CHAPTER 2

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What is strategy?

A strategy is defined as a plan of action taken to achieve objectives. The process of the Strategy involves three
steps: formulation, implementation, and evaluation (David, 2017). Strategic management is a process of creating a
competitive advantage over its competitors and sustaining this advantage in the long term. The process of strategic
management is illustrated below:

Establish
goals/objectives
and scan
environment

Formulation Implementation Evaluation

Establish goals - This is initially performed by creating and/or clarifying your business vision/ mission and identifying
goals/ objectives.

1. Vision: what the company envisions itself to be in the future or to become

2. Mission: describes what the company is all about, who they are, what and how they do things, and for whom
3. Goals: desired outcomes of planning, broader than objectives
4. Objectives: aimed targets that are needed to achieve goals

Scan environment - Perform a thorough analysis and assessment of the internal and external environment of the company.

1. External: looks at the external opportunities and threats, given the dynamics of a particular industry
2. Internal: looks at a company's strengths and weaknesses by assessing its resources

Formulation - develops top-level strategies that can be trickled down to the rest of the organization

Implementation - executes developed plans by providing detailed objectives and action plans

Evaluation - measures and assesses results, and recommends changes for improvement if necessary

Who are the stakeholders?

Stakeholders are individuals or groups of people who can be affected by the activities engaged in by corporations
in achieving their goals. Key stakeholders are shareholders (investors, owners, partners, or anyone who has a financial stake
in the company), customers, employees, suppliers, and society (government, civil society, institutions).

Stakeholder Theory

One of the key arguments used in understanding CSR is the stakeholder theory. This theory states that companies are
responsible for generating reasonable profits for their shareholders but should also be responsible for their stakeholders'
well-being (Freeman, 1984). To illustrate, when a manufacturing company produces industrial waste and dumps it into a
river, residents affected by this unethical practice will demand the proper disposal of chemicals as it affects their right to
clean air and water. Employees of the company may also be exposed to the toxic chemicals in making the product and have
the right to demand protective gear and processes that will not be harmful to them. These residents and employees do not
have any financial or managerial participation except maybe buying the products or helping produce them, but their concerns
should be heard and be a part of the company's decisions. This is a moral claim exercised by a stakeholder, and forms part
of a company's desired ethical behavior.

Strategic CSR

"In the early years of CSR, programs were designed and developed with minimal stakeholder engagement. However,
it has since become evident that creating shared value among a company's stakeholders is critical and essential to the CSR
agenda, and beneficial for program objectives, impact, market value, and bottom line. Dialogue, feedback, transparent
reporting, collaborative partnerships, for example, are powerful tools to build trust and strong relationships among the
stakeholders. This drives CSR into the company's DNA, and ensures the corporate values remain embedded with a
company's culture."

Nena Wuthrich

Executive Director

LBC Foundation Inc.

Strategic SR starts within an organization when it embeds and aligns its CSR initiatives as part of the company's
overall strategy. This simply means that a company's objectives, strategies, and core values take into consideration the
impact its operations have on the stakeholders. Encircled below are the core or critical parts of a strategic CSR framework:

Internal Analysis External Analysis

Goal/Objectives

Vision/Mission Industry dynamics

Core Values Stakeholder issues

Goal/Objectives and concerns
Culture

CSR

Implementation

Evaluation

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Similar to the process of strategic planning, an effective CSR strategy would entail performing the following steps:

1. Identify the goals/ objectives of the company.

2. Scan the environment by looking at the internal and external situations by which the company operates. The internal
assessment looks at the vision, mission, resources, strengths, and weaknesses of the company, whereas external
assessment looks at the needs of the stakeholders, considering the given opportunities and threats that are in line
with corporate goals and objectives. Step 2 provides a foundation and aids in developing a strategic CSR program.

3. Formulate a CSR strategy that is aligned with corporate operations. The company must identify how they will
approach their CSR initiatives (corporate donation, work with foundations, or intermediaries) and programs (single,
focused, or multi-program activities), and understand the needs of your target beneficiaries.

4. Implement the CSR program with consistency, meaning, programs are aligned with the company's goals/ objectives.
Cohesiveness of the entire process is an important element of strategic CSR. This would come to fruition when
CSR is embedded in its operations.

5. Evaluate the program if it has achieved its desired objectives and outcomes. Should there be gaps and
inconsistencies in the plan and execution of the programs, remedial efforts, or ways to improve, these initiatives
should be undertaken.

Success Indicators

For CSR to be strategic, companies must manage stakeholder relationships effectively, for social responsibility is
primarily about stakeholders' well-being.

Alignment of CSR with Business Strategy

In the beginning, some companies may engage CSR on a superficial level, meaning, such activities are of a marginal
or secondary position and are not part of their core business strategy. Companies may be needlessly spending on CSR
programs but with little impact on stakeholders. Therefore, as discussed in the strategic CSR section above, it is vital that
focusing on particular objectives in consonance with corporate strategy will yield the best results: a growing and profitable
business and satisfied stakeholders (McElhaney, 2009; Hildebrand, Sen, & Bhattacharya, 2011).

Leadership

"Passion: Most importantly - follow the lead of "Management's Heart." Authenticity is key. When you see that
Management's heart is the one leading, and when you keep the community's best interest upfront - everything
becomes natural, cohesive, and authentic. It becomes a value-added experience, not just for the beneficiaries, but
also for your own employees."

