Introduction to Corporate Governance PDF

# Introduction to Corporate Governance ## Why practice corporate governance? - Corporate responsibility - Compliance - Prevention of Internal Fraud - Reputation Management ## Introductory thoughts All organizations require governance. - Achievement of goals and objectives - Maintaining order and...

# Introduction to Corporate Governance ## Why practice corporate governance? - Corporate responsibility - Compliance - Prevention of Internal Fraud - Reputation Management ## Introductory thoughts All organizations require governance. - Achievement of goals and objectives - Maintaining order and discipline, controls - Allocations of benefits and burdens among members and agents - Governance is required regardless of purpose or nature of the corporation ## Good Governance The slide shows a diagram of an octagon with the word "GOOD GOVERNANCE" in the center. There are 8 categories surrounding the octagon: - Consensus oriented - Accountable - Transparent - Participatory - Follows the rule of law - Responsive - Effective and Efficient - Equitable and Inclusive ## Introductory thoughts - CG is not a new idea. Only the term is new. - The idea is "as old as trade." - Principal and agent relationship; idea of agency has been the central challenge in governance ## Corporate governance in the 21st Century - Corporate responsibility - Compliance - Reputation Management - Maintenance of Organizational Discipline ## Regulatory Bodies in Corporate Governance When citizens and governments are aggravated by irresponsible business behavior, greater regulation and bureaucratic red tape is the result. - Securities and Exchange Commission (SEC) - Department of Finance (DOF) - Insurance Commission ## Code of Corporate Governance - SEC MC No. 19, Series of 2016 Corporate Governance - the system of stewardship and control to guide organizations in fulfilling their long-term economic, moral, legal and social obligations towards their stakeholders. It is a system of direction, feedback and control using regulations, performance standards and ethical guidelines to hold the Board and senior management accountable for ensuring ethical behavior, reconciling long-term customer satisfaction with shareholder value, to the benefit of all stakeholders and society. Its purpose is to maximize the organization's long-term success, creating sustainable value for its shareholders, stakeholders and the nation. ## Who are covered by the Corporate Governance - Public Interest-Entities - Publicly-Listed Companies (PLCs) - Public Interest-Entities as define by the monitoring agencies SEC, BOA, IC, BSP. These are covered by circulars issued by the monitoring agencies. Note: Non-stock non-profit entities are not mandated BUT are encouraged to observe the good governance principles and practices. ## Parties to Corporate Governance Key parties involved in corporate governance include stakeholders: - Board of directors - Management - Shareholders - Employees ## External stakeholders such as: - Creditors - Auditors - Customers - Suppliers & Contractors - Government agencies & regulators - The community at large or the Public ## Why CG? It's a legal requirement. The slide shows a diagram of two circles. - The first circle is orange represents a "Single Proprietorship". The word "Ownership" is pointing to the top of the circle and the word "Control" is point to the side of the circle. - The second circle represents a "Corporation". The "Ownership" and "Control" are pointing to the circle with the word "Ownership" intersecting the circle. ## Why CG? It's a legal requirement. The agency problem arises out of the agency relationship between Ownership and Management (Control). "Whenever the owner of wealth (the principal) contracts with someone else (the agent) to manage his or her affairs, the agency dilemma arises.” - Tricker Agency means delegation by the Principal to the Agent of responsibility over activities and assets. ## Separation of ownership from management Separation of ownership from management and the idea of protecting shareholders gives rise to a FIDUCIARY DUTY on the part of the Board of Directors and the Senior Management of a Corporation. The fiduciary relationship is highlighted by good faith, loyalty and trust, and the word itself originally comes from the Latin fides, meaning faith. ## CG a quick History - **Limited Liability Company and separate juridical personality** - Corporations are "persons” with rights - Incorporators of a legal entity are liable only to the extent of their investment - **Corporation: An ingenious device for obtaining profit without individual responsibility.** - Ambrose Bierce, The Devil's Dictionary - **The directors of companies, being the managers of other people's money rather than their own, cannot be expected to watch over it with the same anxious vigilance with which they watch over their own.** - Adam Smith, The Wealth of Nations, 1776 ## CG a quick history **21st Century (2000-2010)** - Codes of principles, best practice guides - Director appraisal, training, and development - Board level performance reviews - Premium on price of shares of well-governed companies - **ENRON, Worldcom, TYCO, Barings, SG, etc.