Instructional Module: Republic of The Philippines Nueva Vizcaya State University Bayombong, Nueva Vizcaya

Republic of the Philippines
NUEVA VIZCAYA STATE UNIVERSITY

Bayombong, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: MGT 4-C 2S-2020-2021
College: COLLEGE OF BUSINESS EDUCATION

Campus: BAYOMBONG
DEGREE Business COURSE NO. MGT 4

PROGRAM Administration
SPECIALIZATION Financial COURSE TITLE Good Governance and Social
Management & Responsibility
Economics
YEAR LEVEL 1st Year TIME FRAME WK NO. IM NO. 01
I. UNIT TITLE/CHAPTER TITLE
Chapter 1 – Corporation and Corporate Governance
II. LESSON TITLE

1. What is a Corporation
2. Stakeholders of a Corporation
3. Purposes of a Corporation
4. Shareholders, Bondholders and Directors
5. Multinational and Transnational Corporations
6. Corporate Governance
III. LESSON OVERVIEW
The Corporate world and business community is confronted with a great deal of challenges and
opportunities. Being part of the social order and as society expects, businesses are prodded, asked or
encouraged to improve their business practices in ways that respect ethical values, people,
communities and the environment. In response to these challenges corporations and businesses
recognize that aside from making profit, they are morally obliged to become more innovative,
competitive, productive and responsible members of society. It is morally obligatory even if not legally
required for businesses to protect and uphold the interests of their stakeholders and meet the tests of
good corporate citizenship.
IV. DESIRED LEARNING OUTCOMES
At the end of this lesson, students are expected to:

1. Define corporation
2. Identify and elaborate on the attributes of a corporation
3. Enumerate the different stakeholders of a corporation
4. Distinguish between multinational and transnational corporation
5. Describe how MNCs and TNCs affect the host countries
6. Define Corporate Governance
7. Explain the fundamental principles of corporate governance
8. Describe the concept of agency theory in corporate governance
9. Detail the roles of the non-executive director, chief finance officer (CFO), audit committee and
external auditor in governance
10. List down the reasons on the need for external auditors by corporations
V. LESSON CONTENT
WHAT IS A CORPORATION?
To better understand the term corporation, we need to revisit its definition as stated in the
Corporation Code of the Philippines. “A corporation is an artificial being created by operation of law
, having the right of succession and the powers, attributes and properties expressly authorized by law
or incident to its existence”. From the definition we can get the following attributes of a corporation:
NVSU-FR-ICD-05-00 (081220) Page 1 of 21