Mr. Chito Bauzon

AVP - CSR Marketing

SM Cares (SM Supermalls)

As discussed in the previous chapter, a champion is necessary for CSR to thrive in organizations. Leadership has
always been a cornerstone of effective organizations. Numerous studies have supported the role of leadership in
organizational outcomes, including CSR. Yi-Ru and Chun-Ju (2014) supported that leaders can increase employee
involvement through leader performance and how CSR is communicated to the company. Support from top management is
also a critical area since resources usually will be coming 'from the board or executive management's approval.

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Employee Engagement

One of the ways on how CSR can be strengthened is through employee volunteerism. Companies pave the way for
employees to engage in the programs voluntarily, and some companies even give incentives to employees who participate
in these activities. A company's CSR activities positively influence employee attitude and behavior at work (Chaudhary,
2017). Apart from feeling good about helping the community, employees involved in CSR develop better morale and feel
proud of their workplace.

Collaboration

CSR is not and cannot be operated and implemented in a vacuum. It will take cooperation from various institutions
to make it work effectively and efficiently. The role of government in CR is to ensure that the very essence of corporations
is to provide for the common good, which pertains to stakeholders. Civil society's CSR role is to ensure that they, as
stakeholders too, serve as watchdogs in the monitoring and implementation of CSR. Businesses or corporations must be
consciously aware of the impact of their activities on the public, including all primary and secondary stakeholders (Hudtohan,
2009).

As suggested by Friedman (1970), government alone cannot solve and provide the needs of its people and therefore
needs partners in doing this. Synergy is needed to allow strategic CR to come into efficient fruition. Alliances or partnerships
with government, civil society, business, and all stakeholders are important sources of legitimacy. Trust is also essential.
When organizations opt to work together, they build social capital as relationships develop over time. Social capital is an
interconnected network of relationships in society that benefits everyone.

Communication

Success stories must be encouraged. Communication performs an important role in managing stakeholder
relationships. By communicating the success of a company's CSR initiatives, Estanislao (2017) stated that it would have an
immediate effect on strengthening buy-in within the company and encourage participants to perform better. Furthermore,
informing the various stakeholders on these success stories, no matter how small, will increase public trust and legitimacy.

Value Creation

The ultimate goal of business is to create sustainable value for its stakeholders. Companies, now more than ever,
must be aware of how they operate in today's volatile and uncertain environment and how they eventually affect our daily
lives. Chandler (2019) encourages companies to understand their roles in society and their responsibilities to society.

The role of business in society is ever-changing because it is going beyond the creation of economic and financial
wealth as it is rightfully shaping our values and, importantly guiding public policy (Zadek, 2017).

Engaging in commerce and generating profits is not bad. It is good and needed for human progress and development.
The basic problem is when individuals or companies are focused on profit maximization. From this, there are many other
issues, such as externalization of operational costs, greed, and corruption among others. Companies that create value for
stakeholders through sustainable use of natural resources, risk reduction, reputation, trust, benevolence, transparency,
collaboration, and many more value-added initiatives will have truly performed their roles as ethical and legitimate
corporations in our society.

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CHAPTER 3
CORPORATE GOVERNANCE

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 Corporate governance is a concept that was introduced in the 1970s and the succeeding years leading to the present.
It has become a topic of debate around the world by both academics and practitioners. Corporate governance structures were
put in place to protect the various stakeholders of corporations and prevent corporate scandals and / or failures from
happening. But corporate failures continue to occur despite existing regulations. History has shown that new and stricter
rules ensue after every scandal, but it still did not guarantee good corporate behavior. Even the most stringent rules are only
as effective as the people who must abide by them. It makes you think why exemplary companies awarded with regional
and international corporate governance awards, like Enron and many others, fall into this quagmire of questionable
governance.

Exploration

"The focus on corporate governance in the realm of corporate board discussions and decisions has evolved. Whereas
merely viewed as a systematic structure with internal policies that are implemented to serve all stakeholders with
honesty, reliability, and transparency, we now see the increasing importance of a company's position in serving
society as a prerequisite to achieving long-term success; hence, a significant measure within the corporate
governance umbrella. The tide has shifted even more heavily on the demand side, particularly towards the
betterment of society as a whole, and is now the driver for board decisions in their thrust towards survival and
profitability.
There is no choice."

Carlos Jose Gatmaitan

Faculty / Fellow

Ateneo Graduate School/Institute of Corporate Directors

According to Tricker (2019), who is considered by many to be the father of corporate governance, he defines it as
a way in which a corporation is controlled or governed. Given this definition, it tells us that governance is a process that
allows internal and external mechanisms to ensure that the resources of a company are optimized for the benefit of
stakeholders. It intends to increase the accountability of a company and to avoid disasters before they occur; therefore,
corporate governance is considered a part of risk management. Good governance is a strategic direction for all organizations
because the long-term sustainability of organizational activity is dependent on the proper governance of their resources.
Good governance should apply to all forms of organizations regardless of their structure, be it private or publicly owned,
profit and nonprofit, cooperatives, eleemosynary institutions, government-owned and controlled corporations (GOCCs),
non-government organizations (NGOs), or just about any organized entity.

