NOTES: INTRODUCTION TO CORPORATE GOVERNANCE

• What is Governance?

• Characteristics of Good Governance

• Corporate Governance

• Purpose of Corporate Governance

• Objectives of Corporate Governance

• Basic Principles of Effective Corporate Governance

GOVERNANCE

- process whereby elements in society wield power, authority and influence and enact
policies and decisions concerning public life and social uplifment.
- It comprises all the process 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.
- 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 county and / or organizations.
- used in several contexts such as corporate governance, international governance, national
governance and local governance.
- a structure, estability, equit, inclusiveness...
- norms in certain society, customs, values, rules of the government and public affairs will
be manage in transparent
- culture and institutional government/environment
- the organs of the government

Difference between Governance and Management

Governance Management
• Set norms, strategic vision and direction, • Run the organisation in line with broad
formulate high level goals and policies goals and direction set by the governing
body
• Oversee management and organizational • Implement the decisions within the
performance to ensure that organization is working context of the mission and strategic
in the best interests of stakeholders, and more vision; (environmental scanning -
specifically the members who are served mission - strategic vision…)
organization’s mission.
• Direct and oversee management to ensure that the • Make operational decisions and
organization is achieving the desired outcomes and policies, keep the governance bodies
to ensure that the organization is acting prudently, informed and educated (feedback and
ethically and legally. information transprency openness)
• Be responsive to requests for
additional information
Government- the governing bodies

What is Governance?

Asian Development Bank (ADB)

- Governance has to do with the institutional environment in which citizens interact among
themselves and with government agencies and officials. The capacity of this institutional
environment is important for development because it helps determine the impact
 achieved by the economic policies adopted by the government. This capacity, then, and
the governance quality it reflects, is a vital concern for all governments.
- it is the capacity of institutional environment which citizens interact
- interaction of government agencies and officials; role of the government

UNDP

• Governance is the exercise of economic, political and administrative authority to manage

a country’s affairs at all levels. It comprises mechanisms, processes and institutions,
through which citizens and groups articulate their interests, exercise their legal rights,
meet their legal obligations and mediate their differences.

World Bank

Governance is the process and institutions by which authority in a country is exercised:

• the process by which governments are selected, held accountable, monitored and
replaced;

• the capacity of governments to manage resources efficiently, and to formulate,

implement, and enforce sound policies and regulations; and

• the respect for the institutions that govern economic and social interactions among them.

Usual terms - Governance

• Rules • Management • Impact

• Institutions • Government • Concerns

• Authority • Public Affairs • Norms and values

• Leadership • Exercise • Influence

• Control • Policies • Decisions

• Conditions • Govern • Process

• Power • Legal obligations

• Laws • Responsibility

GOVERNANCE

• Authority • Policies • Institutions/

institutional env.
• Citizens • Government
• Legal
• Economic • Regulations obligation/rights
• Exercise • Management • Capacity
• Power • Procedure • Influence
• Interaction • Rules • Activities
• Process • Social interactions • Transparency
• Political • Implement • Obligations
 • Enforcement • Decision making • Country

• Development • Leadership • Control

• Administrative • Accountability

What governance is not:

1. Governance and corruption are one and the same

Governance- best for public

Corruption- abuse of public power for public game

2. It takes generations for governance to improve

* Individual behavior depend on external conditions, achievements, laws, and incentives.

(more on values of ourselves)

Examples:

1. Other countries prefer filipino workers but in Pilippines, productivity is low.

Reasons: poor governance, low on technological advancement, compensation, not

enough laws to protect worker's rights.

2. Unruly driving

Characteristics of Good Governance

1. Rule of Law

- fair, legal framework to establish rule of law

- enforced impartially
- protect human rights particularly whose most marginal in society
- independent judiciary system, impartial in nature, incorruptible force; they are the key
characteristics to good governance
- rule of law should be consistent

2. Transparency

- fair delivery of services to citizens

- ensure balance between policy making and enforcement following rules and regulations
- enable to access government information, various policies, and implementations
- proper media for transparency
- people should follow and understand the informations, advices, and legislative
requirements
- Ex: SALN - transparent in google

3. Concensus Oriented

- depends on concensus of people in society to make it good...

- majority of people should agree
- it should benefit everybody (people & community)
- long-term perspective, social culture...

