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LIVE CORPORATION AND CORPORATE GOVERNANCE Araneta Bomediano Endrina Mauna Vestil  THE AIMS AND OBJECTIVES OF A CORPORATION AND THE GOALS OF THE DIFFERENT INTEREST GROUPS INVOLVED AIMS AND OBJECTIVES OF A CORPORATION 1. PROFIT MAXIMIZATION 2. VALUE CREATION F...

LIVE CORPORATION AND CORPORATE GOVERNANCE Araneta Bomediano Endrina Mauna Vestil  THE AIMS AND OBJECTIVES OF A CORPORATION AND THE GOALS OF THE DIFFERENT INTEREST GROUPS INVOLVED AIMS AND OBJECTIVES OF A CORPORATION 1. PROFIT MAXIMIZATION 2. VALUE CREATION FOR SHAREHOLDERS 3. CORPORATE SOCIAL RESPONSIBILITY (CSR) 4. MARKET EXPANSION 5. INNOVATION AND R&D 6. RISK MANAGEMENT  DIRECTORS AS BELONGING TO ONE OF THREE GROUPS: TRADITIONALIST BROAD CONSTRUCTIONIST CONSER PRAG- INCLU- -VATIVE MATIC SIVE RATIONALIST GOALS OF DIFFERENT INTEREST GROUPS 1. SHAREHOLDERS 2. STOCKHOLDERS 3. BOARD OF DIRECTORS 4. EMPLOYEES 5. CUSTOMERS 6. SUPPLIERS 7. GOVERNMENT AND REGULATORS 8. SOCIETY AND COMMUNITIES  GOALS OF DIFFERENT INTEREST GROUPS SHAREHOLDERS STOCKHOLDERS 1. PRIMARY GOAL: MAXIMIZE 1. PRIMARY GOAL: SECURE RETURN ON INVESTMENT. DIVIDENDS AND CAPITAL GAINS. 2. INTERESTS: 2. INTERESTS: DIVIDEND PROFITABILITY, STOCK PAYMENTS, SHARE PRICE PRICE APPRECIATION, AND APPRECIATION, AND CORPORATE DIVIDEND PAYMENTS. STABILITY. 3. POTENTIAL CONFLICT: 3. POTENTIAL CONFLICT: SHAREHOLDERS MAY STOCKHOLDERS MAY FOCUS ON PRIORITIZE SHORT-TERM SHORT-TERM FINANCIAL GAINS RETURNS, 4.  GOALS OF DIFFERENT INTEREST GROUPS EMPLOYEES CUSTOMERS 1. PRIMARY GOAL: JOB SECURITY, 1. PRIMARY GOAL: HIGH-QUALITY FAIR COMPENSATION, AND PRODUCTS/SERVICES AT CAREER DEVELOPMENT. REASONABLE PRICES. 2. INTERESTS: COMPETITIVE 2. INTERESTS: PRODUCT SALARIES, BENEFITS, A RELIABILITY, CUSTOMER POSITIVE WORK ENVIRONMENT, SERVICE, AND VALUE FOR AND OPPORTUNITIES FOR MONEY. ADVANCEMENT. 3. POTENTIAL CONFLICT: 3. POTENTIAL CONFLICT: CUSTOMERS MAY DEMAND EMPLOYEES MAY FAVOR LOWER PRICES OR HIGHER HIGHER WAGES AND BETTER QUALITY WORKING CONDITIONS, 4.  GOALS OF DIFFERENT INTEREST GROUPS SUPPLIERS GOVERNMENT AND REGULATORS 1. PRIMARY GOAL: LONG-TERM 1. PRIMARY GOAL: COMPLIANCE CONTRACTS AND TIMELY WITH LAWS AND REGULATIONS, PAYMENTS. AND CONTRIBUTION TO THE 2. INTERESTS: STABLE BUSINESS ECONOMY. RELATIONSHIPS, FAIR PRICING, 2. INTERESTS: TAX REVENUES, AND CONSISTENT DEMAND. LEGAL COMPLIANCE, AND 3. POTENTIAL CONFLICT: CORPORATE GOVERNANCE. SUPPLIERS MAY SEEK HIGHER 3. POTENTIAL CONFLICT: PRICES OR MORE FAVORABLE CORPORATIONS MAY SEEK TO TERMS MINIMIZE REGULATORY BURDENS OR TAXES  GOALS OF DIFFERENT INTEREST GROUPS BOARD OF DIRECTORS SOCIETY AND COMMUNITIES 1. PRIMARY GOAL: PROVIDE 1. PRIMARY GOAL: POSITIVE STRATEGIC OVERSIGHT AND SOCIETAL IMPACT AND ENSURE THE CORPORATION'S MINIMAL NEGATIVE LONG-TERM SUCCESS. EXTERNALITIES. 2. INTERESTS: BALANCING THE 2. INTERESTS: CONTRIBUTIONS INTERESTS OF ALL TO COMMUNITY WELFARE. STAKEHOLDERS, ENSURING 3. POTENTIAL CONFLICT: EFFECTIVE GOVERNANCE SOCIETY MAY DEMAND 3. POTENTIAL CONFLICT: GREATER CORPORATE ALIGNING THE DIVERSE RESPONSIBILITY AND INTERESTS OF ALL INTEREST SUSTAINABILITY EFFORTS GROUPS THE CONCEPT OF GOAL CONGRUENCE AND HOW IT CAN BE ACHIEVED  ACHIEVING GOAL CONGRUENCE ALIGNMENT OF REMUNERATION PACKAGES PROFIT-RELATED PAY: LINKING MANAGERS' PAY OR BONUSES TO THE COMPANY'S PROFITS SHARE OWNERSHIP AND OPTIONS: WHEN MANAGERS OWN SHARES OR HAVE THE OPTION TO BUY SHARES AT A FAVORABLE PRICE, THEIR PERSONAL FINANCIAL INTERESTS BECOME CLOSELY TIED TO THE COMPANY'S SUCCESS.  