XGOVERN – MIDTERM  Supervisory council – controls

REVIEWER CHAPTER 4 the executive board.

-chosen by the employees and
Good Corporate Governance shareholders.
- Important for ECONOMIC  Executive board – incharge of the
DEVELOPMENT corporate management.
- Not only for invidual company, but CONSTITUENT ELEMETS OF THE MODELS
for the economy as a whole.
- It should be improved and promoted  Key players in the corporate
continuously, and a need for a environment
model to measure the quality of  Share ownership pattern in
corporate governance. the given country
 Composition of the BOD
MODELS OF COPORATE GOVERNANCE  Regulatory framework
- Attempts to measure the quality of  Disclosure requirements for
corporate governance that are publicly listed stock corporations.
focused on COMPLIANCE RELATED  Corporate actions requiring
ISSUES. shareholder approval
- Focus on the inputs (composition of  Interaction among key players
the boards, the separation of the
CEO and Chairman roles)
- Aims to incorporate behavioral
aspects, the evaluation of sufficient
number of alternative in
 Decision making and its process
 Quality of information as the
basis sound of judgement
 Results of oversight and guidance
functions of the Board of
Directors
MODELS OF CORPORATE GOVERNANCE
FROM DEVELOP CAPITAL MARKET
1. ANGLO-US MODEL
- Emphasizes the interest of
shareholders, management, and
directors.
- Single-tiered BOD (non-
executive directors)

2. JAPANESE MODEL
- Two dominant legal relationships bet.
 Shareholders, customers,
suppliers, creditors, and
employe union.
 Administrators, managers,
and shareholders.
- Joint responsibility and balance

3. GERMAN MODEL
- Continental model or European
Model
- Carried out by two groups:
 MODELS OF CORPORATE GOVERNANCE
Constituent Elements ANGLO-US JAPANESE GERMAN
KEY PLAYERS Three major players – Four key players Banks & Corporate
managers, directors, and Main bank Shareholders (to a lesser
shareholders and called Affiliated company extent)
as the CORPORATE (keiretsu) AG -German Public
GOVERNANCE TRIANGLE. Management Limited Company;
Government Neither Banks nor
Corporations are key
institutional investors.

SHARE OWNERSHIP -there has been a Financial Institutions and Corporations,

PATTERN marked shift of stock Corporations hold Equity
ownership during the Market; Insurance German Banks are
POSTWAR period from Companies and Banks dominant shareholders
individual shareholders hold significantly of the
to institutional equity market; Banks are
shareholders. key Shareholders.

-increase in ownership
by institutions has
resulted in their
increasing influence.
COMPOSITION OF -includes both INSIDERS -composed almost the -Composition of the
BOD (employed in the insiders Management Board
corporation) and (VORSTAND) and
OUTSIDERS (has no Supervisory board
direct relationship with (AUFSICHTSRAT)
the corporation and its
management).

REGULATORY Wide range of laws and Government Ministries Strong Federal

FRAMEWORK regulatory codes; US has are the most influential. (Federation) & State
the most regulatory Laws
requirement.

UK based on
parliamentary acts and
rules
DISCLOSURE US has the most -are relatively stringent, -corporations are
REQUIREMENTS comprehensive but not as stringent as permitted to a mass
disclosure requirements the US. considerable reserves
of any jurisdiction. which enable German
corporations to
Us corporations are understate their value.
required to disclose a
wide range of
information.

Requires SEMI ANNUAL

reporting and less data in
most categories.
CORPORATE Routine: Routine Routine
ACTIONS • Election of directors • Payment of dividends • Allocation of net
• Appointment of and allocation of income
- Routine and auditors resources • Ratification of the acts
non-routine Non-routine • Election and of management
appointment of directors
 • Establishment and • Election of the
amendment of stock Non-routine supervisory board
option plans • Capital authorization • Appointment of
• Mergers and takeovers • Amendments to the directors
• Restructurings articles of association
• Amendment of the • Payment of retirement Non-routine
articles of incorporation bonuses to directors and • Capital authorization
auditors • Affiliation agreements
Non-routine • Increase of the with subsidiaries
• Establishment and aggregate compensation
amendment of stock
option plans
• Mergers and takeovers
• Restructurings
• Amendment of the
articles of incorporation

INTERACTION -establishes a complex, -generally, links and -designed to include the

