THE CORPORATE

WORLD AND
CORPORATE
GOVERNANCE
Module 1
LEARNING OUTCOMES
1. Differentiate the forms of business organizations
2. Define corporation, corporate governance, and good governance.
3. Recall and explain the attributes of a corporation.
4. Enumerate the different stakeholders of a corporation.
5. Differentiate multinational from transnational corporation.
6. Explain the basic principles of corporate governance.
7. Describe the concept of agency theory in corporate governance.
8. Cite the roles of the officers and external auditor in governance.
9. Give examples of code of conduct of a corporation.
WHAT IS A BUSINESS?
▪ A business – is an organization that uses economic
resources or inputs to provide goods or services to
customers in exchange for money or other goods
and services (Camilar-Serrano, 2016).
FORMS OF BUSINESS
▪ Sole proprietorship – also known as single
proprietorship, is a business owned by only one person
who has complete control and authority of its own. It
owns all the assets and personally answers all liabilities
or losses.
▪ Partnership – is a business owned by two or more
persons who bind themselves to contribute money or
industry to a common fund with the intention of dividing
the profits between themselves.
FORMS OF BUSINESS…
▪ Corporation – A corporation is a business organization
that has a separate legal personality from its owners.
▪ Cooperative – A cooperative is a duly registered business
organization owned by a group of individuals and is
operated for their mutual benefit.
 WHAT IS A CORPORATION
(CORPORATION CODE OF THE PHIL., SEC.
2)
▪ “A corporation is an artificial being created by operation of law,
having the right of succession and the powers, attributes and
properties expressly authorized by law or incident to its
existence.”
 ATTRIBUTES OF A
CORPORATION
▪ Artificial being – a juridical person whose personality is separate and
distinct from its owners.
▪ Created by operation of law – existence through a charter or a grant from
the state.
▪ Right of succession – can continue to exist even in death, incapacity or
insolvency of any stockholder or members
▪ Powers, attributes and properties – it is authorized to do activities
within the purpose(s) of its creation, it has its own traits, and it operates
based on what has been expressed provided in the charter including those
that are considered incident to its existence as a corporation.
STAKEHOLDERS OF A
CORPORATION
▪ Management
▪ Creditors
▪ Shareholders or stockholders
▪ Employees
▪ Clients
▪ Government
▪ Public
PURPOSES OF A
CORPORATION
▪ Early stage survival
▪ To increase profit
▪ To offer vital services to the general public
▪ To offer goods and services to the mass market
OTHER PLAYERS OF THE
CORPORATION
▪ Shareholders – artificial or natural persons that are legally owners
of the corporation
▪ Bondholders – persons or entities that are holders of currently
outstanding bond
▪ Board of directors (BOD) – the collegial body that exercises the
corporate powers of all corporations formed under the Corporation
Code (SEC Code of Corporate Governance).
DUTIES OF THE BOARD OF
DIRECTORS
▪ Governing the organization by establishing broad policies and objectives
▪ Selecting, appointing, supporting and reviewing the performance of the chief
executive
▪ Ensuring the availability of adequate financial resources
▪ Approving annual budgets
▪ Accounting to the stakeholders the organization’s performance
MULTINATIONAL AND TRANSNATIONAL CORPORATIONS
▪ International corporations have several categories based on the business structure,
investment and product/service offering.
▪ Multinational companies (MNC) – have investment in other countries, but do not have
coordinated products offerings in each. They are more focused on adapting their products
and services to each individual local market.
▪ Transnational corporations (TNC) – “enterprises which own or control production or
service facilities outside the country in which they are based” (UNC on Transnational
Corporations and Investment, as cited by Biore, et al (Z2017). They have a central
corporate facility but give decision-making, R&D, and marketing powers to each
individual foreign subsidiary.
▪ Both enterprises manage production or delivers services in more than one country
▪ Management headquarters are found in one country—home country.
▪ Operate in other countries—known as host countries
WHAT IS GOVERNANCE?
▪ Governance – means the process of decision-making and the process by which decisions are
implemented (or not implemented) (United Nations Economic and Social Commission for
Asia and the Pacific). www.unescap.org/pdd
▪ Governance – is the process by which corporations establish their rules and policies and
implement and monitor them. 
https://insights.diligent.com/corporate-governance/what-constitutes-good-governance
▪ Governance can be used in several contexts such as:
Corporate governance
International governance
National governance and
Local governance
www.unescap.org/pdd
 WHAT IS CORPORATE GOVERNANCE?
SOURCE: BIORE, ET AL, 2017, CORPORATE GOVERNANCE AND SOCIAL
RESPONSIBILITY