4. Accountability
 - decision makers in government/private agencies/citizens are all accountable to public
- organization must report, explain, and be answerable on the consequences for decisions
on behalf of the people

5. Effectiveness and Efficiency

- process and institution will produce results- meet the needs while making the best
resources
- proper utilization of resources for sustainable development is the key to good governance

6. Equity and Inclusiveness

- all men and women have the opportunities to improve their well-being (how members
feel abut it)
- equitable and just society should establish for good governance
- organization should implement decisions and follow available people...
- no discrimination (not who you know, its what you know)

7. Responsiveness

- the institution and process must all be serve to all

- basic necessities
- its between the government and people
- sufficient services to people
- it should be in a timely basis, proper way, and sensitive way

8. Participation

- all citizens are the key characteristics of good governance

- all should have voice in decision making either directly or through legitimate institutions
that represent their interests.
- built on freedom of association and speech, participate constructively

Corporate Governance

Corporate Governance is “the conduct of business in accordance with shareholders’ desires,

which generally is to make as much money as possible, while conforming to the basic rules of
the society embodied in law and local customs.” -- Noble Laureate Milton Friedman
GOOGLE explanation -- 8 characteristics of good governance:

1. Participation

- Participation by both men and women is a key cornerstone of good governance. Participation
could be either direct or through legitimate intermediate institutions or representatives. It is
important to point out that representative democracy does not necessarily mean that the concerns
of the most vulnerable in society would be taken into consideration in decision making.
Participation needs to be informed and organized. This means freedom of association and
expression on the one hand and an organized civil society on the other hand.

- All men and women should have a voice in decision-making, either directly or through
legitimate intermediate institutions that represent their interests. Such broad participation is built
on freedom of association and speech, as well as capacities to participate constructively.

2. Rule of law

- Good governance requires fair legal frameworks 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.

- Legal frameworks should be fair and enforced impartially, particularly the laws on human
rights.

3. Transparency

- Transparency means that decisions taken and their enforcement are done in a manner that
follows rules and regulations. It also means that information is freely available and directly
accessible 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.

- Transparency is built on the free flow of information. Processes, institutions and information are
directly accessible to those concerned with them, and enough information is provided to
understand and monitor them.

4. Responsiveness

- Good governance requires that institutions and processes try to serve all stakeholders within a
reasonable timeframe.

- Institutions and processes try to serve all stakeholders.

5. Consensus oriented

- There are several actors and as many view points in a given society. Good governance requires
mediation of the different interests in society to reach a broad consensus in society on what is in
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 and how to
achieve the goals of such development. This can only result from an understanding of the
historical, cultural and social contexts of a given society or community.

- Good governance mediates differing interests to reach a broad consensus on what is in the best
interests of the group and,. where possible, on policies and procedures.

6. Equity and inclusiveness

- A society’s well being depends on ensuring 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.
- All men and women have opportunities to improve or maintain their well-being.

7. Effectiveness and efficiency

- Good governance means that processes and institutions produce results that meet the 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
of the environment.

- Processes and institutions produce results that meet needs while making the best use of
resources.

8. Accountability

- Accountability is a key requirement of good governance. Not only governmental institutions but
also the private sector and civil society organizations must be accountable to the public and to
their institutional stakeholders. Who is accountable to whom varies depending on whether
decisions or actions taken are 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 decisions or
actions. Accountability cannot be enforced without transparency and the rule of law.

- Decision-makers in government, the private sector and civil society organisations are
accountable to the public, as well as to institutional stakeholders. This accountability differs
depending on the organisations and whether the decision is internal or external to an organisation.
CORPORATE GOVERNACE

 Corporate Governance is the process and structure used to direct and manage the
business affairs of the company towards enhancing business prosperity and corporate
accountability with the ultimate objective of realizing long-term shareholder value, and
taking into account the interest of the stakeholders.

 The application of best management practices, compliance of law in true letter and spirit
and adherence to ethical standards for effective management and distribution of wealth
and discharge of social responsibility for sustainable development of all stakeholders.

 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.

 Corporate governance is a topic that has received growing attention in the public in
recent years as policy makers and others become more aware of the contribution good
corporate governance makes to financial market stability and economic growth. Good
corporate governance is all about controlling one's business and so is relevant, and indeed
vital; for all organizations, whatever size or structure.

 The corporate governance structure specifies the distribution of rights and responsibilities
among different participants in the corporation, such as the board, managers,
shareholders, and other stakeholders, and spells out the rules and procedures for making
decisions on corporate affairs. By doing this, it also provides the structure through which
the objectives are set and the means of attaining those objectives and monitoring
performance.

