“ : _ Internal and External Institutions ‘and

- Influences of Corporate Governance

ih i rer i

Learning Objectives: _ Be wg Ss bagels 4 Ce Py

- After studying this chapter, you should be

able to:, . a es 2 Rave ; mh
2 show the lel framework that effected corporat
e goveinance locally.

“2 Enumerate and explain the internal foundation

of corporate gove
g rnance, .
13, Explain the cutter dutiés and responsibilities of board af direc
tors,
“a Sey ahies executive Otter, chief i pitirer a shareholders.

cars Enumerate a and explain the different external

‘environment of corporate re!
governance, ogee ost, Oe, en

Be, Explaii what anti-takeover defenses mean

including its advantages and.
: disadvantages. we Bee a ee Bea sk Ey ont gpd oT eee
: | : py oa
:
ae Pattie ot HS pa att

6.: Understand ie explain shareholders eines limitations.

“7, Identify and exci onthe leading! behavioral man

n agemen
t theories that
ye gt contributed to the understanding of human behavior at work
.” md

i .
a : 1

a
’ : U ‘

cr vi ~~ — , .
Internal and External Institutions and Influences of Corporate Governance I 34

Boag OF
 oa A Wel Te
‘ 7
The Phone Business: Then ; & Now :
y otis and . even years
* Forseveral decades until late 1990s, i oul a shall really ‘n nee d of the:
before one could get a telephone line installe a from ones ' who
lucky rel :
to buying telephone fr
lines
service and can afford the price ‘resort Te’epho ne
Then, the Philippine Long Distanclye 1990 s, the
.. have phones but may no longer need them. the early,
in the voice business and until
~~ Co (PLOT) had a virtual monopoly a small |
controll ed 95 percent of the vvoice market with the balance divided among
oo company
5 ne companies. °°. de
if
- nu titers | telecommunication industry, the administration
to deregulate the as the
(EO) No. 109 in 1994. Otherwise known,
"> Pres. Fidel Ramos issued Executive Order
basic telephone seryices tot rural areas
“Service Area Scheme (SAS)”, the EO aimed to bring
‘the landline networks’ by the various
~~ of the country and. fast-track the roll- out of
ommunications Policy Act ‘of
. _ telecommunication companies.. Likewise, the Public“Telec
the policy for competition, ‘and
~ 1995 (R.A, 7925) was enacted in 1995 thereby, setting
value- added
liberalization of the telecommunications sector. It opened up the paging and.
* services business but. continued ‘regulating’ ‘the rates - for. local. _exchange _ carriers,
" international long distance and (eed arse telephone Pass “unless chert is sufficient
i ayer *
“competition.”.
Among those that renee | innthe SAS were » PLOT which had a nationwide.
;
franchise Bayantel which was awarded the Metro Manila and Bicol areas; Digitel which
was awarded the Central Luzon areas; “Eastern “Telecoms, Northern - Luzon; ‘Isla
:
Communications, Visayas; Piltel and Philcom, Mindanao; Globe, Luzon and Metro Manila;
and Bell Telecoms, Metro Manila arid outlying areas. While the implementation of EO 109
was generally assessed as a success, the 1998 Asian financial crisis and the advent of
mobile phone technologies resulted to mergers among the SAS participants. Currently.
with nationwide operations, ‘only’ PLDT, Digitel and Glob e are left co -
lucrative cellphone and internet business. provi " am
‘As if history is bound to repeat itself in terms of i aving virtual , |
telecommunications industry in the Philippines, PLOT and Digitel
rl monoph . ts
deal whereby PLDT (which already owns Smart and Talk N’
Text) would “ as me
Digitel (which owns Sun). If the deal pushes thro ugh, the PLDT ue a ae |
70% market share of the mobile telecommu nication busine and
ss Dieitel merger will hol
a y
frequency spectrum in the country. Will the merger
be good for ane us? eating
avoided, what can be done? by: Edzee te: /Iricowner jefmart. com rt\ cent _

3-2 | Good Governance and Social Responsibility. . » .

 : Se vs oe ns (tee
: “ Now: PLDT to Buy irinto Digitel yas e eee ° i:
pee a i pees ’. By Paolo Montecillo” ewe. we ate ey ES
es Pipene Dale Inquirer, Mar. 29, 2011.
PPR

“Manila, Philippines: ‘Philippine ‘Long Distance sTalaghahe, Co, “has ‘confirmedcs

rumors t that it will acquire ‘a majority stake in Digitel Telecommunications Philippines | Inc. 9 L 3
operator of mobile network Sun Cellular, from the Gokongwei family.
~ The PLDT group, which already operates three mobile brands Smart, Talk Nw Text “ata
“and Red Mobile will gain an extra 15 million subscribers with the acquisition for a total of an
about 60 million users. This. will give it a commanding lead in the telecom sector, with’
é seven out of every 10 mobile subscribers being in the PLDT network. Its next biggest rival,
aes Telecom, has just over 25. million subscribers. : add Ps ;
“Though this ‘initiative alters. ‘the country’: S ‘telecom’ iandéeaps we: expect
competition within the industry ‘to. remain very robust given that other’ operators,
-including new entrants, are formidable’ and well funded,” e ‘PLOT ‘chairman Manuel
" Pangilinan said in a statement. oe Og ge aad Se 3

. ‘ PLDT will issue P69.2 billion worth ofr new aiaes at P2, 500 aah: as a ‘form of
payment for the 51.5% stakei in Digitel to Gokongwei holding firm JG Summit: Holdings. .
- Digitel is also expected to conduct a tender offer for the 48% of Digitel shares still held by
minority stockholders. At Pi. 60 per share, this exercise ae bring the total raceusttlon cost
- to P74. 1 billion.” a.

Sip , at sve, Sy spit

;
A
he. Byg te, o sph te toe Sp wea 2
Internal and External Institutions and Influences of Corporate Governance | 3
 SaysMVP
TV5-GMA7 Deal inal By End-2012, com - aca: a
By eet Visconti,

= een
ere henw 3rdrdin
end otthetheandyer,sng! acco e:
g est
larg
te disuse ed merg
befor
-Manila, Plitippines ; (UPDATED) - The manal
may be cermplated
television stations, GMA-7 and TV- 5
Pangilinan ‘said, ny |
” the sidelines
on” AtSE Tees oft PLD annual stoc kh olders meeting on June 14,
of a PLDT
an agreement bsHhin that agreement
“would say certainly within the year we should be able to create
-.
a number of conditions... for closing."
addressed for this deal to push through: aan
ee open a number of issues that need to be Network nc ;
between the oan othe
‘agreement on price, share size, and other deal details ry.
, which regulates the me
and Pangilinan-led TV5; and a go-signal from the government
..- Net has been
On the first issue, Pangilinan said, "We are in discussions with .GMA-7
finalized.;.Discussions are moving positively. There is: a desire to come. to terms.":, He-also,
highlighted that there are "positive vibes" between the two camps. "There are still a lot of issues
to be discussed—due diligence, warranties, etc. —but you could sense Heat theres are positive vibes
. . 5 i
- on both sides,” he said."
. When asked how auch the deal price rout ta he replied, nwe baile a price ‘alteady .
- there is a range. It’s below P100 billion.” Pangilinan said discussions started before his trip to the -
‘U. S. He’ “was among ‘the businessmen: who joined ‘President. ae s recent overseas trip.
Pangilinan was alsa | in San ee to launch TV5 International. oy ey

Government Nod : : . i
He also stressed that omhainentis al is ; needed toI clase the transaction. “To os
. conditions precedent must be satisfied, there are conditions required on their side, ‘on our side."
"After that, we have to give them money and they will give us the shares. On the approval of the
government, we don’t know how long that will take or.it they will approve it,” he said. Fears of
industry monopoly may be raised, “butPafaillnah shrugged it at and said, tele are many T Ww 7
stations." - : . : . : at

Roller-coaster iat 2” i oe ga Me Fee

7
on:
The recent reports ona GMAT-1V5 Beal first erupted |in December 2011. ‘Officials ‘Sani
both camps have since made vague, even contrasting, statements. os one point, a ‘Gans owner
was
quoted naming a spectacular deal price of P200 billion.' oe
GMA-7, the trade name of GMA:Network Inc., is controlledd
by ite Dt Gozon n and
. Jimenez families.. Network chair Felipe Gozon and president
Gilberto Duavit have’ separately
confirmed in the past that valuation remains the sticky jissue. Pangilinan had
said he has always
been interested in GMA-7. Before his group acquired. TVS in 2009, he offered to acquire a
controlling stake in GMA-7, but finances and timing of the offers got in
the way.
The rumors on this 3rd effort to forge an agreement have largely
been beneficial to the
GMA-7 camp. Despite its neti income plummeting. 39% in
2011, then another 27% drop i in the first
quarter 2012, the Pangilinan buy-in talks have boosted the
share price of GMA-7, whichis a listed”
firm in the Philippine Stock Exchange. With a higher
share price, GMA-7 ‘stockholders can
command a higher deal pricé, in effect, making the transa
ction more expensive for Pangilinan’s
group. : oi Pate af hag As ed “Weteas —

nsibility _ oe . a = c =
3-4 | Good Governance and Social Respo
 INTRODUCTION - Si pean "a ae pa RE,
The foundation of geod corporate governance | is the ‘intellectual honesty of
directors and senior management. This intellectual honesty i is expressed by acting in the __
~ best interests of the incapacitated company. The corporation, on formation,.is a juridical.
person, but it is absolutely incapacitated until its directors are appointed and the board :
~ inn turnn delegates to management the Implementation of its collective decisions.