Earlier in Chapter 1, we discussed what a corporation is. For this book and to facilitate understanding of good
governance, we shall be using the corporation as the entity and context by which good governance is understood and
practiced.

Philippine Corporate Governance

Corporate governance in the Philippines shares similar qualities with its East Asian counterparts, most observed of
the family-ownership structure (Echanis, 2006; Kabigting, 2011; Saldaña, 1999). This quality has been referred to as among
the weakest attributes of corporate governance in the country if gauged against the codes on control (monitoring function)
and transparency (reporting) is concerned.

Iu and Batten (2001) cited two key features of corporate ownership among East Asian countries: concentration and
composition. The concentration dilemma happens in two forms-low concentration (high dispersion) and high concentration
(low dispersion). The former occurs when the majority of the ownership is held by several majority and minority
shareholders, and the latter, when the majority of the ownership is held by a small number of major stockholders. In low
concentration, conflict arises between shareholders and managers, while in high concentration, between majority and
minority shareholders.
 The problem with concentration is manifested in an Asian Development Bank study (2000, as cited in Iu & Batten,
2001), in which it was reported that 46 percent of corporations in the Philippines were under family control. Because of this,
it "bred a culture of cross-shareholdings, absence of independent directors, related party-lending, and evasion of single
borrower limits" (Arceo-Dumlao, 2000a, as cited in Iu & Batten, 2001). Moreover, Saldaña (1999) claimed that most
publicly-listed Philippine companies allocate only a minimum number of shares to be classified as a public corporation.
Therefore, some of these corporations are missing a wider shareholder base to sustain broader discussions on major
management actions and their judgment of company performance.

Meanwhile, composition refers to the owners or shareholders. These can be in the form of "individuals, a family or
family group, a holding company, a bank, an institutional investor, or non-financial corporation" (ADB, 2000, as cited in Iu
& Batten, 2001). The dilemma of composition in the Philippine context is pronounced in the ownership of banks by
corporate groups. In the study of Saldaña (1999), forming corporate groups is the means by which large shareholders
controlled their investments through allocation in various businesses, and banks are usually included in this arrangement.
This condition contributes to weak corporate governance because it "diminishes the capacity of banks to be effective external
control agents" because these are in the best position to gauge "the efficiency of the corporate group's investment and
financing activities" (p. 18). Iu and Batten (2001) added that the inclusion of banks equates to "easier financing, not more
stringent monitoring" (p. 56).

The problem with composition can also be gleaned in the study of factors contributing to bank failures. Echanis
(2006) mentioned the non-separation of decision management and decision control when owners and directors "effectively
centralized and combined these functions at the board level" (p. 33). In her example, she cited the case of Wincorp, which
closed in 2000 when the owners were also the biggest borrowers, including Sta. Lucia Realty (20 percent ownership and
procured P943 million in loans), and Unioil Resources and Holdings Company Inc. (major stockholder and borrower in
over 50 percent of the pooled investment accounts).

Another weakness of corporate governance as a result of family ownership can be found in transparency. Iu and
Batten (2001) claimed that the need for transparency and disclosure is not crucial in a relationship-based transaction
environment where insiders exercise control over the degree of information disclosure or what the authors would call
"information asymmetry" (p. 57). The OECD Principle (2015) stated that disclosure influences the behavior of companies
and protects investors. Thus, information symmetry lends to withholding information on impropriety and management
practices, making it difficult to monitor misdeeds, let alone making the culprits accountable for their misbehavior.

With the chronicling of OECD Principles (2015) and other codes as stated in the Philippines regulatory structures
such as those of the Securities and Exchange Commission (SEC), Bangko Sentral ng Pilipinas (BSP), and the Philippine
Stock Exchange, transparency has been exercised; however, not to a level that could have prevented, for example, the
closure of some Philippine banks. Despite audits by the BSP, Wincorp got away with violations of the "19 lender rule" of
the Revised Securities Act which stipulates that nonbanks (e.g, investors of Wincorp) cannot collect deposits or investments
from more than 19 clients. Wincorp collected investments from its 2,200 lenders collapsed into less than 20 accounts. Monte
de Piedad Savings Bank, which closed after 115 years of operation in 1997, hid anomalous loans and transactions in their
audited report. The said bank incurred bank loans through a conduit lending investment firm. The BSP likewise audited the
reports but did not discover these discrepancies (Echanis, 2006).

Compounding the problem of transparency is legislature as stated in the cases previously mentioned. Disclosure
clauses of both the SEC and the auditing firms were found to be weak and too generic. The purpose of disclosure is to
provide stockholders with accurate and timely information to protect their interests. Shareholder protection is among the
cornerstones of the Principles of Corporate Governance (OECD, 2015). Ownership structure lends itself to digressions of
transparency, so regular monitoring should be conducted more often (Echanis, 2006), and perhaps demanded from these
regulators to be more stringent.

Deeply entrenched in the family ownership structure is perhaps the Asian cultural imprint, which makes
transparency a difficult practice. "Asia does not have a tradition of strong disclosure" (lu & Batten, 2001, p. 57). The authors
noted that insiders have more control over systems, and firm factions are settled within by limiting the type and depth of
information to be released.