AMONG KEY well-regulated system strengthens relationship interest of labor,
PLAYERS for communication and -prefer that a majority of corporations, banks, and
interaction between its shareholders be LONG shareholders in the
shareholders and TERM. corporate governance
corporations. system.
CHAPTER 5: GOVERNANCE AGENCY
PROBLEMS AND ACCOUNTABILITY OF
CORPORATE MANAGERS AND
SHAREHOLDERS
AGENCY PROBLEM IN CORPORATE
GOVERNANCE
➢ Agency Theory
- Firm can be viewed as a loosely
defined contract between resource
providers and the resource controllers
➢ Principals
- It is a relationship that came into
being occasioned by the existence of
one or more individuals
➢ Agents
- One or more individuals that were
employed to carry out some service and
decision making
➢ Agency Relationship
- Between stockholders and BODs
PRINCIPAL-AGENT SPECIFIC ISSUES
Diversification vs. Dividends
- Control on how the available funds will be
used or invested is an example of an
agency problem.
- Managers prefer to use free cash flows to
be invested in additional product
diversification while shareholders prefer
the funds to be declared as dividends, if it
is backed by income.
Managerial Opportunism
- There are instances wherein
shareholder returns will not be maximized
to the fullest because of unrelated
diversification and growth which leads to
increased compensation for managers.
This also reduces the employment risk of
top managers.
Power Supremacy vs. Technical Expertise
- Some corporate investors are just
putting their money with expectation of
dividend at a certain time. The nature of
their intention made them rely on the
expertise of the agent.
Trust
- Shareholders have more trust than
doubts to the agents and they entrust
everything as far as operation including
charting of
the corporation’s future to its directors and
officers.
- It is the kind of comfort that agents are
taking pleasure from that would sometimes
make them lose their balance.
- This failure in balance is one of the
essential components of managerial
opportunism.
IDENTIFIED AGENCY PROBLEMS
● Adverse Selection
- Insufficiency of information that is
normally obtainable to the principal and to
the agents. Principals screen the agents to
be and most of the screening process is
anchored on the information provided by
the agents. The information is later found
to be inaccurate or is not the same as what
is desired in real performance.
- This insufficiency of information may
be done by the principals through
misrepresentation or provision of
incomplete or half-cooked information.
● Agency Costs
- Since the principal is delegating power
and responsibility, cautious principals will
carry out some type of monitoring
activities to have reassurance that
decisions are most favorable from the point
of view of the principal.
● Conflict of Interest
- A corporation’s managers can or
may have personal objectives that
compete with the owners’ objectives of
maximization of shareholder wealth.
-Almost certainly considerable in majority
of large publicly traded corporations
because the firm’s managers generally
own only a small percentage of the
common shares.
-Shareholders must incur agency costs to
monitor agent’s activity and reduce the
moral danger problem.
● Legal Requirements vs. Opportunistic
Behavior
- The culture of opportunism presented a
very strong reflection of the
ineffectiveness of principal-agent
relationships and the massive deficiency
of the current agency
theoretical efforts and practices.
-The Sarbanes-Oxley Act of 2002
was enacted by the US Congress
which imposed new regulations on
public companies and their auditors.
● Self-Interested Behavior
- Agents have the capability to operate
in their own self-interest rather than the
best interests of the firm because
executives and managers know better
than the shareholders whether they are
capable of meeting the shareholders’
objectives or not.
-Another issue which tempts self-interest
behavior is the absence of clear and
compelling evidence that it is the agents
that are at fault or responsible and
consequently to be blamed or crowned on
the final outcomes of the organization.
REMEDIES WITHIN SHAREHOLDERS
➢ Proxy Voting
- an exercise of voting in behalf of
shareholders through the use of a special
authority given by the shareholder.
BENEFITS:
● Routine Decisions
- Investment and fund managers serving
as proxies will generally vote for
uncontested director or trustee nominees,
other minor things like changes in
company name and other procedural
matters related to annual meetings.
● Governance
- Proxies especially fund manager will
generally vote for charter and
amendments of by-laws, on matters
related to compliance with applicable
laws and regulations affecting
organizations.
● Issues on Anti-takeover
- Proxies and fund managers normally will
vote for proposals that necessitate
shareholders’ confirmation of anti-takeover
measure and proxy system provides a swift
and effective way of piling up these
poison pills.
➢ Derivative Suit
- a lawsuit filed by a shareholder on behalf
of the corporation against a third party.
SPECIFIC FEATURE
- While, under the Corporation
Code of the Philippines shareholders are
the owners of a corporation but for
practical reasons, they are not
empowered to manage the day-to-day
operations and other routinary concerns
of the corporation.
- Instead, shareholders appoint
directors, and the directors in turn
appoint executives and high-ranking
managers.
Derivative suit allows a shareholder to bring
an action in the name of the corporation
against the parties that may cause or is
allegedly causing harm to the corporation.
PROCESS
- In initiating this action, a
shareholder must satisfy various
requisites to prove that he has a
strong and valid status before being
permitted to proceed with the
action.
- The shareholder may be required to
meet some qualifications. One of
these qualifications might be the
minimum value of his holdings in the
corporation and the minimum
duration of his being a shareholder.
In addition, the shareholder who is
about to initiate the action may be
required to post a bond or other fees
to compensate whenever his action
is unsuccessful.
TAKEOVER
Corporate takeover is the "general term"
referring to transfer of control of a firm from
one group of shareholders to another
group of shareholders.
➢ Friendly Takeover
- Before a bidder company makes an
offer for another company, it usually informs
first the board of directors of the
company to be taken over. When the
board thinks that accepting the offer
serves the shareholders interest better, it
then recommends the said offer be
accepted by the shareholders.
➢ Hostile Takeover