ACHIEVING GOAL CONGRUENCE ADDRESSING THE AGENCY PROBLEM: AGENCY THEORY RECOGNIZES THAT EMPLOYEES AND MANAGERS ARE INDIVIDUALS WITH THEIR OWN OBJECTIVES, WHICH MAY NOT ALWAYS ALIGN WITH THE ORGANIZATION'S GOALS. WITHIN A DEPARTMENT, INCENTIVE ALIGNMENT: TO ADDRESS THIS, ORGANIZATIONS CAN PROVIDE INCENTIVES TO MANAGERS THAT ARE TIED TO BROADER ORGANIZATIONAL GOALS SUCH AS PROFIT.  ACHIEVING GOAL CONGRUENCE MONITORING MANAGERIAL BEHAVIOR: MANAGEMENT AUDITS AND REPORTING REQUIREMENTS: THIS CAN BE DONE THROUGH MANAGEMENT AUDITS, ADDITIONAL REPORTING REQUIREMENTS, AND ASSURANCES THAT MANAGERS PRIORITIZE SHAREHOLDERS' INTERESTS.  ACHIEVING GOAL CONGRUENCE ETHICAL CONSIDERATIONS: ETHICAL BEHAVIOR AND CREATIVE ACCOUNTING: PRESENT A MORE FAVORABLE PICTURE OF THE COMPANY'S PERFORMANCE. CREATIVE ACCOUNTING - THE EXPLOITATION OF LOOPHOLES IN FINANCIAL REGULATION IN ORDER TO GAIN ADVANTAGE OR PRESENT FIGURES IN A MISLEADINGLY FAVORABLE LIGHT.  THE SHAREHOLDERS, BONDHOLDERS, BANKERS, AND DIRECTORS  SHAREHOLDERS BONDHOLDERS 1 legal owners of the company and have certain rights 2 creditors corporations of do not have ownership rights and do the not limited liability participate in corporate governance BANKERS DIRECTORS 3 financial institutions or professionals that assess the creditworthiness of the 4 elected by shareholders to oversee the management of the corporation must act in the best interest company and provide the of the corporation and its necessary capital for its shareholders. operations INTERRELATIONSHIPS How are these corporate roles related to each other? INTERRELATIONSHIPS Bondholders and Bankers Shareholders and Directors (creditors) Shareholders elect the board Bondholders receive fixed of directors. interest payments. Directors are accountable to Bankers may provide various the shareholders forms of credit. Shareholders and Bondholders Bankers and Directors Shareholders own equity in the Directors work with bankers to company. secure necessary financing for Bondholders are creditors who the company. are primarily concerned with Bankers assess the company’s the company’s ability to meet financial health and provide its debt obligations. loans based on their evaluation. POTENTIAL Conflicts of Interest  POTENTIAL Conflicts of Interest SHAREHOLDERS BONDHOLDERS Risk Preferences Shareholders prefer riskier strategies for higher returns. Bondholders prefer safer strategies to ensure debt repayment Dividend Payments Shareholders may push for higher dividends, affecting bondholders’ risk.  POTENTIAL Conflicts of Interest SHAREHOLDERS DIRECTORS Corporate Governance Shareholders advocate for changes Directors may take action to protect their positions, even if it harms the company (entrenchment)  POTENTIAL Conflicts of Interest SHAREHOLDERS DIRECTORS Management Decisions Shareholders may disagree with strategic decisions that don’t maximize value Directors may act in their own best interests rather than those of the shareholders. Executive Compensation Concerns about excessive compensation packages approved by directors.  