In the World Bank Report on the Observance of Standards and Codes of corporate® governance based on the OECD
categories, the Philippines scored 74/115 maximum points. Five categories, namely: rights of shareholders, the equitable
treatment of shareholders, the role of stakeholders in corporate governance, disclosure and transparency, and responsibilities
of the board, were rated on a five-point Likert scale from 1 = Not Observed (1 point) to 5 = Observed (5 points) (McGee,
2009). Jordan (1999, as cited in Iu & Batten, 2001) cautioned the dangers in using OECD Principles in Asia, that it might
not affect change both in the short- and mid-term. Using the Principles, which is Western-influenced, is similar to a legal
transplant where a law developed in one country is transferred to another. Iu and Batten (2001) contended that legal
transplants are unattainable since the development of law should be evolutionary (OECD, 2015), and asserted that OECD
Principles could serve as benchmarks but a country must be measured against country-specific metrics.

The Philippines own Code of Corporate Governance is stated in SEC Memorandum Circular No. 2, Series of 2002,
complementing the Corporation Code of the Philippines (Paras & Ramos-Anonuevo, 2002). The said code was revised as
stated in SEC Memorandum Circular No. 19, Series of 2016). Among other things, the Revised Code of Corporate
Governance (2016) specified that the board of directors is mainly responsible for governance. It does not specify the
recommended number of independent directors for a publicly-listed company. The revised Corporation Code of the
Philippines (2019), however, stated that the board should be comprised of at least 20 percent independent directors from the
total number of directors; board committees are formed to aid in complying with good corporate governance, and that
management is accountable to the board, and the board is accountable to the stockholders. Saldaña (1999) maintained that
both the Corporation Code of the Philippines and the requirements of SEC were based or inspired by counterparts in the
US.

The family-ownership structure is unique to East Asia, including the Philippines, and other countries such as Japan
and Germany. This issue should be addressed in the country's corporate governance code, for it is not which model that is
superior that should be regarded, but which one works for the circumstance (Iu & Batten, 2001).

Governance and Management

It must be stated at this point that governance and management are two different areas. Management focuses on the day-to-
day operations of an organization. Executives and managers in management ensure that the company is run well and, ideally,
brings profit for its shareholders. On the other hand, the governance function is carried out by a body or group of persons
(board of directors/ trustees) who governs the organization, making sure that the company or entity is efficiently and
effectively run by management.

Management is defined as how an organization is operated by its human and material resources to achieve organizational
success. Such success may be measured by profits generated through its operations and the continued growth of its resources
to produce more revenues. Management is widely viewed as a hierarchical organization as depicted in the illustration below:

Board of Directors

Management
 The board does not readily manifest itself in the organization structure because of its explicit definition. A board
supervises the management and provides oversight, ensuring that the company is steered in the right direction for the
satisfaction of its various stakeholders without direct interference in the day-to-day operations of the company. The board
of directors may be viewed as an overlapping entity that provides oversight for the organization and that some executives
(e.g., CEO, president, or vice president) are members of the board.

Key Players in Corporate Governance

There are five key players in corporate governance, namely the CEO, the chairman of the board, the board of directors, the
shareholders, and the stakeholders.

CEO - The CEO is the person responsible for leading and managing the entire organization in achieving its
organizational goals. It is the duty of the CEO to collaborate with the board for the overall direction of the company.

Chairman of the Board - The chairman of the board of directors should not only provide leadership of the board,
but also play an important role in the governance practices of the company.

Board of Directors - This is the best entity for steering the company's strategic direction and evaluating its
performance. As a director, questions must be asked during board meetings to make sure decisions made by the
company will be for the best interest of the company in the long term.

Shareholders - Considered owners of the company through their ownership/ holdings of stock shares, this group
actively seeks to maximize stock price increase over a period of time.

Stakeholders - Any group of people who are affected by how a corporation operates in (i.e., employees, suppliers,
government, and society among others).

Other Forms of Organizations

Earlier in the chapter, we mentioned that not all organizations are for profit. We have listed the many types of
nonprofit organizations that can be formed to achieve goals and maximize organizational performance, such as village
associations, charitable institutions, and many others. The main objective of good governance is the proper governance of
its valuable resources for its stakeholders. While these may not be under the scrutiny of regulating bodies, it is just as
important to ensure good governance through its board of directors (or trustees).

Theoretical Perspectives

There are many lenses with which to study and look at corporate governance. We take a look at the most widely used and
researched perspectives.

Agency Theory - This perspective assumes that the two principal characters, the agent (manager) and the principal (owner),
are at odds with their objectives. This theory posits that managers cannot be trusted and act on their interests and not for the
benefit of the owners of the company. Such a view brought about the agency theory (Fama & Jensen, 1983) and the majority
of corporate governance research has used this perspective mainly because of its practical business approach. Measuring
performance through the agents and rewarding them help assuage the intrinsic nature of agents. However, the mechanics
put in place from this perspective has not been guaranteed.

Stewardship Theory - According to this theory, the agent acts in the principal's best interest and therefore acts as a
responsible steward of the company. Davis, Schoorman, and Donaldson (1997), however, believed that agents are naturally
inclined to provide proper oversight and works for the best interest of the owners.

This alternative view of the agent-principal relationship has been widely debated because the tenets of agency theory should
have provided control mechanisms for the agent to behave, but did not do so given the numerous corporate collapses that
are still happening to this day. The argument continues and scholars/ practitioners have yet to find a sound and generally
accepted theoretical perspective on corporate governance.

