in the early 21st century, there is more

emphasis on balancing investor interest with concern for other
stakeholders, such as customers, employees and business partners.
Governance web pages often indicate specific things companies do to
meet expectations of each.
4. Corporate citizenship – companies commonly include a corporate
citizenship statement on corporate governance or investor
relationships web pages. Such statements communicate the business’s
intent to act with social and environmental responsibility. In general,
governance includes an awareness that companies should balance
profit-generating activities with responsible policies and practices.

5. Independence of Directors – having a majority of non-executive

directors will help avoid prejudice and conflicts of interest between the
board and the management. Independent judgement is almost always
in the best interest of the company.

6. Effective risk management – companies cannot avoid risk, so it is

vital to implement effective strategic risk management. For instance, a
company’s management might decide to diversify operations so the
business can count on revenue from several different markets, rather
than depend on just one.

7. Solid structure and organization – one of the fundamental

objectives of corporate governance is for companies to develop more
transparent business practices, meaning a rigidly structured
framework through which to trace all such activity efficiently.

8. Transparency – Corporate transparency helps unify an organization.

When employees understand management’s strategies and are allowed
to monitor the company’s financial performance, they understand their
roles within the company.

9. Self – Evaluation – the key is to perform regular self-evaluations to

identify and mitigate brewing problems. Employees and customer
surveys, for example, can supply vital feedback about the
effectiveness of the current policies. Hiring outside consultants to
analyze the operations also help identify ways to improve a company’s
efficiency and performance.

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Approaches to Corporate Governance
Corporate governance is all about monitoring and controlling
management decisions and strategies all to be best interest pf the company’s
stakeholders. There are two approaches to corporate governance regulations
and companies can decide which of these principles to apply.

1. Rules – Based Approach

 All provisions are legal rules, supported by law which attracts
punishment from the law, if there is failure to comply. Its
characteristics are:
i. Approved set of requirements
ii. Fast approach of ensuring conformity
iii. Implements a checklist method
iv. Clear difference between conformity and non-conformity
v. Easy to observe that entity is conforming
vi. Lessening of flexibility on the part of management and
auditors
vii. Challenging to set rules entirely for all situations
viii. Likely to misunderstand rules
ix. Similar rules apply to all, whatsoever their size are

2. Principles-based Approach
 It is grounded on the outlook that a distinct of rules is unfitting
for every company. Circumstances and situations vary from
companies to companies. The circumstances of a company can
change every now and then. In principles-based jurisdiction,
legal force applies to the provisions of company laws but
additional listing rules are enforced on a “comply or explain”
basis. If there is a reason why there is non-compliance, there
should be explanation for the shareholders. Here are the
common characteristics of a principle-based approach, which
are:
i. Activities of entities must address major principles set out
in codes of best practice
ii. Not merely a box-ticking application
iii. More demanding to avoid than a rules-based approach
iv. Easy to observe that entity is complying
v. Directors are necessary to work in the entity’s best
interests
vi. More stretchy, and therefore better able to cope with
different situations
vii. Easier defense for obvious breach of principles
viii. But principles may be construed in different ways

Theory Related to Corporate Governance

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1. The Agency Theory
 The relationship between the agents and principals in the
business is being examined in agency theory. The agent
represents the principal in a particular business transactions and
takes decisions on behalf of the principal in agency relationship.
Any agent is expected to disregard his self- interest in order to
represent the best interest of the principal.
 In a corporation set-up, the top executives are usually elected
by shareholders. The shareholders are the true owners of the
company. An agency relationship exists between the
shareholders and the top executives who should act for the best
interest of these owners. Any incongruity among the desires of
these two parties any cause inefficiencies and financial losses
leading to principal-agent problem.
 Agency theory in corporate governance is an extension of the
agency theory that tells about the definite type of agency
relationship that happens between the shareholders and top
management of a company. The true owners pf the corporation
or the shareholders as principals select the members of the
board who would act and make decisions on their behalf. The
objective is to represent the outlooks of the shareholders or
owners and conduct actions in their interest.