IM No.: MGT 4-C 2S-2020-2021
Artificial Being
Which means that by fiction of law a corporation is a juridical person whose personality is
separate and distinct from its owners. Corporations has some of the rights that a natural person
possesses. It can sue and be sued in court, it can own and dispose properties, and it is supposed to be
given independence by its owners in terms of existence. Corporation can also be convicted on criminal
offense; fraud is an example
Created by Operation of Law
Which means it will come into existence through a charter or a grant from the state. It cannot
exist by a mere agreement or a unilateral and sell-declaration of existence. Functions of corporations
are governed strictly and it has to do within the bounds of what is being provided in the corporate
charter
Right of Succession
A corporation can continue to exist even in death, incapacity or insolvency of any stockholder or
member. The corporation will not be dissolved even when there are transfers of ownership.
Powers, Attributes and Properties
Which means it is authorized to do activities within the purpose(s) of its creation, it has its own
traits and it operates based on what has been expressly provided in the charter including those that are
considered incident to its existence as a corporation. For example a fishing company need not ask if
they could put up a storage facility for this purpose. These are examples of implied authority being
given occasioned by the giving of the express authority.
Stakeholders of a Corporation
Management
This refers to the party given the authority to implement the policies as determined by the Board
in directing the course/business activities of the corporation (Securities and Exchange Commission
(SEC), Code of Corporate Governance). This is the group of people running the day-to-day activities of
the corporation. This team is composed of decision makers from the top to the bottom of the corporate
hierarchy. They are the ones entrusted by the stockholders to do some maneuverings for the
corporation to reach its destination. They are the decision makers who will shape the future of the
organization. The decisions that will be made by these people may spell-out failure or success of the
corporation. Examples of people who belong to this party are the board of directors, officers, and other
managers that in one way or another influence on the way the corporation is being run.
Creditors
This refers to the party who led to the corporation goods, services or money. Creditors may gain
from corporation by way of interest for money loaned or profit for goods sold or services rendered, thus
it is important that in running the corporate affairs, the concerns of the creditors should be taken into
consideration. It is comforting to note that in the Philippine setting our laws are protective of creditors.
This is evident in the fact that whenever there is a liquidation the first priority of payment belongs to the
outside creditors.
Shareholders
This refers to people who invest their capital in the corporation. The people who in some cases
considered as the first believer of what the entity can do. These are people who bet their money and
assume the high risk of having their money going down the drain. Unlike creditors, shareholders being
a part-owner of the entity cannot demand payment from the corporation. Creditors, on the other hand
can demand payment for principal and the interest and can go to court in case the borrowing
corporation cannot pay its obligation.
IM No.: MGT 4-C 2S-2020-2021
Employees
These are the people who contribute their skills, abilities and ingenuity to the corporation. They
are the ones who invested their future in the company with full trust and confidence that the entity
would make them secure. Running the corporation with high emphasis on employees is popular in
corporate world nowadays that when business owners decide to expand or diversify, they always cite
the number of jobs being created. And when these businessmen are confronted with business
challenges, they always pose this question, “what will happen to the employees?”
Employees and corporations have symbiotic relationships. In an ideal scenario, employees do
what is best for the corporation so that the corporation can provide them gainful and satisfying work.
Good employees can contribute would lead to profit; profit could mean additional benefits to workers.
Clients
The party considered to be the very reason for the existence of the corporation. They are the
buyers of the corporation products or services for final consumption, enjoyment or maybe for the use in
the production/creation of another goods. Clients or customers should be one of the paramount
considerations in the operation of a corporation. It is important to note in this context that big
businesses are directly or indirectly touching so many people’s lives. Some of these consumers are so
dependent on what these big corporations are producing leaving them vulnerable to commercial
exploitation. To balance best the interest of customers first there has to be unilateral and voluntary act
of compassion by these businesses to consumers. Predatory instinct of corporations has to be reduced
if not eradicated by having a sincere and visible operating philosophy which always place clients on the
equation not just plain and simple profit driven motives. That the
Government
The government has several interests in private corporations the most apparent of which are the
taxes that the corporations are paying. Taxes make government afloat and survive as highlighted in the
“lifeblood theory” of taxation. Apart from taxes corporate activities help the economy, in general and the
individuals, in particular. Existence of businesses means jobs. Jobs provide income to individuals in the
form of salaries. Salaries translates to purchasing power. It is worth emphasizing that it is the duty and
responsibility of the government to provide the people the basic ways and means to survive and the
government gets the biggest help from the corporations.
Aside from those mentioned, there are services offered by private corporations that somehow
lessen the burden of the government, for example: health services, education vital industries like
power, water and transportation. In developing countries like the Philippines, it can be expected that the
government cannot provide these services to level of competence to the greater majority. The private
corporations fill the gaps in helping the government deliver of these basic services to the people e.
Government is also a buyer of product of some corporation. Government also set standards and
regulate important aspects of corporate activities. All these things make the government an important
stakeholder of corporations.
Public
The public has a stake in corporations considering that the latter provides the citizens with
essentials such as goods, services, employment and tax money for public programs. The result of
responsible or irresponsible conduct of these corporations can also affect public in so many ways, for
example, if a corporation is environmentally inconsiderate by giving too much emphasis to their profit
objectives, it is the public that would bear the brunt of the consequences like pollution, calamities,
diseases and many other undesirable consequences.
Another aspect being considered are the concerns on natural resources. There is great public
interest in businesses that belong to the extractive industries like mining, logging and petroleum
exploration and extraction of exhaustible natural resources. There is nothing wrong with all these
activities so long as what is due to the general public should be considered in some cases. That is why
it can be said that sometimes there exists a “bureau-industrial conspiracy” which means that there is a
connivance between the persons who decide on the part of government and the representatives of the
big businesses seeking government approval. This scenario leaves the people helpless in asserting
their rights as stakeholders. These natural resources that they are trying to exhaust for profit belongs to
IM No.: MGT 4-C 2S-2020-2021
the people and it is but normal and fitting that whatever they do the interest of the public should be
considered.
PURPOSES OF A CORPORATION
Early-Stage Survival
There are several theories on the aims and objectives of a corporation. However for an entity to
the vast which has just started, the main objective would be survival especially during the early years of
its existence. Corporation should aim first for the most basic. That is how to gain the momentum
especially when its entry is during crises, for it to withstand the hostile environment of commercialism.
To increase Profit
According to Milton Friedman, the social responsibility of business is “to increase profit”. This is
anchored on the argument that stockholders are the owners of the corporation and therefore corporate
profits ultimately accrue to them. Corporate executives and hired managers are the stockholders’
agents and should operate in the interests of their principal, the stockholders.
Stockholders are entitled to their profits as a result of a contract among the corporate
stakeholders. A stakeholder in this perspective refers to employees, managers, customers, the local
community (public) and the stockholders. Each cluster of stakeholder has a contractual relationship
with the firm since they receive the remuneration they mutually agreed to, in a pre-established
agreement or contract.
Based on the above, giving the corporation the authority to operate carries with it the idea that
corporations should earn for the following purposes: first to serve its purpose of existence which is to
make the stockholders happy, second to perform its contractual obligation to stakeholders embedded in
the grant or authority to operate, These includes but not limited to the payment of taxes to the
government, taking care of employees within the bounds of what is legal, giving back to the community
and many others which is part of the implied agreement for its existence.
To Offer Vital Services to the General Public
There are services that are hard for the government to offer to the vast majority of people
without the help of private enterprises. The government cannot even solve by itself the problem as
basic as traffic. In this context that partnerships between the government and the private corporations
to deal with some problems, typical example of this in Metro Manila area where traffic is almost
intolerable, fortunately the government got big help from private investors in NLEX, SLEX, North rail,
South rail and other semi-private infrastructures and other mass transport system investors. Other
services in which the government needs help are in areas of power, water, education and health
services.
To Offer Goods and Services to the Mass Market
Some corporations are run not only for the sole purpose of generating profit but also to provide
service to the masses. This endeavor will meet the needs of the lower income class group by offering
them something at a piece they can afford. For example, cheap and assessable transport service.
Some might ask, what is the difference of this purpose from the previous one? First, they differ in the
area of pricing, pricing in vital industries is not market-dictated. The investors are given guaranteed
returns to cover for their investment risks. And most are government sanctioned and enjoys an almost
monopolized if not fully monopolized environment. Second, they differ in the area of competition. In a
perfectly competitive market, the services and goods are easily obtainable because there are lots of
suppliers. In the less competitive vital industries obtained by government contracts, regulations and/or
franchises, the service and goods are only provided by a few or worse by one producer.
SHAREHOLDERS, BONDHOLDERS AND DIRECTORS
After getting a significant understanding about the corporation and its stakeholders, one needs
to know the other players of the corporation. Shareholders, bondholders and directors complete the
cast when the corporation starts to operate, these are the parties which will be having various claims
over the entity. Shareholders will be having its claim in the form of dividends. Bondholder’s claims will
IM No.: MGT 4-C 2S-2020-2021
be in the form of interest earned via long-term agreement and the directors will have their eyes on their
salaries, incentives and stock options and bonuses.
To gain a better understanding we need to discuss who they are and how they are related to the
corporation.
Shareholders
Shareholders or stockholders are artificial or natural persons that are legally regarded as
owners of the corporation. Stockholders are bestowed with special privileges as depending on the class
of their stockholdings. These rights may include:
1. The right to vote on matters such as elections of the board of directors
2. The right to propose shareholder resolutions
3. The right to receive dividends
4. Pre-emption right which is the right to purchase new shares issued by the
company.to maintain its percentage of ownership in the company. This can also
be called right to first refusal
5. The right to liquidating dividends. That is the right to receive the company’s
assets during liquidation or cessation of business.
However, stockholders’ rights to a company’s assets come only second to the rights of
outside creditors of the company. This means that stockholders typically may receive nothing if
after the company is liquidated, there is not enough money to pay its creditors. Shareholders
play an important role in raising capital for organizations, the capital that is otherwise hard to be
raised in a proprietorship or partnership form of business organization
Shareholders are considered principals and the directors and officers are considered
agents under the agency theory in governance. As principals they are expecting that things that
agents would do would be for the paramount benefit of the stockholders. Although directors and
officers of a company are bound by fiduciary duties to act in the best interests of the
shareholders, still the shareholders themselves deserves an independent third party that would
attest on what the management team is doing. This is here where the external auditors would
come into the picture to lend credibility on the reports prepared by management.
Bondholders
A bondholder is generally defined as a person or entity that is the holder of a currently
outstanding bond. A bond being a certificate of indebtedness by the issuing corporation provides some
advantages on the holder of the said instrument. The holder has the complete authority to manage the
bond in any way that he sees fit and advantageous to him. He can even sell them for it is an investment
on his part.
There are several advantages to being a bondholder rather than a shareholder of a company.
One the major advantages is that when the company goes through a process that involves liquidation
of assets, bondholders and other outside creditors are given priority over stockholders, which means
that the bondholders will receive payments for the outstanding bonds before any of the stockholders
receive theirs in relation to their outstanding shares of stock. Another advantage is that bonds are not
exposed to the fluctuations of interest rates because whatever
Is the agreed interest rate when the bonds were issued it will be the one to be used throughout the life
of the bonds? Interest rate is “nailed” so the bondholder need not worry. There is an element of
predictability of income.
The bondholder will receive regular payments during the life of the bond computed at face value
multiplied by the interest rate. This interest payment usually takes place every six months and will
continue to go on until the maturity of the bond. Typically, the life of a bond would take as short as 5
years to as long as 25 years, the bondholder has a guaranteed return of the principal at some point in
the future, this makes investment in bonds rewarding on the part of the investor who can afford to have
their money in the hands of the investee for longer periods of time.
Board of Directors
BOD refers to the collegial body that exercises the corporate powers of all corporations formed
under the Corporation Code (SEC Code of Corporate Governance). It conducts all business and
controls or holds all the asset of such corporation. This who be headed by the chairman of the board
who is considered as the most influential person in the corporation. The board’s activities are
determined by the powers, duties and responsibilities delegated to it or conferred on it by an authority.
IM No.: MGT 4-C 2S-2020-2021
These issues are typically detailed in the corporation’s by-laws. The by-laws normally specify the
number of members of the board. It may also contain matters such as how the board members are to
be chosen including the specifics on when and where they are going to meet to discuss things
concerning the operation of a corporation.
Duties of the Boards of Directors
 Governing the organization by establishing broad policies and objectives
Examples of these broad policies are as follows: investment policies that will answer the
question as to where to put excess money for additional revenue purposes; diversification
policies that will answer the question as to what type businesses that the corporation will be
getting into as additional lines of business in the near future.
 Selecting, appointing, supporting and reviewing the performances of the chief executive
As stewards of the corporation, the board of directors is expected to be with the chief executive
in latter’s direct or indirect dealings with the corporation.
 Ensuring the availability of adequate financial resources
It is expected from the board that the survival and financially healthy functioning of the entity will
be on the top of their agenda. With the coordination of people from the finance department,
BOD has to make certain that funds are available to finance day-to-day activities of the entities.
 Approving annual budgets
Another responsibility of the board of directors is to approve the annual budget, which can be
described as the reflection of organizational program and plan into financial terms. The annual
budget will more or less define the operations of the corporation at any given year
 Accounting to the stakeholders the organization’s performance
One of the most critical duty of the board of directors is to account for the entity’s performance
to its stakeholders who are the owners of the corporation. They need to inform every
stakeholder what went on at any particular given period. This can be accomplished by providing
the reports on financial highlights, short and long-term plans, and material investments during
the period including the financial statements duly audited by an independent auditing firm.
MULTINATIONAL AND TRANSNATIONAL CORPORATIONS
International corporations have several categories depending on the business structure,
investment and product/service offerings. Multinational companies (MNC) and transnational
corporations (TNC) are two of these categories. Both MNC and TNC are enterprises that
manage production or delivers service in more than one country. They are characterized as
business entities that have their management headquarters in one country known as home
country and operate in several other countries known as host countries like manufacturing oil,
mining, and agriculture, consulting, accounting, construction, legal, advertising, entertainment,
hotels, banking and telecommunications are often run through TNC’s and MNC’s.
Multinational corporations (MNC) have investment in other countries, but do not have
coordinated product offerings in each country. They are more focused on adapting their
products and services to each individual local market. Well known MNC are mostly consumer
goods manufacturers and quick service restaurants like Unilever, Proctor and Gamble,
McDonald’s and 7-11.
Transnational corporations (TNC) have been technically defined by the United Nations
Commission on Transnational Corporation and Investment as “enterprises which own or control
production or service facilities outside the country in which they are based in one
A transnational corporation is any corporation that is registered and operates in more
than one country at a time. A transnational has its headquarters in one country and operates
IM No.: MGT 4-C 2S-2020-2021
wholly or partially owned subsidiaries in one or more countries. The subsidiaries report to the
central headquarters.
Compared with MNC’s, transnational corporations (TNC’s) are much more complex
firms. They have invested in foreign operations have a central corporate facility but give
decision-making, R&D and marketing powers to each individual foreign market. Most of them
petroleum, IT consulting, pharmaceutical industries among others, examples are Shell,
Accenture, Deloitte, Glaxo-Smith Klein and Roche.
Many of them are owned by a mixture of domestic and foreign stockholders. Most TNC’s
and MNC’s are massive with budgets that outweigh smaller nation’s gross domestic product
(GDP). For example, the combined 2011 GDP and sales revenues of top corporations (World
Bank and Fortune Global 500 data), showed that sales revenues of Royal Dutch Shell, Exxon
Mobil, Wal-Mart Stores, BP and Sinopec Group was ranked 25 th, 26th, 27th, 29th, and 30th
respectively.
Thus, TNC and MNC alike are highly influential to globalization, economic and
environmental lobbying in most countries. Because of their influence, countries and regional
political districts at times tender incentives to MNC and TNC in form of tax breaks, pledges of
governmental assistance or improved infrastructure, political favors and lenient environmental
and labor standards enforcement in order to be at an advantage from their competitors. Also
due to their size, they can have a significant impact on government policy, primarily through the
threat of market withdrawal. They are powerful enough to initiate lobbying that is directed at a
variety of business concerns such as tariff structures, aiming to restrict competition of foreign
industries.
Corporations have various motives for establishing a corporate presence in other
countries. One possible motive is a desire for growth. A corporation may have reached a
plateau meeting domestic demands and anticipate little additional growth. A new foreign market
might provide opportunities for new growth.
Other corporations desire to escape the protectionist policies of an importing country.
Through direct foreign investment, a corporation can bypass high tariffs that prevent its goods
from being competitively priced. For example, when the European Common Market (the
predecessor of the European Union) placed tariffs on goods produced by outsiders, US
corporations responded by setting up European subsidiaries.
Two other motives are more controversial. One is preventing competition. The most
certain method of preventing actual or potential competition from foreign businesses is to
acquire those businesses. Another motive for establishing subsidiaries in other nations is to
reduce costs mainly through the use of cheap foreign labor in developing countries. A
transnational corporation can hold down costs by shifting some or all of its production facilities
abroad.
Transnational corporations with headquarters in the United States have played an
increasingly dominant role in the world economy. This dominance is most pronounced in the
developing countries that rely primarily on a narrow range of exports, usually primary goods. A
transnational corporation has the ability to disrupt traditional economies, impose monopolistic
practices and assert a political and economic agenda on a country.
Another concern with transnational corporations is their ability to use foreign subsidiaries
to minimize their tax liability. The Internal Revenue Service (IRS) must analyze the movement of
goods and services between a transnational company’s domestic and foreign operations and
then assess whether the transfer price that was assigned on paper to each transaction was fair,
IRS studies indicate that US transnational corporations have incentive to set their prices so as
to shift income away from the United States and its higher corporate tax rates and to shift
deductible expenses into the United States. Foreign-owned corporations doing business in the
United States have similar incentive. Critics argue that these tax incentives also motivate US
transnational corporations to move plants and jobs overseas.
CORPORATE GOVERNANCE