{ti is the quality oF governangs that iis incre and{ atthe e Goan Mindless e
compliance with a set of rules is not good governance. Good governance > connotes acting.
_ with responsibility, accountability, fairness and “transparency.: Transparency . has / a
¢ "withering. effect. on.-“misconduct and , is: “absolutely critical : in,- communicating - to!
», stakeholders any decisions of the board. In this context, transparency demands that the i
communications consist of: substadee over r form and ‘contain: positive: and. negate
; aspects, if ae we Sty ste

OM company heeds the right Feces team and processes. The right team making: =
up ‘he board must ‘determine a common| understanding of the purpose of the company,
the Values that drive its business and who are the important stakeholders. The board must | an
also identify the sustainably issues ay aare ‘pertinent to the business of the corgpany.

wy tS“The besa needs toKop the th ininclusive approach: $0 governance; This means
rr “that
the boca, in its decision- -making process,’ needs: to ‘take. ‘account of. the Jegitimate_
po interests god ea of the stakeholders linked to the eam. Age, ETS teas,
i Bi Bale it The
P Maciageraant must cpitnicaie th the particular groupings 5 off stakeholders,
Now ‘that Sustainability has’ become the moral and economic | imperative: of the 2 21st - 1 ts
century, governance, strateey and sustainability have become¢ inseparable.
eX “9 2, FM
“Long-term strategy must follow consideration by the board of directors o onni tines /
‘five aspects: . financial, ; human,.. social, environmental and technology. Reports to _
stakeholders must integrate. the’ impacts of the company’ s ‘business ona 2 community, i
1 Sronomically, socially and stwifbnoserly Be en

"While it isoie. duiey of. directors to take tisk for reward, directors rn ensure that»
they apply the principles of ggod governance ‘when taking risks for reward. Good.
governance attracts capital while poor governance will repel capital. Capital has neeote 2
a scarce resource in a flat, borderless world, where with ate click ofa mieue, eaplta ¢can:
leave a market and destroy Ihe parti, Lowy s Bog
eS 8 ae a ee ae de NO, Bl” Pi Re

1S oe yee Se ey B : a : - toe a fe tg . e
Internal and External Institutions and Influences of Corporate Gover
nance | 3-5.
ue ee a
 4

CORPORATE GOVERNANCE IN THE PHILIPPINES bin og .

Bry

Find its own

‘Lon beter the collapse of Enron anand wider the Philippines mctitree
share of saat scandals like BW Resourcesscopin inthe stock Parker i mee
, hs and then collapsed iin 1999. These scan dals brought down
. rene weakened private ' investor’ confidence. . The : scandals. i mer shen
"_ Management’ s desire to project a false picture of performance, with t the aimo : gup
. a ‘the value or the enpperetion in a competitive global market.

Corporate governance - 9 needed to’ make: corporate . managements rere

sc accountable, and their auditors more rigorous. But ‘good governance requires fair lega
frameworks that should be enforced impartially. The Philippine Securities and Exchange
* Commission (SEC), a principal player Jin matters: of. corporate ° governance, Issued :
Memorandum Circular No. 2, Series of 2002, ‘otherwise known as the Code of Corporate
Governance, under SEC Resolution No. 135, dated Apr. 4, 2002: The code i is now
cae
_and must tbe followed under pain of penalty. bide 2 ae ma tae:
a

The Code aims to promote antuarates governance. ie that will raise investor
o confidence, develop the capital market and help achieve high sustaine
d growth for the
“corporate sector and the economy. The code applies to: (1) corporat
ions whose: securities
are registered ‘or: listed, (2) corporations who “are: grantees ‘of ' permits/licenses and
secondary franchises from the Commission, (3) public
companies and (4) branches or
subsidiaries of. foreign corporations ‘Operating in the Philippin
es” whose. securities are
registered or ie Sorne il the code’ s selene
features are as follows:

“The cud prescribes that the Board uf

piece shail rir be responsible for
‘the governance of the corporation.
The Board should establish the
and mission, strategic’ objectives, polic corp oration’s vision
ies and procedures that guid
activities of the company, an? e and direct. the
the : mechanism for. manttorng _ management's
performance:
* ° ‘, . .
ett we te sa ,
»
me ‘
ie
The Board shall also constitute dom URN
niinaes in aid off good corporate governanc
such as: "s ae ae 8 Cenk & 2 e

1 The Audit Committee, fl ressonable |is to Tncute

Board members thei importance ofa ees in the minds of the
ound system ofi tntera »
Board’s oversight responsibility; ' l control and the
a -
2. The Nomination Committee, whose function is to
qualifications of all persons nomina review and evaluate ane
ted to the Board; and . ° : ‘
3. The Compensation or Rem uneration Co mmittee, whos
formal e taskjis toestablish
and
transparent, procedure fo r a.2
lean a } Balloe 6n
remuneration. : exe cut ive
¥

Ne

3-6 | Good Governance and Social Responsibility oa is wt ROA

4
 : * 8 . oe ey
‘
gv ‘The code also emphasizes the | importan
ce of the work of the Corporate Recratar
who must be y, «
Filipino and an officer of thé corporation. He should work
"and bic wit th all the constituen and deal fairly.”
cies of the corporation. | eee
opt dandt eh
9 “In order for the Board
‘Members to fulfill their responsibilities, ‘they should be -
_ provided with complete, adéqua
te and timely information prior to Board meetings onan.
on-going basis. The Boar dis primari
ly accountable to the shareholders, ‘and Management
is primarily accountable to the Board.
The Board, through the Audit Committee, shall
‘recommend to the stock holders a
duly accredited external auditor who shall undertake
“an independent. audit a ind
shall provide an objective, ‘assurance on the way
“financial statements are prepared in which .
and presented. The external auditor should be rotated
"SEY, five (5) years. or ea tlier-or -
the handling partner should be ere

ae The ‘followin
g stockholders rights a auld ) be respected (1), voting right; (2) ppre-
‘emptive right; (3) power ofi
inspection; (4) ri ight to information; (5) right
(5) _appraisal fight: among others, to dividends and *
The’ management. may establish a performance.
~ evaluation system to Measure
the perfor mance of fhe Board and top-level
management .. 7 e
7 of the corporation." AON ee : i
: (ole = "Disclosure isis-a vital and dominant
theme i in1 the Code. ‘The morere transparent the
3 internal workings. of the. company, and
cash flows, the. more. difficult, it will be
“Management and controlling shareholders for
to ee ropriate or .mismanage company
SESE, *
: a een

y " Eaipabrations shall cmnlgens ond adopt their cor

rporate governance rules and
_, Principles, in accordance with the Code.’ Rules Shall be a
i n manual form," available
. teference ‘by: the directors and submitted to the SEC. “Any Cc ' as Joos
Orporation who fails to ado
a manual’ of corporate governance shall be penalized P 100,00 pt - oo
0
after due Notice and > |”
hearing, Alt corporations affected by this Code shall submiit their
manual by au 1, 2002 Jiggs
to be effective Jan: 1 2003. ,
we
oe
Corporate Governance in PLDT (Excerpts)
: fire a Fe

PLOT is’ committed: to the highest stands of corporate ‘governance as

articulated in-our Articles of Incorporation, By-Laws,
Manual on Corporate 4
3 Governance (CG Manual), Code of Business Conduct
atid Ethicsa iests of re
“and d pertinent Fae rules and Fegulationie = ie
4x - Be be ake) ¥
ay t :
AS a,.publicly- listed Philippine corporation, PLOT is y eoueried by: caren ais
~ governance rules and regulations of the’ Philippine Securiti
es, and, Exchange . x mas
. Commis sion (Philippine SEC) and the Philippine Stock Exchange
(PSE). At the S See
‘same time, “PLDT ‘voluntarily complies with the corpora
te governance standards *-
" of the United States since its American Depositary
Shares are listed and traded ~
inthe New York Stock Exchange (NYSE). PLDT as an associated
company of First “.- re
Pacific Company Ltd. (First Pacific), which is listed
in the Hong Kong Stock°
Exchange, also looks to the corporate governance ander
s ofof Hong Koopfor ee ,
guidance and benehmarking, Punpeaee: .

Internal and External Institutions and Infuence

s of Corporate Governance V33- 9
¥ 3 .
fy hs
 schmark apaliist recognized international best practices .
in orde to ele 7
t developments in cor; porate governance
: ana d m vate

cain 3 structures, i processes,

CGit endeavors and i
nd practices to global s tandards. Most
—,
venture beyond compliance and promote ="
ethic
conporate valns'pifided by the principles of accountability, integrity, alrness _
enrpore™ . 2 Pte
=, me ;
“and transparency. > _

"INTERNAL FOUNDATION OF CORPORATE GOVERNANCE

| BOARD OFDIRECTORS
"_ Aboard of directors is a body of
elected or appointed by shareholders
who jointly
~~ oversee the activities ‘and the overall managerial and operationa l of the
. aspects
-.. corporation.
The said activities are determined
by the powers, duties, and responsibilities
=" delegated to it or granted by an authority which can be from
the shareholders and/or :
_ from the by-laws itself. oe i et Ry TP et Rha le E
>. A mere mention the phrase "board of directors"
to the average investor, will
- probably imagine the images of nicely dressed men and women
© , Converged ona round mahogany table, in a-well-set room'
bringing corporate folders with them,
“ amiably. This is fully reasonable consi smiling ~
dering ‘that many annual reports
~, feature glossy photographs prominently
of just such a sight. However,if we ask the
to explain the main responsibilities of the average investor
board of directors only very few will be
give you a good and definitive answer. able to
: .
f . Authority and Responsibili
ty and Purpose of the Boa
rd of Directors - _—
rr The most important responsibili
ty of the board of directors
. Fesources entrusted to them
by the shareholders! a

employees, = **:

The board of directors is the

structure at any publicly lis
|
ted ¢

ca
acquisitions and mergers.” ted in some instances discourage
te eS Fe a ae Mere

