CH4-SEC Code of CG, Cont.

UNIVERSITY OF SOUTHERN MINDANAO
Chapter 4
SEC CODE OF CORPORATE

GOVERNANCE, continued
Expected Learning Outcomes
1. Understand how the ethical behavior of the board can be
strengthened.
2. Describe how the company disclosure policies and
procedures can be enhanced.
3. Appreciate how the external auditor’s independence can
be strengthened and how audit quality can be enhanced.
4. Understand how a company could increase focus on non-
financial and sustainability reporting.
5. Explain how a company can promote a comprehensive
and cost-efficient access to relevant information.
SEC Code of Corporate Governance, Continued 2
Expected Learning Outcomes
6. Understand how integrity, transparency and proper
governance of a company could be ensured through
effective internal control system and enterprise risk
management framework.
7. Describe briefly how a synergic relationship with
shareholders could be cultivated and promoted.
8. Explain how the rights of stakeholders could be respected
and how to institute effective redress for the violation of
their rights.

INCREASING FOCUS ON NON-FINANCIAL

AND SUSTAINABILITY REPORTING
Principle 10
“essential and relevant”
• The company should ensure that material and

reportable non-financial and sustainability
issues are disclosed.
Sustainability
o Ability to be maintained at a certain level.
o Ability to exist constantly.
Sustainability reporting
o Includes voluntary corporate disclosures about sustainability
initiatives, plans and associated outcomes.
Recommendation 10.1
• The Board should have a clear and focused
policy on the disclosure of non-financial
information, with emphasis on the management
of economic, environmental, social and
governance (EESG) issues of its business,
which underpin sustainability. Companies
should adopt a globally recognized
standard/framework in reporting sustainability
and non-financial issues.
Explanation
• Disclosure to all shareholders and other stakeholders of:
Company’s strategic (long-term goals)
Operational objectives (short-term goals)
Impact of a wide range of sustainability issues.
• Can be made through

Points to Remember
1. Disclosure of non-financial information
- Whatever needs to be disclosed except financial report or
statements.
2. Management of EESG issues.
- Ex: reports and updates on climate change, energy and reduction of
energy consumption, water consumption, greenhouse gas emissions
report in relation to sustainability.
3. There must be a disclosure of company’s strategic goals and impact
of sustainability issues.
- On the sustainability report, indicated are the impacts and risks plus
the management approach towards those.
11. PROMOTING A COMPREHENSIVE

AND COST-EFFICIENT ACCESS TO
RELEVANT INFORMATION
Principle 11
• The company should maintain a comprehensive

and cost-efficient communication channel for
disseminating relevant information. This
channel is crucial for informed decision-making
by investors, stakeholders and other interested
users.

Recommendation 11.1
• The company should include media and

analysts’ briefings as channels of
communication to ensure the timely and
accurate dissemination of public, material and
relevant information to its shareholders and
other investors.

Example
• Company’s websites containing updated

information relevant to investor’s decision
making such as:
Downloadable financial statements report
Articles of Incorporation
Notices and Minutes of Annual Stockholder Meetings

"INTERNAL CONTROL SYSTEM AND

RISK MANAGEMENT FRAMEWORK"
12. STRENGTENING THE INTERRNAL CONTROL

SYSTEM AND ENTERPRISE RISK MANAGEMENT
FRAMEWORK.
Internal Control
• Internal control is a process, effected by an

entity's board of directors, management and
other personnel, designed to provide
reasonable assurance: That information is
reliable, accurate and timely. Of compliance
with applicable laws, regulations, contracts,
policies and procedures.
Insert Running Title 14

ENTERPRISE RISK MANAGEMENT
• (ERM) is a methodology that looks at risk

management strategically from the perspective
of the entire firm or organization. It is a top-
down strategy that aims to identify, assess, and
prepare for potential losses, dangers, hazards,
and other potentials for harm that may
interfere with an organization's operations and
objectives and/or lead to losses.
12. STREGTHENING THE INTERNAL

CONTROL AND ENTERPRISE RISK
MANAGEMENT FRAMEWORK
Principle 12
• To ensure the integrity, transparency and

proper governance in the conduct of its affairs,
the company should have a strong and effective
internal control system and enterprise risk
management framework.

