Chapters 3

SEC CODE OF CORPORATE GOVERNANCE

Memorandum Circular No. 19, Series of 2016

Code of Corporate Governance for Publicly-Listed Companies

(CG Code for PLCs)

PUBLICLY-LISTED COMPANIES – companies whose shares of stocks are listed or can be bought/sold in the stock market.

STOCK MARKET – collection of markets and exchanges where regular activities of buying, selling, and issuance of shares
of publicly-held companies take place

 Philippine Stock Exchange (You may visit their website to feed your curiosity about stocks, stock prices,
examples of publicly-listed companies, the sector they belong to, their financial statements, company
disclosures, etc.)

PURPOSE OF THE CODE: to promote the development of a strong corporate governance culture and keep abreast with
recent developments in corporate governance

DATE OF EFFECTIVITY: January 1, 2017

NB: The existence of a Code of Business Conduct does not automatically mean compliance.

“COMPLY OR EXPLAIN” APPROACH – voluntary compliance + mandatory disclosure

 Companies do not have to comply with the Code, but they must
(1) state in their annual corporate governance reports whether they comply with the Code provisions,
(2) identify any areas of non-compliance, and (3) explain the reasons for non-compliance.

ASPECTS OF THE CODE

1. Principles – high-level statements of corporate governance good practice

2. Recommendations - objective criteria that are intended to identify the specific features of corporate governance
good practice that are recommended for companies operating according to the Code

NB: When a Recommendation is not complied with, the company must disclose and describe this non-compliance, and
explain how the overall Principle is being achieved.

NB: A company may achieve the principles even without following all recommendations.

3. Explanations – strive to provide companies with additional information on the recommended best practice

NB: This Code does not, in any way, prescribe a “one size fits all” framework. It is designed to allow boards some
flexibility in establishing their corporate governance arrangements.

NB: The Principle of Proportionality should be considered.

DEFINITIONS (as how these terms were used in this Code)

CORPORATE GOVERNANCE – the system of stewardship and control to guide organizations in fulfilling their long-term
economic, moral, legal and social obligations towards their stakeholders
  system of direction, feedback and control using regulations, performance standards and ethical guidelines to
hold the Board and senior management accountable for ensuring ethical behavior – reconciling long-term
customer satisfaction with shareholder value – to the benefit of all stakeholders and society
 PURPOSE: to maximize the organization’s long-term success, creating sustainable value for its shareholders,
stakeholders and the nation

BOARD OF DIRECTORS – the governing body elected by the stockholders that exercises the corporate powers of a
corporation, conducts all its business and controls its properties.

NB: The shareholders have the right to elect the Board of Directors.

MANAGEMENT – a group of executives given the authority by the Board of Directors to implement the policies it has
laid down in the conduct of the business of the corporation.

NB: The Board of Directors has the authority over the management.

INDEPENDENT DIRECTOR – a person who is independent of management and the controlling shareholder, and is free
from any business or other relationship which could, or could reasonably be perceived to, materially interfere with his
exercise of independent judgment in carrying out his responsibilities as a director.

EXECUTIVE DIRECTOR – a director who has executive responsibility of day-to-day operations of a part or the whole of
the organization.

NON-EXECUTIVE DIRECTOR – a director who has no executive responsibility and does not perform any work related to
the operations of the corporation.

CONGLOMERATE – a group of corporations that has diversified business activities in varied industries, whereby the
operations of such businesses are controlled and managed by a parent corporate entity.

 Example: SM Investments Corporation (SM) – holding company of the SM Group, with interests in retail,
property, and banking.

Retail: The SM Store, Supermarket, Hypermarket, Savemore, Waltermart,Alfamart

Property: SM Prime Holdings, SMDC/SM Development Corporation Banking/Financial services: BDO,

Chinabank

INTERNAL CONTROL – a process designed and effected by the board of directors, senior management, and all levels of
personnel to provide reasonable assurance on the achievement of objectives through efficient and effective operations;
reliable, complete and timely financial and management information; and compliance with applicable laws, regulations,
and the organization’s policies and procedures.

ENTERPRISE RISK MANAGEMENT – a process, effected by an entity’s Board of Directors, management and other
personnel, applied in strategy setting and across the enterprise that is designed to identify potential events that may
affect the entity, manage risks to be within its risk appetite, and provide reasonable assurance regarding the
achievement of entity objectives.

 REASONABLE ASSURANCE – high but not absolute assurance; recognizes the possibility of having misstatements

RELATED PARTY – shall cover the company’s subsidiaries, as well as affiliates and any party (including their subsidiaries,
affiliates and special purpose entities), that the company exerts direct or indirect control over or that exerts direct or
indirect control over the company; the company’s directors; officers; shareholders and related interests (DOSRI), and
their close family members, as well as corresponding persons in affiliated companies. This shall also include such other
person or juridical entity whose interest may pose a potential conflict with the interest of the company

 Example: Jollibee Foods Corporation (JFC)

Subsidiaries: Jollibee, Greenwich, Chowking, Mang Inasal, Burger King, Dunkin Donuts, CBTL, Red Ribbon

RELATED PARTY TRANSACTIONS – a transfer of resources, services or obligations between a reporting entity and a
related party, regardless of whether a price is charged. It should be interpreted broadly to include not only transactions
that are entered into with related parties, but also outstanding transactions that are entered into with an unrelated
party that subsequently becomes a related party.