- Permits the “acquirer to be” company
to bypass the target company’s
management is it is uncooperative and
unwilling to agree to a merger or takeover
- A takeover is regarded as “hostile” if their
target company’s board casts-off the offer
but the “acquirer to be” is persistent to
pursue it.
➢ Reverse Takeover
- Type of merger used by private
companies to become publicly traded
without passing through an initial
public offering (IPO)
➢ Tender Offers
- A tender offer is a corporate finance term
which means a type of takeover proposal
that is public and open invitation, usually
coursed through media by a prospective
acquirer to all stockholders of a publicly
traded corporation (acquired to be")
which is the target corporation.
- Shareholders of the target corporation will
be given an offer to tender their stocks for
sale at a specified price during a
specified time. In this type of takeover
proposal, the bidder/acquirer
communicates directly to the stockholders
of the target company and the directors
of the target company may not
necessarily endorse the proposal.
- The employ of a tender offer is a
familiar approach when an individual or
entity is kicking off a takeover bid.
FINANCING A TAKEOVER
Financing a takeover is an act of funding
for the purpose of obtaining control over a
corporation through the purchase of stock
or any other means; the process of
providing capital for someone to establish
control of another corporation.
➢ Debt Financing
- A company acquiring another pays a
specific amount of money for the merger
transaction to complete.
- This technique is often used by private
equity companies to lessen the impact of
cash flows at the same time. Debt
financing could reach as high as 80% of
the purchase price leaving only 20% to be
raised internally by the acquiring
company.
➢ Partial or Full Equity Conversion
- This is done by giving the shareholders of
the target company offers that include a
debt instrument in partial or full payment
of shares
➢ Share Swap/All Share Deal
- In a takeover, sometimes the
transaction can entirely be financed by a
share swap or all share deal
EXTERNAL FORCES AFFECTING
GOVERNANCE
➢ Competitors
- Refers to corporations and other business
entities, private or public, offering the
same product or services that the company
is offering
➢ Financiers
- concerned with the management of
large amounts of money on behalf of
governments or other large organization
activity such as lending money, project
financing, large-scale investment. the
company governance affects in a sense
of being the fund provider and while
financier securing them.
➢ Regulatory Agencies
- It deals with areas of administrative law
of regulation that enforce rules and
regulations that impose supervision or
oversight for the benefit of the public at
large scale to set up safety and oversee
use of public goods and commerce.
➢ Watchdogs
- Refers to independent organizations
regulating or trying to police a particular
industry or corporate conduct to watches
the activities of a particular part of
government in order to report illegal acts
or problems
➢ Predator companies
- Refers to other corporations that are
always watching and waiting for a
chance to take over a certain company
via friendly or hostile.
➢ Information enhancers, Providers
and Gatekeepers
- These are independent third-party
persons or entities whose cooperation is
important because they have the
capability to at least deter, if not prevent,
misconducts of corporations.
- The entities and people are considered
gatekeepers to financial markets by
providing information on investments and
business concerns to investors and fund
providers
➢ Investment Bankers
- A brokerage or a dealership operation
and offers advisory services to its clients
on investment concerns which acts as an
agent for a corporation issuing securities.
➢ Role Investment Banker
- responsible for raising capital for
businesses and individuals by issuing
debt and selling equity.
1. Origination (Investigation, Analysis and
Research)
● Discovery- finding of potential issue
of securities.
● Investigation-testing and analyzing of
the investment credit of the potential
security issuer including the inherent
reliability of the issue.
● Negotiation- determination of amount,
price, and the terms of proposed issue
2. Underwriting
- An arrangement with an investment
banker whereby the investment banker
agrees to buy the entire issue at a set
price. It also refers to the guarantee by the
investment banker that the issuer company
will receive a certain minimum amount for
their newly issued securities for sale.
3. Distribution
- A reputable investment banker with
history of selecting good companies
and pricing securities adds efficiency
that the securities can be sold
➢ Stock Exchange
- refers to an entity which offers trading
services and facilities for stock brokers
and traders, to buy and sell shares of
stock and other securities.
➢ Role of Stock Exchange
1. Raise Capital
- It helps for the expansion and other
development corporations to create
projects by selling shares in the investment
public.
2. Mobilize Savings
- It means pulling out money from
deposits and having it as part of
circulation which promotes business
activities that benefit several sectors such
as trading, manufacturing, agriculture,
and services.
3. Facilitates Growth
- As it observes to see acquisition as to
increase product lines, augment
distribution channels, protect itself against
market unpredictability, increase its
market share or other business as it believes
that it is necessary to achieve all of the
above.
4. Distributes Profit
- Investors are willing to wait until the
declaration of dividends takes place
and to those speculative investors who
are partially in the real trade of playing
with the price.
5. Improves Corporate Governance
- Companies tend to improve their
management standards and efficiencies
for them to please these shareholders who
have different levels of demand and who
are constantly conscious of the return of
their investment.
6. Creates Opportunities for Small Investors
- Minimum amount for someone to trade in
the local stock exchange can easily buy
the share he can afford with proper
research.
7. Facilitates raising Capital for
the Government
- Stock exchange is also serving
government avenue to raise funds through
issuance of bonds and other papers the
latter guarantees.
8. Indicator of Economy
- Without manipulation, securities prices
increase or remain stable is a good
indication that the economy in general is
stable and growing. Moreover, the stock
exchange is the only facility that can
provide information on a daily basis in
real time.

