CORPORATE

GOVERNANCE
GROUP 1

Justine B. Panis Dominic Bandoquillo

Justin L. Barreda Brent Joseph Balderama
Riza B. Ballester
PHILIPPINE CORPORATE
GOVERNANCE
• Corporate governance in the Philippines shares similar qualities with its East
Asian counterparts, most observed of the family-ownership structure
(Echanis, 2006; Kabigting,
• 2011; Saldaña, 1999). This quality has been referred to as among the
weakest attributes of corporate governance in the country if gauged against
the codes on control (monitoring function) and transparency (reporting) is
concerned.
• Iu and Batten (2001) cited two key features of corporate ownership among
East Asian countries: concentration and composition. The concentration
dilemma happens tA sian forms-low concentration (high dispersion) and high
concentration (low dispersion) the former occurs when the majority of the
ownership is held by several majority and minority of major stockholders. In
low concentration, conflict arises between shareholders and shareholders,
and the latter her thenration, confic are pete by archol number managers,
while in high concentration, between majority and minority shareholders,
The problem with concentration is manifested in an Asian Development Bank
study (2000, as cited in lu & Batten, 2001), in which it was reported that 46
percent of corporations in the Philippines were under family control.
Because of this, it "bred a culture of cross-shareholdings, absence of
independent directors, related party-lending, and evasion of single borrower
limits" (Arceo-Dumlao, 2000a, as cited in Iu & Batten, 2001). Moreover,
• Meanwhile, composition refers to the owners or shareholders. These can be
in the form of "individuals, a family or family group, a holding company, a
bank, an institutional investor, or non-financial corporation" (ADB, 2000, as
cited in Iu & Batten, 2001). The dilemma of composition in the Philippine
context is pronounced in the ownership of banks by corporate groups. In the
study of Saldaña (1999), forming corporate groups is the means by which
large shareholders controlled their investments through allocation in various
businesses, and banks are usually included in this arrangement. This
condition contributes to weak corporate governance because it "diminishes
the capacity of banks to be effective external control agents" because these
are in the best position to gauge"the efficiency of the corporate group's
investment and financing activities" (p. 18). Iu and Batten (2001) added that
the inclusion of banks equates to "easier financing, not more stringent
monitoring“
• The problem with composition can also be gleaned in the study of factors
contributing to bank failures. Echanis (2006) mentioned the non-separation
of decision management and decision control when owners and directors
"effectively centralized and combined these functions at the board level" (p.
33). In her example, she cited the case of Wincorp, which closed in 2000
GOVERNANCE AND
MANAGEMENT
• It must be stated at this point that governance and management are two
different areas. Management focuses on the day-to-day operations of an
organization. Executives and managers in management ensure that the
company is run well and, ideally, brings profit for its shareholders. On the
other hand, the governance function is carried out by a body or group of
persons (board of directors/ trustees) who governs the organization, making
sure that the company or entity is efficiently and effectively run by
management.
• Management is defined as how an organization is operated by its human and
material resources to achieve organizational success. Such success may be
measured by profits generated through its operations and the continued
growth of its resources to produce more reveneus
• The board does not readily manifest itself in the organization structure
because of its explicit definition. A board supervises the management and
provides oversight, ensuring that the company is steered in the right
direction for the satisfaction of its various stakeholders without direct
interference in the day-to-day operations of the company.
• The board of directors may be viewed as an overlapping entity that provides
 KEY PLAYERS IN
CORPORATE GOVERNANCE
• There are five key players in corporate governance, namely the CEO, the
chairman of the board, the board of directors, the shareholders, and the
stakeholders.
• CEO - The CEO is the person responsible for leading and managing the entire
organization in achieving its organizational goals. It is the duty of the CEO to
collaborate with the board for the overall direction of the company.
• Chairman of the Board - The chairman of the board of directors should not
only provide leadership of the board, but also play an important role in the
governance practices of the company.
• Board of Directors - This is the best entity for steering the company's
strategic direction and evaluating its performance. As a director, questions
must be asked during board meetings to make sure decisions made by the
company will be for the best interest of the company in the long term.
• Shareholders - Considered owners of the company through their ownership/
holdings of stock shares, this group actively seeks to maximize stock price
increase over a period of time.
• Stakeholders - Any group of people who are affected by how a corporation
operates in (i.e., employees, suppliers, government, and society among
OTHER FORMS OF
ORGANIZATION
• Earlier in the chapter, we mentioned that not all
organizations are for profit. We have listed the many types
of nonprofit organizations that can be formed to achieve
goals and maximize organizational performance, such as
village associations, charitable institutions, and many
others. The main objective of good governance is the
proper governance of its valuable resources for its
stakeholders. While these may not be under the scrutiny of
regulating bodies, it is just as important to ensure good
governance through its board of directors (or trustees).
THEORETICAL
PERSPECTIVES
• There are many lenses with which to study and look at corporate
governance. We take a look at the most widely used and researched
perspectives.
• Agency Theory - This perspective assumes that the two principal characters,
the agent (manager) and the principal (owner), are at odds with their
objectives. This theory posits that managers cannot be trusted and act on
their interests and not for the benefit of the owners of the company. Such a
view brought about the agency theory (Fama & Jensen, 1983) and the
majority of corporate governance research has used this perspective mainly
because of its practical business approach. Measuring performance through
the agents and rewarding them help assuage the intrinsic nature of agents.
However, the mechanics put in place from this perspective has not been
guaranteed.
• Stewardship Theory - According to this theory, the agent acts in the
principal's best interest and therefore acts as a responsible steward of the