IM No.: MGT 4-C 2S-2020-2021
DEFINITIONS
The Malaysian High Level finance Committee Report on Corporate Governance defined
corporate governance as follows:
“Corporate governance is the process and structure used to direct and manage the
business affairs of the company towards enhancing business prosperity and corporate
accountability with the ultimate objective of realizing long-term shareholder value whilst taking
into account the interests of other stakeholders
The Wall Street Journal (23 June 1999) defined corporate governance as:
Corporate governance in principle refers to a joint responsibility imposed on the Board of
Directors and management to protect shareholders right and enhance shareholder value. In
practice the board is the real representative of shareholders and acts as a check against
management. The Board must ensure among other things that the company is accountable to
shareholders, that it gives equitable treatment to all its “owners” small as well as large, and that
it acts transparently.
Corporate governance refers to a system whereby shareholders, creditors and other
stakeholders of a corporation ensure that management enhances the value of the corporation
as it competes in an increasingly global market place (SEC Memorandum Circular No. 2, Series
of 2002, and Code of Corporate Governance).
According to Sir Adrian Cadbury, corporate governance is concerned with holding the
balance between economic and social goals and between individual and communal goals>
Corporate governance framework is there to encourage the efficient use of resources and
equally to require accountability for the stewardship of these resources. The aim is to align as
nearly as possible the interests of individual corporations and society.
Corporate governance is defined as the structure and processes by which companies
are directed and controlled. Good corporate governance helps companies operate more
efficiently, mitigate risks and safeguard against mismanagement and improve access to capital
that will fuel their growth. It makes companies more accountable and transparent to investors
and gives them the tools to respond to stakeholder concerns, including implementation of good
environmental and social practices.
Corporate governance also contributes to development. Increased access to capital
encourages new investments, boosts economic growth, and provides employment
opportunities. Businesses that operate more efficiently tend to allocate and manage resources
more sustainably. Better stakeholder relationships help companies address environmental
protection, social and labor issues.
FUNDAMENTAL OBJECTIVES OF CORPORATE GOVERNANCE

