Introduction to Corporate Governance

Overview of Corporate Governance

• Corporate governance is a system that ensures accountability and ethical behavior among a company's Board and senior management for the benefit of stakeholders and society.
• The SEC Memorandum Circular No. 19, released on November 22, 2016, is the Code of Corporate Governance for Publicly Listed Companies (CG Code for PLCs) in the Philippines.
• The CG Code follows a "comply and explain" approach, allowing companies to choose compliance while requiring disclosure of compliance status in annual reports.

Components of the Code

• Principles: High-level statements advising good practices in corporate governance applicable to all companies.
• Recommendations: Specific criteria that highlight features of good corporate governance for companies adhering to the Code.
• Explanations: Supplementary information for companies on best practices in corporate governance.

Characteristics of Good Governance

• Good governance parallels good government, emphasizing accountability, ethics in decision-making, and more.
• Criteria for good corporate governance include:
  • Accountability
  • Ethical decision-making
  • Transparency and predictability
  • Rule-bound decision-making
  • Responsiveness
  • Long-term public interest focus

Key Characteristics of Good Governance

• Participation: Encourages inclusive decision-making for all individuals, supported by freedom of association and speech.
• Rule of Law: Entails a fair legal framework, impartiality in enforcement, and protection of human rights.
• Transparency: Ensures decision-making processes are open, with accessible and understandable information available to affected stakeholders.
• Responsiveness: Organizations must address stakeholder needs promptly and efficiently.
• Consensus-Oriented: Aims for mediation of differing interests to achieve broad agreement on policies and procedures.
• Equity and Inclusiveness: Ensures all members, especially vulnerable groups, feel included and can enhance their well-being.
• Effectiveness and Efficiency: Processes should yield results that satisfy needs while optimizing resources.
• Accountability: Decision-makers must answer to the public and organizational stakeholders.

Board of Directors

• The Board of Directors (BOD) acts as the governing body and is elected by shareholders, tasked with overseeing corporate actions and strategy.

Good Governance Characteristics

• Participation: Inclusive decision-making should be facilitated, allowing all individuals to express their opinions either directly or through representative organizations.
• Rule of Law: Legal frameworks must be fair and enforced impartially, protecting human rights, particularly for minorities.
• Transparency: Decision-making processes should be clear and accessible, ensuring stakeholders receive adequate and understandable information.
• Responsiveness: Organizations must address the needs of all stakeholders in a timely manner.
• Consensus Oriented: Focus on mediating diverse interests to achieve broad agreement on policies and procedures beneficial to the collective.
• Equity and Inclusiveness: All members must feel they have a stake in the organization, specifically providing opportunities for vulnerable groups to improve their well-being.
• Effectiveness and Efficiency: Processes should yield successful results while optimizing the use of resources.
• Accountability: Decision-makers must answer to the public and stakeholders regarding their actions and decisions.

Director Qualifications (Securities and Exchange Commission)

• Ownership Requirement: Every director must own at least one share of the corporation’s stock, with the share registered in their name.
• Additional Qualifications: Criteria may include educational background, business competency, age, integrity, and diligence.
• Code of Ethics: Boards must establish and enforce a code of business ethics and conduct.

Disqualifications of Directors

• Legal Convictions: Exclusion for individuals convicted of financial crimes or violations related to securities and investment conduct.
• Administrative Violations: Disqualification for willfully violating relevant laws or rules enforced by the Commission.
• Insolvency: Those declared insolvent by a court or regulatory body cannot serve as directors.
• Criminal History: Conviction related to offenses punishable by imprisonment exceeding six years within five years before election or appointment.
• Absenteeism: Directors missing over 50% of meetings may be disqualified temporarily.

Audit Committee Responsibilities

• Financial Review: Oversee financial statements, ensuring compliance with accounting standards and regulations.
• Non-Audit Work: Evaluate and disclose non-audit tasks performed by external auditors in the annual report.
• Internal Audit Access: Ensure internal auditors have unrestricted access to organizational records and enforce independence in their evaluations.

Board Committees

• Nomination Committee: Reviews qualifications for board candidates and assesses the board's effectiveness in memberships and replacements.
• Compensation Committee: Establishes transparency in executive remuneration processes, ensuring alignment with corporate culture and strategy.

Commitment and Independence

• Active Participation: Directors must consistently attend and participate in board meetings unless justifiably absent.
• Limit on Concurrent Directorships: Non-executive directors should limit their positions to five publicly listed companies to maintain adequate oversight and preparation for meetings.