AGENCY PROBLEMS IN

CORPORATE GOVERNANCE:
Accountability of Managers
and Stockholders
5.1 DEFINING AND
ENFORCING MANAGER’S
DUTIES

"A manager has his

cards dealt to him
and he must play
them." - Miller
Huggins
Basic Functions of Managers

Planning
Organizing
Staffing
Leading
Controlling
Mintzberg's Set of Ten Roles

Category Role
Informational Monitor
Disseminator
Spokesperson
Interpersonal Figurehead
Leader
Liaison
Decisional Entrepreneur
Disturbance handler
Resource allocator
Negotiator
Skills needed by
managers
Technical

Human

Conceptual
5.2 Mechanisms of
Stockholder’s
Accountability
Three Key Features:

 It is external

 It involves social interaction and

exchange

 It implies rights of authority

Four Core Components of
Accountability in Global
Governance
Transparency

Answerability or Justification

Compliance

Enforcement or Sanctions
Vertical Accountability

refers to mechanisms in which citizens

and their associations can directly hold the
powerful to account, such as through
elections in which voters select
representatives and also hold incumbents
to account
Horizontal Accountability

refers to inter-institutional mechanisms or

checks and balances (Goetz and Jenkins, 2001, p. 7;
Woods, undated, p. 4)
Six Basic Components for
Accountability
Person Responsible (A)
Stakeholder (B)
Subject Matter (M)
Evidence (E)
Accountability Rule (R)
Accountability Analysis Point (AAP)
Proxy Contest
a strategy that involves using
shareholder's proxy votes to replace
the existing members of a company's
board of directors.  By removing
existing board members, the person or
company launching the proxy contest
can establish a new board of directors
that is better aligned with their
objectives.
Steps Involved in a Proxy
Contest
 The acquiring company and / or a group of major stakeholders -
such as large institutional investors - decide to join forces and
launch a proxy contest against the target company.

 These investors threaten to use their proxy votes - which is

commonly used in large corporations for voting by shareholders -
to make the target company comply with their wishes.  Proxy
voting allows shareholders who have confidence in the judgment
of others to "stand-in" and vote for them on corporate governance
matters such as the election of board members.

 If successful in gathering enough proxy votes, the acquiring

company can then elect new board of directors using proxy
ballots.

 These newly installed board members will be much more

agreeable to the takeover or merger, and eventually the deal is
finalized.
Tender offer
- formal offer to purchase a given
number of shares of a firms stock at
a specified price
Two-tier offer
- A tender offer in which the terms
offered are more attractive to those
who tender shares early
Exchange Offer
- An offer by a firm to exchange its
own securities such as bonds or
preferred stock. 
The Market for Corporate
Control
- defined as equity transactions that are large
enough to change the control of the company.
5.3 Outside Forces: Regulators,
Government Enforcement (Civil
and Criminal)
Regulators

- public authority or government agency responsible for

exercising autonomous authority over some area of human
activity in a regulatory or supervisory capacity. They deal in
the area of administrative law—regulation or rulemaking
(codifying and enforcing rules and regulations and imposing
supervision or oversight for the benefit of the public at large).
 Regulators in Corporations

 Securities and Exchange Commission

(SEC)
• The SEC is the securities regulator.

• The SEC is a centralized institution that generally administers and

supervises all corporate acts,

• In principle, the SEC has the authority to enforce laws and

regulations

• The SEC is mainly empowered and regulated under the SRC

 Regulators in Corporations

 Philippine Stock exchange (PSE)

• In June 1998, the SEC granted SRO status to PSE, allowing it to

impose rules as well as implement penalties on erring trading
participants and listed companies.

 Philippine Depository Trust Corporation

(PDTC)
• PDTC also provides registry and clearing and settlement
infrastructure services to issuers of fixed-income securities such as
bonds, commercial paper, negotiable certificates of deposits, and
other negotiable instruments.
 Regulators in Corporations

 Bangko Sentral ng Pilipinas (BSP)

• It provides policy direction in the areas of money, banking, and
credit. It supervises operations of banks and exercises regulatory
powers over non-bank financial institutions with quasi-banking
functions.

 Department of Trade and Industry (DTI)

• Its main role is to contribute to the country’s goal of achieving

economic growth towards poverty reduction.
Regulators in Corporations

 Courts

• Courts of general jurisdiction or the designated RTC have

jurisdiction over all cases involving corporate disputes. The
Supreme Court has designated certain RTCs in all judicial districts
to handle cases involving corporate disputes.
Government Enforcement

(Civil and Criminal)

Securities and Exchange
Commission

and

Department of Justice
Corporate Liability
it determines the extent to which a
corporation as a legal person can be liable
for the acts and omissions of the natural
persons it employs.
Criminal sanctions includes:
Imprisonment

 Fines

Community service orders

 Criminal law
 Represents formal public disapproval and condemnation because of
the failure to abide by the generally accepted social norms, codified
into the criminal law.