** - **Sub-prime mortgage crisis (2008)** - **RCBC, Metrobank, Urban Bank, EIB** - **Pandemic Covid19** - **Wirecard AG (2020)** ## Stewardship - Directors are the stewards of the company. - Directors have a fiduciary duty to act as stewards of the shareholders' interests in the corporation. - Good faith is central to the idea as directors are not motivated by self-interest and should be trusted. ## What's next (or is it now?) in CG? - Changing expectations of directors and boards - rise of activist investors; special interest investors; demand for high standards of governance while delivering “breakthrough results" - Society's changing expectations of directors and boards - Pressures for sound governance, director level stewardship and ethical business behavior; "CSR" and “ESG” (environmental, social and governance). - Climate Change - How will businesses react and respond? - Are all companies now tech companies? - How do we respond to digitization/digitalization? - Pandemic- How will Boards manage the crisis? ## Why CG? It's good for business. It's a responsibility! - Better CG - More Investors/Better Credit - More Capital/Financing ## Stakeholder Theory - Stakeholder - those affected by a company's decisions: shareholders, employees, customers, suppliers/vendors, creditors, local community, regulators, government, etc. - Perspective of governance from a societal level: appropriate relationship between the enterprise and the other stakeholders - Drivers of a Successful Business: motivating staff, responsiveness to customers, removing wastage from the supply chain, maintaining good relations with suppliers. – Tomorrow's Company, Hamilton ## The Stakeholders Principle The slide shows a diagram of a company in the center with arrows pointing to the outside to different stakeholders: - Environment - Stockholders - Customers - Suppliers/Creditors - Community - Competition - Employees - Government/Regulators ## Governance and Management Board: Ensures that the company is being well-run and runs in the right direction Management: Runs the company ## Four Broad Governance Functions - **Conformance:** Compliance and responsiveness to power that granted the authority to operate - Accountability - Oversight - Past and Present Focused - **Performance:** Concerned with the Board's contribution to the corporate direction - Strategy Formulation - Policy Making - Future Focused - Management - Rest of the Company ## A WELL-GOVERNED COMPANY - Sound strategy - Robust audit and control system - Respect and protect shareholder rights - Ensure integrity in financial reporting - Recognize and manage risks - Disclosure and transparency - Respect stakeholder rights - Avoid conflicts-of-interest - Nurture a culture of ethics and compliance - Accountability - Strategy Formulation - Oversight - Policy Making ## A Well-Governed Company - **Board of Directors/Trustees** - Policy and Strategic Direction - Performance Targets - Accountability - **Internal Controls** - **Strategic and Business Planning** - Succession Planning and Talent Pool Management - **Risk Management** - **Executive Management** - Senior Management - Decision & Control - Operational Management ## The Failed Board - Guilty as Charged 1. Arrogance 2. Fraud 3. Corruption 4. Conflicts-of-interest 5. Preferential treatment 6. Executive excess 7. Failure of all the gatekeepers 8. Culture of greed ## In simple terms, good corporate governance is... - LEADERSHIP with the highest moral standards - LEADERSHIP with the highest ethical and compliance practices - LEADERSHIP that acts for the good of others, if not, at least for the common good. - LEADERSHIP like a good father of a good family. - LEADERSHIP is mentoring the next generation of leaders towards professionalism and excellence. - LEADERSHIP by Example! ## Enemy of Good Governance.... - You - personal integrity/beyond reproach - People around you - the right (qualified and competent) team - Corruption & Unethical behavior - at all levels of the organization. - Inequity - everyone should have dignity and right to decent living ## Success in Good Governance - OBJECTIVES of the ORGANIZATION ARE DECISIVELY PURSUED AT ALL LEVELS (Mission and Vision) - GOOD GOVERNANCE FROM THE BOARD MEMBERS - COMPETENCE AND EXCELLENCE OF MANAGEMENT - OBSERVANCE OF TRANSPARENCY, FAIRNESS, ACCOUNTABILITY & STEWARDSHIP AT ALL LEVELS. - HEALTHY AND CONDUCIVE WORKING ENVIRONMENT - BEST PRACTICE AND CONTINUOUS BENCHMARKING - PASSING ON THE BATON TO THE NEXT GENERATIONS OF LEADERSHIP ## In Summary - The Board and Management are agents of the Shareholders. - Being fiduciaries give rise to obligations and duties that should be performed professionally. - As fiduciaries means observing a set of values: accountability, integrity, transparency fairness & STEWARDSHIP. ## Acknowledgement 1. Atty. Vincent Edward R. Festin - Founding President of GGAPP and Professor of Business Ethics at the Ateneo Graduate School of Business and former Head of CG Education and Communication of the PLDT. 2. GGAPP and its various presentations & pictures in the past.