LEGAL, REGULATORY AND POLITICAL ISSUES

A corporation is an entity created by law. Company law dictates how it is created or

incorporated. Laws are considered conduct approved and enforced by a government. Society
cannot function effectively if there is no basis or mechanism that regulates the interaction
between its citizenry. The law is also 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 organization that
are socially responsible and governed well.

Diagnostic Questions:
1. Is there a need to regulate business activities?
2. Who should be doing the oversight function of internal and external regulation?
3. Who do you think should be responsible for the cost of regulation?
4. Can big business influence affect public policy?

Regulation is defined as a legal system that controls and regulates the business
activities of a certain country. As discussed earlier, corporations are legal entities that have
similar rights accorded to that of a legal 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 CSR 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.

The Rationale for Regulation

The study of economics describes how societies produce and consume goods and
services. Milton Friedman, considers by many to be the foremost economist of the twentieth
century suggested that more money infused in an economic system lessens the degree of
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).

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 within
the industry, who have engaged in the business properly and have coordinated with the
regulating bodies to ensure legal and lawful operations.

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 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.

Organizations 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.
Discussion shall be focused on 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 Philippine 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, by-laws, 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. The removal of the minimum number of incorporators.

2. Required minimum Php1,000,000.00 capital stock on stock corporations
3. Removal of the 50-year corporate term. This means a corporation can exist indefinitely.
4. Creation of 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 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, Lu and Batten (2001) agreed 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).

Legal Documents Needed by Corporations to be Compliant

1. Company Vision and Mission
2. Company By-laws
3. Certification of Incorporation to be filed at Securities and Exchange Commission (SEC)
4. Code of Conduct / Company Code
5. Composition of the Board of Directors
6. Documents required by the Bureau of Internal Revenue (BIR)
7. Documents required by the Local Government Unit (LGU such as Health and Sanitary
Permit, Building Permit, Business Permit, Mayor’s Permit)
8. Documents required by the Bureau of Internal Revenue (BIR)
9. Documents required by the Department of Labor and Employment (DOLE)
10. Documents required by the Occupational Safety and Health Office

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 visibility
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 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 business and financial systems worldwide.
Another example is the TRAIN Law (Tax Reform for Acceleration and Inclusion), legislated in
2017. This 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 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.

Source:
Good Governance and Social Responsibility by Danilo Lorenzo delos Santos
and Leveric Ng, pp. 41- 47