Professional Documents
Culture Documents
Corporate Good Governance
Corporate Good Governance
Corporate Good Governance
Corporation – It is an artificial being created by operation of law, having the right of succession and the
powers, attributes, and properties expressly authorized by law or incident to its existence. Corporation
Code of the Philippines.
Attributes:
1. Artificial Being
2. Created by operation of law
3. Right of Succession
4. Powers, Attributes, and Properties
Stakeholders
1. Management
2. Creditors
3. Shareholders
4. Employees
5. Clients
6. Government
7. Public
Rights
- Right to Vote
- Right to Propose shareholder resolution
- Right to receive dividends
- Pre-emptive Right – purchase new shares (right to first refusal)
- Right to Liquidating Dividends
2. Bondholders – holder of outstanding bond
- Considered as an investment
- Claims interest earner on long term agreement
- Complete authority to manage
3. Board of Directors
- Governing body of the corporation
- Conduct all business and controls or holds all the assets
- Claims : Salaries, bonuses, stock options or any other ways of priveleges
Duties of BOD:
Corporate Governance
Good Governance
Fundamental Objectives
1. Transparency
- Vital to corporate governance
- Reporting financial or non financial information lessen nepotism, corruption, etc…
Aim: maintaining investors, consumer, and other stakeholder confidence
Non-transparency will lead to scaring off investors, being singled out by authority and
uncomfortable scenarios.
2. Accountability
- Recognition and assumption of responsibility
- Obligation to report, explain, and be answerable for its resulting consequences
- Acknowledging and taking charge for and being transparent about the impact of the
company’s policies, decisions, actions, products and its associated performance.
3. Prudence
- Care, caution, and good judgement as well as wisdom in taking ahead
Management Committee
BOD : body responsible in safeguarding the interest of the organization (good planning and
management of finances and other resources)
Shareholders are entitled to what is left after employees, suppliers and creditors are paid their
due.
How to attain the goal? – Learn to identify investments and financing arrangements that favorably
impact the value of stock.
- Principal. The person the agent represents or individual who actually performs something
Giving the agent to represent him or her (Agency Contract)
- Agent. Person who represents the principal and other person
- Third Party
Contract of Agency – agreement between a principal and agent
Someone hires another to represent his interests
There will be no agency cost of the share the managers of the corporation
1. To survive
2. To avoid financial distress and bankcruptcy
3. To beat the competition
4. To maximize sales or market share
5. To minimize costs
6. To maximize profits
7. To maintain a steady earnings growth
What would be the management goal if they do not have control at all?
Two Factors
1. How closely are management goals aligned with the stockholder goals?
2. Can management be replaced if they do no pursue stockholder goal?
- Contract between resource providers and resource controllers (Principal and Agents)
Conflict – Agency Problem Cause – Agency Cause
Agency loss – benefits that should have occurred to the owners been the ones who exercised direct
control to the corporation
Opportunistic Behavior – policy skirting and indulging to excessive privileges at the exposure of
shareholders interests
BOD
Effect of Agency in Governance (Agency Theory – Unique Relationship ; Unique Relationship – Unique
Effect)
Concept of Goal Congruence – harmony and alignment of goods with the over all objectives
Roles of Non-executive
Non-Executive Director (NxD) – member of BOD who does not take part in the executive function of the
management team.
Areas of Responsibility
1. Strategy – offer creative contribution and to act as a constructive reviewer in looking at goals
and plans
2. Establishing Networks – represent the company in some external corporate undertakings
- Job of NxD, connect the company to the outside world
3. Monitoring of performance – on matters relating to the progress made towards realizing the
established strategies
- Monitor and examine the performance of management in meeting agreed goals and
objectives
4. Audit – NxD properly report to the shareholders
- Company report the shareholder by presenting fair and real reflection on how company was
administered (financial performance, highlights of the corporation which is necessary)
CFO
- Corporate Officer
- Principally accountable for managing financial risk
- Responsible for financial planning, recording, keeping and financial reporting
- Direct finances
- Needed to handle cash flow
- Create reports about spending
- Keep track on working capital requirement (to meet short term and daily requirement)
- Supervises and manages on large accounting department and come up with ways to
maximize profits
Roles:
Roles of the Audit Committee – essential component in the over all corporate governance system
Obj: geared toward carrying out practical, progressive changes in the function and expectations placed
on BOD.