3-8 | Good Governance and Social Responsibili

ty at's
%
"Structure and Makeup of the Board ef Direc
tors
* The board is made up of individual men and women, the "directors" who are,
elected by the shareholders. Many companies work’ ona rotating ‘system, so that only a .
»: fraction of the directors are up for election each year; this makes it much more : difficult lel
fora complete board change to take place due to a hostile takeover. In fact this system j if
2 pues employed as ‘a device as one of the tactics under. anti-takeover defenses. In on
‘most cases, directors either: 1, ) have a ‘vested interest in the company, 2.) work in the
*- upper management of the company, or,3, .) are independent fifrom the company b but ar e |
,, Bann Fefor they business abilities. tg 4 om arspe pee
as
& cae ! BE aay Tali PP,
=
“Committdes on the Board of Directors. “ a he fe pal” Soils
a
. The board of director's responsibilities includes the institution of the audit and -
“ compensation committees. The audit committee is responsible iin making ‘sure that the _
company’ s financial statements and reports: are ‘reasonably " accurate, and use fair ;
~ estimates ‘in accordance with the applicable financial reporting standards. The board e
‘members select, hire, and work: with an‘outside auditing firm. ‘The firm isi the entity’ that*
© actually does the auditing and assurance ‘services. The compensation ‘committee ‘places
the base compensation, stock option: awards, and incentive bonuses for the company Ig 5 ‘
executives, including the CEO. In recent years, many board of directors have come > under
~ fire tor Alleah executive salaries tto reach atan unchecked levels. . i> Hefg et
ed hb AE,

"Ownership Structure and Its Impact onnthe Board of Directors a " WAM © ‘ 8 a

The’ particular ‘ownership structure a a corporation has a huge impact on the “4

r efficiency. and effectiveness’ of the board of directors to govern, In a company where ave.
* large, single shareholder exists, that entity or individual investor can ‘effectively ‘control a
“the corporation.. If the director has a trouble, he can appeal things to the controlling
‘shareholder. Ina company \ where no controlling shareholder exists, the directors should
~ act as if one did exist and attempt to protect this iimaginary entity at all times, even to the
extent. of firing the CEO,- making changes to the structure that ‘are. Hhpepalar with: ‘
management, or turning down acquisitions due to cost consideration, fat We Bay
- pracy at a Mest a 2. Ee he qoalt leyen eet ie x ta ug laye Seale eat | :

- ina elaine few number of companies, investment “8 one person can account ‘ ‘
as much as 50% to 67% or even more. In the this case, the controlling shareholder can,
also serve as the CEO and/or Chairman of the Board, being the supermajority. In this case,
a director is completely at the will of the owner and es no enough muscle to override :
the majority stockholder’ declel ati. A tet e ‘wie LS sci . os .
o

Internal and External Institutions and Influences ofCorporate Governance | 3-9.

fe
 4

CHIEF EXECUTIVE OFFICER (CEO)

The Chief Executive Officer (CEO) is usually the singular organizational rent
that i principally accountable in carrying out the oe pone oe ae
; r d o f d i i
established by the board of directors. In this case, ‘the chief f executi >
directly under the board of directors, and thus presents Toe a the the cone
it is -_— the responsibility
ibiti of the “chi chief execu tive officer
of to-bring into line the « ;
internally and externally, with their long-term vision. The central part duty ofa CeO isto .
make possible to engage business outside of the company while directing amb vee
"managers and other executive officers towards a central objective. A CEO must ave a
balance of internal and external initiatives to put together a sustainable organization. The
typical responsibilities of a CEO are as follows: :

‘Support tothe Board . °~ wees me oe

* One of the : responsibilities of the CEO is:to supports operations -and
~ administration of board by giving information and advice to board members. CEO should
be serving as the crossing point between board and staff, supporting whatever the
Board's evaluation of chief executive as well as evaluation of other high ranking people in
organization. eA! vt eo

Delivery of Program, Product and Service (PPS) - re

‘+ Administer design, marketing,’ promotion, ‘delivery and quality of programs,
‘products and services. The CEO is expected to be the brand
bearer. For example, John
Francis Welch Jr, of GE (1981-2001) and the late, Steve Jobs
of Apple and many other
CEOs are considered as the icons of their respective companies...

Financial, Risk and Tax Management,

EG eageus 2s « feo
" Recommends yearly budget for. board’s
approval and cautiously. manages
organization's resources within the bounds
of budget guidelines. This: utilization of
“resources may also have other bases such as
la WS,. regulations, and other directiv
Housing projects is one good es.
example for this, wherein there is
developer should set aside certain certain regulation that a
percentag e for low-cost housing
- Customerclass, © tt,
to cater the lower

Human Capital Management -

i
Prcently ages the human capital of the
personne! policies and procedur organization based on sanc
es that fully conform to tioned
‘standards both local and internat current | aws, regul i
ional, °° _ ° . anon, one.

‘ 5 0 | Good Governance and

Social Responsibility
 Rhy Pig Jat. of Fay Ded
4 . Beet tn wis
Public Relations (PR) a a6 Hy, 843 :
‘ bone ’

n
Pledge that the organization and itsmissi on, , programs ‘and initiatives, products
and services are consistently presented in strong and physically visible manner. to the
my community. It is also the job of the CEO to PACSaEE and’ build 7 positive image of the -
a rh to itsrelevant seaRE OLSEN: | ve wy 8 Ei
aot i Bra, 8

_ CHIEF FINANCIAL OFFICER (cro) me alg afte Eos Eo 4hah =is

hy

at
is

Fort many F acdeety held bustnesiag, the deakton to hire a chief financial offi cer
» 2 (cF0) is often a difficult decision. Beyond the issue of whether the company can afford a”
* high- -caliber financial professional, many business owners are often confused over just |
what itis that a CFO does or should do. More. than just a glorified accountant or someone
‘ whose long service to the organization has been rewarded with a fancy. title, a chief,
finance officer (CFO) has a number of. responsibilities within. the corporation that are ;
expanding business.
- essential in providing a strong financial foundation, for a growing and
The following are some of the critical areas which’ an. effective CFO will work on in
.. discharging his functions:

Implements Internal Controls °

: OA CFO will be the one recaparsetb foro conveying the important financial controls’
toa company. These controls features should include the effective administration of cash°
~ flow and overhead expenses, establishing credit policies for customers and working with’
‘major vendors to attain. more favorable payment terms, and implementing measures for»
‘ assessing and evaluating optimal inventory levels. At a higher level, a CFO should also
-- develop:effective controls that provide supervision against fraudulent activities. ie ti ASR
Vg ie * bas int ia pe yo hes Mi SS ait ray ys ASE, |
bey AB
F a
"Supervises Major Impact Projects r Bo ‘
- Outside of implementing and monitoring company controls relating finance, an
= effe ctive eCFO and
suert also handles and supervises those projects that require ‘significant
will qualitativ
e ‘interpretations , ‘and analysis ‘' in order*to ‘reach at. an _ a
For example, a CFO will take responsibility gt
- understanding of the options that are available.
na oe-

for developing a company's annual budget; work together with’ the business owner and -
- ’
division or department managers to ensure that the final financial product'accurately and
objectively projects the real things. A CFO might also carry out a meticulous analysis ofa.’
company's future capital investment requirements asa eee innsaana additional O
top sda tne yt s
fi inancing. |
eh g

Develops Relations with Financing Sources :

- One of the most important respanaibltes ofan affuctive CFO i is to> institute exed ,
on the ** :
a relationships with banks and other financial institutions that may impact
in this area may include'9
company's ability to finance its operations. Specific activities
regular meetings with officers at the company's bank to review ongoing operations, »
discussing possible future loan transactions, revista loan covenants if there is any,
*
aa

of Cormarete Govedionée ri 3-11 P

internal andhesanl lnstttuttone and Influences
 wig oe

negotiating more favorable terms for bank lines of credit, and discussions with private
investors on how additional capital might be invested into the
enterprise. La ep 4

AdvisortoManagement 9
. An effective CFO is also an important member of the management team of some
emergent companies. Because of his/her financial sharpness and general business
knowledge, a good CFO can facilitate and help the business owners, executives and other
top managers make the substantial connection between a company's operations and its
: financial performance that are reflected in financial figuress...-+. 05.=
. 6 os
a Hg moe

Drives Major Strategic Issues _- Liga @e Pare ye PS

aor A good CFO can also be expected to take part in important role of attending some
‘ major strategic issues that will have an impact on the company's long-term future. These
issues include the hatching of the company acquisition strategy which in the end would
«help fuel and boost the company’s additional growth: Keeping an eye on diversification
- of a particular product lines, business activities,’and portfolio is ‘also part of the CFOs ~
concern. A CFO would also play a significant role in any endeavor the purpose of which is
_ to seek investment from the public or financial markets especially in times when the
|, company is having an initial public offering (IPO). 2225.9, Te MS aR eres
rl : fee AL “tod OF
: ~. Risk Manager - ae : o Oe os sige aye sy eget! ha
= The CFO is on the best position to foresee risk considering that they have this rare
perspective on how the company operates. CFOs are close to the internal control system
and financial reports which pass through many Operational areas. CFOs are high ranking
“Officers doing real and actual things in the infantry. Their views are not “tree top”, their
. ‘views are real and they are in proximity of hard figures that could back their decision.
Brg ie a : : ge ES eS gt ED a, 2
ass The CFO's viewpoint on risk canbea helpful source to the board
the CEO as well as other senior officers ‘as they manage the corporate
of directors and
affairs. The CFO
may be .in the best position to anticipate high risk transactions
ancnd the adverse
consequences of a changing external
environment. This unique capability of. CFOs ©
however is only valuable if the CFO is communicating
well with the CEO, the board and
” the other officer of the organization. -_ Gas dia. ita 2 on aeny) an
Relationship Role cod wha a Be wer sls one tee ob ME
fe E More often CFO is the nucleus in an organization
with m any connections. The CFO
- will work together with the CEO, the board of directo
r. s, the audit committee, the internal
‘audit
the or,
external auditor. Strong’ verbal and written’ communication skills are
" ‘indispensable if the nucleus is to support the conn .
ections effectively. CFO serves the
bridge between these a variety of parties within the organ
ization. 6 2.
v
«
de ot
4 4

ae

3.12 | Good Governance and Social Responsibility... .-

 = y oy3

~ Objective Referee
~ CFO needs to denon iripartiality Auch as ‘when advising the CEO or, the
board of directors on accounting matters. The skill to present important { financial issues ©
"is an invaluable resource but it should always be in, the context that it is being done not
. to favor somebody. CFOs are not valued by. board of directors or.« audit committees | on
attributes or Ftendencies ot beating financial fares with i secylficed transparency: aig ©