Resource Dependency Theory - Based on organizational theories, this theory looks at corporate governance from a
strategic management view. It examines how the external resources of organizations affect how organizations behave for
their maximum utility (Pfeffer & Salancik, 1978). The long-term survival of an organization is dependent on the efficient
and effective use of its resources, such as raw materials, labor, executive management, and strategic networks to name a
few. This theory suggests that board members should actively develop their resources to build a competitive advantage.

Stakeholder Theory - Given the growing social activism seen in the last century, Freeman 1984) developed this societal
perspective and viewed organizations as entities that are responsible for their actions that affect anyone involved or affected
by their existence. This approach to corporate governance encourages boards to consider their stakeholders' concerns, not
only shareholders, as the metric for a successful organization is the satisfaction of all its stakeholders.

Culture and Corporate Governance

In Chapter 1, we discussed how important culture is on CSR. This relationship of culture with good corporate
governance is also supported by research. The influence of culture influences board practice and acceptance (Humphries &
Whelan, 2017) and contributes to the development of best practices. The context by which corporate governance is
understood and practiced is an important dimension to consider when studying the relationship between an organization's
culture and governance processes. Corporate governance is generally seen as mechanisms that promote good governance,
but it is a culture that gives it the impetus. For instance, there are nuances in corporate governance practices between the
East and the West.

A prime example of this would be the oft-discussed Chinese social value of "saving face" for a particular person/
entity/organization. Most Asian cultures, including the Philippines, have this particular emotional idiosyncrasy. In the West,
where emotions are given lesser importance, this is not seen so much of an issue as Western culture is deemed to be more
open and straightforward.

Approaches to Corporate Governance

A rules-based approach to corporate governance relies on regulation and the law to ensure compliance. This is best
exemplified by the US Sarbanes and Oxley Act. On the other hand, it is in a principles-based approach wherein companies
are required to explain why certain violations of the code have been made. This is sometimes referred to as a "comply and
explain" approach. Both approaches adopt a unitary board (against the European two-tier board) wherein there are two
boards, one made up of executive directors and another board made up of non-executive directors (shareholders and
employees).

Functions of the Board

There are four main functions of a board: Accountability, strategy formulation, monitoring and supervising, and
policy-making (Tricker, 2019).

External perspective Provide accountability Formulate strategy

Internal perspective Monitor and supervise the Set policy
management
Time reference Past and current Future
 Accountability - Why be accountable? Simply because the success or failure of an organization rests on the board
and the board should be accountable not only to their shareholders but also to all the other stakeholders affected by
their actions/ behavior.

Monitoring and supervision - Another function of the board is to oversee the performance of its management.
There are various financial and nonfinancial metrics available but most companies prefer to use financial metrics
as it is readily quantifiable, such as sales, net income, financial ratios, and others. Another common tool used is the
budgetary control system that compares the budget against actual numbers from operations.

Setting policy - For strategies to work, a set of policies, procedures, and plans must be prepared for management
to abide by. This is also used to supervise management activities. These may either be set by the board or by
approving the recommendations by management which is often the case.

Strategy formulation - Can a company survive without a strategy? Hardly. This is the most important function of
the board as this will steer the company to achieve its vision and mission. A large part of board work is spent on the
formulation and calibration of organizational strategies. Board members require strategic planning with varying
backgrounds and expertise. The most common tool used in strategic planning is the SWOT (strength, weakness,
opportunity, and threat) framework.

Providing accountability and formulating strategy are outward-looking perspectives, whereas monitoring and
supervising, and policymaking are inward-looking. The time reference for accountability and monitoring and supervision
refers to both historical (what happened in the past) and current period, whereas strategy formulation and policy-making
are future-focused activities.

Membership of the Board

Board size is determined by the current board and should comply with the terms established in the bylaws of the
corporation. A corporation is composed of one director (for OPCs) up to a maximum of 15 directors with each director
owning at least one share of stock, as per the guidelines indicated in the Philippine Corporate Code (2019). The term for
each director is set at one year among holders of stocks of the company (three years in the case of trustees, chosen from
among the members of the corporation).

Directors are normatively nominated by the shareholders, controlled by the board in the director selection process
as best practices indicate. But in cases where a founder or majority group is in control of a corporation, the nomination
usually comes from these entities through the nomination committee, much more so when the organization is in its start-
up stage.

Director classification comes in many forms but there are three main director types: independent, non-executive,
and executive directors. Independent directors are individuals who have no connection with the company and is free from
any relationship which may be considered a conflict of interest. While non-executive directors are individuals who are not
part of management but are related to a certain aspect of the company, such as being a supplier, family representative,
friend, adviser, or shareholder. On the one hand, executive directors hold a particular executive position inside the
organization, such as the CEO or other senior executive positions such as the vice president.

Aside from the fundamental requirements of a director having integrity, intellect, and independence, a director
must have the following core competencies: good communication skills, ability to read and understand financial
statements, strategic planning, critical thinking, and networking.

Politics in the Board

An aspect of organizational life is the existence of politics. Politics can be destructive if used the wrong way but
can also be used positively to further a worthwhile agenda or cause that will benefit the company. Corporate politics may
be described as processes and interactions, involving power and authority that influence decisions made for the benefit of
an individual, group, or organization. In the study of corporate governance, it is important to understand a company's
governance structure, or where the power lies. Tricker (2019) noted that human behavior is based on relationships, and by
the processes of power. How people behave in an organization is dictated by their association of power.