Must have a working knowledge on goals and long term plans and visions including issues the
company is facing
1) External Risk
a. Rapid Technological Changes – not to be left out
b. Downturns in the industry – products sold
c. Unrealistic earnings expectations by analysts – less aggressive when it comes to
expectations of business outcomes
. associated with conservative and realistic information
2) Operating or Internal Risk
a. Recurring of organizational changes
b. Turnover of key personnel
c. Complexities of transactions
d. Complex organizational structure
e. Performance based compensation that are exclusively inappropriate
f. Exposure to currency differences on foreign currency denominated loans
g. Financial results
3) Information and Control Risk
a. Unsuitable control environment
b. Lack of sincere management supervision and inappropriate management override of
existing control
c. Late communication of reports
Responsible for Financial Reporting
1. BOD
2. Finance and accounting
3. Auditor
Auditor – there is a need for independent auditor because of the apparent separation of ownership and
management
- Audit services – use extensively by business org. to cast out doubt on the information given
by management which are also generated under its direct control given by independent
- Auditing – assuring the readers of FS with confidence in the FS
Opinion: will lend and add some credibility to the FS (external auditor)
: review or examines the FS exhaustively (back up his opinion: auditor)
1. Make report with opinion whether the report complies with relevant standards and present a
true and fair view of profit or loss
- Report: Management
- Opinion: Auditor
Considerations:
Auditor
- The review that the auditor will conduct on FS will not guarantee that the FS is free from
errors.
Auditor’s opinion to discharge his duties
External Auditing
External Auditor
Structuring the organization – division and distribution of work, coordination of activities that are
directed in achieving goals and objectives of the organization.
Management – how org. manages structure, resources, activities and how it measures and monitors
resulting performance towards declaring the goals of the corporation
1. Must be organized for business performance – goals and obj. congruent to the very reason why
business organization is being put up, for the purpose of earning profit.
2. Structure should contain the least number of management levels – simple and has a clear line of
communication between and among the different management levels
3. Organization structure should facilitate training and testing of future organization leaders –
experience trainings (rotation)
Organizational Structure
- Formalized patterns of interactions that link a firm’s task, technologies, and people
- Pattern of relationship among positions in the org. and among member of the org.
- Defines tasks and responsibilities, work roles and relationships and channels of
communication
- Purpose: division of work and coordination of activities directed towards achieving goals and
objectives.
Objectives:
1. Accountability for areas of work undertaken by groups and individual members of the org.
2. Coordination of diff. parts of the org. and diff. areas of work – interrelated
3. Effective and efficient organizational performance including resource utilization – important to
have division of task
4. Monitoring the activities of the organization
5. Flexibility in order to respond to changing environmental factors
6. Social satisfaction of members of the org.
1. Allocation of individual task and responsibilities, job specialization and definition – allocate the
work of personnel clearly
2. Formal reporting relationships, levels of authority, and spans of control – related to
accountability
3. Grouping together of sections, departments, divisions and large units – formal pattern of
relationship that can actually define if the employee will stay
4. Systems for communication of information, integration of effort and participation – presence of
system to facilitate the communication interrelated
- See the totality of the activities of a corporation
5. Delegation of authority and procedures for monitoring and evaluating the action – who will be
responsible to take charge of the unit/department
- There must be rubrics and guideline to monitor and evaluate activities
6. Motivation of employee through systems for performance appraisal – giving of awards
1. Functional
- An organizational form in which the major functions of the firm, such as production,
marketing, R & D, and accounting, are grouped internally
Advantages:
Disadvantages:
- increase diversification
- adaptability increased if service/product requires technical knowledge or large equipment.
Disadvantage
Advantage:
- more responsive to local/regional issues and different cultures, national/ local laws.
Disadvantage:
Note: Functional managers’ report to divisional managers who then report to coporate upper
management.
Advantages:
Disadvantages:
1. Product Structure
- Customers are served by self-contained divisions taht handle a specific type of product/service
- Allows functional managers to specialize in one product area
- division managers become experts in their area
- removes need for direct supervision of division by corporate managers
- divisional management improves the use of resources
2. Geographic Structure
- Each region or country or area with customers with customers with differing needs is served by
local self-contained division producing products that best meet those needs.