“In principle of good corporate governance, , boards of sinecters, ‘audit committees i

and ¢
CEOs need to understand all sides of a financial accounting or disclosure issues SO
they can make an informed and rational decision. The ares can ined phos be atrusted -
adviser i in these matters of Thetis compliance reporting.” Peet ecg
y

"SHAREHOLDERS:

‘shareholder Rights and Responsibilities

Share ownership carries with it important rights ‘ond. responsibilities. share

amerahiar gives the owner with the right to ashare of thei income of the company called - ’
"dividend and a right to a share of net proceeds | on the. sale during liquidation of the . .
- company. Ownership of a share in the equity of a company ‘also includes the right to sell”.
_ or transfer that share without the need to inform or getting | the consent of the : other:
stockholders. .
Yorer .

- “An important right ‘and rasparialblliey of shareholders i is to vote. This voting tight Li
‘includes the right to information about the company ‘and the. right to express an opinion ;
- on the company’s performance. “in most “public, companies, 1 there is a separation of
ownership and control, making it difficult to pursue the rights’ to ‘information and to :
. provide feedback. While no one disputes that shareholders own companies, ; the” fact is”
_ that management often controls the company. As long ES there is a gap between the.
: objectives of management and the‘objectives of owners, there’ isa risk that management
* will act in its own self-interest and possibly t to the detriment of the owners. In pursuing:
the rights to information ‘and | cinfluence, . shareholders. must “keep, in, “Mind ; their
responsibilities: sl itt Pais wate eal 3 Ee mo HS get 7

4_ . They
does must ensure that the obiigation to provide information to ahacncldae
not detract “
from the company’ s ability to compete in its$ marketplace.
information should not cost competitiveness, . |: gl ARATE
“e“- The
They must ensure that their right to attempt to influence these company does
not translate into behavior that: will: paralyze “and° detrimental’ to. the
company: It should not spin ‘at a level wherein the principal (shareholders)
-and agent- (officers) . will now ‘ becoming ' adversarial in® running: the”
isis not que
~ corporation. The rule ‘of the thumb is that managing a company
care exercise off steckholdters referendum
4 i =
at

gace |"3-13 . i
internal and External Institutions and Influences of Corporate G Aj ern
ue ; Reviewing ththe Role of Shareholders
i General vi pa ge
Se ry eeda
ee a ee fee amtg Sate Bl Ay
S ae ah AEN mg aE a | SE
The directors and not the shareholders area faspeleiile forthe management ot
: the corporation. However, under the corporate statutes, rah rcholder Under “te |
so fundamental that they require the, approval of the sha |
i paipatasion Code of the Philippines these
tf matters aoe

: fh effecting certain merger or ‘reorganizations! Phe ule

es
rea
«@'» Selling all or substantially all of the corpora tion’ S assets.
A%
e Adding or removing any r kestrictions on itis business that the.corporation
may -
ari Reld carry on. © ae
yan’ _ Changing the corporation's share éapital, - of ay
“ k ge. vate a, |
i @ Increasing or decreasing the number of. ‘rectors or. the minimum ‘or -
~** taximum numbers of directors. 1 ag a
‘ .e Confirming
Adding by-laws.
or changing restrictionsos on a eo i SNe bey |
theiissue, transfer or Ownership
" +F
Pas
of shares.
Shareholder Ability to ‘Change
the Board

‘Shareholders ihe’ are “dissati

sfied with how “the directors:
- corporation May remove the are “running ‘the
directors or refuse to re-elect
a alfficute course to fake, part the m. In practice, this may be
iclatly where theshares of the
corporation are mwieey held.
e
°
While the ¢ corporate decreas} require <

shareholders to any sharehold a mar cel to’ Yar oulde a: ‘list oF

er\who requests it, thereb
a proxy battle over the elec y enabling shareholders
tion of directors, many sha to mount:
"resources required to coun reholders do not h ave the
ter a management prop t time or
institutional jinvestors who osal, The exceptions”
have, on occasion, made thei are large ‘ :
or in private meetings with r voic es heard at ann
representatives of a ‘corpora ual meetings 1%
~ meeting. Occasionally, tion, prior to.a sha
proxy battles do occur reholder»
board of directors, which result t in.1 the ‘e
placement oF the:
: Fon 3 . ;
tS _ EXTERNAL ENVI
RONMENT OF F CORPORATE GOVERNANCE
. - aurrors | eee mine a re Pap
- tj.» One of the most
important external instit
auditors. Their job is utions inin governance t is
to help to ensure that the indepentiern .
“rec ords accurate, adhering firms are run efficiently by keeping pub
” properly standards of reporting for
public
lic .
and on time. Independent. . auditors
analyze an
information for various entities suc
h as companies, potential i
government both at the local and national level.
Beyond car rying out
the fundamental
tasks ofattesting the information proaided by manageme .
nt Hiss may also engage | in:

3-14 | Good Governance and Social Responsibility»

consultancy services which may
n trcliide, financial ard investment t planning, information
technology conguttn, and limited legal: services. Pe A ae oe ean oe
a BS pee awe ust Tk,

“Some (doenateri audits. ‘and. - public accountants’ specialize inetorenicy

accounting investigating and interpreting white-collar crimes such as securities far and
embezzlement, bankruptcies and contract disputes, ‘and other complex and possibly
criminal financial transactions, including money laundering by organized criminals. These
auditors. and accountant combine their knowledge of accounting and finance with law
and investigative techniques to determine’ whether a certain corporate activity is illegal.
Many auditors and forensic accountants work closely with law enforcement personel
cial lawyers during | vestiparians and often appear assexpert Resse s during trials.”

LEGAL LENVIRONMENT : a og
busted Bie 2 Tete . Wes

“va Some contend that it is; the market ‘that can “reali press ‘real governance
‘considertog that it is a variable independent from anybody. There are, however, some : =
- limits to this contention..Markets may be good for some governance tasks, weak for.
others. Markets may be good at limiting some types of “skirting,” but be less good at -
limiting “stealing,” especially ‘if. the stealing represents a small part of the firm’s total
value. If a low percentage of a firm’s: assets is stolen in relation to forgone market.
opportunities, the market ‘may not, ‘deter. the*manager. The manager may never get”. -
another job, but that manager will leave rich. Law and other institutions are more.
- important here than markets. That is, sometimes the non- -market institutions aree better,
cheaper, and faster at governing the firm than any a the market SOSA an

“The legal environment is derived partly from te general political lineata in

| a
country. Legal environment has three distinct dimensions::.) fo: ty 6° ft tape fet
tay des 7d Bho at
;. The domestic laws of home pias _
‘The domestic laws of each of foreign markets : .
a ns International law in general. 7
siren!

MARKETS

%.
saith pone
ee pe me
BE ay oo am
The 2 fan s product sh z
» Capital market, :
a The managerial labor marke:
tr.

The ae three are important barometers if the firm could survive, * grow,
expand, diversify, and lastly, retain a good stock of human capital to manage the company
_asit battles the gnfergiving &arena of competition. . a We on de aod Gade tod at
wy

Y Internal and External Institutions and influences of Corporate Governance | 3-15

 vusiy conei darie od the effect s, some e
ne Dan
analyst belitt leae ance of othther
the importanc
_ In serio usly consi derin g
markets punish
_ Corporate governance institutions, their contentio nis that, all of the three
in
. pal
nonstandard firms and reward well-performing ing firms. The contention is correct
riables would
_Tesponse to the idea that, failure in nonm arket corporate governance va
~ necessarily destroy all firms. ; 9)
ernance to make the
Market imperfections press those charg ed with gov outstanding conduct
e their
-” company afloat in terms of governance standards, to hav
Good internal decision-
" visible and leave it to the market to do some natural pic kings.ges, economize on capital,
make the firm react well to product market c han
‘making can a ee
PLER SSa
Be ae
or make sure good managers come, stay, and perform, sal
. , Oe
fo owe

Product. markets can be considered "ad the most fear|ed disciplinaeerian_ ,by |
‘managers; It is a simple “no product, no firm” thing. Capital markets also favor t ose who
utions do not impose
have good track records in terms of governance. Financial instit
g, and strict
much risk-offsetting features like. higher interest rate, conservative dendin
:. characteristic when they make some financial arrangement with the company; this is one _
of the prime benefits of good CG..A labor market is also important variable in selecting
In competition to haul the right stock of
"the “right” people for positions in the company.
~ people good governance is always.a factor to be reckoned with, the general pattern is
that, people want to be with the desirable companies to utilize the best skills av ailable in.
theming ¢ 2, eh Pita Meh ee ee ated wed a eat