Improvement of Shareholder Value
Shareholder’s value can be improved by making a pre-commitment to build better
relations with primary stakeholders like employees, customers, suppliers and communities.
Better relations will lead to an increase in shareholder’s wealth since this would help the firms
expand and develop intangibles which the firm could capitalize on and in turn become a source
of their competitive advantage. Good reputation is just one example to these intangibles which
could largely predict the future of the business. Better relations with employees engender
commitment. Good relations with customers and suppliers complete the full circle of strong
alliances.
Conscious Consideration of the Interests of Other Stakeholders
When a company meets the objectives of increasing the shareholder’s value, it will have
greater internally-generated resources in improving its commitment in meeting its
environmental, community and social obligations. It can pay taxes well; reward, train and retain
key staff and enhance employee’s satisfaction. A key focus area is a company’s human capital,
which is a lead indicator of success
IM No.: MGT 4-C 2S-2020-2021
WHAT GOOD GOVERNANCE PROMOTES

Transparency
Transparency is vital with respect to corporate governance due to the critical nature of
reporting financial and non-financial information. The aim includes maintaining investor,
consumer and other stakeholder’s confidence. The lack of dedication to corporate governance
policies particularly those related to transparency will drive home the point that the company is
unbalanced and the leadership is not incorporating it to the highest level of truthfulness. Failure
in transparency issues could lead to many things, scaring off investors is just one of them; being
singled out by the authority is another which could mean the watchful eyes of the agencies will
be focused on the company and many other uncomfortable scenarios which no company wants
to be in.
Information is the currency of democracy according to Thomas Jefferson. Transparency
is a thing of huge concern in government setting since it entails giving out of information. It is
crucial because nearly all decisions of government officials are in the interest of the public.
Transparency lessens the likelihood of nepotism, corruption, favoritism and the likes. Shortage
of information about the how the government agency’s function can make it easy for corrupt
officials to cover their tracks. It can be said that the most corrupt countries are the least
transparent. Sunshine has its cleansing properties; so, let the light in.
Accountability
Accountability is the recognition and assumption of responsibility for the decisions,
actions, policies, administration, governance and implementation of programs and plans of the
corporation and people involved, including the obligation to report, explain and be answerable
for its resulting consequences. It is acknowledging and taking charge for and being transparent
about the impacts of the company’s policies, decisions, actions, products and its associated
performance.
It is based on the premise that an accountable organization will take actions to
 Set a policy based on a comprehensive and balanced understanding and
response to material stakeholder’s issues and concerns; the emphasis on this
premise is the overall broad philosophy and operating style of the entity itself
 Set goals and standards against which strategy and associated performance can
be measured and evaluated. This highlights the deliverables by the people to the
organization.
 Disclose credible information about strategy, goals, standards and performance
to those who base their actions and decisions on this information. In this way
there will be goal congruence in the organization
Recall that the above premises are actually the fundamental objectives of corporate governance
(1) improvement of shareholders value (2) conscious consideration of the interest of other
stakeholders.
Prudence
Prudence is defined within the Code of Governance as “care, caution and good
judgment as well as wisdom in looking ahead”. It is the management committee which is in
corporate setting, the board of director, who will be the body responsible in safeguarding the
interests of the organization through good planning and management of finances and other
resource of the organization.
BENEFITS OF GOOD GOVERNANCE

To put it into perspective; Arthur Levitt (former chairman of the US Securities &
Exchange Commission) once said “If a country does not have a reputation for strong corporate
governance practices, capital will flow elsewhere. If investors are not confident with the level of
IM No.: MGT 4-C 2S-2020-2021
disclosure capital will flow elsewhere. If a country opts for lax accounting and reporting
standards, capital will flow elsewhere. All enterprises in that country suffer the consequences.
From the investors perspective a simple question can be raised “will you invest in a region or a
country the track record of which in governance is questionable, if yes, how long?
It is well established reality that investors would behave differently in settings in which
good governance, both in political and corporate setting. It is not seriously practiced. Investors’
concern will be more on short-term prosperity instead of ling-term stability. There are many
countries in the world where investors are so speculative. One of evidences of these speculative
behavior is the fact that they are more flexible in terms of locations. For instance, HSBC, in
Hong Kong has a collapsible building; that is, it can be dismantled, shipped out, and assembled
at a place of choice. A better example is in utility services, there was a time in Nigeria when
utility companies providing power are having their main supply of power from barges for them to
easily get out of the country if something goes wrong.
It can be deduced that good governance immeasurably benefits not only a specific
company or industry but also the country. The following are the specific benefits of good
governance.
Reduced Vulnerability
Adopting good corporate governance practices leads to an improved system of internal control.
This leads to greater accountability, protection of corporate resources and eventually better profit
margins. Good corporate governance practices will also pave the way for probable future development,
diversification including the capability to attract investors, both sourced nationally and abroad. Good
corporate governance will also reduce the costs of loans or credits for corporations since companies
with good corporate governance can be considered low-risk companies in the eyes of debt investors.
Marketability
Embracing principles of good corporate governance can also play a role in enhancing the
corporate value of companies. This leads to easy access to capital in financial markets which helps the
company survive in an even more competitive environment. Good corporate governance will also make
the company more attractive in open market. This attribute will be beneficial and will place the company
at a finer end of bargaining in times when strategic alliances are mergers, acquisitions, and corporate
absorptions and buy outs, partnerships, joint ventures and other mitigating initiatives.
Credibility
There are a good number of benefits when an entity embraces good corporate governance, one
of which is the company need not spend more resources in compliance with the regulatory and other
financial institution’s requirements necessary since all these things are already integrated in company’s
operating approach.
Companies that are known for good governance practices do not need to sell themselves that
hard for investors to fuse-in their investment either as equity or as debt investors. In the context of
investment, everything could raise and fall in credibility and reputation. When a company is credible,
investors trust comes next; where investors trust in money follows; where there is money there is
flexibility. It is in having that flexibility in a competitive world that could spell out the difference between
failure and success.
Valuation
Observed evidence and studies conducted in recent years back the idea that it pays to have
good corporate governance. It was found out that more than 84% of global investors are willing to pay a
higher price or a premium for the shares of well governed company over one considered poorly
governed given all financial figures comparably equal. The issue is reliability of company-provided
information. This is one convincing fact that embracing corporate governance principles and practices
affects corporate financial and non-financial value of the enterprise.
AGENCY PROBLEM IN CORPORATIONS

IM No.: MGT 4-C 2S-2020-2021
In traditional (neo-classical) approach, corporation is treated as a single entity, it is often called

holistic approach. It is one of the features of sole proprietorship. Owner-managers have no conflict of
interest. In big companies we almost always have the separation of owners and managers. Financial
manager should work in the best interest of the owners by taking actions that increase the value of the
company. However, we’ve also seen that in large corporation’s ownership can be spread over a huge
number of stockholders.
If we assume that stockholders buy stock because they seek to gain financially, then the answer
is obvious; good decisions increase the value of the stock and poor decisions decrease the value of the
stock. Given our observations, it follows that the financial manager acts in the shareholder’s best
interest by making decisions that increase the value of the stock. The goal of financial management is
to maximize the current value per share of the existing stock.
The separation of stockholders and management has some advantages. It allows share
ownership to change without interfering so much with the operations of the business. It allows the
company to hire professional managers. This dispersion of ownership means that managers, not
owners can control the firm. But it brings problems, if the managers and owners’ objectives are not the
same and whether management really acts in the best interests of the owners
The goal of maximizing the value of the stock avoids the problems associated with the
sometimes-conflicting parochial goals. There is no ambiguity in the criterion and there is no short-run
versus long run issue. We explicitly mean that our goal is to maximize the current stock value. By this
we mean that they are only entitled to what is left after employees, suppliers and creditors (and anyone
else with a legitimate claim) are paid their due. If any of these groups go unpaid, the stockholders get
nothing. Because the goal of financial management is to maximize the value of the stock, we need to
learn how to identify these investments and financing arrangements that favorably impact the value of
the stock.
Agency Relationships and Costs
The connection between owners and managers is called principal-agent problem and the
conflict is called an agency relationship. Such a relationship exists whenever someone (principal) hires
another (the agent) to represent his interests. The shareholders are the principals; the managers are
their agents. Shareholders want management to increase the value of the firm, but managers may have
their own axes to grind or nests to feather. Agency costs are incurred when (1) managers do not
attempt to maximize firm value and (2) shareholders incur cost to monitor the managers and influence
their actions. More generally the term agency costs refer to the costs of the conflict of interest between
stockholders and management. Of course, there are no costs when the shareholders are also the
managers.
Agency costs can be direct or indirect. An indirect agency costs is a lost opportunity such as the
one we have described. Direct agency costs come in two forms. The first type is a corporate
expenditure that benefits management but costs the stockholders. Perhaps, the purchase of a luxurious
and unneeded corporate jet would fall under this heading. The second type of direct agency costs is an
expense that arises from the need to monitor management actions. Paying outside auditors to assess
the accuracy of financial statement information could be one example.
Goals of Financial Management