POTENTIAL Conflicts of Interest DIRECTORS BANKERS Loan Terms Directors seek favorable terms for growth; bankers impose stricter covenants. Financial Disclosure Bankers require detailed financial info; directors may be reluctant. Debt Levels Directors prefer higher debt for expansion; bankers focus on stability.  POTENTIAL Conflicts of Interest BONDHOLDERS BANKERS Priority of Claims Bankers (secured) vs. bondholders (unsecured) during default. Debt Covenants Bankers impose restrictions; bondholders seek flexibility. Interest Payments Fixed interest for bondholders vs. variable rates for bankers. AGENCY THEORY on concepts of governance Agency Theory provides a theoretical framework for understanding the relationship between the principal (shareholders) and agents (managers or directors). The agent represents the principal and its best interest without regard for self-interest. Agency Problems - divergence of interest between the principal and agent. AGENCY THEORY on concepts of governance Agency Loss a standard or a metric that aims to determine whether or not an agent acts in their principal’s best interest. the difference between the optimal results for the principal and the consequences of the agent’s behavior. AGENCY THEORYon concepts of governance Governance (Corporate Governance) - can be used to change the rules under which the agent operates and restore the principal’s interests. Aligning Interests Monitoring and Control Accountability Transparency  THE ROLE OF NON- EXECUTIVE DIRECTORS, ADMINISTRATORS, MANAGEMENT BUY-OUTS AND BUY-INS, EXECUTIVE SHARE SCHEMES IN CORPORATE OPERATIONS ROLE OF NON- EXECUTIVE DIRECTORS PERFORMANCE REVIEW STRATEGIC DIRECTION TIME COMMITMENT RISK MANAGEMENT PEOPLE PROFESSIONAL DEVELOPMENT PARTICIPATION IN COMMITTEE MEETINGS T CORPORATE ADMINISTRATOR ROLE DOCUMENT MANAGEMENT EVENT COORDINATION COMMUNICATION FACILITATION REGULATORY COMPLIANCE STOCK OPTION ADMINISTRATION CONTRACT MANAGEMENT BOARD ONBOARDING SPECIAL PROJECTS MANAGEMENT BUY- OUTS AND BUY-INS MANAGEMENT BUYOUT (MBO) STRATEGIC INVESTMENT MANAGEMENT CHANGE ALIGNMENT OF INTERESTS MANAGEMENT BUYIN (MBI) OWNERSHIP TRANSITION STRATEGIC REALIGNMENT EMPLOYEE OR MANAGEMENT BUY-OUT EXECUTIVES SHARE SCHEMS INCENTIVIZE PERFORMANCE ATTRACT AND RETAIN TALENT ALIGN INTERESTS REWARD LONG-TERM SUCCESS: WAYS AND MEANS OF PROMOTING ETHICAL BEHAVIOR WITHIN THE ORGANIZATION AND IN RELATION TO THE OUTSIDE WORLD PROMOTING ETHICAL BEHAVIOR IS ESSENTIAL FOR BUILDING TRUST AND CREDIBILITY WITHIN AN ORGANIZATION, LEADING TO HIGHER EMPLOYEE MORALE AND RETENTION. ADDITIONALLY, IT ENHANCES THE ORGANIZATION'S REPUTATION AND MITIGATES RISKS ASSOCIATED WITH LEGAL ISSUES, CONTRIBUTING TO SUSTAINABLE GROWTH AND LONG-TERM SUCCESS.. INTERNAL PROMOTION OF ETHICAL BEHAVIOR Leading by Example Create a Code of Ethics Provide Intensive Ethics Training Allow for Open Communication Recognize and Reward Ethical Behavior Regularly Policy Review EXTERNAL PROMOTION OF ETHICAL BEHAVIOR Engage with Stakeholders Maintain Ethical Supply Chains Promote Ethical Marketing  THE ROLE OF THE CHIEF FINANCIAL OFFICER (CFO), THE AUDIT COMMITTEE, INTERNAL AUDITOR AND EXTERNAL AUDITORS ROLE OF THE CHIEF FINANCIAL OFFICER (CFO) Oversees financial operations and ensures accuracy in reporting. Manages risk and financial planning. Ensures internal controls and compliance with financial regulations. Liaises with the audit committee and external auditors.  