. OTHER EXTERNAL FACTORS cE aches Ag a,

~

ae . . i # ‘ 3 * : Sg oe hate ae Bas oe Eat tach wit ee ahs WO

: External Environment may create major threats or.in some cases precursor of
openings and possibilities for an organization.. An organization is ‘directly affected
by
events happening in the environment that it is supposed to be functioning in. The externa
_ environment offers the model, the thrust and the most esséntial
l _.
variab le that shapes an
organization, Any organization that ada pts the external
environment without difficulty
essentially survives and the ones that do not
are the ones that are eliminated in the
: Bn competition; it’s a plain survival of the fittest.
‘Who can blend into its environment
, Stay alive. External environment may will
effect ina ny of the following areas”. 2 °°“
~ Political Environment *

~ to shape an organization bot

h internally and externally, .
.:
© Technological Environment 2.) , “ ne Doe ce CaS Saas
: Any new development may render a N organi
zation's proces Ses and
obsolete if it is not quick to adapt to the new c hanges. To move for systems
war ditis essential to:
‘ ‘i : ;

3-16 | Good Governance and Social Responsibility Bie ’ J

 cep updating an. organization ona reiterative Eels This — even more relevant inin.
casee of businesses that rer heavily on technology and are technologically sensitive.
one
ait ate oa 8 re i so
x rf a i 22 Fg ; . vee pety
social Environment

- Perhaps tl most basic s$ the social environment; which comprises thegeneral

; behavior of the sbcie e ethical leanings of the individuals responsible for the:
functioning
and eventual long-term existence of the organization. Social environment is
: practically the ecosystem within which organizations Prive, then enabling atmosphere | in. .
which business i in situated into.’ - cpt et e "de ; 7

i: ‘CORPORATE PROTECTION’ WITHIN LEGAL BOUNDARIES” he

meas
'

ts “ANTE-TAKEOVER DEFENSES -

" Antitakeover tactics come in | many different forms a appearances. Technical

languages such as “shark repellent” and “poison pill” are used to describe the defensive . . ‘
‘means or tactics that companies - use to ‘challenge’ a lurking merger of: two or more >
a businesses into one. Another instance wherein anti-takeover defenses will be employed *
"isin case when there i isa hostile takeover, a setting where a business i is acquired against mn
. . the management’ s or some of shareholders’ wishes. Anti-takeover tactics are designed :
_ to make a company unattractive tois predator The following may be done to prevent the’. c
- unwelcome takeover" Nag gh TG me ve

“se The “flip “in” which allows existing shareholders: topurchase more shares at a. -
tes 8 at ee
“ ~ discount.in order to dilute the value of the shares. ©
-@. The “hipaved allow une shareholders to purchase the bidder's shares aat ao
ae | Sgt 28 Pe PHL GIS ke e e
"° discount. |
oe “Acquisition of previous iissued stock iin the open market (treasury stock). »
oe Provision such as “one can never be a board member if you aree already ona
board member, of a competitor company”. ‘ og
on.
. gt Supermajority vote as prerequisite of companies major move e like merger,
i
i consolidation or acquisition, ‘issuance of additional stocks and reacquisition ae
a |
~~ of previouslyi issued stocks. ~
~e Aprovision in the company’s charter or articles of incorporation which allows
eee ‘. shareholders to sell their shares to the bidder for more than the ‘market price.
oe “The “debt facade”, a ployvwherein a company takes on ‘plenty of debts to.
: . make it unappealing, as a bidder would Be ‘answerable for those ams onceer ae
wont ‘\ ine .
he will become shareholder.. -
wil ‘have to be)
- oe LThe “debenture sheltering”, ‘business | issues bonds that
. eee
eo ‘redeemed at a higher price in the future.
and
as, The . company offers- its employees . atacle, sptions, high banises,
the bidder's paket very much if pes
-. exceptional severance pay that woulda hure Lh Be et lat OE L.
potty Ey Mt
takeover would take plat
hes

a Internal and External Institutions and Influences of Corporate Governance | 3-17.

 i rane
» Staggered elections to the haar af directors over a number
horns” wi Stile
- would mean that a potential bidder will be “locking
board of directors antl new elec tions can He held,
nee . aie.
ve. Jeg Vd

_In somee countries, antits iasereet strategies are illegal or some contol ie greater
degree on their use is mandated. In, the United States however, Kiis oof ne ae
economic decline and fear of becoming a prey or an acquisition arge Be
. opportunistic corporations | who ‘are trying to take advantage of the situation have
renewed interest in anti-takeover tactics ‘in all their forms and substance. .

ADVANTAGES OF ANTI-TAKEOVER DEFENSES. a

: a I “ me h pag ry!
1 Anti isketaney tactics are: pastive whari a company has the sense to.believe that its
a stock has a higher market price than reflected and thus may ‘become the target for a
. -, takeover, - 9, . oe ‘ :
‘2° Anti-takeover tactics are good when the preeiar company’s purpose is to’ acquire
., the company and then use it for not good purposes: which. would not benefit the
z constituent companies. e.g. load the icompany being ‘taken over with liabilities,
hide
~~ the predator company’s corporate inefficiencies, distorting the performance
of the
“ ‘acquired companies, and i hiding, the corporate inefficiencies
of, the: _ Predator
_, company. ey
~ 3. Short-term poison pills may help busindsses go through difficult financial periods
- ” when they could be defenseless targets.” bat," wate wee a

DISADVANTAGES OF ANTI: ‘TAKEOVER DEFENSES , see hey . a. : 2 ah

*
It will prevent a| peuuinaly wd
fsleoner wie or aim. ‘Anti-takeove? tactics are

s these are more coverage, diversificat

ion, strathening integr
2, > Anti-takeover tactics are sometimes ation and ties,
u sed ito embed management and
- shareholders from selling their sci
stock and
3. Board members, who are alre
ady i
‘am poison pills to Fetain their
positions,

The following action sho

uld be observed | in usi
ng anti-ta keover tac
tics: :
@ Check that. the
use of anti- takeover
: strategies iss legal
in the “country or

t » lofty: bonuses,
oyees you might la and s ecial
ter want to fire.’
‘ ,
i.

3-18 | Good # Sovernautce and Soct

a Responsibility ie dhs hed
 “i588 Calculate tisk associated to debes, ifyyou are staking on debts or issuing bonds :
atk make the company unappealing, make sure that you
can andl ad
- debts even if the economy slides
down.” :
3 Consult with partners, directors lawyers and accountants before initiating ; a
~ anti-takeover strategies. a gs Bent
. Don’ t use anti-takeover strategies ‘except when | you are surethat it wil not fs j :
backfire leaving the company at tisk and defenseless.
Y a coed y PERCE

* “tiasiiTy ISSUES AND INDEMNIFICATION OF OFFICERS -

Liability « can accrue for officers ‘and directors when "they cause “Financial ad
i Hentinalcial harm to the corporation, or when they act solely on their own behalf which .
- is detrimental to ‘the corporation, this can bei ina form of commission ofa crime and other©
_wrongfull acts., Certain acts may ‘place. an’ officer or director to personal liability
_ (uninsured), and other acts, - although they ‘would otherwise openly expose then, to -
“ liability, may be either r compensated feor insured against iy the ire ne Mees
ss

Personal Liability of off icerssand Directors. me oa ee ae a

“\The following are issues that may Tubleet athens and directors tto personal
iby se fey, gids ie Kg; TR pack mee t cat we
geste

e © Issues involving misappropriation .

e-': Issues involving nondisclosure of conflict offi interest
| Issues on loyalty - io a erage a ?
“> Issues. on ‘non-separation of personal ‘and business concerns rin
"; oe > Issues onn prudence a a
- 7 tn eae | me eI “vhs

a Indemnifi cation of Offic cers sand Directors

- Indemnification of officers and directors refers t6

| ‘the act of the vaiimbarcine
officers and directors for expenses ‘incurred, liabilities accrued, and amounts paid in”
defending ‘claims brought’ to them. for actions taken on behalf of, the’ corporation. bao 7
Shareholders should recognize. that in the absence of this method of ‘trying to limit the a
*- ‘difficult
personal for
liability of officers
corporations to and directorswilling
find anyone: for claims
teto takebrought
such’ a against them,
risky job it’ ‘will be
of serving as |:3 “a

ae gare oo 4 “
officers or. directors,

AS a result. of this, some corporate. “iplawe are ‘now ‘containing provisions a

regarding indemnification and insurance for officers and directors. Provisions may vary as |
to where and when indemnification will, apply.: Provision for indemnification and =. |
insurance of ‘officers, directors, and person holding sensitive positions can also be 2)
included in the bylaws of the. corporation to have a strong basis as to alter, when, and,
\ be done.
how the related process will is. tel WS asPS
‘

“Internal and External Institutions and Influences of Corporate Governance | 3-19 ©

}
a ge
 qi Directors’ and Officers insurante®

e There are matters‘that cannot be indemnified fader the law or ‘the company does
- not have the enough resources to indemnify officers and director. In this case, the
are allowed to purchase
appropriate remedy would be insurance coverage. Corporations
insurance to cover matters resulting from acts taken by officers and directors. This
insurance coverage is different and separate from the general liability insurance the
_. corporation purchase for the corporation itself in general. Insurance of this type hurts
~ corporate pocket considering that it is not cheap..The reasons for the increase of the cost
"are two (2) things: first,, the cost for directors’ and officers’ insurance has gone up
dramatically due to the inherent risk associated to it (it involves big fishes in the
corporation who can decide big things). Second, the exclusions for coverage have also
_ increased; insurance companies understandably want to trim down 1 their assumed risk,
ao the lesser specific.coverage, the patter, io

SHAREHOLDERS’ IMPOSABLE LIMITATIONS -

THROUGH CLASSES OF STOCK _

: A company may avis many different types of shares that come with different
conditions ane BEDE: There are ae main types of cHaree :
5 at eS" Bg

Ordinary shares wie US Bie ER He

; _ These are Standard shares with no Special rights or restrictions. ‘They have the
potential to give‘the highést financial gains, but also have the highest risk. Fiedioary
shareholders are the last to be paid if the * company is wound up.SS |

Preference Shares OMEN RR, Eee Eee

oo Thesé shares pleally'ccarry a right that Bives the holder
preferential treatment
. when annual dividends are distributed to shareholders. Shares
in this category have a
fixed value, ‘which means that a shareholder would not benefi
t from an increase in the
business’ profits. However, usually they have rights
to their dividend ahead of ordinary
shareholders if the business is in trouble. Also, where
a business will be liquidated and
: wind up, they i are likely to be repaid the barf
vera value or liquidating value of the
shares ahead sible shareholders. a g eee engi
7 Cumulative Preference Shares a
These shares, give holders the right that,
if: a dividend cannottbe paid one aes
ui be carried forward to the succ it
eeding years. Dividends on mare
shares must be paid, despite the ete peace
earning levels of the * business.
,

3-20 | Good Governance and Social Responsibility

n
- Redeemable e Shares | ue Bd MAE A ae .
+ wy
OG

issue only redeemable shares.”