▪ ..”is the process and structure used to direct and manage the business and
affairs of the company towards enhancing business prosperity and corporate
accountability with the ultimate objective of realizing long-term shareholder
value, whilst taking into account the interests of other stakeholders”
(Malaysian High Level Finance Committee Report on Corporate Governance)
▪ “Corporate governance, in principles, refers to the joint responsibility imposed
on the BOD and management to protect shareholder rights and enhance
shareholder value” (Wall Street Journal, June 23, 1999).
 WHAT IS CORPORATE GOVERNANCE?
SOURCE: BIORE, ET AL, 2017, CORPORATE GOVERNANCE AND SOCIAL
RESPONSIBILITY

▪ ..”refers to the system whereby shareholders, creditors and other

stakeholders of a corporation ensure that management enhances the value
of the corporation as it competes in an increasingly global market place
(SEC Memorandum Circular No. 2, Series of 2002, Code of Corporate
Governance).
▪ “Corporate governance is concerned with holding the balance between
economic and social goals and between individual and communal goals”
(Sir Adrian Cadbury)
FUNDAMENTAL OBJECTIVES
OF CORPORATE GOVERNANCE

▪Improvement of shareholder value

▪Conscious consideration of the interest of other
stakeholders
 WHAT IS GOOD GOVERNANCE?
(CORPORATE GOOD GOVERNANCE)

▪ Good governance has a variety of important characteristics, and it can

mean different things to different people. Groups and individuals that
hold positions of power must have a sense of accountability and a mode
of checks and balances if they want to govern successfully.
▪ As it relates to corporations, good governance typically leads corporations to
achieve their goals. In successfully fulfilling their mission and plans,
corporations that embrace good corporate principles will enhance the
company’s prosperity and find favor in the eyes of their shareholders.
https://insights.diligent.com/corporate-governance/what-constitutes-good-governance
 WHAT IS GOOD GOVERNANCE?
(IN PUBLIC ADMINISTRATION)

▪ Governance as the normative sense has given the concept of ‘Good Governance.’
▪ Good governance refers to the welfare in governance and improving the quality
of governance.  It enables the government to provide equal opportunities and fair
delivery of goods and services to the people who are most marginal in society. 
▪ Good governance refers to mobilizing the people of a country in the best
direction possible. It requires the unity of people in society and motivates
them to attain political objectivity. In other words; it ensures proper
utilization of all the resources of the state for its citizens which ensures
sustainable development.
WHAT CONSTITUTES GOOD
GOVERNANCE?
GOOD GOVERNANCE HAS NINE MAJOR CHARACTERISTICS

▪ Participatory ▪ Effective and efficient

▪ Consensus oriented ▪ Equitable and inclusive
▪ Accountable ▪ Follows the rule of law
▪ Transparent ▪ Strategic vision
▪ Responsive

https://skpatodia.in>blog>good-governance- https://insights.diligent.com/corporate-govern
character ance/what-constitutes-good-governance/
GOOD GOVERNANCE IN PUBLIC MANAGEMENT

▪ https://schoolofpoliticalscience.com/what-is-good-governance /
 IMPORTANCE OF GOOD
GOVERNANCE IN A STATE
▪ Economic development
▪ Social development
▪ Political development
▪ https://schoolofpoliticalscience.com/what-is-good-governance/
WHY IS GOOD GOVERNANCE
IMPORTANT?
▪ To preserve and strengthen stakeholders confidence.
▪ To provide the foundation for a high performing organization
▪ To ensure the organization is well placed to respond to a changing external
environment.