ROLE OF THE AUDIT COMMITTEE Oversees financial reporting and compliance with regulations. Reviews internal controls and risk management strategies. Works with external auditors to ensure financial integrity. Reports findings to the board of directors.  ROLE OF THE INTERNAL AUDITOR Evaluates the effectiveness of internal controls. Identifies risks and recommends mitigation strategies. Ensures compliance with internal policies and regulations. Reports to the audit committee and management.  ROLE OF THE EXTERNAL AUDITOR Provides an independent audit of financial statements. Assesses internal controls related to financial reporting. Ensures compliance with laws, regulations, and accounting standards. Reports audit findings to the audit committee. CORPORATE GOVERNANCE case studies in the local and international scene METROBANK INTERNAL FRAUD CASE (2017) METROBANK INTERNAL FRAUD CASE (2017) OVERVIEW In July 2017, Metropolitan Bank and Trust Company (Metrobank), one of the Philippines' largest banks, was rocked by a significant internal fraud involving an estimated P900 million. METROBANK INTERNAL FRAUD CASE (2017) NATURE OF THE FRAUD Key Figure: Maria Victoria Lopez Amount Involved: At least PHP 900 million, potentially rising to PHP 2.5 billion Modus Operandi: Lopez allegedly engineered the release of loans to a fake account under the name of Universal Maria Victoria Lopez Vice President Robina Corporation. Corporate Services Unit, Metrobank METROBANK INTERNAL FRAUD CASE (2017) DISCOVERY AND INVESTIGATION Investigating Bodies: Discovery 1. Bangko Sentral ng Pilipinas (BSP) - The National Bureau of Investigation Probed into the breach of internal (NBI) conducted a sting operation on controls July 17, 2017. 2. National Bureau of Investigation (NBI: Focused on the criminal aspects of the case. 3. Anti-Money Laundering Council (AMLC): Potential involvement in the investigation.  IMPACT ON METROBANK MARKET VALUE BSP ordered Metrobank Metrobank's stock fell to add PHP 4.45 billion to by 5.03% following its reserves to cover the news. higher operational risks. OPERATIONAL FINANCIAL The bank lost over PHP 14 billion in market value amid the fraud issue. METROBANK INTERNAL FRAUD CASE (2017)  METROBANK INTERNAL FRAUD CASE (2017) KEY IMPLICATIONS FOR CORPORATE GOVERNANCE INTERNAL CONTROLS EMPLOYEE 1 2 MONITORING Metrobank’s weakness in internal control systems Regular audits and reviews allowed employees to to help identify potential perpetrate the fraud red flags among employees. CULTURE AND ETHICS 3 REGULATORY A strong corporate culture 4 COMPLIANCE that emphasizes ethical Comply with all applicable behavior and accountability is essential for preventing fraud laws and regulations.  ENRON CORPORATION SCANDAL (USA)  Enron scandal, series of events that resulted in the bankruptcy of the U.S. energy, commodities, and services. company Enron Corporation in 2001 and the dissolution of Arthur Andersen LLP, which had been one of the largest auditing and accounting companies in the world. The collapse of Enron, which held more than $60 billion in assets, involved one of the biggest bankruptcy filings in the history of the United States,