7SUPERMAJORITY
: Réfers toD percentage of ownership that is way ices the simple ma jority chic 2
is, ‘onee half (%) plus one (1) share of the total shares outstanding. Usually super, majority :
3 could mean 67% to 90%. ‘Unlike other percentage holding which can only havesignificant
s influence on corporate affairs, supermajority can have full control on major: goings onin
“the corporation. A supermajority is often requisite fora company to take certain actions, oA
7 such as amending the charter, An some cases, to protect the company from predator, ©
“ some companies require supermajorities as anti-takeover measures., For example, ay
“ company may require two-thirds of shareholders to approve a merger. or: acquisition. - ,
Supermajority provisions may be needed principally to make certain the company's iv
independent. survival. This may limit however the board of directors' elbow of, authority, ;
~~ and, may even u Ramipes a friendly end rational takeover that may do more good for the
company og = e :
vie 18
ta eS

‘ : “One issue “about: siypermeiority is that os the small business owners who often
a - look for "angel" investor to increase capitalization of the business. As an investor, that
carries along with ‘it ‘the recognition, on- - equity in the business by virtue of their °
% investments. It is ‘fairly norinal for these. angel’ ‘investors to have: equity for’ their.
_ investment. They also seek to have some say | in how the company is run'to protect their |
_ interests. Faced with capital needs, small business owners often not only give these:
minority (equity-wise) owners preferential but also provide them Helen. Supermajority
geotne nents a certain ACHONR that require HE owners' consent. ay

- SHAREHOLDER VorING AAGREEMENTS .

a , éhareholder voting: ‘agreement is a legal contract amongg shareholders of a ee

Ad
corporation involving Voting of shares. The shareholder voting agreement frequently
covers eat
covers how members of the Board of Directors are to be selected and occasionally
major corporate events such as mergers and acquisitions. Venture capitalist often expects vie
a shareholder voting agreement to be executed jin connection with ell DeyeReneeT |in a aie
: ba ‘ 2 ee
alia company.
Met ws :
ag Rhy yee : :
Dred
= a mT vahalders matin a “shareholders may choose | to ‘pool their vote fs of
ved shareholders will .
fora particular goal. Voting agreements may stipulate that the invol
Corpo ratio n. Code of the.
cast the vote their shares collectively * or cooperatively.
agreements as long as they ralute te
Philippines does not prohibit a shareholder voting
any malicious Intention or i
issues upon which shareholders can vote and it ‘does not have
any violation onaly agency pegallabiah anil Bones corporate OpErereth,

of Corporate Governance: soi ie

internal and External Institutions and Influences
ee Fey
 “in: some advanced countries, the state may require that voting pools follow
. «detailed procedures and guidelines to be valid. The laws may limit the length of ,
. shareholder agreement, or may require a copy of the agreement and have it depositeq
“with the: corporation. ‘Violators of the valid agreement may be sued and the court may
5 require voting according to the agreement otherwise violating votes willil disqualified.

aL sHaRevoLDERs MANAGEMENT AGREEMENTS: a

. “Together with the company's aftieles of incorporation which regulates the

- conducts of the’ company, what gives investors their most important contractual
, protections is the shareholders’ agreement. This agreement will only be relevant, of
7 course, ‘if the corporate structure j is being used. Agreements of this kind are by far the
most recommendable system or method for the protection of shareholders. ” «Sours
. Chris Southorn, ‘www. cmck. com). The main features oii a shareholders’ agreement
oe Got NOTE f° Role gaff
are:
: : PS ast i ae, Pe ereleg
Me Saat
“Board Appointment Rights ieee mF 9 ne si
Ege
‘ ee
eh way
:Itis common for the shopehetders agreement to establish
the relativa idehis of
representation that the shareholders will have on the compan
y's board of directors of the
, company. A minority shareholder may seek to have
one director on the boardi in order to
be kept informed of matters discussed at board level.
A larger shareholder may seek to
_ appoi nta large number of directors to reflect its proportion
ate holding of. shares at
board
level. Usually, the agreement will provide that
any director spretitesl by a svarenolder
can only | be removed byt
that Bartyse: Se Ee asd ; 1
ca: eg,
ie.
me‘Veto Rights. “al 5 -

‘s ~ wn a * Veto right refers tot th “ight to overturnm decisions

process involves listing of materi ings that Carinot be done without thei investors’ prior
* = consent and ratification. These normally range
from fu ndamental matters, such as isa
burthershares, commitment Jad assets,“fee aa “
expenditure and so > on.
Piaget + Bo gowey ‘
ey : Adoption and Amendment of Business
, :
Plans and Budgets ed
i?
i a te the; agreement may provide a process
for ad opting and =theraline Birn
ufi and budgets, to ensure that individual shar irecs plans
e holders orn their appolnted , AInSat
_Propetly FEBPeSeriea |inn that Pre are
e.

"Scope of Business : ,
=. Although this thing g canate found i
» Particularly jn a joint in the charter of he ceporstion it
vent ure or a start- -up com is common
specify the scope of the pany, for the shareholders' agreement
bu to
ill conduct, and provide that cons
ent |
Hiisinesst or do somealy pp aibeat
ian attempts, \.
\ kt
he why

3-22 | Good Governance and Social Responsibili

ty 7 : i Powe
om
 intellectual Property Rights .. Mel se ply cog Een co OE BA ge gee ge toe,

~ Where” shareholder parties” are eoneinining unique and distinct advantage or

process such patent, trademark, copyrights, or any form of information or competencies |
to a venture, the shareholders’ agreement may provide for the ownership and licenses of
intellectual property rights, preserving certain such rights for the parties themselves and |
others to the company. This i is another ctcommon n agreement ina Jolt venture orneray
fare 2
.
Right to Information | ene tl a . - eis ae a
Pit is extremely important for the investors to monitor ‘performance closely, .
nae to give them an early warning if things are starting to go wrong. Accordingly,
they will expect a contractual right to receive regular reports, management accounts,
_ cash flow forecasts and so on, together with statutory accounts. The investor will also
=) often seek the right to have its own director appointed to the board. He will expect board
: meetings: ta be held regularly and all material decisions to be made iy the board.

x, Warranties from the Management Team i ce

; RN TEE Se UE a et
In general terms, these are a series of statements, about the company / that the
investors would expect to be true and accurate. At a first-stage capital raising, it is unlikely
that these statements will be little more than confirmations: that the team stands behind
its business plan; that the company isclean; and that the team knows of nothing that has
been. withheld from, _investors.., ‘However, at _subsequent funding rounds, once, the |
company has a track record, the warranties will extend to the company's general trading.
~ affairs. This actually the statement of management responsibility intended to be given to
shareholders and other interested parties (stakeholders) of the corporation.

strategie Investor Rights tie os aan’ aps oO. uate gay eee, ‘
" Where’ a shareholder i is Tactdig for more than a return on its investment, "the
“shareholders' agreement “may. provide an opportunity ‘to negotiate’ terms. covering
secondary commercial arrangements, such as giving a shareholder or its group first rights: ,
‘of refusal on certain type of business or contract with the company, or the right to be
infarc of and to co- rinvest i in investments to hes made bytthe company.; 2 oR
PoySH Od

Restrictions on Teansfits of Shares - tate ae :

The investors will be keen to eiake'ssure that the management team they aare.
backing, holds on to their shares. In certain circumstances, managers will be permitted,
through an agreement, to tra nsfer shares to Fatal orto trusts. .

