XGOVERN: Governance, Business Ethics, Risk Management and Internal Control PDF

XGOVERN: GOVERNANCE, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL Junior Philippine Institute of Accountants and Auditors-United _____________________________________________________________________________________________________________________________________...

XGOVERN: GOVERNANCE, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL Junior Philippine Institute of Accountants and Auditors-United _________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ ______________________ their legal liability. OVERVIEW​ ​ ​ ​ ​ ​ 1.​ Models of Corporate Governance ​ Management - acts as the 2.​ Agency Problems and Accountability of agent of the investors by Corporate Managers and Shareholders undertaking the affairs of 3.​ Corporate Social Responsibility the corporation. ​ Board of Directors - act as MODELS OF CORPORATE GOVERNANCE fiduciaries for shareholders’ ​ Good Corporate Governance - is very interests by overseeing the important for economic development, not management on their only for the company itself, but also for the behalf. economy as a whole. Method of Equity FInancing ​ “LOGIC” of Governance: Raising -​ form of financing where ○​ Continuous Learning ○​ Oversight Capital companies generate ○​ Guidance capital by selling shares to ○​ Information investors, granting them an ○​ Culture ownership interest. ANGLO-US MODEL Composition Insiders of the Board -​ Persons with Ownership Individual/Institutional Investors of Directors significant/personal (Outside Shareholders) relationship with corporate -​ shared ownership management. -​ entities which pool money -​ executives, managers, to purchase securities, real employees property, and other Outsiders investment assets or -​ Persons or institutions originate loans. without direct relationship -​ include banks, insurance with the corporate companies, pensions, management hedge funds, REITs, Corporate Routine Corporate Actions: investment advisors, Actions 1.​ Elections of directors endowments, and mutual Requiring 2.​ Appointment of auditors funds Shareholder Key Players Corporate Governance Triangle: Approval Non-Routine Corporate Actions: 1.​ Establishment or amendment of stock option plans 2.​ Mergers and takeovers 3.​ Restructurings 4.​ Amendment of the articles ​ Shareholders - contribute of incorporation capital and maintain ownership in the enterprise, Interaction ​ Wide range of institutional while generally avoiding Among investors and financial 1  XGOVERN: GOVERNANCE, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL Junior Philippine Institute of Accountants and Auditors-United _________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ ______________________ Players specialists monitor the ** The average Japanese board corporation’s performance contains 50 members** ​ Shareholders may exercise their voting rights regardless Corporate Routine Corporate Actions: of their physical absence Actions 1.​ Payment of dividends and through a proxy Requiring allocation of reserves Shareholder 2.​ Election of directors; and Approval appointment of auditors GERMAN MODEL Non-Routine Corporate Actions: Ownership Affiliated Banks and Companies 1.​ Capital authorizations -​ Where a strong, long-term 2.​ Amendments to the articles affiliation exists between a of association and/or bank and a corporation charter 3.​ Payment of retirement Key Players Open-ended Hexagon: bonuses to directors and auditors 4.​ Increase of aggregate compensation ceilings for directors and auditors Interaction ​ Generally links and ​ Main Bank - provides loans Among strengthens relationships and services related to Players ​ Outside shareholders are bond and equity issues, largely excluded from the settlement accounts, and process related consulting services ​ Shareholders may exercise ​ Keiretsu (Financial/Industrial their voting rights regardless Network) - industrial groups of their physical absence with interlocking trading through a proxy or through relationships and mail cross-holdings of debt and ​ Shareholder activism is equity; informal business restricted contracts ​ Management JAPANESE MODEL ​ Government - directs industrial policies Ownership -​ German banks and Composition Insiders (almost completely) Corporations of the Board -​ Executive managers (heads of Directors of major divisions of the Key Players ​ German Banks company and its central ​ Shareholders (lesser extent) administrative body Composition Management Board (Vorstand) Outsiders (seldom) of the Board -​ Responsible for daily -​ Unaffiliated shareholders of Directors management of the 2  XGOVERN: GOVERNANCE, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL Junior Philippine Institute of Accountants and Auditors-United _________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ ______________________ company Interaction ​ Designed to include the -​ Composed solely of Among interests of labor, executives Players corporations, banks, and Supervisory Board (Aufsichtsrat) shareholders in the -​ Appoints and dismisses the corporate governance management board system -​ Approves major ​ Shareholders must either management decisions attend the meeting in -​ Advises the management person or be represented in board person to be able to vote. -​ Composed solely of representatives CHINESE MODEL ** The size of the supervisory Ownership Government holds a substantial board is set by Industrial stake Democracy Act and the Law on Employee Co-Determination** Key Players ​ SHareholders ​ Government Corporate Routine Corporate Actions: ​ Board of directors Actions 3.