https://governancetoday.com/GT/GT/Material/Governance__what_is_it_and_why_is_it_importa
nt_.aspx
BENEFITS OF GOOD GOVERNANCE

▪ Reduced vulnerability
▪ Marketability
▪ Credibility
▪ Valuation
AGENCY PROBLEMS IN
CORPORATION
1. Agency relationship and costs
2. Goals of financial management
3. Do managers act in the stockholders’ interests?
4. Managerial compensation
5. Control of the firm
6. Stakeholders
AGENCY PROBLEMS…
1. AGENCY RELATIONSHIPS AND COSTS
▪ Agency relationship is the connection between owners and managers. The conflict is
called principal-agent problem.
▪ The shareholders are the principals; the managers are their agents.
▪ Agency cost – refers to the costs of the conflict of interest between stockholders and
management. This is incurred when (1) managers do not attempt to maximize firm
value and (2) shareholders incur costs to monitor the managers and influence their
actions. It can be direct or indirect.
▪ Direct agency cost – corporate expenditure that benefits management but costs the stockholders or
expense that arise from the need to monitor management actions.
▪ Indirect agency cost – is a lost opportunity
▪ There are no costs when the shareholders are also the managers
AGENCY PROBLEMS…
2. GOALS OF FINANCIAL MANAGEMENT
▪ For profit businesses, the goal of financial manage is to make money or add value for the
owners.
▪ Possible financial goals: to survive, to avoid financial distress and bankruptcy, to beat the
competition, to maximize sales or market share, to minimize costs, to maximize profit, to
maintain steady earnings growth, etc.
▪ Instead of that, managers may prefer the company to be bigger than more profitable, or
corporate power and wealth or put overemphasis on corporate size or growth, or
overemphasize organizational survival to protect their job security,
AGENCY PROBLEMS…
3. DO MANAGERS ACT IN THE
STOCKHOLDERS’ INTERESTS?
This depends on two factors:
▪ How closely are management goals aligned with stockholder goals?
▪ Can management be replaced if they do not pursue stockholder goals?

4. MANAGERIAL COMPENSATION
▪ Top managerial compensation are usually tied to financial performance in general and
oftentimes to share value in particular
▪ Their compensation also relates to job prospects. Better performers within the company
will tend to get promoted and will be in greater demand in the labor market
▪ Those who are successful in pursuing stockholders goals can reap big rewards
AGENCY PROBLEMS…
5. CONTROL OF THE FIRM
▪ Control of the firm ultimately rests with stockholders. They elect the board of directors, who
in turn, hire and fire management.
▪ Unhappy stockholders can act to replace existing management called as proxy fight. A group
solicits proxies in order to replace the existing board and thereby replace existing managers. A
proxy is the authority to vote someone else’s stock.
▪ Another way that management can be replaced is by takeover.