Restrictive Covenants Tae

These will make it clear that, wohl: Taepnbiarg of the management are Einniloyed
and for a period of time afterwards, they cannot compete with the company or solicit
customers or employees. One would expect these covenants to fit together ‘with
restrictive covenants contained in employment agreements but the covenants in the

Internal and External institutions and Influences of Corporate Governance | 3-23

 shareholders! a reement will be directly ini favor
of the investors. tt is obviously critical
ants they
the mana geme nt’ s persp ectiv e that the Y are comfortable with the covet
* from :
, § ott *
: are entering into. “Sat kee “eh tts

a
Exit Provisions .
is no
isjby its nature illiquid ecerise: there
a shareholding inaareas company very ofte n
rdingly, a shareholders’ agreement will
. market live and open of the shares. Acco by’ the
to encourage or facilitate a realization,
include provisions that are intended ity for fai
, this is particularly important
shareholders of their investments. Once again tag A
n exit E process. . bog en oe TAG Hs OY
" shareholders who are = unable to sorta an

in an average2 alfaraholdans
There arez of course many other detailed provisions te
| document. No. business angel, priva
agreement. It is normally a sophisticated legal
antial amount in. any company
equityfirm or institutional investor, should invest a subst
eholders’ ‘agreement. :
__witheut protecting himself spits contractual rights ininashar

‘BEHAVIORAL MANAGEMENT THEORY *

As:management — ahinuee in find 2oth century questions began to

_ come ‘up : regarding‘ the interactions ‘and : motivations: ‘of the® individual . ‘within - °
: _ organizations. Management principles developed during the classical period were simply
~* not useful in dealing with’ many management “situations and could not ‘explain “the
- behavior of individual employees. In short, ‘classical theory ignored employee motivation
and behavior. As a result, the behavioral ‘school. was a _hatural outgrowth, at, this
Seeing management ape eles Bo Teg :

/ “The behavioral qaneRenenk theory is often ‘called the? human sTatations

“movement because it ‘addresses the human dimension of work,, Behavioral theorists .
. believed that a better understanding of human behavior at work such as motivation,
i conflict, expectations, and group dynamics, improved productivity. Z
4

. rN theorists ad ‘contributed te this anbicae Nisweu employees ass individuals,

? resources, and assets to be developed and worked with—not as machines, asi innthee past.
: pring individuals and Experiierits contributed to this theory. tit ,

.\ welts ae oe on 7 4A aac
ELTON MAYO eo

Elton Mayo! s conteibatiine came as ‘pert of he ‘Hawthorne

studies, a series of.
... experiments that rigorously applied classical management theory
only to reveal its
_ : eatene The Hawthorne experiments consisted of two studies
conducted at the
ae stud en or me on Electric Company i in Chicago from 1924 to
1932. The
sof lighting lee ue e t Y a group of engineers seeking to determine
the relationship
“workers ‘ worker productivity.. Surprisingly enough,
they discovered that-
oe pre geht ietheaser as the Nehting devel , decreased—that is, until the

ea XN
3-24 | ‘Good covinga wt oy. : enc y ade

rg
 oN,

employees weree unable tosee what they were

w e doing, after which performance naturally
as a Ea ed: er
Py tt,

“A fe years later, a don group of experiments

¢ began. aren ‘researchers
Mayo and F. J. Roethlisberger supervised a group of five women in a bank wiring, room.
"They gave the women special privileges such as the right to leave their workstations _
. , without permission, take rest periods, enjoy free lunches, and have variations in pay’ levels ©
oo, and: workdays. This - experiment also. resulted in:1. significantly increased rates: of ©
\

zee Broduetity. : Aas

es
eo . : pet we ieee ie ie

an this case,
¢ ‘ave and Roethlisberger concluded that thei increase in productivity’.
cs resulted from the supervisory arrangement rather than the changes i in lighting or other.
associated worker benefits. Because the experimenters became the primary supervisors |
_ of the employees, the intense interest they displayed for the workers was the basis for":
‘the increased motivation ‘and resulting productivity. Essentially, the experimenters:
became a part of the study and influenced its outcome.: :This is the origin of the term’
= ‘Hawthorne effect, which describes the special attention’ ‘researchers pry to. a a study's
at and the impact that attention, nage on the study’ sfindings.

The general Gonchiceor from the Halithorne! ‘studies was s that hiutriain relations:
-s and the ‘social ‘needs. of Workers. are’ ‘crucial.’‘aspects ‘of business management. ‘This
: principle | of human motivation“ “helped * revolutionize. theories and: practices “of:
“ rongeertiw ‘,

ABRAHAM MASLOW : 2
DORETo eT ue Bel ag ae HE ES

‘brah Maslow, a practicing se feticloutsk, developed one of the mostst Widely

recognized need theories, a theory of motivation based niet a Corisideration
of human - a
oe Needs. Hibs theory of human needs had three assumptions:
; hie alan fo Lay's
aeyds ‘Hera meaetla are never compietely satisfied.” i xi a ba /
mle. ; Human behavior i is purposeful abd | is motivated by the needd for satisfaction Bh,

"Needs can be classified according toa : hlefarchical struct

ure of i importance, from os
the lowest to highest. Maslow broke down the needs bieranciy into
five Spelt ic areas:
ast 1. Physiological hewde.. Mastow grouped - ‘all physical needs necessary for. oe
_.-, maintaining basic human. well- -being, such.
as food and drink, ,into this
_. category. After the need is satisfied, however, it is no longer i isa motivator.
2. Safety needs, These needs include the need for
basic security, Stability, :
protec tion, and freedom from fear. A normal state exists for an indivi
dual to «
* have all these needs generally Esta Otherwise, they become Ercan To
motivators. Boat A ov 9! .
3. Belonging and love. weal ‘After the physical and safet y needs are
satisfied pes
and are no longer motivators, oe need for belonging a nd
love emerges as ae

internal and Ester Institutions and influences of Corporate Governance 1 — bee

i
 -. primary - motivator, The . individual _ Strives to . establish . meaningfy|
relationships with significant others. le eat Reda
“4. Esteem needs. An individual must develop self-confidence and wants to
_. achieve status, reputation, fame, and glory.) eS at ae
8 Self-actualization. needs. Assuming that all the: previous needs in the
_ «hierarchy are satisfied, an individual feels a need to find himself. . ..

: Maslow's hierarchy of needs theory helped managers visualize , employee

motivation. : ees ae 4

_ DOUGLAS MCGREGOR eh a ohn irons bit ae”

Douglas McGregor was heavily influenced by both the Hawthorne studies and
Maslow. He believed that two basic kinds of managers exist.
One type; the Theory X
manager, has a negative view of employees: and
assumes that they are : lazy,
untrustworthy, and incapable of assuming responsibility.
On the other hand, the Theory
Y manager assumes that employees are not only trustw
orthy and capable of assuming
“responsibility, but also have high levels of Motivation, «5.3. i i kent * Ah pared
-.- An important aspect of McGregor's idea
was his belief that managers who hold
either set -of assumptions can create
se If-fulfilling prophecies — that through. their
behavior, these managers -
create situation s where subordinates act in ways
_ the manager's original expectations, that confirm,

_ FREDERICK HERZBERG.
ow gk
_«.. Frederick Herzberg was a well-res pected American who has con
* to the way in which tribu ted greatly 7
managers think abo ut motivatio
_ theory in 1959 in a book entitled ‘The Motiva n at workrk.
He first published his
tion to Work’ and put forw
" content theory which is often re ferred to ard a two factor
as a two-need 5 ystem, It is
which explains the factors of an individual’s S motiva a content.theory _
desires, what satisfies their n eeds
mo’ tion by identifying their nee
and des ires and by establ ds and
Pursue to satisfy these desires ishing the’ aims that the
y

* 3-26 | Good Go
vernance and So
cial Responsibili
ty
 ‘
E : : . : of

: the. cause2 of dissatisfaction.” The two types of factors s n may be listed as follows in order o
importance:, re av go 'ph pe. a, ey td on he
Ns, Bene

t Hygiene Factors (leading to dissatisfaction): Bigs Mee oe Pep dials uae

or Company Policy _. ne en at ote fot 0” Oo Re a MaliesJol g EER
oe Supervision 9°. 2
oy: pay. :
Relationship with Boss
Work Conditions
‘Salary , > mera, faites
Relationship with Peers ae a

ie Motivators (leading to satisfaction):

~. ® Achievement
=e” Recognition
. The work itself
"Responsibility _
» Advancement fe
Growth

pid The dissatisfiers ; are= lepafere, factors | in the sense that they are ‘maintenance x Se
= factors required to avoid dissatisfaction and stop workers from being unhappy, but do’...
‘not create satisfaction jin fpenanlves, They can beavoided by using ‘hygienic’ ao to “8 Sih
aa privet ther “4 ob | a8

It is clear from the lists that the factors i in "eae sare not actually opposing which ae :
means that the satisfiers are not the. opposite | of the dissatisfiers., The opposite of |: :
satisfaction isn’t dissatisfaction but is ‘no satisfaction’, Both, lists contain factors that lead = 7
to motivation, but to a differing extent because, they fulfill different needs., The hygiene ie ;
“factors have an end which once fulfilled then cease to be motivating factors while the. 8
a motivation factors are much more e open-ended z ry this is why they canpiaes to > motivate.
fedea

- Herzberg alalsao developed the concept that there are two distinct human needs:
“as Physiological needs: “avoiding unpleasantness ‘or,discomfort and may be: ae
mh. fulfilled via money to buy food and shelter etc, :
ee Psychological needs: the need forpeysetial development futfiled by: activities met
:
~ which ccause one to Brow. ;

i He identified this asthe Adam nd edit Cencent wliere Bel is eniinal and ?
wants to avoid pain or discomfort, but Abraham is human and needs to go beyond the ..’ ~::
physical requirements and expand psychologically too.: . Herzberg believed that the ©
hygiene factors causing no satisfaction are not:‘applicable to the task an employee
undertakes but are external to that task. They are the Adam part of the concept where.
an incentive may be attributed to a fear of punishment or increase in discomfort or as he rc
phrased ‘it ‘A Kick up the Ass’ (KITA). He thought that these did work but only as short© fT
term motivators e.g. constantly increasing someone’ s salary to motivate Kem ‘wall merely - ae
ce | 327, : a
Internal snd External Institutions and Infuences of Corporate Governan
4
. €ncourage them to look for the next wage rise and
nothing else; however, salary may also
be a de-motivator where the employee perceives it to be too
low or low compared to that
Of their peers. The long term motivators are the Abrah
am part of the concept thet: ead
to satisfaction and are intrinsic to the job itself and the job design. i nl the
_ Chambermaid who prefers to receive a note of apprec
iation for her high standards rom
a guest thana carelessly delivered gratuity.
: ee
It is important to understand that the two types of factors are not eae
exclusive and that management must try to fulfil both types of need
for an emp ae to
be truly satisfied with their job. Once the hygiene factors have been satisfied provid
ing
more of them will not create further motivation but not satisfying
them May cause de-
motivation; unlike the motivation factors where management may not fulfill
all of them
but the workers may still feel motivated. Major companies have keeogh
ized this sftuatian
when designing their methods of reward and recognition.
., © Bagel aed