➢ Financial Press

- Refers to media through newspaper,

magazines, TV channels, broadcast
programs and other platforms that
specialize on financial news and
updates where it provides an avenue
where the information sources and the
information seekers meet.
CHAPTER 6: CORPORATE SOCIAL
RESPONSIBILITY
- has attained a high profile in the
academic domain (de Bakker,
Groenewegen, & den Hond, 2005;
Lockett, Moon, & Visser, 2006; &
Walsh, 2003; Walsh, Weber, &
Margolis, 2003)
- many consider it an absolute
necessity that organizations define
their roles in society and apply
social, ethical, legal and responsible
standards to their businesses
- From a CSR perspective,
organizations are seen as key
drivers in the process of
constructing a better world
- As a result, organizations are
developing and updating their
programs and policies, and
attempting to measure their social
and environmental performance,
while at the same time engaging in
consultations with stakeholders
and, during this process,
communicating their values to
employees, environmental groups,
local communities and
governments.
HISTORY
18th CENTURY
ADAM SMITH
- economist and philosopher
- articulated the traditional or classical
economic model of business.
- this suggested that the needs and
desires of society could best be met
by the interaction of individuals and
organizations in the marketplace.
INDUSTRIAL REVOLUTION
- Many of the principles
advocated by Smith were borne
out as the introduction of new
technologies allowed for more
efficient production of goods and
services.
- Large organizations developed and
acquired great power, and their
founders and owners became
some of the richest and most
powerful men in the world.
LATE 19TH CENTURY
- many of these individuals believed in
and practiced a philosophy that
came to be called "Social
Darwinism," which, in simple form, is
the idea that the principles of natural
selection and survival of the fittest
are applicable to business and
social policy.
- This type of philosophy justified
cut throat, even brutal, competitive
strategies and did not allow for
much concern about the impact of
the successful corporation on
employees, the community, or the
larger society.
1900 AND 1960
- the business world gradually began
to accept additional responsibilities
other than making a profit and
obeying the law.
BEGINNING OF 20TH CENTURY
- backlash against the large
corporations began to
gain momentum.
- Laws and regulations such as the
Sherman Antitrust Act, were enacted
to rein in the large corporations and
to protect employees, consumers
and society at large
- An associated movement,
sometimes called the "social gospel",
advocated greater attention to the
working class and the poor. The
labor movement also called for
greater social responsiveness on the
part of business.
BASIC PREMISES OF CORPORATE SOCIAL
RESPONSIBILITY
- Business Leaders
- Employees
- Investors
- Local Communities
- Media
- NGO’s
- Regulators
SPECIFIC RELEVANCE OF CORPORATE
SOCIAL RESPONSIBILITY
- Changing social expectations
- Competitive labor markets
- Disclosure demands by stakeholders
 - Dwindling government role
- Globalization
- Pressure from investors
- Supplier Relations
- Wealth and Vulnerabilities
ETHICAL LEADERSHIP
- is a leadership that is concerned in
leading in a manner that respects
the rights, dignity and stake of others.
- ethical leadership focuses on how
leaders employ their business and
political power in the decisions they
make and actions they engage
into
ETHICAL DECISION-MAKING PROCESS IN
ORGANIZATIONS
Ethics
- refers to system, values, philosophies,
and principles that govern the
behavior of organizational members
which are the consequences of
Organizational pronouncement.
Ethical decision making
- the process of trying to establish
organizational values from which
ethical decisions will be based on.
- Part of the requisite of ethical
decision making process in
organization is answering the foil
questions whenever confronted with
any instance that requires decision.
• Managerial side, did
the leader provide leadership
and oversight?
• On the human side, did the