company. Davis, Schoorman, and Donaldson (1997), however, believed that
agents are naturally inclined to provide proper oversight and works for the
best interest of the owners. This alternative view of the agent-principal
relationship has been widely debated because the tenets of agency theory
should have provided control mechanisms for the agent to behave, but did
• Resource Dependency Theory - Based on organizational theories, this theory
looks at corporate governance from a strategic management view. It
examines how the external resources of organizations affect how
organizations behave for their maximum utility (Pfeffer & Salancik, 1978).
The long-term survival of an organization is dependent on the efficient and
effective use of its resources, such as raw materials, labor, executive
management, and strategic networks to name a few. This theory suggests
that board members should actively develop their resources to build a
competitive advantage.
• Stakeholder Theory - Given the growing social activism seen in the last
century, Freeman (1984) developed this societal perspective and viewed
organizations as entities that are responsible for their actions that affect
anyone involved or affected by their existence. This approach to corporate
governance encourages boards to consider their stakeholders' concerns, not
only shareholders, as the metric for a successful organization is the
satisfaction of all its stakeholders.
CULTURE AND CORPORATE
GOVERNANCE
• In Chapter 1, we discussed how important culture is on CSR. This
relationship of culture with good corporate governance is also supported by
research. The influence of culture influences board practice and acceptance
(Humphries & Whelan, 2017) and contributes to the development of best
practices. The context by which corporate governance is understood and
practiced is an important dimension to consider when studying the
relationship between an organization's culture and governance processes.
Corporate governance is generally seen as mechanisms that promote good
governance, but it is a culture that gives it the impetus. For instance, there
are nuances in corporate governance practices between the East and the
West.
• A prime example of this would be the oft-discussed Chinese social value of
"saving face" for a particular person/entity/ organization. Most Asian
cultures, including the Philippines, have this particular emotional
idiosyncrasy. In the West, where emotions are given lesser importance, this
is not seen so much of an issue as Western culture is deemed to be more
open and straightforward.
 APPROACHES TO
CORPORATE GOVERNANCE
• A rules-based approach to corporate governance relies on
regulation and the law to ensure compliance. This is best
exemplified by the US Sarbanes and Oxley Act. On the
other hand, it is in a principles-based approach wherein
companies are required to explain why certain violations of
the code have been made. This is sometimes referred to as
a "comply and explain" approach. Both approaches adopt a
unitary board (against the European two-tier board)
wherein there are two boards, one made up of executive
directors and another board made up of non-executive
directors (shareholders and employees).
FUNCTIONS OF THE
BOARD
• Accountability - Why be accountable? Simply because the success or failure
of an organization rests on the board and the board should be accountable
not only to their shareholders but also to all the other stakeholders affected
by their actions/ behavior.
• Monitoring and supervision - Another function of the board is to oversee the
performance of its management. There are various financial and
nonfinancial metricsavailable but most companies prefer to use financial
metrics as it is readily quantifiable, such as sales, net income, financial
ratios, and others. Another common tool used is the budgetary control
system that compares the budget against actual numbers from operations.
• Setting policy - For strategies to work, a set of policies, procedures, and
plans must be prepared for management to abide by. This is also used to
supervise management activities. These may either be set by the board or by
approving the recommendations by management which is often the case.
• Strategy formulation - Can a company survive without a strategy? Hardly.
This is the most important function of the board as this will steer the
company to achieve its vision and mission. A large part of board work is
spent on the formulation and calibration of organizational strategies. Board
members require strategic planning with varying backgrounds and expertise.
MEMBERSHIP OF THE
BOARD
• Board size is determined by the current board and should comply with the
terms established in the bylaws of the corporation. A corporation is
composed of one director (for OPCs) up to a maximum of 15 directors with
each director owning at least one share of stock, as per the guidelines
indicated in the Philippine Corporate Code (2019). The term for each director
is set at one year among holders of stocks of the company (three years in
the case of trustees, chosen from among the members of the corporation).
• Directors are normatively nominated by the shareholders, controlled by the
board in the director selection process as best practices indicate. But in
cases where a founder or majority group is in control of a corporation, the
nomination usually comes from these entities through the nomination
committee, much more so when the organization is in its Start-up stage.
• Director classification comes in many forms but there are three main
director types: independent, non-executive, and executive directors.
Independent directors are individuals who have no connection with the
company and is free from any relationship which may be considered a
conflict of interest. While non-executive directors are individuals who are not
part of management but are related to a certain aspect of the company, such
as being a supplier, family representative, friend, adviser, or shareholder. On
• Aside from the fundamental requirements of a director having
integrity, intellect, and independence, a director must have the
following core competencies: good communication skills, ability to
read and understand financial statements, strategic planning,
thinking, and networking.
POLITICS IN THE BOARD
• An aspect of organizational life is the existence of politics. Politics
can be destructive if used the wrong way but can also be used
positively to further a worthwhile agenda or cause that will benefit
the company. Corporate politics may be described as processes and
interactions, involving power and authority that influence decisions
made for the benefit of an individual, group, or organization. In the
study of corporate governance, it is important to understand a
company's governance structure, or where the power lies. Tricker
(2019) noted that human behavior is based on relationships, and by
the processes of power. How people behave in an organization is
dictated by their association of power.