PURPOSE OF CORPORATE GOVERNANCE

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 shareholders' value and protect
interests 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 CORPORATE GOVERNANCE

The following are the basic objectives of corporate governance:

1. Fair and Equitable Treatment of Shareholders

A corporate governance structure ensures equitable and fair treatment of all shareholders of the
company. In some organizations, a group of high net-worth individual and institutions who have
a substantial proportion of their portfolios invested in the company, remain active through
occupation of top-level positions that enable them to guard their interest. However, all
shareholders deserve equitable treatment and this equity is safeguarded by a good governance
structure in any organization.

2. Self-Assessment

Corporate governance enables firms to assess their behavior and actions before they are
scrutinized by regulatory agencies. Business establishments with a strong corporate governance
system are better able to limit exposure to regulatory risks and fines. An active and independent
board can successfully point out deficiencies or loopholes in the company operations and help
solve issues internally on a timely basis.

3. Increase Shareholders' Wealth

Another corporate governance's main objective is to protect the long term interests of the
shareholders. Firms with strong corporate governance structure are seen to have higher valuation
attached to their shares by businessmen. This only reflects the positive perception that good
corporate governance induces potential investors to decide to invest in a company.

4. Transparency and Full Disclosure

Good corporate governance aims at ensuring a higher degree of transparency in an organization

by encouraging full disclosure of transactions in the company accounts.

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.

The basic principles of effective corporate governance are threefold as presented below:

Transparency and Full Disclosure is Accountability is the board taking

the board telling us what is going responsibility?
on?

Good and Effective Governance

Corporate Control is the board doing

the right thing

Positive answers to the following questions indicate a firm's conformance and compliance with
the basic principles of good corporate governance:

A. Transparency and Full Disclosure

 Does the board meet the information needs of investment communities?

 Does it safeguard integrity in financial reporting?
 Does the board have sound disclosure policies and practices
 Does it make timely and balanced disclosure?
 Can an outsider meaningfully analyze the organization's actions and
performance?

B. Accountability

 Does the board clarify its role and that of management?

 Does it promote objective, ethical and responsible decision making?
 Does it lay solid foundations for management oversight?
 Does the composition mix of board membership ensure an appropriate range and
mix of expertise, diversity, knowledge and added value?
 Is the organization's senior official committed to widely accepted standards of
correct and proper behavior?
C. Corporate Control

 Has the board built long-term sustainable growth in shareholders' value for the
corporation?
 Does it create an environment to take risk?
 Does it encourage enhanced performance?
 Does it recognize and manage risk?
 Does it remunerate fairly and responsibly?
 Does it recognize the legitimate interests of stakeholders?
 Are conflicts of interest avoided such that the organization's best interests
prevail at all times?

Various participants in determining the direction and performance of a corporation

 Shareholders  Customers

 Management  Creditors

 Board of Directors  Suppliers

 Employees  Community

Corporate Governance

 Framework***  Step by step procedure

 Rules, practices, laws **  Practices and procedures

 Long-term success

THE FOUR P'S OF CORPORATE GOVERNANCE

The Four Ps of Corporate Governance is the guiding philosophies behind why governance exists
and how it operates.

People

People come first in the Four Ps because people exist on every side of the business equation.
They are the founders, the board, the stakeholder and consumer and impartial observer.

People are the organisers who determine a purpose to work towards, develop a consistent process
to achieve it, evaluate their performance outcomes, and use those outcomes to grow themselves
and others as people.

It’s cyclical, yes, but it has to start with people.

Purpose

Purpose is the next step. Every piece of governance exists for a purpose and to achieve a
purpose. The ‘for’ is the guiding principles of the organisation. Their mission statement. Every
one of their policies and projects should exist to further this agenda.
The ‘achieve’ is the small step on the road to completing that large goal. It might seem pointless
to type up minutes for a meeting that felt irrelevant, but those minutes and all the other
governance from that meeting contribute to making the business effective at achieving it’s stated
purpose.

Process

Governance is the process by which people achieve their company’s purpose, and that process
is developed by analyzing performance. Processes are refined over time in order to consistently
achieve their purpose, and it’s always smart to take a critical eye to your governance processes.

Can they be streamlined? Are they efficiently achieving their purpose? It takes work to make
your processes function, but once they do you will quickly see how they can help your company
grow.