Importance of Committees

Committees are formed because board work can be done more effectively. By focusing and discussing particular
issues separately from general board meetings, the time management of directors is optimized. It is advisable and
recommended that the chairman of these committees be independent directors so that they truly perform their oversight
roles according to the requirements of the regulating bodies. In publicly listed companies, the following committees are
required by regulating bodies:

1. Audit committee - As a result of corporate meltdowns, this committee has become a nonnegotiable aspect of good
governance. The main objective of the audit committee is to oversee accounting and financial reporting processes
and results. They make sure that internal and external audits are carried out with integrity.
2. Remuneration committee - This committee is responsible for identifying compensation and benefit plans for
directors and senior executives through performance appraisals. Excessive compensation packages during economic
downturns or financial crises warrant a closer investigation of the rationale behind said compensation.
3. Nomination committee - To assure an effective working board, the directors on board must be independent thinkers,
including its executive directors. The nomination committee should nominate the right mix of board members to
ensure objectivity, independence, and expertise. However, there is usually a preponderance of the "old boy's club"
in many companies. Having a majority independent director board does not necessarily equate to better governance
if the CEO and the chairman are in control of the board.

Other committees can be formed by the board as part of good governance but this will depend on the need and
circumstance of a company.

Toward an Effective Working Board

An effective working board would require the sound leadership of a board. Apart from this fundamental quality, it
would be ideal for directors to have the following traits:

1. Commitment - commitment in terms of time spent and in the achievement of strategic objectives;
2. Expertise - possess strong technical knowledge of the industry or business;
3. Unity - ability to work and get along with fellow board members; collaborating effectively in getting the group to
agree on resolutions;
4. Independence - challenging the status quo and critically questioning perspectives; and
5. Networking - providing resource connections for possible alliances in business development.

As with any professional endeavor, training and development are the key to building skills that will enhance
performance. This also builds participant confidence in carrying out their respective roles in the organization. Professional
director associations such as the Institute of Corporate Directors (ICD) and Good Governance Advocates and Practitioners
of the Philippines (GGAPP) are two leading outfits that provide such training.

Information symmetry is needed for board members to perform their functions properly. Documents for review must
be given on time with complete formation. While each director may have different needs depending on his knowledge of
the company's operations, it is the director's right and duty to get information.

Lastly, good communication skills provide a smooth flow of information to the parties involved in corporate governance.
Miscommunication usually leads to misunderstanding. Communications with all stakeholders involved, primarily the
shareholders, are the key in ensuring governance structures and processes (e.g, financial reporting, annual general meetings,
disclosures, and others) are understood therefore must be undertaken clearly and cohesively.
Board Evaluation

One of the purposes of evaluating boards is to continuously improve best practices and see if they are functioning
effectively. The board is tasked to do evaluations internally and/or through a third party to ensure compliance within the
legal and regulatory framework. Of course, best practice would dictate such processes to go beyond conformance and
compliance. Every country would have different evaluation parameters but most rating systems follow the OECD Principles.
In Asia including the Philippines, the ASEAN corporate governance scorecard (ACGS) is used. Evaluating the board would
include a review of the company's governance and board structure, board members, and processes.

Concerning board evaluation, individual directors are also assessed. The chairman of the board normally assesses
directors. Who now assesses the chairman? In some companies, it is the independent director who does this assessment.
Again, each company may have its method of evaluation, as indicated in its governance codes or the company bylaws.

Family Governance

Family corporations are unique in the sense that there is an emotional component to it. Schmid, Rouvinez, and Poza
(2014) argued that the objective of good family business governance is the sustainable development of the economic value
and emotional value (well-being) of the enterprise. Higher economic value is manifested through its revenues, while
emotional value refers to the emotions that create an attachment to the company. In other words, emotions must be managed
before good corporate governance can even progress. The creation of a family constitution (with the assistance of a lawyer
and/ or consultant) should help in the process of good family governance as this is a document that describes their strategy
and structures. All family members must be included in the construction of this constitution.

There are challenges to the governance of family-owned enterprises even if it has been transformed into a publicly
listed company. Issues such as nepotism, lack of professional managers, family infighting, third-generation entitlement, and
the absence of succession planning can lead to disruptions. Some family businesses have been in existence for generations
and the continuity of these enterprises may become fragile over time if family governance is weak.

Ethical Stewardship

One of the board of directors' responsibilities is to ensure the proper governance of their organization's resources,
and address the needs of its various stakeholders. Apart from formulating business strategies and policies, a director is also
held accountable for actions taken by the company and monitoring management. A director's position in the board carries a
lot of weight in the downstream activities of an organization's various functions. We may have all the necessary tools and
processes in implementing good corporate governance but this is not enough, as manifested in quite a number of corporate
scandals over the last 30 years around the globe.

What is needed, beyond compliance on form and structure by which corporations are regulated and assessed, is
awareness and affirmation of ethical values in corporations— values such as integrity, which Estanislao (2017) stated as the
very core of governance character. This has to be imperatively paired with the sound leadership of the CEO and the board
of directors. Corporate participants in all levels must continuously be trained in good governance so that they may be able
to demonstrate moral behavior for followers and peers to emulate.