Probably one of the most important ideas that Herzberg postul

ated based on his
findings of satisfaction is that of ‘job enrichment’. This is
the addition of different tasks to
a job to provide greater involvement and interaction with that job. It is obviously a
‘continuous management process:. |
iy
Fa eo ee =
a ee
“Se The job must use the full abil ity of the employee and Provide them with,
'. sufficient challenge «© +. 3 4

Any employee who demonstrates

an increasing level of ability should be.
given correspondingly increasing
levels of responsibility oe
tn
If a job cannot be designed to
use an employee’s full
ability management should
consider employing someone -
of lesser skillS or perhaps automation
person’s skills cannot be used of the tas k: If a
to the full the

© Es Bag Tesco, one of

the leading retailers
achieving the Nat in the UK, recently gain
ional Business Awards ed recognition via
. -
__ that: "Tesco was voted ‘Employer of the Year’
Employer of the Year bec wh en the judges declared
1 co recognize ho
_ holistic”. Tes ause its solutions were .
w motiv ated staff who seen to be more
"POstt are : committed to their
i performance. They
invest several million r Poun
work have a.
“ training schemes which are bas ds each year: in.
ed on Herzberg motivators. Fore
xample: e-
~ 1. New and more open lin
es
_ - ideas from customers and staf
f. ro
~~. 3.“ A scheme
mi existsa“ to spot individual talent and a ae
~*~ up the promotionaltadder..: 77 i to fast-track ;
“track shop ie
coer floor
A better understanding gay Pe menses
of individual employees
Personal circumstances
:

.
3-28 | Good Governance and Social Responsibility
 a

and
"These initiatives have helped Tesco deliver record growth and sales profits
» illustrate how theory may be used in practice. © > ‘
tot Toe ta Be
at ee eT ee ec ee ee PE oe

4 Over the years, there are criticisms that have arisen, like his sample of employees

“
his
was not representative of all workers, but further studies have tended to support
to take credit
_ findings. In addition, some critics have declared that it is natural for people
for satisfaction, but to blame dissatisfaction on external factors. Every individual is just
~ that — an individual and theories of motivation cannot realistically apply to each single
people are -
“employee; however, they are useful for identifying the main ways in which
in developments
‘motivated. Herzberg and his findings have been extremely influential
w associated with the field of job design’ and methods of management to provide job
on motivation.” ~ Pattyn etd tie syed gb gts et eS
- satisfactiand
5

i a Snes Se 8 oR tie ote PP ahh dS '

- When Frederick Herzberg researched the sources of employee motivation during *

.the 1950s and 1960s, he discovered a dichotomy that stills intrigues (and’ baffles)
t
‘ managers: “the things that make people satisfied and motivated on the job are differen
~. in kind from the things that make them dissatisfied.” 8 oe ec |

“Ask workers what makes them unhappy at work, and you'll hear about an
annoying boss, a low salary, ari uncomfortable work space, or stupid rules. Managed -
” badly, environmental factors make people’ miserable, and they ‘can, certainly be
to work much
ey a demotivating. But even if managed brilliantly, they don’t motivate anybody
harder or smarter.’ People are motivated, instead, by interesting work’ challenge, and —
need for
‘increasing responsibility. These intrinsic factors answer people’s deep-seated
~» growth and achievement.-
“3 > Herzberg’s work ‘influenced a generation of scholars and managers’-but his:
conclusions don’t:seem to have fully penetrated the American ‘workplace. if the |.
extraordinary attention still paid to compensation and ‘incentive ‘packages. is any
‘indication. — So. mabe eos

what is the ‘simplest, surest and most direct way of getting someone to do
something? Ask? But if the person responds that he does not want to do it, then that calls
° the
to determine the réason for such obstinacy. Tell
for psychological consultation an expert in’
not understand you, and now
person? The response shows that he does
communication methods has to be brought ho you how to get through. Give the —
in to show
person a monetary incentive? | do not need to remind the reader of the complexity and ©
difficulty involved in setting up and administering an incentive system. Show the person?
way. "gy ee BT ee
This meansa costly training program: We need a simple

satisfaction
- ‘As a group, these theorists discovered that people worked for inner uals
of individ in an -
and not materialistic rewards, shifting ‘the focus to the role i Sioa
~~ : pT “st
organization's performance. 4

ne i
et

My

internal and External Institutions and Influences of Corporate Governance | 3-29.

Lennie eee

4
; : REFRAMING ORGANIZATION

me pervasivee and4 dominant, they ee also Betsline

* 2 “As orga nizations
der to understan
have beco p ult is that managers are often nearly as clueless
d and manage. The res ement we
~ = Dilberts of theup world think they are. The conseque and subtle.
of myopic
“leadership show every day; sometimes: in small nces sical manag
re i
ans .
Our basic premise is that a ‘primary eS | |
ao organizational catastrophes.
é .. failure | is faulty thinking rooted i in gates ideas.”
. re] it at lis 4
vida dS Hene
: Managers and those ie bey to help them
pg. fa “Ts SS (ah? ee ne
too atten rely c on fecectteiee models
re that capture only part of organizational life. Learning multiple perspectives, or frames, is.
a'defense against thrashing around without a clue about what you are doing or why.
". Frames serve multiple functions. They are filters for sorting essence from trivia,ma aps that
: aid navigation, and tools for, solving problems and getting things. done, ae
rae
aD pow’ : on j ; be tld : of i Ae

“Therea are four frames white a are all rant |in both managerial viedo: and social
_science knowledge. The structural approach focuses on the architecture of organization
— the design of units and subunits, rules and roles, goals and policies. The human ;
~ © resource lens emphasizes understanding people, their strengths and foibles, reason and
_ emotion, desires and fears. The political view sees organizations as competit
ive arenas of.
"scarce resources, competing interests, and struggles for power
and advantage. Finally,
“the symbolic frame focuses on issues of meaning and
faith. It nut ritual, STEROL, ie g
ieand ee at the heart of organizational pee

Each of the frames! is ‘both powerfil oa Sohoe

ents Collectively,
they oe it
ys possitifes to reframe, looking at the same thing
from mul tiple. lenses or points of view
©, When the world. seems hopelessly confusin g and . -
nothing is. working,- reframing
powerful tool for gaining clarity, reg is a
aining balance, ee new Bptions; andid finding .
ie | _ Strategies that friake aa difference.

= Bare’ s reign as history's greatest co

bigger behemoth, WorldCom, with assets
~ months later, in July 2002. Stoc
k worth me than $45 a share two
Hing cents, aE at BO ae Spee oat sella Mee 8"
“Among the possible wa
\ Ys ‘of talkin
. (Fiedler, 1982; Fiske
and Dyer, 1985; Lord . about frames are s Saherntaeae or dschema thacl ;
« . Sternberg, 1991; and Foti, 1986 ), rep
pales and Laj JOie, "1991; resentations (Frensch and
Cognitive maps (Weick Voss Wolfe, Lawren
and Bougon, 1986), ce, and Engle,’ 1991), :
_* categorizations (Cronshaw paradigms
(Gregory, 1983; Kuhn , 1970),
‘models (Senge, 1990), def, 1987), im Plicit th social
eories (p
initions of the situat ion {Grief and Downey, 1983), mental
~ scholars (including Allison, 1971;
Bergquiuist, 1992; Bi
1986; Perrow, 1986; Qu rnbaum,19 Elmore, 1978; Morgan
inn, 1988; Quinn, Fa , ©
Scott, 1981) ha erman, Thompson,
ve made ities arguments for fey nd McGrath, 1996; an
d.
i social collectives. : aR roaches to grou
ps: and
oe, Poe

3-30 " ‘Good Governance and Social Resp te

onsibility a
 vat a

EMPLOYEE stock OWNERSHIP FPLAN (ESOP)

EE a tones which wants to set up :an ESOP creates a trust to which it makes -
Spnual contributions, These contributions are allocated to individual employee accounts
within the trust. A number of different formulas may be used for allocation. The most ~
common is allocation in proportion to compensation, but formulas” allocating stock
according to years of service, “some combination of compensation and years of service, - -
~ and equally, have all been used. Typically employees might join the plan and begin -
receiving allocations after completing one year of service with the company, ‘where any
year in which an s employee works at least 1, 000 hours i is counted asa year of service. :
+ Lokal

- The shares of company. ae and other plan assets aidcated to taplovaas!

2 accounts must vest before employees are entitled to receive them. Vesting is a process
whereby employees become entitled to an increasing percentage of their accounts over.
time. Employees receive the vested portion of their accounts at either termination,
' disability, death, or retirement. These distributions may be made in a lump sum or in --
installments over a ‘period of years. If employees become. disabled or die, they or ‘their te
beneficiaries receive e the oe d portion of their ESOP accounts a EE a :

“in a pulbfctesraed company,

a +: Smployees may sell theirdistributed shares on ‘the
market. The form of distribution of a privately held firm can vary, depending on the plan -
: document or all or substantially owned by the ESOP. with by-laws that only authorize
company stock be owned by employees. But if privately held, the company makes the -
distribution in stock, it must give the employees a put option on the stock for 60 days
’ after the distribution. If the employee ‘chooses not to sell at that time, the company must °° :
offer another ‘put option for a second sixty day period starting one year after the
‘distribution date. After, thisis period ths Company has nosles obligation to Rep uechase
_ the shares. west het

ores in ESOP company tayyaa an installment distribution provided that it makes

the payments i in ) substantially equal amounts, and over a period to start within one year —
for a retirement distribution, within five years for a pre-retirement distribution, and not
to exceed five years in duration in either case. The company
must provide adequate
security and pay interest to the ESOP a on ae oo “balance ofan installment
aishilautton eT gag Oe

Internal and External Institutions and influences of Corporate Governance | 3-31