 Example: transactions between JFC and Greenwich

STAKEHOLDERS – any individual, organization or society at large who can either affect and/or be affected by the
company’s strategies, policies, business decisions and operations, in general. This includes, among others, customers,
creditors, employees, suppliers, investors, as well as the government and community in which it operates.

 Example: To name a few, the concern of the creditor is the capacity of the company to pay off its debts. The
concern of the investor is the financial status and the profitability of the company, among others.

This Code consists of 16 principles grouped into 5 sections. To reiterate, principles arestatements of corporate
governance good practice.

(NOTE: Memorize the 16 principles.)

1. THE BOARD’S GOVERNANCE RESPONSIBILITIES (7)

P1: Establishing a Competent Board

The company should be headed by a competent, working board

a. to foster the long-term success of the corporation, and

b. to sustain its competitiveness and profitability in a manner consistent with its corporate objectives and the long-
term best interests of its shareholders and other stakeholders.

Important Points to Remember

- collective working knowledge, experience, or expertise that is relevant to the company’s industry or sector

- appropriate mix of competence and expertise

- majority of non-executive directors to help secure objective and independent judgment on corporate affairs

- relevant annual continuing training for all directors

- policy on board diversity

- assistance by a Corporate Secretary and its duties and responsibilities

- assistance by a Compliance Officer and its duties and responsibilities

P2: Establishing Clear Roles and Responsibilities of the Board

The fiduciary roles, responsibilities and accountabilities of the Board as provided under

a. the law,

b. the company’s articles and by-laws, and

c. other legal pronouncements and guidelines should be clearly made known to all directors as well as to stockholders
and other stakeholders.

Important Points to Remember

- how the board members should act: on a fully informed basis, in good faith, with due diligence and care, and in the
best interest of the company and all shareholders

- 2 key elements of the fiduciary duty of board members

- What is fiduciary duty

- competent and qualified Chairperson

- roles and responsibilities of the Chairman/Chairperson

- succession planning program for directors, key officers, and management

- remuneration of key officers and board members

- formal and transparent board nomination and election policy

- grounds for permanent and for temporary disqualification of a director

- group-wide policy and system governing related party transactions

- primary responsibility for approving the selection and assessing the performance of the Management

- effective performance management framework

- Board’s oversight responsibility over an appropriate internal control system and a sound enterprise risk management
(ERM) frameworks

P3: Establishing Board Committees

Board committees should be set up to the extent possible to support the effective performance of the Board’s functions,
particularly with respect to

a. audit,

b. risk management,
 c. related party transactions, and

d. other key corporate governance concerns, such as nomination and remuneration.

The composition, functions and responsibilities of all committees established should be contained in a publicly available
Committee Charter.

Important Points to Remember

- board committees that focus on specific board functions

- Audit Committee and its duties and responsibilities

- Corporate Governance Committee (CG Committee) and its duties and functions

- Board Risk Oversight Committee (BROC) and its duties and responsibilities

- Related Party Transaction (RPT) Committee and its functions

- Committee Charters

P4: Fostering Commitment

To show full commitment to the company, the directors should devote the time and attention necessary to properly and
effectively perform their duties and responsibilities, including sufficient time to be familiar with the corporation’s
business.

Important Points to Remember

- presence and active participation in all meetings of the Board, Committees, and Shareholders

- limit on board directorships

P5: Reinforcing Board Independence

The Board should endeavor to exercise objective and independent judgment on all corporate affairs.

Important Points to Remember

- minimum number of independent directors

- qualifications, disqualifications, and maximum term of an independent director

- roles and responsibilities of the Chief Executive Officer (CEO)

- lead director and his/her functions

- abstention of a director from participating in meetings on which he/she has a material interest

- non-executive directors

P6: Assessing Board Performance

The best measure of the Board’s effectiveness is through an assessment process. The Board should regularly carry out
evaluations
 a. to appraise its performance as a body, and

b. assess whether it possesses the right mix of backgrounds and competencies.

Important Points to Remember

- self-assessment of performance

- guidelines in determining Board performance

P7: Strengthening Board Ethics

Members of the Board are duty-bound to apply high ethical standards, taking into account the interests of all
stakeholders.

Important Points to Remember

- adoption of Code of Business Conduct and Ethics

- implementation and monitoring of compliance with the Code

2. DISCLOSURE AND TRANSPARENCY (4)

P8: Enhancing Company Disclosure Policies and Procedures

The company should establish corporate disclosure policies and procedures that are

a. practical and

b. in accordance with best practices and regulatory expectations.

Important Points to Remember

- importance of establishing disclosure policies and procedure

- period to disclose any dealings in the company’s shares

- full disclosure of relevant and material information on individual board members and key executives

- disclosure of remuneration policies and procedure

- disclosure of policies governing Related Party Transactions (RPTs)

- disclosure of material facts and events

- Manual on Corporate Governance

P9: Strengthening the External Auditor’s Independence and Improving Audit Quality

The company should establish standards for the appropriate selection of an external auditor, and exercise effective
oversight of the same to strengthen the external auditor’s independence and enhance audit quality.

Important Points to Remember

- appointment, reappointment, removal, and fees of the external auditor

- Audit Committee Charter

- disclosure of the nature of non-audit services performed by its external auditor