Such training must reiterate and reinforce the values by which we live decent lives. Ethical stewardship
(Caldwell, Hayes, Karrie, & Bernal, 2008) is good for business and involves demonstrating respect for values that include
honesty, fairness, equality, dignity, diversity, and individual rights. If only institutions are always run with ethical
behavior, then people in organizations would not find themselves and their companies involved with these debilitating
circumstances.

Unfortunately, it is not as simple as it sounds. It takes time for individual and collective efforts to build and form
lasting values in organizations. Executive training and development is a cornerstone of organizational growth and
development.
 As part of organizational values formation, it is important to remind big companies of the true objective of forming
corporations. Apart from providing fair returns to the company and its investors, it is the responsibility of corporations to
contribute to the task of nation-building through economic development. Further, and because of the concept and hegemony
of shareholder supremacy, this responsibility is more often than not marginalized.

Controlling shareholders also need to be reminded that corporations are not exclusively "owned" by them and that
corporations belong to all shareholders regardless of the number or percentage of their shareholdings. Gone were the days
when corporations were considered "private." Not only are they accountable to their shareholders, but we are also now
living in an era where corporations are accountable to the various publics, rightfully demanding ethical behavior from these
giants. The corporation's various stakeholders must be protected, and that firm profitability is certainly achievable without
sacrificing good corporate governance.
CHAPTER 4
LEGAL, REGULATORY, AND POLITICAL ISSUES

ANO KA NGAYON | ANG HABA DIBA? | TAMAD MO KASE

 A corporation is an entity created by law, as discussed in Chapter 1. Company law dictates how it is created or
incorporated. Laws are considered conduct approved and enforced by a government of a particular country. Society cannot
function effectively if there is no basis or a mechanism that regulates the interaction between its citizenry. The law is also a
mechanism that protects people's fundamental rights, establishes order, resolves disputes, and sets standards. Business law
(or commercial law) is a body of law that deals with corporate contracts, manufacture or sale of goods and services,
employment, labor relations, and many others. Knowledge of the law is essential in running organizations that are socially
responsible and governed well.

Regulation

"One primary consequence of CSR and corporate governance activities is the impact on the financial
performance of the company. For a profit-oriented organization like us, we are expected to produce positive EBIT,
good return on equity and assets, plus an attractive EPS in accordance with the law. In the conduct of business, it's
always a challenge to be utopic in complying with all legal, regulatory, fiscal, and even tax rules. We take a balance
by adapting the ethical theory of Utilitarianism which holds that the most ethical choice is the one that will produce
the greatest good for the greatest number. We also manage to take up the proactive strategy by being fully aware of
our social responsibilities, and actively supporting and participating various efforts by keeping abreast with the
evolving global and local initiatives."

Mr. Ulysses King

Chief Financial Officer

Omnicom Media Group-Philippines

Regulation is defined as a legal system that controls and regulates the business activities of a certain country. As
discussed previously, corporations are legal entities that have similar rights accorded to that of a person. A corporation is
allowed to perform functions that humans make, like engaging in business activity (e.g., signing contracts, owning properties,
negotiating terms of engagement, and others).

Legislation and regulation on CR and Corporate governance can sometimes overlap because both concepts deal
with normative business conduct, and both have similar requirements. Corporate governance deals with external regulation
(legal) and internal control of the corporation through legal means by its board of directors. In contrast, CSR deals with an
internal commitment of a company to behave ethically and satisfy the needs of its various stakeholders. CSR can influence
corporate governance structures, as can be seen with the growing nonfinancial assessments or "soft" governance systems in
corporations today. CSR is a voluntary initiative in the West for which no legislation has been made into law.

The Rationale for Regulation

The study of economics describes how societies produce and consume goods and services. Milton Friedman,
considered by many to be the foremost economist of the twentieth century, suggested that more money infused in an
economic system lessens the degree of government involvement. Friedman was a staunch advocate of free markets because
he believes that free markets raise the standard of living and not from central planning by the government (Hetzel, 2007).

Free Market - Considered a basic form of capitalism (monetary goods and services are owned by private
individuals and companies), a free market is an economic system that restricts government intervention in the
economy. This concept means that private businesses are based on supply and demand, and the less the government
is involved in the economy, the better off businesses will be. Transactions in a free market are made privately
between buyers and sellers. A pure free-market economy does not exist because markets are, to some degree,
constrained by regulation that seeks to protect the players in the market and the general public, such as foreign
exchange rates, price controls, quotas, documentation requirements, consumer rights, and labor relations.

Apart from public safety and welfare, there is also a need to protect industries. Without regulation, any individual
can enter into the market and disrupt the business environment by unscrupulous practices. Regulations serve to protect
legitimate players with the industry, who have engaged in the business properly and have coordinated with regulating bodies
to ensure legal and lawful operations.

Lastly, regulation is needed to produce revenues for the government to support national economic programs and
policies. Part of what businesses pay (i.e., taxes, licenses, and permits) goes to the government agencies that perform
oversight functions.