leader nurture individuals by
providing responsibility and
accountability?
• In the operational corporate
context, will it facilitate
improvements more especially on
compliance requirement?
MYTHS ABOUT ORGANIZATIONAL ETHICS
- Being ethical is easy
- Being ethical is not part of doing
business
- Being ethical brings no benefit
WHAT ETHICS IS NOT
- Ethics is not the same as feelings
- Ethics is not religion
- Ethics not just following the laws
- Ethics is not following culturally
accepted norms
- Ethics is not science
CORPORATE CITIZENSHIP
- refers to the acceptance by business
of a conscious effort in focusing and
in satisfying the economic, legal,
ethical, philanthropic and social
responsibilities and other acts
expected from the corporation to
do to its stakeholders.
KEY ELEMENTS
- Commitment to quality
- Ethical legal compliance
- Stewardship and governance
- Superior employee relation
- Social advocacy
- Environmental advocacy
- Community involvement
PHILANTHROPY AND SOCIAL INITIATIVES
Philanthropy
- is the practice of giving money
and time to help make life better
for other people. It is a
manifestation of love for mankind.
Corporate philanthropy
- key component of a
corporation's broader social
responsibilities
- refers to the giving of the company's
profit directly to charitable
organizations or to individual in need
with the intention of helping and
improving the quality of life of the
different corporate stakeholders.
BENEFITS OF CORPORATE PHILANTROPHY
- Benefits to Business
 Enhances corporate reputation
 Improved relations with the
government, the community and
the key stakeholders
 Supports a company's strategic
business goals
- Benefits to Stakeholders
 Build employee morale and
engagements
  Enlarges sense of community and
social obligations
 Develops future workforce
contributing to a sustainable
company
- Benefits to the Community
 Improves quality of life of
the community members
 Provides human and
capital resources to non-
profit organizations
SOCIAL SCREENING OF INVESTMENTS
"SCARE-OFF FROM" STRATEGY
- This is considered as the most rigid
way screening of investments.
- It can be characterized by hard
policies such as no investments to
those companies with questionable
environmental records, those
engaged in child labor,
discrimination (sex, racial, religious,
cultural, etc.), those who use
animals in product testing and many
other anti-earth or anti-green
policies.
IMPACT MITIGATION
- This approach is founded upon the
idea that for everything the
company does there is always an
impact to the stakeholders.
WHOEVER IS THE BEST
- This strategy involves a kind of free
market model where companies
within the same industries compete
with one another for the best records
on a variety of social issues.
MAIN OR DERIVATIVE CONNECTIONS
- This strategy involves a kind of free
market model where companies
within the same industries compete
with one another for the best records
on a variety of social issues.
- It involves asking how far back in
the industrial process one wants a
particular social screen to go.
CORPORATE GREENWASHING
Greenwashing
- refers to the practice of
companies characterized by
deceptively
making it appear that their products,
services and policies are
environmentally friendly by
projecting cost cuts as reduction in
use of resources or investments in
"green concerns" like in areas of
ecology and environment.
- it is "green marketing tactics" which
refer to the deceiving use of green
PR to win the hearts of consumer for
purposes of improving image,
building up goodwill and eventually,
drawing more revenue.
GREENWASHING SINS
- Sin of the hidden trade-off
- Sin of no proof
- Sin of vagueness
- Sin of irrelevance
- Sin of fibbing
- Sin of lesser of two evils
- The sin of worshiping false labels
WAYS ON HOW TO SPOT GREENWASHING
- Poor use of scientific facts or the lack
of any common scientific
knowledge and facts.
- The use of buzz words like "carbon
intensity", "sustainable development",
"carbon offsets" and "clean
technology."
- Look at the environmental label on
the product.
- Never abandon common sense
- Look out for negligible green claims