Recommendation 12.1
• The Company should have an adequate and

effective internal control system and an
enterprise risk management framework in
the conduct of its business, taking into account
its size, risk profile and complexity of
operations.

Recommendation 12.2
• The Company should have in place an

independent internal audit function that
provides an independent and objective
assurance, and consulting services designed to
add value and improve the company’s
operations.

Functions of an Internal Audit
a. Provides independent risk-based assurance service to the Board,
Audit Committee and Management, focusing on reviewing the
effectiveness of the governance and control processes in
i. Promoting the right values and ethics,
ii. Ensuring effective performance management and accounting in
the organization,
iii. Communicating risk and control information,
iv. Coordinating the activities and information among the Board,
external and internal auditors, and Management;

b. Performs regular and special audit as contained in the annual

audit plan and/or based on the company’s risk assessment;
c. Performs consulting and advisory services related to governance
and control as appropriate for the organization;
d. Performs compliance audit of relevant laws, rules and regulations,
contractual obligations and other commitments, which could have
a significant impact on the organization;
e. Reviews, audits and assesses the efficiency and effectiveness of the
internal control system of all areas of the company;

f. Evaluates operations or programs to ascertain whether results are

consistent with established objectives and goals, and whether the
operations or programs are being carried out as planned;
g. Evaluates specific operations at the request of the Board of
Management, as appropriate; and
h. Monitors and evaluates governance processes.

Recommendation 12.3
• Subject to company’s size, risk profile and complexity of
operations, it should have a qualified Chief Audit Executive
(CAE) appointed by the Board. CAE shall oversee and be
responsible for the internal audit activity of the
organization, including that portion that is outsourced to a
third party service provider. In case of a fully outsourced
internal audit activity, a qualified independent executive or
senior management personnel should be assigned the
responsibility for managing the fully outsourced internal
audit activity.

functionally to administratively to
the CEO
Audit Committee
directly reports to
CAE

Functions of Chief Audit Executive
a. Periodically reviews the internal audit charter and presents it to
senior management and the Board Audit Committee for approval;
b. Establishes a risk-based internal audit plan, including policies and
procedures, to determine the priorities of the internal audit
activity, consistent with the organization’s goals;
c. Communicates the internal audit activity’s plans, resource
requirements and impact of resource limitations, as well as
significant interim changes, to senior management and the Audit
Committee for review and approval;

Functions of Chief Audit Executive
d. Spearheads the performance of the internal audit activity to

ensure it adds value to the organization;
e. Reports periodically to the Audit Committee on the internal audit
activity’s performance relative to its plan; and
f. Present findings and recommendations to the Audit Committee
and gives advice to senior management and the Board on how to
improve internal processes.

Recommendation 12.1
• The Company should have an adequate and

effective internal control system and enterprise
risk management framework in the conduct of
its business, taking into account its size, risk
profile, and complexity ofcoperations.

Recommendation 12.2
• The Company should have in place an

independent internal audit function that
provides an independent and objectives
assurance and consulting services designed to
add value and improve the company's
operations.

Recommendation 12.3
• Subject to a company's size, risk profile and

complexity of operations, it should have a
qualified Chief Audit Executive (CAE) appointed
by the Board. The CAE shall oversee and be
responsible for the internal audit activity of the
organization, including that portion that is
outsourced internal audit third party service
provider.
Recommendation 12.4
• Subject to its size, risk profile and complexity of

operations, the company should have a separate
risk management function to identify, assess
and monitor key risk exposures.