Performance

Performance analysis is a key skill in any industry. The ability to look at the results of a process
and determine whether it was successful (or successful enough), and then apply those findings to
the rest of your organisation, is one of the primary functions of the governance process.

Using these results to develop personal skills, both your own and your coworkers’, is how the
Four Ps cycle revolves endlessly. 

Corporate Governance in the Philippines SEC, PSE and BSP Response

2001- World Bank & IMF Report: Corporate  SEC issued Corporate Governace
Governance Assessment of the Philippines Code in 2002, amended in 2009
based on OECD Principles  Required training and defined
disqualifications of Directors
 High concentration of wealth by  Required accreditation of external
limited number of families auditors, term of managing partner
 Weak enforcement of corporate law limited
and capital market regualations  Required setting up of various Board
 Weak corporate boards Committees
 Need to professionalize accounting  Imposed minimum of 2 independent
and auditing sectors directors in Boards
 Poor disclosures of financial and non-  Required Audit Committees to Self-
financial information Assess Performance
 Unprotected rights of minority
shareholders
Need for Corporate Goverance

Corporate Governance is integral to the existence of the company. Corporate Governace is

needed to create a corporate culture of transparency , accountability and disclosure.

Corporate Enhanced Better Access to

Performance Investor Trust Global Market

Enhancing Enterprise Easy Finance From Combating

Evaluation Institutions Corruption

Reduced Risk of Corporate Accountability

Crisis and Scandals

PRINCIPLES OF CORPORATE GOVERNANCE

 Sustainable development of all stakeholders – to ensure growth of all individuals

associated with or effected by the enterprise on a sustainable basis.

 Effective management and distribution of wealth – to ensure that enterprise creates

maximum wealth and judiciously uses the wealth so created for providing maximum
benefits to all stakeholders and enhancing its wealth creation capabilities to maintain
sustainability.

 Discharge of social responsibility – to ensure that enterprise is acceptable to the society

in which it is functioning.

 Application of best management practices – to ensure excellence in functioning of

enterprise and optimum creation of wealth on sustainable basis.

Best Management Practices:

o Development and maintenance of competent and diverse board.

o Defined roles and responsibilities
o Alignment of strategic goals
o Accountability

 Compliance of law in letter and spirit – to ensure value enhancement for all
stakeholders guaranteed by the law for maintaining socio-economic balance

 Adherence to ethical standards – to ensure integrity, transparency, independence and

accountability in dealings with all stakeholders.

CORPORATE GOVERNANCE - PILLARS

 Accountability- answerable for the actions/decisions

 - ensure that management is accountable to te Board
-ensure that the Board is accountable to shareholders

 Fairness- ensuring the protection of shareholders' rights and the enforceability of

contracts with service/resource providers
- equal - handed, balanced, no bias
-protects shareholders rights, treat shareholders including minorities, euitably,
and provide effective redress for violations

 Transparency- open and clear disclosure, not concealing info

- requiring timely disclosure of adequate information concerning
corporate financial performance.
-ensure timely, accurate disclosure on all material matters, including the
financial situation,performance, ownership and corporate governance.

 Independence- independent free from conflict of interest (√)

- vested interest influences connection/relationship (X)
-procedures and structures are in place so as to minimize, or avoid
completely confict of interest
-indepenedent directors and advisers i,e. free from the influence of
others.

CORPORATE GOVERNANCE - ELEMENTS

1. Good Board Practices

2. Well-defined Shareholder Rights
3. Board Commitment
4. P/E Ratio
5. Transparent Disclosure
6. Control Environment

1. Good Board Practices

 Clearly defined roles and authorities
 Duties and responsibilitiesof Directors understood
 Board is well structured
 Appropriate composition and mix of skills
 Appropriate Board procedures
 Director Remuneration in line with best practice
 Board sel-evaluation and training conducted

2. Well-defined Shareholder Rights

 Minority shareholder rights formalized
 Well-organized shareholder meetings conducted
 Policy on extraordinary transactions
 Policy on extraordinary transactions
 Clearly defined and explicit dividend policy

3. Board Commitment
 The Board discusses corporate governance issues and has created a corporate
governance committee
 The company has a corporate governance champion
  A corporate governace improvement plan has been created
 Appropriate resources are committed to corporate governace initiatives
 Policies and procedures have been formalized and distributed to relevant staff
 A corporate governance code has been developed
 A code of ethics has been developed
 The company is recognized as a corporate governance leader