- Global geographic structure
different divisions serve each world region when managers find different problems or
demands across the globe
generally, this structure is adopted when managers are pursuing a multi-domestic strategy
3. Market (Customer) Structure
- An organizational form in which there are multiple lines of authority and some individuals report
to two managers
- grouping of products and function
Advantages:
Disadvantages:
- Potential conflict between project leaders and functional leaders regarding resources
- Project may be jeopardized if project members as well as leaders enter the conflict on opposite
sides
- Does not tolerate diversification well
- Can cause uncertainty and lead to intense power struggles
- Working relationships become more complicated
- Decisions may take longer
- An anticipated event in the political arena will lead to the loss of revenue assets resulting from
policy change
- Political environment has a significant impact on a company's international operating activities
- The greater level of involvement in a foreign markets, the greater the need to monitor the
political climate
Political climate will affect among others the marketability of product, inflow of investments
and valuation of share price.
Changes in government more often result in changes in policy and attitudes towards foreign business
Government
Ideas about how to promote national interest in the light of the economic and political resources and
objectives
1. Reflected in the attitudes and policies of the government towards foreign business
2. Foreign products and investment that are vital to the growth and development receive
favorable treatment (reduced tax, exemptions from quotas and other incentives)
3. Products classified to be luxury, non-essential, undesirable, or threat to local industry are
frequently subjected to a variety of import restrictions (tariffs and quotas)
1. Character
- Drives what we do when no one is looking
- Build though the way we live by thinking good thoughts and performing good acts
- character makes a man
- part and parcel of human person, innate
- by nature, man is good
- choice and decision of human person if he is going to change/destroy his character engraved in
his heart (H A P P Y T H OU G H T S will help us develop our character)
2. Ethics
- Set of rules that describes what is acceptable conduct in the society
- standards that we could use if our actions are moral, judge our conduct
MORALITY - degree of accountability of a human person in relation to his conduct/behavior
or thoughts
- One foundation of trust
- Guide to moral daily living
- Helps corp. judge whether such behavior can be justified.
3. Integrity
- To be honest and sincere
- Adhering to a moral code in daily decision making
- Being trusted
4. Laws
- promulgated to express the need of the people (provide sense of right and wrong and guide
behavior)
- not all laws are based on ethical especially on its legality NOT ALL LEGAL ARE ETHICAL
Private Sector- chief economic force of every country (needs govt regulation)
Manifestations
- Businesses need the court system for protecting property rights, enforcing contracts, and
resolving commercial disputes
- Govt. protect consumers from businesses
- Govt. hears and correct consumers complaints about business frauds and put into effect recalls
of sub standards and dangerous products
- Govt. controls private companies’ actions to protect public health and safety (ex. FDA)
2. Contract Enforcement
- If one fails or refuses to meet its obligation under a contract, a company will turn to the govt.
legal system for enforcement
- Govt. will intervene
3. Employee Protection
- Rights: regular employment, probationary employment, minimum employable age, prohibition
against stipulation of marriage, anti-sexual harassment law and human rights (Stop ENDO –
contractual)
- Minimum wage law: beneficial to both management and labor
Set a minimum benchmark of compensation across all industries
4. Environmental Protection
- Regulate industry and thereby protecting the public form environmental externalities
Externality – marketing transactions impact a third party besides the marketer and
purchaser
- Example: Clean Air Act – epicenter of troubles for businesses engaged in selling motorcycles
with 2-stroke engine in mid 2000s.
5. Investor Protection
- Companies make financial information public, thereby protecting the right of investors and
facilitating further investment (Ex. SEC)
6. Permission
- Businesses need permission from governments to operate and corporations need a charter from
government.
- License and permits and different agencies and bureaus.
7. Taxation – government tax businesses
PRESSURE GROUPS
- Organized group that seeks to influence not only govt. policy but also private enterprises’
operating policy
- Concerned in the protection and advancement of a particular cause or interest
- Promote a specific issue and raise it up as commercial or political agenda
- May have higher general ideological objectives in mind when they do some campaign for their
cause
1. Economic (ex. Professional Org., Trade Associations, Trade Unions, Giant Private Corporations)
2. Public
- Cluster of publics on certain issues
- Visibly vocal on issues (environment, consumer protection)
- (ex. Haribon foundation, Greenpeace Consumer and Oil Price Watch)
3. Sectoral
- groups work to protect and advance the interest of specific social groups
- crossbreed of political groups
- (ex. Gabriela)
4. Religious/Attitude
- Fast growing groups in the Phil.
- One of the most powerful groups
- Share universal beliefs and objectives on one issue and they believe that their major role is to
mobilize support in the country for what they believe in.