Recommendation 12.5
• In managing the company's Risk Management

System, the company should have a Chief Risk
Officer (CRO) who is the ultimate champion of
Enterprise Risk Management (ERM) and has
adequate authority, stature , resources and
support to fulfill responsibilities, subject to a
company's size, risk profile and complexity of
operations.
Points to Remember
1. Effective Internal Control System
2. Effective Enterprise Risk Management Framework
3. Company size, risk profile and complexity of operations
4. Functions of n independent or separate internal audit
5. Chief Audit Executive – responsibilities and functions
6. Risk Management Function – Chief Risk officer and functions
• Examples:
Frequency of review of internal control system
Attestation that they have internal audit
Information about key risk currently facing & how they manage it.

CULTIVATING THE SYNERGY

RELATIONSHIP WITH
SHAREHOLDER
13. PROMOTING SHAREHOLDER RIGHTS
Recommendation 13.1
• The Board should ensure that shareholders

rights are disclosed in the Manual on
Corporate and on the company's website.

Recommendation 13.2
• The Board should encourage active shareholder

participation by sending the Notice of Annual
amd Special Shareholders' Meeting with
sufficient and relevant information at least 28
days before the meeting.

Recommendation 13.3
• The Board should encourage active shareholder
participation by making the result of the votes
taken during the most recent Annual or Special
Shareholders' Meeting publicly available the
next working day. In addition, the Minutes of
the Annual and Special Shareholders' Meeting
shoukd be available on the company website
within five business days from the end of the
meeting.
Recommendation 13.4
• The board should make available, at the option

of the shareholder, an alternative dispute
mechanism to resolve intra-corporate disputes
in an amicable and effective manner. This
should be included in the company’s Manual on
Corporate Governance.

Recommendation 13.5
• The board should establish an Investor

relations Office (IRO) to ensure constant
engagement with its shareholders. The IRO
should be present at every shareholders’
meeting.

DUTIES TO STAKEHOLDERS
14. RESPECTING RIGHTS OF STAKEHOLDERS

AND EFFECTIVE REDRESS FOR VIOLATION OF
STAKEHOLDER’S RIGHTS

Recommendation 14.1
The Board should identify the company’s

various stakeholders and promote
cooperation between them and the
company in creating wealth, growth and
sustainability.

Recommendation 14.2
• The Board should establish clear policies and

programs to provide a mechanism on the fair
treatment and protection of stakeholders.

Recommendation 14.3
The Board should adopt a transparent

framework and process that allow stakeholders
to communicate with the company and to obtain
redress for violation of their rights.

Principle
• The rights of stakeholders established by law, by

contractual relations and through voluntary
commitments must be respected. Where
stakeholders’ rights and/or interest are at stake, the
stakeholders should have opportunity to obtain
prompt effective redress for the violation of their
rights.

15. ENCOURAGING EMPLOYEE’S

PARTICIPATION
Principle
• A mechanism for employee participation should

be developed to create a symbiotic
environment, realize the company’s goals and
participate in its corporate governance
processes.

Recommendation 15.1
• The board should establish policies, programs, and
procedures that will encourage employees to actively
participate in the realization of company’s goals and
governance.
• Establishment of policies and programs covering (1) health,
safety, and welfare (2) training and development (3)
reward/compensation for employees.
• Recognizing firm specific skills and potential contribution.

Recommendation 15.2
• The board should set the tone and make a

stand against corrupt practices. They should
also disseminate the policies and programs to
employees through trainings to embed them in
company’s culture.

Recommendation 15.3
• The board should establish a suitable

framework for whistleblowing that allows
employees to freely communicate their
concerns about unethical practices without fear
of retaliation.

16 ENCOURAGING SUSTAINABILITY AND SOCIAL

RESPONSIBILITY
Principle
• The company should be socially responsible in

all its dealings with the communities where it
operates. It should ensure that its interactions
serve its environment and stakeholders in a
positive and progressive manner that is fully
supportive of its comprehensive and balanced
development.
Recommendation 16.1
• The company should:

Recognize and place an importance on the
interdependence between business and society.
Promote mutually beneficial relationship.
Contribute to the advancement of the society.