6. STAKEHOLDERS
▪ Management and stockholders are not the only parties with an interest in the firms decisions.
Other stakeholders such as employees, customers, suppliers and the government all have a
financial interest in the firm. Such groups will also attempt to exert control over the firm,
perhaps to the detriment of the owners.
WHAT IS AGENCY THEORY?
▪ Agency theory suggests that the firm can be viewed as loosely defined contract
between resource providers and the resource controllers.
▪ It is a relationship that exists when one or more individuals, called principals,
employ one or more individuals, called agents, to carry out some service and
entrust decision making rights to the agents.
▪ Agency theory argues that in the modern corporation, managerial actions
sometimes depart from those required to maximize shareholder returns.
▪ In this theory, the owners are the principals and the managers are agents.
AGENCY THEORY…
▪ There is an agency loss—the benefits that could have accrued to the owners
had the owners been the ones who exercised direct control of the corporation.
▪ This agency loss can be reduced through:
▪ Providing financial incentives for executives and managers for their efforts of
putting priority on maximizing the shareholders’ wealth.
▪ Shares option
▪ Executive compensation deferred to the future
▪ Anticipating managerial “opportunistic behavior”—policy skirting and
indulging in excessive privileges at the expense of shareholder interest.
EFFECTS OF AGENCY IN
GOVERNANCE
▪ Conflict of interest
▪ Managerial opportunism
▪ Incurrence of agency cost
▪ Shareholder activism
▪ Managerial defensiveness
CONCEPT OF GOAL
CONGRUENCE
▪ Goal congruence is the harmony and alignment of goals of both the principal and the agent
which is consistent with the overall objectives of the organizations.
PERFORMANCE INCENTIVES
AND DISINCENTIVES
▪ Pay dependent on profit level
▪ Shares incentives
▪ Shareholders’ intervention
▪ Threat of being fired
▪ Takeover threat
ROLES OF NON-EXECUTIVE
DIRECTORS
Non-executive directors does not take part in the executive function of the management team,
not an employee of the company or connected with it in another way.
▪ Developing strategy
▪ Establishing networks
▪ Monitoring of performance
▪ Audit
ROLES OF CHIEF FINANCIAL
OFFICER (CFO)
▪ Chief Financial officer (CFO) – is a corporate officer principally accountable
for managing the financial risks of the corporation.
▪ Implements internal control
▪ Supervises major impact projects
▪ Develops relations with financing sources
▪ Advisor to management
▪ Drives major strategic issues
▪ Risk manager
▪ Relationship role
▪ Objective referee
ROLES OF AUDIT COMMITTEE
▪ Audit Committee – is an essential component in the overall corporate governance system.
They should be independent from the operational aspects of the company
▪ AC Responsibilities:
▪ Oversight function and ultimately responsible for the company’s reporting processes and the
quality of its financial reporting.
▪ Issues that AC should consider:
▪ Risk identification and response
▪ Pressure to manage earnings
▪ Internal controls and company growth
▪ Risk identification and response:
▪ External risk (independent)
▪ Rapid technological changes
▪ Downturn in the industry
▪ Unrealistic earning expectation by analysts
▪ Operating/internal risk
▪ Information and control risk
WHO IS RESPONSIBLE FOR FINANCIAL
REPORTING?

▪ The BOD – the company’s BOD including the audit

committee
▪ Finance and Accounting – financial management including
the internal auditors
▪Auditor – the independent auditors
ROLES OF EXTERNAL
AUDITOR
▪ Auditing is a systematic process by which a competent, independent person
objectively obtains and evaluates evidence regarding assertions about
economic actions and events
▪ Audit services are used to cast away doubts on the information given by the
management
▪ To check if unreliable information might be fed not only to decision makers
but more importantly to the shareholders.
FACTORS THAT CONTRIBUTE TO
INFORMATION RISK
1. Remoteness of information providers to the information users
2. Bias of information providers
3. The volume of data
4. Complexities in transactions'
DUTIES OF EXTERNAL AUDITOR
1. Make a report on the fact and fairness of the entity’s annual accounts.
2. Conduct of audit. The auditor must considered whether the following are
present:
1. Proper accounting records being kept by the company
2. Financial statement figures that agree with accounting records
3. Adequacy of notes to financial statement and other disclosure necessary.
4. Compliance with relevant laws and standards of financial accounting and
reporting.
REFERENCES
▪ Textbook: Biore, Christopher, et al., (2017). Good Governance & Social Responsibility, 2nd
ed., DomDane Publishers and Made Easy Books.
▪ Serrano, Angelita Ong, (2016). Business Ethics and Social Responsibility, 1st ed. Philippines:
Unlimited Books Library Services & Publishing, Inc.
▪ https://skpatodia.in>blog>good-governance-character
▪ https://insights.diligent.com/corporate-governance/what-constitutes-good-governance/
▪ https://schoolofpoliticalscience.com/what-is-good-governance
▪ https://skpatodia.in>blog>good-governance-character
THANK YOU
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