​ Allocation of net income ​ Employees Requiring 4.​ Ratification of the acts of Shareholder the management board for Composition Board Structure Approval the previous fiscal year of the Board ​ Board of Directors - 5.​ Ratification of the acts of of Directors Responsible for making the supervisory board for strategic decisions and the previous fiscal year. supervising company 6.​ Election of the supervisory administration board. ​ Board of Administrators - 7.​ Appointment of auditors. Accountable for monitoring company operations and Common Corporate Actions: ensuring regulatory 1.​.Capital authorizations compliance 2.​ Affiliation agreements with subsidiaries; Board Composition 3.​ Amendments to the articles -​ Individuals with strong ties of association and/or to government and charter industry are highly 4.​ Increase of the aggregate favored when appointing compensation ceiling for the supervisory board Board Independence -​ Provide an objective Non-Routine Corporate Actions: [perspective on the 5.​ mergers, takeovers and company’s operations restructuring Regulatory ​ Government regulation - 3  XGOVERN: GOVERNANCE, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL Junior Philippine Institute of Accountants and Auditors-United _________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ ______________________ ○​ Shareholders prefer the funds to be Framework highly influenced by declared as dividends as long as it is government policies and backed by income. regulations ​ Managerial Opportunism - shareholder ​ Securities regulation - returns are not maximized to the fullest oversees stock exchanges because of unrelated diversification and and enforces disclosure growth which leads to increased requirements compensation for managers. ​ The Company Law of PRC - ​ Power Supremacy vs. Technical Expertise - shareholders are left with the supreme provides rules on power over the corporation, because while shareholder rights, board the agents handle technical operations, structure, and corporate they just wait for the ultimate result. disclosure ​ Trust - Shareholders entrust everything as far as operation including charting of the Interaction ​ Complex corporation’s future to its directors and Among ​ Employee representation officers, which can sometimes lead to Players on board is common agents taking pleasure and losing their ​ Labor unions play a balance. significant role in labor relations and business Identified Agency Problems ​ Adverse Selection - insufficiency of decisions information that is normally obtainable to the principal and to the agents (e.g. inaccurate information on agents’ resumes and misrepresentation of information by the AGENCY PROBLEMS AND ACCOUNTABILITY OF principals) CORPORATE MANAGERS AND SHAREHOLDERS ​ Agency Costs - Since the principal is ​ Corporate Social Responsibility - is a delegating power and responsibility, business approach that promotes ethical cautious principals will carry out some type practices, social well-being, and of monitoring activities to have reassurance environmental sustainability while balancing that decisions are most favorable from the profitability and stakeholder interests. point of view of the principal. ​ Conflict of Interest - A corporation’s AGENCY THEORY managers can or may have personal ​ Suggests that the firm can be viewed as a objectives that compete with the owners’ loosely defined contract between resource objectives of maximization of shareholder providers and resource controllers wealth. ○​ Principals = shareholders ​ Legal Requirements vs. Opportunistic ○​ Agents = corporate directors or Behavior - The culture of opportunism managers presented a very strong reflection of the ineffectiveness of principal-agent AGENCY PROBLEMS relationships and the massive deficiency of the current agency theoretical efforts and Principal-Agent Specific Issues practices. ​ Diversification vs. dividends - Control on ​ Self-Interested Behavior - Agents have the how the available funds will be used or capability to operate in their own invested self-interest rather than the best interests of ○​ Managers prefer to use free cash the firm because executives and managers flows to be invested in additional know better than the shareholders whether product diversification 4  XGOVERN: GOVERNANCE, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL Junior Philippine Institute of Accountants and Auditors-United _________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ ______________________ they are capable of meeting the open invitation, usually coursed shareholders’ objectives or not. through media by a prospective acquirer to all stockholders of the REMEDIES