Laws, Codes, and Regulations

We now discuss the various codes, laws, and regulations that are relevant in the practice of CSR and corporate
governance:

Sarbanes and Oxley Act (SOX) - Although this is an American legislation, it is significant because of increased
financial accountability in auditing (internal and external) and disclosure to protect investors. Strict reforms were
made in 2002 to existing regulations due to the infamous corporate meltdowns (e.g., Enron, Tyco, and Worldcom).
This act influenced how corporations around the world would improve their respective reporting standards. The
financial meltdown in 2008 led to another act passed, the Dodd-Frank Wall Street Reform and Consumer Protection
Act (sometimes referred to as SOX 2), which focused on closer monitoring and regulation of banks.

Organization for Economic Cooperation and Development (OECD) - There are many codes from various
international agencies such as the International Corporate Governance Network (ICGN), and they all revolve around
similar principles of good corporate governance. We shall be focusing on the revised G20/OECD principles (2015):

Principle 1: Ensuring the basis for an effective corporate governance framework.

The corporation should have a corporate governance framework that promotes transparent and fair markets that
abide by the rules of law.

Principle 2: The rights and equitable treatment of shareholders and key ownership functions. The corporate
governance framework should be able to protect and facilitate the exercise of shareholders' rights. It should also
ensure the equitable treatment of shareholders, including minority and foreign shareholders.

Principle 3: Institutional investors, stock markets, and other intermediaries. The corporate governance framework
should provide sound incentives throughout the investment chain and allow stock markets and other intermediaries
to engage and contribute to good corporate governance.

Principle 4: The role of stakeholders in corporate governance. The corporate governance framework should
recognize the rights of all stakeholders and promote active cooperation between corporations and stakeholders in
sustaining financially sound companies.

Principle 5: Disclosure and transparency. The corporate governance framework should ensure timely and accurate
disclosure is made available to investors and the public. This includes the financial situation, performance,
ownership, and governance of the corporation.

Principle 6: The responsibilities of the board. The corporate governance framework should ensure the company's
proper strategic guidance, effective monitoring of management by the board of directors, and the board's
accountability to the company and shareholders.

Philippine Corporation Code

The Corporation Code of the Philippines was approved in 1980 that prescribes the rules and regulations in the
establishment and operation of corporations in the Philippines. The content of this code includes the incorporation of private
corporations, regulation of the board of directors, and the powers and capacity of corporations, bylaws, and board meetings.
It is very important to know about the law and understand it if he or she would like to get into the business. Ignorance of
the law is not an excuse.

The Code was revised in 2019, after almost 40 years, to improve the ease of doing business in the Philippines and
thereby fortify further economic development. Some of the notable changes made with the revised code are:

1. Removal of the minimum number of incorporators

2. Required minimum ₽1,000,000.00 capital stock on stock corporation
3. Removal of the 50-year corporate term. This means a corporation can exist indefinitely.
4. Creation of a one-person corporation (OPC)
5. Use of the Internet to attend a meeting and filing of reports which were not allowed in the old code
6. Power of the Securities and Exchange Commission (SEC) to remove disqualified directors or trustees

Philippine Code of Corporate Governance

The SEC first came out with the code in 2002 and has undergone numerous amendments, the latest of which was
done in 2019. One of the main purposes of the code is to align Philippine governance codes with that of the international
business community standards (such as the OECD and ASEAN Corporate Governance Initiatives). Corporate governance
in the Philippines is principles-based (meaning, companies are asked to comply or explain a violation of the code). New
measures that were put into law with the Revised Philippine Corporation Code mentioned above put more pressure on
boards to perform better corporate governance practices such as director appraisal or performance reports and a paperless
boardroom through modern computer software.

Company Codes

There are countless examples of governance codes adopted by companies based on widely accepted international
governance codes such as the OECD. The Organization for Economic Cooperation and Development (OECD, 2015)
provides the guidelines for how organizations may practice good governance. However, no matter how sound the principles
are, Iu and Batten (2001) argued that there is no single model of corporate governance that can be applicable to all countries.
The OECD Principles, a Western concoction, may not necessarily be most fitting for the Asia-Pacific context, given the
different cultural contexts. The authors further asserted, "Finding which model is superior is not important, as long as it
works for the circumstance" (p. 58).

Political Issues and Corporate Governance

Political issues are important topics of good corporate governance. Good governance does not limit itself to
addressing business disruptions and creating a competitive advantage through strategy. How these political issues are
addressed, such as climate change, healthcare, income taxes, bribery in government, and others, are part and parcel of a
company's long-term strategy. These are issues that concern just about every individual in any society-the stakeholders.

Changes in government policy and regulations can affect the operational viability or even the survival of a
corporation. For this reason alone, the board should be aware of the uncertain and volatile environment that we live in today.
Being prepared to manage these changes will help mitigate risks.

The COVID-19 global pandemic that reached its peak in the first quarter of 2020 is a prime example of how
healthcare as a political issue can affect a company. The devastating economic effects of COVID-19 have put a strain on
businesses and financial systems worldwide. Another example is the Train Law (Tax Reform for Acceleration and Inclusion),
legislated in 2017. The tax reform program had several implications for various business industries, and companies have to
adjust to these changes.

Environmental issues such as global warming caused by pollution and greenhouse gas emissions have gained robust
public support in the last 20 years. Unfortunately, the government has not yet made any legislation in the area of CSR.
However, the good news is that the pressure from the public and advocacy groups all over the world on a more sustainable
way of conducting business has created an impact on how large corporations manage their resources.