UPDATES ON CORPORATE GOVERNANCE

Updates on Corporate Governance
• February 7, 2021
SEC Code of Corporate Governance 53

Updates on Corporate Governance
•February 15, 2021

SM Companies receive 10 top awards on corporate governance.
SM Investments Corp. (SMIC) and its subsidiaries clinched 10
awards for scoring high in the recently concluded 2019 Asean
Corporate Governance Scorecard (ACGS) assessments.
China Bank and SM Prime were named under top 20 Asean
Publicly Listed Companies. China Bank was recognized among
the top 3 Publicly Listed Companies per country.

DISCUSSION QUESTIONS
CASE 2: SHELL
CASE STUDY

HISTORY
• In what became known as the Royal Dutch case. In 2004, Shell

overstated its oil reserves. This resulted in a loss of confidence in the
group, a $17 million fine by the Financial Services Authority and the
retirement of both its chairman Sir Phillip Watts and its exploration
director, Walter van der Vijver. Expostulating that he was sick and
tired of lying. van der Vijver, the firm's head of exploration and
production, told Sir Phillip Watts in November 2003 that he had
enough of covering up for shortfalls in the firm's reserves and that
he wished to do this no longer. Watts, accordingly, replaced him.

• Van der Vijver's outburst was over the overly aggressive and
inaccurately optimistic recordings that he had been stimulated to
record in the financial statements. However, Watt's zealous
overbooking caught up with him. In January of that year, questions
compelled Shell to reclassify a huge fifth of its 'proved' reserves. This
suspicious action caused investigations to be carried out that
unrobed the corruption and both men were forced out of the
company.

• Inquiries also showed that, despite strict accounting laws that may
easily intimidate companies form deception, Shell's ambition proved
too much for them. Deflated profits made them inflate reserves in
order to retain the services of their investors and to attract further
shareholders.
• A consequent lawsuit in 2007 resulted in Shell having to pay $450
million to non-American shareholders (Treanor, 2009). Shell briefly
suffered for its errors, but, once again, managed to climb out of its
mess to regain some of its original reputation.

DISCUSSION QUESTION 1
TO WHAT EXTENT THE EVENT FACING SHELL

IN 2004 CAUSED BY HUMAN FAILINGS OR
STRUCTURAL (ORGANIZATIONAL) FAILINGS?

Answer
- The 2004 Shell issue of overbooking reserves was more due to human failings,
although structural (organizational) failings also have its fair share to the occurrence
of the scandal as well. The company also acknowledge the need to change their
complex organizational structure. They have misled their investors for years when
they overestimated their oil and gas reserves from 2002 and 2003. Furthermore, their
internal control system was weak that is why even when the executives have been
aware of the occurrence of the dilemma much earlier, it was not solved because they
do not know what to do. Their top management heads behaved unethically instead of
addressing and resolving the issue. It could have been detected earlier if only they
have internal auditors who would review their records and operations. They also did
not follow the SEC regulations, but it was a good thing that they publicized the issue
because it is their shareholder’s right to be informed about their non-financial and
sustainability issues as these influence their decision-making. However, it was a bit
late and have already caused bigger issues as to their integrity and sustainability.

DISCUSS THE POTENTIAL DIFFICULTIES FACING THE

MEMBERS OF THE PARENT COMPANIES IN ATTEMPTING
TO MONITOR AND CONTROL THE ACTIVITIES OF
MANAGEMENT.

Answer
- Since Royal Dutch/Shell have a complex organizational structure
and they also failed to follow strict compliance of SEC regulations,
ideally, the parent companies have a long way to go in attempting to
monitor and control the activities of their management. This is where
the importance of having an effective control system and enterprise risk
management framework come to place. An internal audit is necessary to
assess the efficiency and effectiveness of the internal operations and
compliance audit would be of big help to the company. They also need to
change their organizational structure to provide for a balanced and well-
structured flow of tasks and responsibility so that each activities of the
management are properly monitored.

IS IT DESIRABLE THAT OIL COMPANIES SHOULD BE

ALLOWED TO EXERCISE DISCRETION OVER HOW THEY
BOOK OIL AND RESERVES?