WITHIN SHAREHOLDERS “acquired to be” corporation. Proxy Voting -​ an exercise of voting on behalf of FINANCING A TAKEOVER shareholders through the use of a special FInancing a Takeover authority given by the shareholder/principal. -​ Is an act of funding for the purpose of obtaining control over a corporation ​ Benefits of Proxy Voting: through the purchase of stock or any other ○​ Routine Decisions means ○​ Governance ○​ Issues on Anti-takeover ​ Debt Financing - acquisition financed by ​ Disadvantages of Proxy Voting: debt is known as leveraged buyouts and thr ○​ Lack deliberative features debt will usually be booked in the balance sheet of the acquired company Derivative Suit ​ Partial or Full Equity Conversion - done by -​ a lawsuit filed by a shareholder on behalf of giving the shareholders of the target the corporation against a third party company offers that include a debt (insiders: directors and other senior officers) instrument in partial or in full payment of shares ​ Specific Feature - allows a shareholder to ​ Share Swap/All Share Deal - bidder bring an action in the name of the company issues its own new shares to the corporation against the parties that may shareholders of the “acquired to be” cause or is allegedly causing harm to the company company. ​ Process - a shareholder must satisfy various EXTERNAL FORCES AFFECTING GOVERNANCE requisites to prove a strong and a valid ​ Competitors - corporations and other status before being permitted to proceed business entities, private or public, offering with the action. the same product or services that the ​ Takeover - transfer of control of a firm from company is offering one group of shareholders to another group ​ Financers - persons or entities who is usually of shareholders involved in lending money, project ○​ Friendly Takeover - before a bidding financing, large-scale investment, or company makes an offer for another large-scale management of money company, it usually informs first the ​ Regulatory Agencies - public authority or board of directors of the company government agency responsible for to be taken over. exercising autonomous authority over some ○​ Hostile Takeover - permits the area of corporate activity in a regulatory or “acquirer to be” company to bypass supervisory capacity the target company’s management ​ Watchdogs - independent organizations if it is uncooperative and unwilling to trying to police a particular industry or agree to a merger or takeover. corporate conduct to ascertain ○​ Reverse Takeover - type or merger compliance to standards and existing laws used by private companies to ​ Predator Companies - corporations that are become publicly-traded without always on watch and waiting for a chance passing through an initial public to takeover a certain company, be it via offering (IPO). friendly or hostile takeover ○​ Tender offers - a corporate finance ​ Information Enhancers, Providers and term which means a type of Gatekeepers - independent third party takeover proposal that is public and person or entity whose cooperation is 5  XGOVERN: GOVERNANCE, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL Junior Philippine Institute of Accountants and Auditors-United _________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ ______________________ important because they have the capability HISTORY OF CSR to at least deter, if not prevent, misconducts ​ 1960s - start of the wide use of the phrase of corporations. corporate social responsibility (CSR) ​ Investment Bankers - individual or entity ​ 18th Century - Adam Smith articulated the which acts as an agent for a corporation classical model of business. Businesses must issuing securities act honestly and fairly. ○​ Role of Investment banker ​ 1960s - 1970s - civil rights movement, ​ Origination - investigation, consumerism, and environmentalism analysis, and research affected society’s expectations of business ​ Underwriting - public cash ​ 20th Century – backlash against large offerings corporations and businesses began to gain ​ Distribution - marketing and momentum selling ○​ Social Gospel - advocated greater ​ Stock Exchanges - entities which offer attention to the working class and trading services and facility for stockbrokers the poor and traders, to buy and sell shares of stock ○​ Labor Movement - was called for and other securities greater social responsiveness on the ○​ Role of Stock Exchanges: part of business ​ Raise Capital ​ Mobilize Savings CARROLL’S PYRAMID OF CORPORATE SOCIAL ​ Facilitates Growth RESPONSIBILITY ​ Distributes Profit ​ Improves Corporate Governance ​ Creates Opportunities for Small Investors ​ Facilitates Raising Capital For the Government ​ Indicator of Economy ​ Financial Press - newspapers, magazines, tv channels, broadcast programs and other media specializing in financial news and updates ​ Economic responsibilities - produce goods and services in a way that is profitable to CORPORATE SOCIAL RESPONSIBILITY their owners. ​ Long-term vow by business to perform within ​ Legal responsibilities - comply with the laws the bounds of ethics and to contribute to and regulation that reflect society’s values economic