Assuming that we restrict ourselves to for-profit businesses, the goal of financial management is
to make money or add value for the owners. This goal is a little vague, of course, so we examine some
different ways of formulating it in order to come up with a more precise definition. Such a definition is
important because it leads to an objective basis for making and evaluation financial decisions.
If we were to consider possible financial goals we might come up with some ideas like the
following:
1. To survive
2. To avoid financial stress
3. To beat the competition
4. To maximize sales or market share
5. To minimize costs
IM No.: MGT 4-C 2S-2020-2021
6. To maximize profit
7. To maintain a steady earnings growth
What would be the management goal if they have no control at all? One the main
answer comes from outside the mainstream economy. It is the idea that managers prefer
the company to be bigger than more profitable. So, managers left to themselves would
tend to maximize the number of resources over which they have control or, more
generally corporate power of wealth. This goal could lead to an overemphasis on
corporate size or growth.
Do managers Act in the Stockholder ‘Interest
Principal –agent problems would be easier to resolve if everyone had the same information.
That is rarely the case in finance. Managers, shareholders, and lenders may all have different
information about the value of a real or financial asset, and it be many years before all the information,
the perfect information is revealed. Financial managers need to recognize these information
asymmetries and find ways to reassure investors that there are no nasty surprises on the way.
Whether managers will in fact act in the best interests of stockholders depends on two factors,
first, how closely management goals are aligned with stockholder goals? This question relates to the
way managers are compensated. Second can management be replaced if they do not pursue
stockholders’ goals? This issue relates to control of the firm. As we will discuss there are a number of
reasons to think that even in the largest firms, management has a significant incentive to act in the
interest of stockholders.
Managerial Compensation
Management will frequently have a significant economic incentive to increase share value for
two reasons. First, managerial compensation particularly at the top, is usually tied to financial
performance in general and often times to share value in particular. For example, managers are
frequently given the option to buy stock at a bargain rice. The more the stock is worth, the more
valuable is this option. In fact options are increasingly being used to motivate employees of all types,
not just top management.
The second incentive managers have related to job prospects. Better performance within the
firm will tend to get promoted. More generally those managers who are successful in pursuing
stockholders’ goal will be in greater demand in labor market and thus command higher salaries. In fact,
managers who are successful in pursuing stockholder goals can reap enormous rewards.
Control of the Firm
Control of the firm ultimately rests with stockholders. They elect the board of directors who in
turn, hire and fire management. An important mechanism by which unhappy stockholders can act to
replace existing management is called a proxy fight. A proxy is the authority to vote someone else’s
stock. A proxy fight develops when a group solicits proxies in order to replace the existing board and
thereby replace existing management.
Another way that management can be replaced is by takeover. Those firms that are poorly
managed are more attractive as acquisitions then well managed firms because a greater profit potential
exists, thus avoiding a takeover by another firm gives management another incentive to act in the
stockholder’s interest.
Sometimes depart from those required
Stakeholders
Management and stockholders are not the only parties with an interest in the firm’s decisions.
Employees, customers, suppliers and even the government all have a financial interest in the firm.
Taken together, these various groups are called stakeholders in the firm. In general, a stakeholder is
someone other than a stockholder or creditor who potentially has a claim on the cash flows of the firm.
Such groups will also attempt to exert control over the firm, perhaps to the detriment of the owners.
AGENCY THEORY IN GOVERNANCE
Agency theory suggests that the firm can be viewed as a loosely defined contract between
resource providers and the resource controllers. It is a relationship that came into being occasioned by
IM No.: MGT 4-C 2S-2020-2021
the existence of one or more individuals, called principals, employing one or more individuals, called
agents, to carry out some service and then entrust decision making right to the agents. Agency theory
argues that in the modern corporation, in which share ownership is publicly or widely-held managerial
actions sometimes depart from those required to maximize shareholder returns. In agency theory
language, the direct control of the corporation owners are principals and the managers are agents, and
there is an agency loss necessary the extent of which is the benefits that should have accrued to the
owners had the owners been the ones who exercised direct control of the corporation.es at
The agency loss can be reduced through the installation of some mechanism like providing
financial incentives for executives and managers for their efforts of putting priority on maximizing the
shareholders wealth. This system includes shares options for senior executives at discounted prices.
This way the senior executive’s interest will be aligned to that of the shareholders. Other similar
systems tie executive compensation and levels of benefits to the shareholder’s returns and have part of
executive compensation deferred to the future. This is to provide executive rewards on for the long run
value, maximization of the corporation. This system would deter short run executive mentality of
“harvest and enjoy while available” and other actions which harms corporate value.
In similar terms, the related theory of organizational economics, is concerned in anticipating
managerial “opportunistic behavior” which includes policy skirting and indulging in excessive privileges
at the expense of shareholder’s interest. The key structural mechanism to restrain such managerial
“opportunism” is the board of directors. This body should provide a monitoring of managerial actions on
behalf of shareholders. Such impartial review will only take place when the chairman of the board is
independent of executive management. Where the chief executive officer is also chairman of the board
of directors, the objectivity of the board will possibly be compromised. Agency and organizational
economics theories predict that when the CEO also holds the dual role of chair, then the interest of the
owners will be sacrificed to a certain degree in favor of management that is there will be managerial
opportunism and agency loss. This loss is way above the owners’ normal benefits had they been the
ones performing the agent’s functions of running the day-to-day corporate activities.
EFFECTS OF AGENCY IN GOVERNANCE
As said earlier of a corporation is a form of business organization where a principal agent