Answer
- Under Principle 10 of the SEC Code of Corporate
Governance, The company should ensure that the
material and reportable non-financial and sustainability
issues are disclosed. Since, Shell is an Oil Company, their
booking of reserves is of most important to ensure their
sustainability. Therefore, a discretion would be a violation
to the rights of their shareholders and other stakeholders.
They should be allowed to know about information which
influence how they decide about their investments.

SINCE THE MARKET WILL SOONER OR LATER

DETERMINE IF RESERVES HAVE BEEN OVERSTATED,
DOES IT MATTER THAT OVERBOOKING CAN TAKE
PLACE?

Answer
- Of course, it is. This type of information must be
reported on a timely basis because this shows if the
company are able to maintain its business in the future.
Just like what happened to Shell, overbooking have
misled their investors by thinking that their investments
are secured because Shell still have a lot of reserves to
use in their future operations but it was, in fact, still
subject to future circumstances that losing those
reserves is possible.

WHY MIGHT THE SENIOR MANAGEMENT OF A LARGE

QUOTED COMPANY BE SENSITIVE TO THE CONCERNS OF
LARGE INSTITUTIONAL INVESTORS SUCH AS CALPERS?

Answer
- Large institutional investors like Calpers plays
a huge influence in corporate management
because they are entitled to exercise the voting
rights in a company. They can actively engage in
corporate governance to enhance the value of
investee firms. Hence, their concerns are very
appealing to the senior management.

WHICH STAKEHOLDERS WERE MOST AFFECTED BY

THE EVENTS AT SHELL IN 2004?

Answer
- Stakeholders who were mostly affected by
the 2004 Shell issue were the investors who
were misguided by the overestimated
information.

THANK YOU!

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UNIVERSITY OF SOUTHERN MINDANAO

SEC CODE OF CORPORATE

SEC Code of Corporate Governance, Continued 3

INCREASING FOCUS ON NON-FINANCIAL

• The company should ensure that material and

SEC Code of Corporate Governance, Continued 7

11. PROMOTING A COMPREHENSIVE

• The company should maintain a comprehensive

SEC Code of Corporate Governance, Continued 10

• The company should include media and

SEC Code of Corporate Governance, Continued 11

• Company’s websites containing updated

SEC Code of Corporate Governance, Continued 12

"INTERNAL CONTROL SYSTEM AND

12. STRENGTENING THE INTERRNAL CONTROL

• Internal control is a process, effected by an

Insert Running Title 14

• (ERM) is a methodology that looks at risk

12. STREGTHENING THE INTERNAL

• To ensure the integrity, transparency and

SEC Code of Corporate Governance, Continued 17

• The Company should have an adequate and

SEC Code of Corporate Governance, Continued 18

• The Company should have in place an

SEC Code of Corporate Governance, Continued 19

SEC Code of Corporate Governance, Continued 20

b. Performs regular and special audit as contained in the annual

SEC Code of Corporate Governance, Continued 21

f. Evaluates operations or programs to ascertain whether results are

SEC Code of Corporate Governance, Continued 22

SEC Code of Corporate Governance, Continued 23

SEC Code of Corporate Governance, Continued 24

SEC Code of Corporate Governance, Continued 25

d. Spearheads the performance of the internal audit activity to

SEC Code of Corporate Governance, Continued 26

• The Company should have an adequate and

Insert Running Title 27

• The Company should have in place an

Insert Running Title 28

• Subject to a company's size, risk profile and

• Subject to its size, risk profile and complexity of

Insert Running Title 30

• In managing the company's Risk Management

SEC Code of Corporate Governance, Continued 32

CULTIVATING THE SYNERGY

• The Board should ensure that shareholders

Insert Running Title 34

• The Board should encourage active shareholder

Insert Running Title 35

• The board should make available, at the option

SEC Code of Corporate Governance, Continued 37

• The board should establish an Investor

SEC Code of Corporate Governance, Continued 38

14. RESPECTING RIGHTS OF STAKEHOLDERS

SEC Code of Corporate Governance, Continued 39

The Board should identify the company’s

SEC Code of Corporate Governance, Continued 40