2. The Stewardship Theory

 A steward is defined as someone who protects and takes case of
the needs for others. Under the stewardship theory, company
top executives protect the interests of the owners or
shareholders and make decisions on their behalf. The sole
objective is to create and maintain a successful organization so
the shareholders prosper. Managers innately seek to do a good
job, maximize company profits and bring good returns to
stockholders because they feel a strong duty to the company.
They do this essentially for the interest of the company and the
ego and sense of worth of managers are combined with the
image not their own financial interest.
 The main purpose of the stewardship theory of governance is to
satisfy shareholders. With a single leader, a strong channel is
formed to convey business requirements to the shareholders
and vice-versa. During difficult situations faced by the business,
this set-up helps to obviously know who is really in-charge or
responsible. Stewardship governance entails choosing the right
personality that would lead the boardroom of the company.
 The stakeholder theory recognizes the needs of every segment
that comprises the company which consists of but not limited to
the employees, suppliers and business partners with equal
importance.

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 3. The Stakeholder Theory
 States that the purpose of a business is to create value for wider
group stakeholders other than just shareholders. This theory
considers the corporate environment as a network of
interconnected groups, all of which are required to be pleased to
sustain the healthy and success of the company in the long-
term. According to Edward Freeman a company’s genuine
success comes from satisfying all its stakeholders, not only
those who might gain profit from its stock. According also to
him, there are six (6) principles that must direct the connection
between the stakeholders and the corporation, which are;
o The principle of entry and exit
o The principle of governance
o The principle of externalities
o The principle of contract costs
o Agency principle
o The principle of limited immortality
 The stakeholder theory in corporate governance centers on the
effects of corporate activities of all recognizable stakeholders of
the company. This theory suggests that corporate officers and
directors must consider the interest of every stakeholder in its
governance practice. Further, besides the usual members of the
company such as the corporate officers, directors and
shareholders, it also promotes the interest of any third party
that may have some degree of reliance on the company.

Corporate Governance Responsibilities and Accountabilities

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.
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
stakeholder. 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 board 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. Employees and creditors have a vested interest in the organization
and how it is governed. Regulators are a response to society’s wishes to
ensure that organizations, in their pursuit of returns for their owners, act
responsibly and operate in compliance with relevant laws.

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Parties involved in Corporate Governance
1. Shareholders
 Provide effective oversight through election of board of members,
approval of major initiatives such as buying or selling stock, annual
reports on management compensation, from the board.

2. Board of Directors
 The major representative of stockholders to ensure that the
organization is run according to the organizations charter and that
there is proper accountability.

3. Non-Executive or Independent Directors

 The same as the broad role of the entire board of directors.

4. Management
 Operations and accountability. Manage the organization effectively;
provide accurate and timely reports to shareholders and other
stakeholders.

5. Audit Committees of the Board of Directors

 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.

6. Regulators
a. Board of Accountancy
 Set accounting and auditing standards dictating underlying
financial reporting and auditing concepts; set the
expectations of audit quality and accounting quality.

b. Securities and Exchange Commission

 Ensure the accuracy, timeliness and fairness of public
reporting of financial and other information for public
companies.

7. External Auditors
 Performs audits of company financial statements to ensure that the
statements are free of material misstatements including
misstatements that may be due to fraud.

8. Internal Auditors
 Perform audits of companies for compliance with company policies
and laws, audits to evaluate the efficient of operations, and periodic
evaluation and test of controls.

Potential Challenges in Corporate Governance

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 Corporate governance is the term used to describe the balance among
participants in the corporate structure who have an interest in the way in
which the corporate structure who have an interest in the way in which the
corporation is run, such executive staff, shareholders and members of the
community. It directly impacts the profits and reputation of the company,
and having poor policies can expose the company to lawsuits, fines,
reputational damage, and loss of capital investment. Here are some common
pitfalls your corporate governance policies should avoid.

1. Conflict of interest – a conflict on interest within the framework of

corporate governance occurs when an officer or other controlling
member of a corporation has other financial interest that directly
conflict with the objectives of the corporation. When conflicts of
interest are present, they deteriorate the trust of shareholders and the
public while making the corporation vulnerable to litigation.