relationship exists; the shareholder being the principal and the board of directors, executives and
managers as agents. This unique relationship also presents a very unique effect in the context of
corporate governance. The following are the effects of agency in corporate governance.
Conflict of Interest
Principal and agent have diverse interests and the separation of ownership and control provides
potential for different interest to surface. Shareholders lack direct control of corporations especially
those publicly traded corporations. Board of directors on the other hand has the direct control on the
activities of these enterprises being the ones entrusted by the shareholders to decide on corporate
affairs. In the above situation it can never be avoided that sometimes problems arise when the agent
makes decisions that result in the quest of goals that conflict with those of the shareholders.
Managerial Opportunism
It refers to the act by the agent of taking advantage on things that are within his control by virtue
of the rights given to him by the principal, sometimes the uncalibrated and unchecked enjoyment of
corporate resources and capabilities contradicts the idea of increasing the shareholder’s and firms
value. Excessive monetary benefits like bonuses and privileges routine efforts of trying to secure
comfortable position like undue diversification to increase compensation and to reduce employment
risk, are just some of examples of managerial opportunism.
Incurrence of Agency Costs
As mentioned earlier agency presents conflict of interest because agents might do things which
are detrimental to the maximization of shareholders wealth. To counter this the principal needs to
sacrifice resources for him to closely monitor and control the agent’s behavior. These costs are called
agency costs which refers to the sum of incentive costs, supervision and monitoring costs, enforcement
costs and other agency losses incurred by principals in trying to ensure that agent’s operating style is
consistent with the aim of maximizing the shareholders and the firms value
IM No.: MGT 4-C 2S-2020-2021
Shareholder Activism
Shareholders can call together to discuss the corporations direction. They can vote as a block to
elect candidates to the board. Institutional activism will also offer a premium on companies with good
corporate governance since this type of activism carries with it the capability to give incentive when
agents perform well. Another issue that is well connected to shareholder activism is share ownership.
Having some board members executives, managers that are at the same at the same time
shareholders may cause alignment of their interests with plain shareholders. This is especially
applicable with institutional investors. The increasing pressure and power of institutional owners to
discipline ineffective top-level managers will now definitely influence the firm’s choice of strategies to be
employed in internal governance.
Managerial Defensiveness
This in relation to issues of takeover whereby management will employ some tactics to
discourage takeovers and buyouts. These tactics may involve asset restructuring via termination of
investment, changes in the financial structure of the firm such as acquisition of own shares in the open
market, presenting bad takeover scenarios to shareholders for them not to approve rake over. Normally
in a takeover the non-performing executives and managers are dismissed from their jobs.
CONCEPT OF GOAL CONGRUENCE
Goal congruence is the harmony and alignment of goals of both the principal and the agent
which is consistent with the overall objectives of the organization. While it is true that in an agency
relation, the presence of self-interested behaviors is given, nevertheless managers can be to act in
shareholders’ best interest’s by giving incentives which will compensate them for good performance on
one hand at the same time give them disincentives on their poor performance on another.
PERFORMANCE INCENTIVES AND DISINCENTIVES
Pay Dependent on Profit Level
When management is rewarded based of the level of profits made, naturally members of
management will make every effort to achieve high profit levels for them to earn more. This system is
the most effective way to increase not only the value of shareholder s wealth but also the value of the
firm both in tangible and intangible context. The flip side of this scheme however is that it encourages
the use of creative accounting and reporting practices to attain certain profit objectives. For example,
the infamous corporate scandals, the mark to market accounting used by Enron Corporation is one of
the most glaring of these creative practices
Share Incentives
This can be done when a company is publicly listed company and managers are given the
chance to subscribe shares of the company at a discounted price. Managers will have something to
protect and it can be naturally expected that they will venture into projects which will improve the firm’s
value. In this system there is commonality of stake between the plain shareholders and those
executives and managers that are at the same time shareholders. Duality of capacities of executives
and managers are not without disadvantages, intricacies on shareholders at the same time agents will
be discussed later in a succeeding chapter
Shareholder’s Intervention
There is now a visible shift of character of shareholders by a large scale. Shareholders of today
are now more active than before. They now dip their hands more unlike before when some of them will
just wait on what the board will present on the table. Some shareholders are now active institutional
investors who will definitely exercise a more direct influence over the performance of an enterprise.
They are now taking an active role by scrutinizing performance of the company, and are very swift in
their effort of lobbying with other small shareholders when they believe poor service or any
mismanagement by the directors is happening.
IM No.: MGT 4-C 2S-2020-2021
It is the above characters that will make board, executives and managers more conscious on
the way they manage and decide things. It will make their decisions more leaning in favor of
shareholder knowing that somebody is watching over their shoulders. Somebody keenly monitoring on
the operating philosophies they employ.
Threat of Being Fired
The shareholders who have ultimate control over the corporation can take a straight and hostile
approach by threatening the boars, executives and managers with removal from office if they placed
their personal interest over that of shareholders and that of maximizing the value of the firm. The
increase in numbers of institutional investors has enhanced the shareholders powers to discharge
directors since they are able not only to dominate bot also lobby other shareholders in decision making.
Takeover Threat
It is but normal for board, executives, and managers to move heaven and earth to avoid or
discourage corporate takeovers as they are aware that their job would at least be risk if not to be lost
totally if takeover takes place. To push for goal congruence, that is to have things in accordance with
welfare of shareholders and enhancement of firm’s value, the shareholders can easily make a threat to
accept takeover proposal if their set objectives are not met by the agents (board, executives, and
managers) in general.
ROLES OF THE NON-EXECUTIVE DIRECTORS
A non-executive director is a member of the board of directors of a company who does not take
part in the executive function of the management team. This director is not an employee of the
company or connected with it in any other way. He is separate from the inside directors who are
members of the board who also served as executive managers of the company.
Fundamentally, the non-executive director’s role is to give a meaningful contribution to the
board by providing objective criticism. At present, it is widely accepted that non-executive directors
have an important contribution to make for the proper administration of companies and, therefore on
the economy at a larger context. Non-executive director should bring an independent judgment to bear
on issues of strategy, performance and resources including key appointments and standards of conduct
(taken from the Cadbury Report)
Non-executives’ directors have the responsibilities in the following areas:
Strategy
As an outsider, the non-executive director may have an impartial, clearer and wider view of
external factors affection the company and its business environment than the executive directors. The
normal role of the non-executive director in strategy development is therefore to offer a creative
contribution and to act as a constructive reviewer in looking at the goals and plans developed by the
chief executive and his executive team.
Non-executive director should continually face and contribute in the development of the
company’s long-term goals and visions. Together with the other directors and officers of the company,
he is expected to participate in setting long-term broad operational principles and policies that benefits
the stakeholders in areas that concerns on company stability, increasing the firm’s value and ultimately
in increasing shareholders value.
Establishing Networks
One of the important functions of the non-executive director is to represent the company in
some external corporate undertakings. It is the job of the non-executive director to connect the
company to the outside world and in the process, gain benefit from networks of businesses. This
network of businesses are no doubt beneficial to the organization since this could spark certain
avenues for alliances which the most effective way to survive in a very competitive environment.
Monitoring of Performance

