CHAPTER 1

CORPORATION AND
CORPORATE GOVERNANCE
CORPORATION

■ Sec. 2 Corporation Code of the Philippines

“A corporation - is an artificial being
created by operation of law, having
the right of succession and the
powers, attributes and properties
expressly authorized by law or
incident to its existence”
Attributes of a Corporation

■ Artificial being
■ Created by Operation of Law
■ Right of Succession
■ Powers, Attributes & Properties
Artificial being
Is a juridical person whose
personality is separate and
distinct from its owners
has some of the rights that a
natural person possesses
 It can be sue and be sued in
court
It can own and dispose
properties
Independent of existence from
owners
Can be convicted on criminal
offense (ex. Fraud)
Created by Operation of
Law
It will come into existence
through a charter or grant from
the state
It cannot exist by a mere
agreement or a unilateral and
self-declaration of existence
Functions are governed strictly
as provided in the corporate
charter
Right of Succession
■It can exist even in death,
incapacity or insolvency of any
stockholder or member
■It cannot be dissolved even when
there are transfers of ownership
Powers, Attributes &
Properties
■It is authorized to do activities
within its purpose, creation
■It has its own traits
■It operates based on what has been
expressly provided in the charter
Stakeholders of a Corporation
Management
Creditors
Shareholders
Employees
Clients
Government
Public
Purposes of a Corporation

■ Early Stage Survival

■ To increase Profit
■ To offer vital services to the General Public
■ To offer Goods and Services to the Mass Market
SHAREHOLDERS,
BONDHOLDERS and DIRECTORS
They are the parties which will have various claims over the entity;
■ Shareholders/Stockholders – has claim in the form of dividends
■ Bondholders – has claims in the form of interest earned over long
agreement
■ Directors – receive salaries, incentives, stock options and bonuses
Shareholders/Stockholders

-are artificial or natural persons that are

legally regarded as owners of the
corporation
- are bestowed with special privileges
depending on the class of their
stockholdings
Preferred
Common
Preferred and Common Stockholders
■ common stockholders have a greater claim to a
company's assets and earnings when the company has
excess cash and decides to distribute money in the form
of dividends to its investors.
■ preferred stockholders must be paid before common
stockholders.
■ during times of insolvency  common stockholders are
last in line for the company's assets, preferred
shareholders are paid out first
■ dividends of preferred stocks are different from and
generally greater than those of common stock. 
■ preferred stock dividend are paid at regular intervals,
dividends are typically guaranteed
■ the company's board of directors will decide whether or
not to pay out a dividend to common stockholders
Bondholders
■ - a person or entity that is the holder of a currently
outstanding bond

What is a corporate Bond?

A corporate bond is a debt security issued by a corporation
and sold to investors. The backing for the bond is usually the
payment ability of the company, which is typically money to
be earned from future operations.
The Difference Between Corporate Bonds and Stocks
When an investor buys a corporate bond, he lends
money to the company.

 when an investor purchases stocks, he essentially

buys a piece of the company.

The value of stocks rises and falls with the value of

the company, allowing the investors to earn profits but
also subjecting the investors to losses.

With bonds, investors only earn interest rather than

profits. If a company goes into bankruptcy, it pays its
bondholders along with other creditors before its
stockholders, making bonds arguably safer than stocks.
Board of Directors
■ BOD refers to the collegial body that exercises the corporate
powers of all corporations formed under Corporation Code
■ BOD is headed by the Chairman of the Board who is
considered the most influential in the corporation
■ BOD duties and powers, number of BOD, schedule of
meetings are within the By-Laws of the corporation
MULTINATIONAL CORPORATIONS
(MNC)
 MNC is an organization that owns
or controls production of goods or
services in one or more countries
other than their home country.
 MNC has an international identity
as belonging to a particular home
country where they are
headquartered.
 MNC does not have coordinated
product offerings in each country.
It is more focused on adapting
their products and service to each
individual local market.
 MNC have branches in other
countries.
TRANSNATIONAL
CORPORATION 
(TNC)
 TNC is a commercial
enterprise that operates
substantial facilities, does
business in more than one
country and does not
consider any particular
country its national home.
 TNC is borderless, as it does
not consider any particular
country as its base, home or
headquarters.
 TNC gives decision-making,
R&D and marketing powers
to each individual foreign
market.
 TNC have subsidiaries.
CORPORATE GOVERNANCE
 Corporate governance is the system of rules, practices and
processes by which a company is directed and controlled.

 Corporate governance essentially involves balancing the

interests of a company's many stakeholders, such as
shareholders, management, customers, suppliers,
financiers, 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.
Good corporate governance creates a
transparent set of rules and controls in which
shareholders, directors and officers have aligned
incentives. Most companies strive to have a high
level of corporate governance. For many
shareholders, it is not enough for a company to
merely be profitable; it also needs to demonstrate
good corporate citizenship through environmental
awareness, ethical behavior and sound corporate
governance practices.
-Good corporate governance helps companies
operate more efficiently, improve access to capital,
mitigate risk, and safeguard against mismanagement. It
makes companies more accountable and transparent
to investors and gives them the tools to respond to
stakeholder concerns.

- Corporate governance also contributes to

development. Increased access to capital encourages
new investments, boosts economic growth, and
provides employment opportunities.
 What Good Governance
■ Promotes
Transparency
- is vital with respect to corporate governance due to the critical
nature of reporting financial and non-financial information.
■ Accountability
- is the recognition and assumption of responsibility for the
decisions, actions, policies and administration, governance and
implementation of programs and plans of the corporation and people
involved, including the obligation to report, explain and be
answerable for its resulting consequences.
■ Prudence
- Is defined within the Code of Governance as “Care, caution and
good judgement as well as wisdom in looking ahead”
Benefits of Good Governance
■ Reduced Vulnerability
■ Marketability
■ Credibility
■ Valuation
Agency Theory in
Governance
■ Suggests that the firm can be viewed as a loosely
defined contract between resource providers and the
resource controllers.
■ It is a relationship that came into being occasioned by
the existence of one or more individuals, called
principals, employing one or more other individuals,
called agents, to carry out service and then entrust
decision-making rights to the agents.
Effects of Agency in
Governance
■ Conflict of Interest
■ Managerial Opportunism
■ Incurrence of Agency Cost
■ Shareholder Activism
■ Managerial Defensiveness
Performance Incentives and
Disincentives
■ Pay Dependent on Profit Level
■ Shares Incentives
■ Shareholders’ Interventions
■ Threat of Being Fired
■ Takeover Threat