 Justifies more severe penalties because it is necessary to overcome

the higher burden of proof to establish criminal liability.

 The theoretical value of punishment is that the offender feels shame,

guilt or remorse, emotional responses to a conviction that a
fictitious person cannot feel.

 If a state turns too often to the criminal law, it discourages self-

regulation and may cause friction between any regulatory agencies
and businesses that they are to regulate.
Civil law
With the lower burden of proof and better
case management tools.

But there is little moral condemnation and

no real deterrent effect.
 Difference of criminal and
civil law
Criminal law
 means that a law (state or
federal) has been broken.
 In a criminal case, you
seldom see a judge or a
jury reward monetary
rewards
 In the case of criminal law,
the burden of proof is
always on the state or on
the federal government
that is prosecuting the
case.
Civil law
 no laws have been broken
but your rights as a
citizen of your state or of
the United States has
been infringed upon.
 in civil court, a judge can
award cash settlements as
part of the punishment
 In civil court, the burden
of proof is on the plaintiff
in most cases.
Civil Liability
The Supreme Court held in this case that a
corporation is civilly liable in the same
manner as natural persons for torts.
 Criminal Liability
The Corporation Code of the Philippines specifically states in Section
144 the criminal penalties for violations of “any” of the provisions of
the Corporation Code and the penalties include;

 fine of not less than PHP1,000 but not more than PHP10,000

 Or imprisonment for not less than 30 days but not more than five
years.

 Or both, at the discretion of the court.

CORPORATE CRIME SITUATION IN
THE PHILIPPINES
A. Tax Evasion

B. Fraud/Swindling

C. Foreign Bribery (Internet and Various Media Reports)

D. Large Scale Pilferage

5.4 SARBANES OXLEY
ACT
What is the Sarbanes Oxley
Act?
The Sarbanes-Oxley Act of 2002 also known as
the Public Company Accounting Reform and
Investor Protection Act of 2002 and commonly
called Sarbanes-Oxley, Sarbox or SOX, is a
United States federal law enacted on July 30, 2002
and introduced major changes to the regulation of
financial practice and corporate governance. The
legislation set new or enhanced standards for all U.S.
public company boards, management and public
accounting firms. The act contains 11 titles, or
sections, ranging from additional corporate board
responsibilities to criminal penalties.
 What does Sarbanes Oxley
Address?
 Sarbanes Oxley Act Establishes new standards for Corporate Boards
and Audit Committees
 Sarbanes Oxley Act Establishes new accountability standards and
criminal penalties for Corporate Management
 Sarbanes Oxley Act Establishes new independence standards for
External Auditors
 Sarbanes Oxley Act Establishes a Public Company Accounting
Oversight Board (PCAOB) under the Security and Exchange
Commission (SEC) to oversee public accounting firms and issue
accounting standards.
 Restore public confidence in the nations capital markets by
strengthening corporate accounting controls.
 The act also covers issues such as auditor independence, corporate
governance, internal control assessment, and enhanced financial
disclosure.
History of Sarbanes-Oxley Act

 A variety of complex factors created the conditions and culture

in which a series of large corporate frauds occurred between
2000-2002. The spectacular, highly-publicized frauds at Enron
WorldCom, and Tyco exposed significant problems with
conflicts of interest and incentive compensation practices. The
analysis of their complex and contentious root causes
contributed to the passage of SOX in 2002.

 The hearings produced remarkable consensus on the nature of

the problems: inadequate oversight of accountants, lack of
auditor independence, weak corporate governance procedures,
stock analysts' conflict of interests, inadequate disclosure
provisions, and grossly inadequate funding of the Securities and
Exchange Commission.
Reasons Why SOX Arise
 Auditor conflicts of interest

 Boardroom failures

 Securities analysts' conflicts of interest

 Inadequate funding of the SEC

 Banking practices

 Internet bubble

 Executive compensation
Contents of Sarbanes-Oxley
Act
1. Public Company Accounting Oversight Board (PCAOB)
2. Auditor Independence
3. Corporate Responsibility
4. Enhanced Financial Disclosures
5. Analyst Conflicts of Interest
6. Commission Resources and Authority
7. Studies and Reports
8. Corporate and Criminal Fraud Accountability
9. White Collar Crime Penalty Enhancement
10. Corporate Tax Returns
11. Corporate Fraud Accountability
Important Sections in SOX