IM No.: MGT 4-C 2S-2020-2021
Non-executive directors should take responsibility for monitoring the performance of executive
management, more particularly on matters relating to the progress made towards realizing the
established company strategies. Non-executive directors should not be concern only on strategy alone.
Included in his responsibility is to monitor and examine the performance of management in do it more
agreed goals and objectives of the company. Succession planning is also part of his responsibilities but
taking into consideration the sensitivity of the matter he should do it more carefully with the concurrence
of the directors and officers.
Audit
It is the duty of the whole board to ensure that the company report properly to its shareholders,
this can be done by presenting a true, fair and real reflection on how the company was administered at
any given time. Include in this report is financial performance and highlights that are deemed necessary
, including the assurance that the internal control systems are in place and monitored routinely and
thoroughly. A non-executive director has an important role to play in fulfilling this responsibility whether
or not a formal audit committee of the board has been established.
ROLES OF THE CHIEF FINANCIAL OFFICER (CFO)
The chief financial officer (CFO) is a corporate officer principally accountable for managing the
financial risks of the corporation. This officer is also responsible for financial planning and record-
keeping, as well as financial reporting to higher management. He will be the one who will direct the
corporation’s finances. In corporations large and small, a CFO is needed to handle both cash inflow
and outflow and to create reports about the corporations spending. Keeping track on the working capital
requirements of the company to meet short-term and daily requirements on operation are also the
responsibilities of the CFO.
In large corporations, the primary duties of the CFO maybe to supervise and manage a large
accounting department, while coming up with ways to maximize profit to the company. A CFO might for
example evaluate the way in which employees work to determine the way to most efficiently get work
done for the least amount of money. These responsibilities however can be shared with other corporate
heads or with general managers or lower-level supervisors.
CFO’s have different specific roles depending on so many things: industry peculiarity, corporate
structure, profile of investors (e.g., majority family-owned), government intervention, and whether the
company listed or not both in local stock exchange or international exchanges; However, the following
roles cut across corporate CFOs around the world.
Implements Internal Controls
A CFO will be the one responsible for conveying the important financial controls to a 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.
Supervises Major Impact Projects
Outside of implementing and monitoring company controls relating to finance an effective CFO
also handles and supervises those projects that require significant quantitative and qualitative
interpretations and analysis in order to reach an understanding of the options that are available. For
example, a CFO will take responsibility for developing a company’s annual budget, work together with
the business owners and division or department managers to ensure that the final financial product
accurately and objectively projects the real requisites of the business. A CFO might also carry out a
meticulous analysis of a company’s future capital investment requirements as a prerequisite in securing
additional financing.
Develops Relations with Sources
One of the most important responsibilities of an effective CFO is to institute good working
relationships with other banks and other financial institutions that may impact on the company’s ability
to finance its operation. Specific activities in this area may include regular meetings with officers of the
IM No.: MGT 4-C 2S-2020-2021
company’s bank(s) to review ongoing operations, discussing possible future loan transactions, revisiting
loan covenants if there is any, negotiating moon how additional re favorable terms for bank lines of
credit, and discussions with private investors on how additional capital might be invested into the
enterprise.
Advisor to Management
An effective CFO is also an important member of the management team of some emerging
companies. Top of his financial sharpness and general business knowledge, a good CFO can facilitate
and help the business owners, executives and other top managers make substantial connection
between a company’s operations and its financial performance that are reflected in the actual figures
and also of projections.
Drives Major Strategic Issues
A good CFO can also be expected to take part in important role of getting involved on some
major strategic issues that will have an impact on the company’s long-term future. These issues include
the hatching of the company’s 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 CFO’s 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).
Risk Manager
The CFO is the best position to foresee risks 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 just “tree top”, their views are real and they are in proximity of hard
figures that could back their decisions.
The CFO’s viewpoint on risk can be a helpful source to the board of directors and the CEO as
well as other senior officers as they manage the corporate affairs. CFO may be in the best position to
anticipate high risks transactions and the adverse consequences of a changing external environment.
This unique capability of CFO’s however is only valuable if the CFO is communicating well with the
CEO, the board and the other officers of the organization.
Relationship Role
More often, the CFO is the nucleus in an organization with many connections. The CFO will
work together with the CEO, the board of directors, the audit committee, internal auditors and the
external auditor. Strong verbal and written communication skills are indispensable if the nucleus is to
support the connections effectively. CFO serves the bridge between these varieties of parties within the
organization.
Objective Referee
CFO needs to demonstrate impartiality such 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 be in the context that it is not being done to favor somebody. CFOs are not valued by board of
directors or audit committees on attributes of boosting financial figures with sacrificed transparency.
In consonance with the principle of good corporate governance, boards of directors, audit
committee and CEOs need to understand all sides of a financial accounting or disclosure issues so
they can make an informed and rational decision. The CFO can and should be a trusted adviser in
matters of financial reporting.
ROLES OF THE AUDIT COMMITTEE
The audit committee is an essential component be geared toward in the overall corporate
governance system. The objectives of this committee should be geared toward carrying out practical
progressive changes in the functions and expectations placed on corporate boards. One of the
IM No.: MGT 4-C 2S-2020-2021
fundamental principles of an effective audit committee is that committee members should be

independent from the operational aspects of the company. This means that a company’s senior
management should not be audit committee members. The senior management however has to be
given the opportunity for important communication with the audit committee.
Understanding the Audit Committee Responsibilities
An audit committee should be engaging mainly in an oversight function and ultimately is

responsible for the company’s financial reporting processes and the quality of its financial reporting. For
the committee to carry out the said responsibilities, the committee must have a working knowledge on
the company’s goals and its long-term plans and visions including the issues the company is facing in
trying to achieve these objectives. Examples of issues that the committee should consider:
 Risk identification and response

 Pressure to manage earnings
 Internal controls and company growth
Risk Identification and Response
To be effective, an audit committee must have understanding of the risks the company faces
and more importantly the company’s internal control system for identifying and mitigating those risks.
Risks that could affect the company and that the audit committee should be conscious about include:
 External Risk (Independent)
Rapid technological Changes

Audit committee should always be on the lookout for the company not to be left behind
due to the advancement of technology. The new rule in this modern time is to embrace things
brought about by technology and be a survivor.
Downturns in the Industry

The product that the company is selling may have passed already its maturity stage and
it is already on its way down. The audit committee should have a clear picture of the “what if
scenario” of the entity. A very good example, Nokia began as a textile company and then went
into electronics and electronics migrated to wireless devices (mobile phone) but they missed the
next boat.
Unrealistic earnings expectations by analyst

An audit committee is expected to be not just composed and collected but also less
aggressive when it comes to expectation of business outcomes. Audit committees should be
associated with conservative and realistic information and thus they should deal figures from the
realist point of view. They should know how much meat within a cup of soup because this would
be the real basis in putting up plans for the company’s future.
 Operating/Internal Risks
Recurring organizational changes, turnover of key personnel is some of the danger sign
That the audit committee cannot afford to neglect. Things like this hamper the operational
momentum of the company rendering it slow in its progress in achieving its vision.
Another internal risk worthy of consideration is the complexities of transactions, complex
organizational structures, swift growth, performance-based compensation that are excessively
inappropriate, exposure to currency differences on foreign currency denominated loans, and
financial result that are abnormally different from that of the industry.
 Information and Control Risk

The audit committee in carrying out its responsibility has to address the following
concerns
Are considered as perennial in most organization, unsuitable control environment that are
sometimes “toned at the top”. Another is the lack of sincere management supervision and
inappropriate management override of existing controls which is by description the best habitat

IM No.: MGT 4-C 2S-2020-2021
for abuse. Timeliness is another concern since information needs to be communicated early
enough to the stakeholder for this information to be useful.
Who is responsible for financial reporting? The responsibility for financial reporting is vested in
three groups
1. The BOD the company’s board of directors including the audit committee
2. Finance and Accounting – financial management including the internal auditors
3. Auditor – the independent auditors
While it is true that this triumvirate forms a” three-legged stool”, there is a need to emphasis that
the audit committee must take the lead in the financial reporting process, since the audit
committee is an extension of the full board and hence the ultimate monitor of the process. An
audit committee that functions well could definitely send a strong message and partial
assurance to the other stakeholders that the system is in place and it is protecting the
organization both in short and long-term basis.
ROLES OF THE EXTERNAL AUDITOR
Auditing is a systematic process by which a competent, independent person objectively

obtains and evaluates evidence regarding assertions about economic actions and events to
ascertain the degree of correspondence between those assertions and established criteria and
communicates the result to interested users
Need for External Auditor
There is a need for independent auditor because of the apparent separation of

ownership and management. Audit services are used extensively by business organizations to
cast away doubts on the information given by management which are also generated under its
direct control. There exists information risk. Business structures are becoming more complex
which increases the possibility that unreliable information might be fed not only to decision
makers but more importantly stakeholders.
Factors that Contribute to Information Risk
1. Remoteness of information providers to the information users