advancement at the same time and norms. improving the quality of life of the workforce ​ Ethical responsibilities - abide by the ethical and their families as well as of the local norms of society. community and society at large. ​ Philanthropic responsibilities - activities that ​ Areas of concern: go beyond the expectations of society, ○​ Environmental protection including volunteer work, sponsorship, and ○​ employees' welfare donations. ○​ community and civil society in general (not only for the present but more importantly the future) 6  XGOVERN: GOVERNANCE, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL Junior Philippine Institute of Accountants and Auditors-United _________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ ______________________ ​ Local Communities - want to know that ARGUMENTS FOR AND AGAINST CORPORATE businesses are being good citizens. SOCIAL RESPONSIBILITY ​ Media - expose some examples of best or worst practices to the spotlight, in this way Argument/s against CSR: companies with good practices are given ​ The “economic” argument - suggests that incentive in the form of free mileage, self-interested actions in free markets companies performing worst practices are generally benefit society. However, if a given disincentive through exposure. social problem cannot be resolved by the ​ NGOs - expose these examples of market, it is the government's responsibility, irresponsible corporate conduct and not business, to address it. campaign for greater corporate ​ The “competitive” argument - accountability and transparency. acknowledges that addressing social issues ​ Regulators - want to make certain that comes at a cost to businesses, and when business activities not only generate business companies internalize the costs of opportunities, jobs and economic growth responsible actions, they may harm their but also help solve serious problems such as competitive position compared to others. climate change and the environment. ​ The “capability” argument - asserts that business executives and managers, while SPECIFIC RELEVANCE OF CSR skilled in finance, marketing, and operations, ​ Changing Social Expectations - Consumers are typically not equipped to address and the public in general expect more from complex societal problems, as they lack the the companies who produce the products necessary knowledge and expertise in social and services they buy issues. ​ Competitive Labor Markets - Employees nowadays are gradually more concerned Argument/s in favor of CSR: not only on other benefits and take home ​ The “self-interest” argument - suggests that pays but also business philosophy that corporations should act in ways that ensure match their principles. a favorable operating environment in the ​ Disclosure Demand by Stakeholders - future, emphasizing long-term benefits over Stakeholders now know their roles and rights, short-term profits. which includes the right to be informed on how the corporation does its business. BASIC PREMISES OF CSR ​ Dwindling Government Role - Due to limited ​ Business leaders - understand that long-term government resources, corporations though company value is based on the capability subjected to so many regulatory filings still of the enterprise to respond to society's have the upper hand when ranged against changing needs the regulators ​ Consumers - search for products and ​ Globalization - When informed consumers services of companies they believe are see wrongdoings by companies, they can doing the 'right thing' in terms of consumer immediately bring this to the attention of the protection, human rights and the public by capitalizing on the use of environment. technology ​ Employees - have a preference to work for ​ Pressure From Investors - businessmen buy companies whom they share similar mission and sell stocks by taking into account and values, and where they can make a ethical aspects of companies whom they contribution to society. deal stocks with ​ Investors - look for companies that ​ Supplier Relations - An example to this not recognize and manage their risks and are buying products who used child labor and entrepreneurial in terms of attitude in boycott campaigns on products from identifying emerging and promising business manufacturers that did not follow ILO opportunities. standards 7  XGOVERN: GOVERNANCE, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL Junior Philippine Institute of Accountants and Auditors-United _________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ ______________________ ​ Wealth and Vulnerabilities - In developing ○​ Customer Satisfaction and developed countries, consumers can ○​ Ethical Practices afford to be choosy and picky on the ○​ Transparency products they buy, corporations therefore ○​ Continuous Improvement have to offerd to with these consumer tendencies. ​ Ethical And Legal Compliance ○​ Compliance With Laws And ETHICAL LEADERSHIP Regulations ○​ Adherence To Ethical Practices Ethical leadership ○​ Transparency And Accountability -​ concerned in leading in a manner that ○​ Code Of Conduct respects the rights, dignity and stake of ○​ Disclosure And Reporting others.