4. P/E Ratio- Price Earning Ratio

5. Transparent Disclosure
 Financial Information disclosed
 Non-Financial Information disclosed
 Financials prepared according to International Financial Reporting Standards
(IFRS)
 Companies Registry filings up to date
 High-Quality annual report published
 Web-based disclosure

6. Control Environment
 Internal control procedures
 Risk management framework present
 Disaster recovery systems in place
 Media management techniques in use
 Business continuity procedures in place
 Independent audit committee established
 Internal Audit Function
 Management Information systems established
 Compliance Function established
 Independent external auditor conducts audit

ILLUSTRATIVE APPLICATION OF THE BASIC PRINCIPLES OF CORPORATE

GOVERNANCE AND BEST PRACTICE RECOMMENDATIONS

Principles of Good Corporate Governance Best Practice Recommendations

1. A company should lay solid foundation 1-a. Formalize and disclose the functions
for management and oversight. It should reserved to the board and those delegated to
recognize and publish the respective management.
roles and responsibilities of board and
management.
2. Structure the board to add value. Have a 2-a. A board should have independent
board of an effective composition, size directors.
and commitment to adequately discharge 2-b. The roles of chairperson and chief
its responsibilities and duties. executive officer should not be exercised by
the same individual.
2-b. The board should establish a nomination
committee.
3. Promote ethical and responsible 3-a. Establish a code of conduct to guide the
decision- making. Actively promote directors, the chief executive officer (or
ethical and responsible decision-making. equivalent), the chief financial officer (or
equivalent) and any other key executives as to
 The practices necessary to maintain
confidence in the company’s integrity;
 and
 The responsibility and accountability of
individuals for reporting and
investigating reports of unethical
practices.
3-b. Disclose the policy concerning trading in
company securities by directors, officers and
employees.
4. Safeguard integrity in financial reporting. 4-a. Require the chief executive officer (or
Have a structure to independently verify equivalent) and the chief financial officer (or
and safeguard the integrity of the equivalent) to state in writing to the board that
company’s financial reporting. the company’s financial reports presents a
true and fair view, in all material respects, of
the company’s financial condition and
operational results and are in accordance with
relevant accounting standards.
4-b. The board should establish an audit
committee.
4-c. Structure the audit committee so that it
consists of:
 Only non-executive or independent
directors;
 An independent chairperson, who is not
chairperson of the board; and
 At least three (3) members.
5. Make timely and balance disclosure. 5-a. Establish written policies and procedures
Promote timely and balance disclosure of designed to ensure compliance with IFRS.
all material matters concerning the 5-b. Listing Rule disclosure requirements and
company. to ensure accountability at a senior
management level for compliance.
6. Respect the rights of shareholders and 6-a. Design and disclose a communications
facilitate the effective exercise of those strategy to promote effective communication
rights. with shareholders and encourage effective
participation at general meetings.
6-b. request the external auditor to attend the
annual general meeting and be available to
answer shareholder questions about the audit.
7. Recognize and manage risk. Establish a 7-a. The board or appropriate board
sound system of risk oversight and committee should establish policies on risk
management and internal control. oversight and management.
2-a. The chief executive officer (or
equivalent) and the chief financial officer (or
equivalent) should state to the board in
writing that:
 The statement given in accordance with
best practice recommendation 4-a ( the
integrity of financial statements) is
founded on a sound system of risk
management and internal compliance and
control which implements the policies
adopted by the board; and
 The company’s risk management and
internal compliance and control system is
operating efficiently in all material
respects.
8. Encourage enhanced performance. Fairly 8-a. Disclose the process for performance
review and actively encourage enhanced evaluation of the board, its committees and
board and management effectiveness. individual directors, and key executives.
9. Remunerate fairly and responsibly. 8-a Provide disclosure in relation to the
Ensure that the level and composition of company’s remuneration policies to enable
remuneration is sufficient and reasonable investors to understand:
and that its relationship to corporate and  The cost and benefits of those policies;
 individual performance is defined. and
 The link between remuneration paid to
directors and key executives and
corporate performance.
9-b. The board should establish a
remuneration committee.
9-c. Clearly distinguish the structure of non-
executive director’s remuneration from that of
executives.
9-d. Ensure that payment of equity-based
executive remuneration is made in accordance
with thresholds set in plans approved by
shareholders.
10. Recognize the legitimate interests of 10-a. Establish and disclose a code of conduct
stakeholders. Recognize legal and other to guide compliance with legal and other
obligations to all legitimate stakeholders. obligations to legitimate stakeholders