This makes first-hand knowledge difficult to obtain by some stakeholders
because
They are divorced from management. Complex corporate structure, less involvement by
shareholder in the day-to-day operations decisions as geographical dispersion are just
some of the factors that widen the distance between the information user and provider.
2. Bias of information Providers
There is assumed conflict of interest between the shareholder and management
Regarding financial information. Financial statements and other financial information
serve as a “report card” of management of its stewardship the only report card prepared
by the one being graded. Having said this information may be presented in favor of the
provider when his goals are different with some stakeholders.
3. The volume of data
When business grow possibly thousands if not millions of transactions are
Processed daily through the use of sophisticated computer programs or via manual
systems. There is this possibility therefore that improperly recorded
Information may be buried in the records leaving the overall results inaccurate not
misleading, trained professionals therefore are needed in the area.
4. Complexities in Transaction
Changing and new relationship in business leads to some innovations in
Accounting and reporting process. Transactions nowadays are getting
complicated and becoming more difficult to record let alone be understood by the
stakeholders. Examples of these are derivatives, futures, multi-level mortgages in
securities, reinsurances, different valuations and other complex transactions in
the financial markets which the board of directors and other decision makers in
the company might venture into.
IM No.: MGT 4-C 2S-2020-2021
Auditing is an endeavor of assuring the readers of the financial statements with confidence in
the figures of financial statements. This is highlighted by the accountancy profession meaning of
audit. Audit of financial statements which is an exercise, the objective of which is to permit
auditors to express an opinion as to whether the statements give a true and fair view of the
affairs of the entity at a given period in accordance with the relevant frameworks and standards
The logic behind this definition is that the auditor’s opinion will lend and add some credibility to
the financial statements. It is expected that the auditor, as an independent expert on financial
preparation and reporting should conduct the examination exhaustively for him to have good
backings on the opinion he will be expressing in the independent audit reports.
Auditor’s Duties
In most countries, the auditor has a legal duty to make a report to the enterprise on the
fact and fairness of the entity’s annual accounts. This report should state the auditor’s opinion
on whether the statements have been prepared in accordance with the relevant standards more
importantly on relevant legislation and whether they present a true and fair view of the profit or
loss at any given period. The responsibility to report on the truth and fairness of the financial
statement’s rests with management, the auditor therefore has a responsibility to form an opinion
on certain other matters and to report any reservations that he has on the reports. In the audit
report, these reservations can be seen in the qualification of opinion by the auditor.
In the conduct of an audit, the auditor must consider whether the following are present:
1. Proper accounting records being kept by the company

2. Financial statements figure that agrees with accounting records
3. Adequacy of notes to financial statements and other disclosures necessary
4. Compliance with relevant laws and standards of financial accounting reporting
VI. LEARNING ACTIVITIES
Activity 1. On the space provided write A. for stakeholders; B. for agency issues and problems C for
attributes of corporation; D for responsibility of CFO/CEO
________1. public
________2. implement internal control
________3. employees
________4. conflict of interest
________5. managerial opportunism
________6. develop relations with financing sources
________7. advisor to management
________8. managerial defensiveness
________9. management
_______10. audit
Activity 2. Internet Exercise
Locate the website of the World Council for Corporate Governance and work on the following:
1. What are the mission, vision and objectives of the WCFCG?

2. What was the 2005 London Declaration?
3. Explain the acronym PREEMPTIVE
VII. ASSIGNMENT
Mini –Case
Mysterious Terminations

IM No.: MGT 4-C 2S-2020-2021
Multi Global Finance and Insurance Corporation (MGFIC) was, by all accounts, a model insurance
company. Profits were strong and had been for several years in a row. The company carried the
highest ratings in its industry and it had been recently voted one of the top 100 companies to work for in
the Philippines in recognition of its “very employee-focused work environment”. MGFIC offers very
generous benefits: free lunches in the cafeteria, on-site daycare facilities and even free Starbucks
Coffee in the employee break rooms. In an industry that was still struggling with the massive claims
after a succession of typhoons and floods in the Philippines, MGFIC was financially stable and
positioned to become one of the major insurance companies in the country.
So, why were the CEO, Juan Paredes; the CFO, Lydia Sanchez and the COO, Jose Aquino all fired on
the same day with no explanation other than that the terminations were related to issues of conduct?
Questions:
1. Who would most likely have intervened to terminate the senior team over issues
of conduct?
2. Give some examples of the kind of ethical misconduct that could have led to the
termination of the entire senior leadership of MGFIC
3. Was it a good idea to fire them all at the same time with no detailed explanation?
4. How are stakeholders of MGFIC likely to react to this news? Explain.
VIII. EVALUATION (Note. This: Not to be included in the student’s copy of the IM)
IX. REFERENCES
Numbering the IM No.: IM-CCCCCC-SSSSSS-NNNN-NNNN
School Year
Semester
Course Number
e.g.:
IM-COURSE NO-SEMESTER-SCHOOL YEAR
IM-MCB180-1STSEM-2020-2021

Instructional Module: Republic of The Philippines Nueva Vizcaya State University Bayombong, Nueva Vizcaya

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Instructional Module: Republic of The Philippines Nueva Vizcaya State University Bayombong, Nueva Vizcaya

Uploaded by

Copyright:

Available Formats

Republic of the Philippines

NUEVA VIZCAYA STATE UNIVERSITY

College: COLLEGE OF BUSINESS EDUCATION

DEGREE Business COURSE NO. MGT 4

I. UNIT TITLE/CHAPTER TITLE

Chapter 1 – Corporation and Corporate Governance

II. LESSON TITLE

III. LESSON OVERVIEW

IV. DESIRED LEARNING OUTCOMES

At the end of this lesson, students are expected to:

NVSU-FR-ICD-05-00 (081220) Page 1 of 21

Created by Operation of Law

Powers, Attributes and Properties

To Offer Vital Services to the General Public

To Offer Goods and Services to the Mass Market

SHAREHOLDERS, BONDHOLDERS AND DIRECTORS

Duties of the Boards of Directors

 Governing the organization by establishing broad policies and objectives

 Ensuring the availability of adequate financial resources

 Approving annual budgets

NVSU-FR-ICD-05-00 (081220) Page 7 of 21

FUNDAMENTAL OBJECTIVES OF CORPORATE GOVERNANCE

WHAT GOOD GOVERNANCE PROMOTES

BENEFITS OF GOOD GOVERNANCE

AGENCY PROBLEM IN CORPORATIONS

NVSU-FR-ICD-05-00 (081220) Page 10 of 21

In traditional (neo-classical) approach, corporation is treated as a single entity, it is often called

Goals of Financial Management

Do managers Act in the Stockholder ‘Interest

Control of the Firm

AGENCY THEORY IN GOVERNANCE

EFFECTS OF AGENCY IN GOVERNANCE

As said earlier of a corporation is a form of business organization where a principal agent

Incurrence of Agency Costs

CONCEPT OF GOAL CONGRUENCE

PERFORMANCE INCENTIVES AND DISINCENTIVES

Pay Dependent on Profit Level

Threat of Being Fired

ROLES OF THE NON-EXECUTIVE DIRECTORS

Non-executives’ directors have the responsibilities in the following areas:

NVSU-FR-ICD-05-00 (081220) Page 15 of 21

ROLES OF THE CHIEF FINANCIAL OFFICER (CFO)

Implements Internal Controls

Supervises Major Impact Projects

Develops Relations with Sources

Drives Major Strategic Issues

ROLES OF THE AUDIT COMMITTEE

fundamental principles of an effective audit committee is that committee members should be

Understanding the Audit Committee Responsibilities

An audit committee should be engaging mainly in an oversight function and ultimately is

 Risk identification and response

Risk Identification and Response

 External Risk (Independent)

Rapid technological Changes

Downturns in the Industry

Unrealistic earnings expectations by analyst

 Information and Control Risk

NVSU-FR-ICD-05-00 (081220) Page 18 of 21

ROLES OF THE EXTERNAL AUDITOR

Auditing is a systematic process by which a competent, independent person objectively

Need for External Auditor

There is a need for independent auditor because of the apparent separation of