Section 302- Corporate Responsibility for Financial Reports

Section 401- Disclosures in Periodic Reports

Section 404- Management Assessment of Internal Controls

Section 409- Real Time Issuer Disclosures

Section 802- Penalties for altering documents

Section 906- Corporate Responsibility for Financial Reports

Section 1107 - Criminal penalties for retaliation against whistleblowers

5.5 Gatekeeper and access to
capital: Auditors; Investment
Banker; Rating Agencies;
Exchange, The Financial Press
Gatekeeper

A gatekeeper is defined as someone who

controls access to something. It also refers
to individuals who decide whether a given
message will be distributed by a mass
medium.
Auditors

Auditors prepare, analyze, and verify financial

documents, accounting records, and operating
procedures in order to determine the financial
status of an establishment and provide
information to clients.
Internal auditors

Internal auditors work for one firm or business.

Serving as consultants to management and the
directors, auditors assist management by
examining and evaluating the activities of the
firm.
External auditors

An external auditor is an audit professional who

performs an audit on the financial statements of a
company, government, individual, or any other
legal entity or organization, and who is
independent of the entity being audited.
Investment
Banker
 
Investment Banker is financial institutions and
individuals who assist companies in raising
capital, often through a private placement or
public offering of company stock. Sometimes
investment bankers are referred to as brokers or
deal makers.
THE ROLE OF THE INVESTMENT
BANKER
Transaction Broker

 Financial Advisor

Transaction Facilitator
Rating Agencies

Rating Agencies is a company that

investigates the creditworthiness of
companies and governments and assigns
ratings to their securities, especially their
bonds. Rating agencies perform this
service in exchange for a fee.
7.1 Corporate
Governance and
Foreign Investment
Corporate Governance
- is the set of processes, customs, policies,
laws, and institutions affecting the way a
corporation is directed, administered or
controlled.
Scope of Corporate
Governance
Principles of Corporate
Governance
 Rights and equitable treatment of shareholders

 Interests of other stakeholders

 Role and responsibilities of the board

 Integrity and ethical behavior

 Disclosure and transparency

Role of the
Accountant in
Corporate
Governance
Foreign Investment

 Investment by citizens and government

of one country in industries of another;
also investment within a country by
foreigners.
Types of Foreign
Investment

Foreign direct investment

Foreign Indirect investment

What concerns foreign
investors?
Country Specific Company Specific
 Property Rights  Strong Management team with a
excellent track record
 Strong Legal & Political
Institutions  Good Strategy

 Consistent Government  Market Dominance

Macroeconomic and Fiscal Policy
 Strong Cash Generation
 Stable political system
 Capital Appreciation
 Profit/dividend Repatriation
Foreign investment and
governance: Macro level
Four main elements to attract foreign
investment:
Predictability

Participation

Transparency

Accountability
Foreign investment and
governance: Firm level
 Relationship between
governance: macro and firm level
(Continued)
Macro level

Increasing Technology Transfer Emerging

FDI in the Market
1990s Corporate Governance Practices Countries

$ 1214 billions (1990s)

Attracting
FDI to
Implementing
Emerging
Corporate
Market
Countries Governance

$ 1436 billions (2000-2005)

Firm level
Figures source: Inflows of FDI to Developing Countries, UNCTAD, World Investment Report 2006.
Conclusion Impact of Good Corporate
Governance on Attracting Investment
 Competitiveness

 Sound governance shows investors a high level of

potential for success in a company.

 Goodgovernance makes a company visible in the

domestic and international market.

 A betterallocation of capital overtime, and hence

higher productivity and growth.

 Increased ability of companies to raise funds

overseas and compete internationally.
 Stronger foundations for further opening of the capital
account.

 Linkages to international networks, contacts and

possible lucrative partnerships.

 Employment

 Target firms need good corporate governance practices

to evaluate takeover offers

A good corporate governance practice prevents firms

from being seen as an easy target by other firms and
governments.

 Good corporate governance is also necessary to attract

venture capital.
References:

 http://www.worldbank.org/ifa/rosc_cg_phl_07.pdf
 http://en.wikipedia.org/wiki/Regulatory_agency
 http://www.pse.ph/html/RelatedOrganizations/govt_agencies.ht
ml#DTI
 http://www.investorwords.com/2603/investment_banker.html
 http://www.princetonreview.com/Careers.aspx?cid=84
 http://en.wikipedia.org/wiki/Internal_audit
 http://www.investopedia.com/terms/i/internalauditor.asp
 http://findarticles.com/p/articles/mi_m1094/is_4_36/ai_8092411
8/
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