2. Oversight issues – oversight is a broad term that encompasses the

executive staff reporting to the board and the board’s awareness of
the daily operations of the company and the way in which its
objectives are being achieved. Without this oversight, corporate staff
might violate state or federal law, facing substantial fines from
regulatory agencies, and suffering reputational damage with the
public.
3. Accountability issues – the action of each level of the corporation is
accountable to the shareholders and the public. Without accountability,
one division of the corporation might endanger the success of the
entire company or cause stockholders to lose the desire to continue
their investment.

4. Transparency – in order to be transparent, a corporation must

accurately report their profits and losses and make those figures
available to those who invest in their company. A lack of transparency
can also expose the company to fines from regulatory agencies.

5. Ethics violations – members of the executive board have an ethical

duty to make decisions based on the best interest of the stakeholders.
Further, a corporation has an ethical duty to protect the social welfare
of others, including the greater community in which they operate.

6. Governance standards – a board should always produce unbiased

rules and policies and disseminate those standards in the business.
There must be a clear enforcement mechanism consistently applied as
way to check and balance against those actions of the operational
managers.

7. Short-termism – in order to implement effectively good corporate

governance, it must need boards that can manage the company on

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 continuing years to produce sustainable value for the company. The
short tenures could deprive the board a long-term oversight and vital
expertise.

8. Diversity - based on good judgement and practicality, boards should

possess a good combination of skills and perspectives to ensure the
success of any organization. The roles of the boards are tough
particularly because they need to generate strong decisions, hence
they must be good mix of them inside the boardroom.

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 ASSESSMENT

Name: __________________________________ Score: ___________

Degree Program/Year/Section: ____________ Date: ____________

I. Face-to-Face Class

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 REFERENCES

Ilano, A.B. (2017), Business Policy and Strategy, Rex Bookstore, Inc.

Rothaermel, F.T. (2017), Strategic Management 3rd eiditon, McGraw-Hill

Education.s

Zarate, C.A. (2012), Business Policy and Strategy, Rex Bookstore, Inc.

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 2 ENVIRONMENTAL SCANNING
AND SITUATION ANALYSIS

CONTENTS
2.1 External Environment
2.2 Internal Environment
2.3 SWOT Analysis

OUTCOMES
LO1. Discuss the concepts
and principles of strategic
management and
illustrate the strategic
management process.

OBJECTIVES
1. Explain what the
external and Internal
environment is and how
it relates to strategy
formulation.
2. Appraise the different
elements of external and
internal environment.
3. Formulate a SWOT
analysis to craft efficient

O
business strategies. ne of the elements of a good strategy
is the diagnosis of the competitive
challenge of am organization. And this
requires the organization and the strategist
to do an environmental scanning and
situation analysis. In the past module, it was
emphasize that in order to understand the
competitive environment of an organization
they must consider both the external and the
internal environment of the organization.
Through this, top management as well as the
different business units can formulate
strategies that are aimed to gaining
competitive advantage.

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 3 Strategy Formulation

CONTENTS
3.1 Formulating Strategy
3.2 Business Level Strategy
3.3 Competitive Strategy
3.4 Corporate Level Strategy
3.5 Global Strategy
3.6 Balanced Scorecard

OUTCOMES
LO2. Conduct industry and
company analysis to serve
as basis for crafting
business strategies.
LO3. Formulate business
strategies based on the
results of the industry and
company analysis.

OBJECTIVES
1. Explain the importance
of developing different
level strategies.
2. Develop tactical actions
to competitive rivalry.
3. Develop corporate
strategies for expansion
and corporate
diversification.
4. Understand the business
level strategies in the
global market.
T
he development of strategy is the
making of top executives and line
managers by making choices among
alternatives that are more likely to gain the
desired profit objective. The strategic
development process begins with analysis of
the internal and external environment. The
data and information are put in round table
discussions and brain storming. Everyone is
expected to contribute their ideas and opinion
until the chosen strategy is finalized. The
participative system in drawing the strategy
makes people in the organization aware of
the probable actions and plans that will be
agreed upon. Dictated strategies develop
resentment which will not result in
cooperative efforts for achievement.

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 Strategic Management Midterms

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