Ch1: Corporation And Corporate Governance PDF

CH1: CORPORATION AND CORPORATE Employees GOVERNANCE ○ Primary Goal: Job Security, Fair Compensation, AIMS AND OBJECTIVES O...

CH1: CORPORATION AND CORPORATE Employees GOVERNANCE ○ Primary Goal: Job Security, Fair Compensation, AIMS AND OBJECTIVES OF A CORPORATION And Career Development. 1. Profit Maximization ○ Interests: Competitive Salaries, Benefits, A 2. Value Creation For Shareholders Positive Work Environment, And 3. Corporate Social Responsibility (Csr) Opportunities For Advancement. 4. Market Expansion ○ Potential Conflict: 5. Innovation And R&D Favor Higher Wages And Better 6. Risk Management Working Conditions, Customers DIFFERENT TYPES OF DIRECTORS ○ Primary Goal: Traditionalist (conservative) High-Quality Products/Services At ○ accountable to shareholders’ maximization only. Reasonable Prices. Broad Constructionist (inclusive) ○ Interests: ○ recognizes specific responsibilities to Product Reliability, Customer constituents other than shareholders and Service, And Value For Money. is willing to act on its convictions. ○ Potential Conflict: ○ frame their decisions in terms of what is in Demand Lower Prices Or Higher the best long-term interest of the Quality corporation as a whole. Suppliers Rationalist (pragmatic) ○ Primary Goal: ○ “What is good for the shareholder is good Long-Term Contracts And Timely for everyone else” Payments. ○ Interests: GOALS OF DIFFERENT INTEREST GROUPS Stable Business Relationships, Shareholders Fair Pricing, And Consistent ○ Primary Goal: Demand. Maximize Return On Investment. ○ Potential Conflict: ○ Interests: Seek Higher Prices Or More Profitability, Stock Price Favorable Terms Appreciation, Dividend Payments Government And Regulators ○ Potential Conflict: ○ Primary Goal: May Prioritize Short-Term Gain Compliance With Laws And Stockholders Regulations, And Contribution To ○ Primary Goal: The Economy. Secure Dividends And Capital ○ Interests: Gains. Tax Revenues, Legal ○ Interests: Compliance, And Corporate Dividend Payments, Share Price Governance. Appreciation, And Corporate ○ Potential Conflict: Stability. Corporations May Seek To ○ Potential Conflict: Minimize Regulatory Burdens Or Focus On Short-Term Financial Taxes Returns Society And Communities Board Of Directors ○ Primary Goal: ○ Primary Goal: Positive Societal Impact And Provide Strategic Oversight And Minimal Negative Externalities. Ensure The Corporation's ○ Interests: Long-Term Success. Contributions To Community ○ Interests: Welfare. Balancing The Interests Of All ○ Potential Conflict: Stakeholders, Ensuring Effective Governance Demand Greater Corporate ○ Potential Conflict: Responsibility And Sustainability Aligning The Diverse Interests Of Efforts All Interest Groups ACHIEVING GOAL CONGRUENCE BANKERS Alignment Of Remuneration Packages financial institutions or professionals that ○ Profit-Related Pay assess the creditworthiness of the company Linking Managers' Pay Or and provide the necessary capital for its Bonuses To The Company's operations Profits ○ Share Ownership And Options DIRECTORS When Managers Own Shares Or elected by shareholders to oversee the Have The Option To Buy Shares At A Favorable Price, Their management of the corporation Personal Financial Interests must act in the best interest of the corporation Become Closely Tied To The and its shareholders. Company's Success. INTERRELATIONSHIPS Addressing The Agency Problem Shareholders and Directors ○ Agency Theory ○ Shareholders elect the board of Employees And Managers Are Individuals With Their Own directors. Objectives, Which May Not ○ Directors are accountable to the Always Align With The shareholders Organization's Goals. Within A Bondholders and Bankers (creditors) Department, ○ Bondholders receive fixed interest ○ Incentive Alignment payments. To Address This, Organizations ○ Bankers may provide various forms of Can Provide Incentives To credit. Managers That Are Tied To Broader Organizational Goals Shareholders and Bondholders Such As Profit ○ Shareholders own equity in the company. Monitoring Managerial Behavior ○ Bondholders are creditors who are ○ Management Audits And Reporting primarily concerned with the Requirements company’s ability to meet its debt Can Be Done Through obligations. Management Audits, Additional Bankers and Directors Reporting Requirements, And ○ Directors work with bankers to secure Assurances That Managers necessary financing for the company. Prioritize Shareholders' Interests. ○ Bankers assess the company’s financial health and provide loans Ethical Considerations based evaluation. ○ Ethical Behavior And Creative Accounting Present A More Favorable Picture POTENTIAL CONFLICTS OF INTERESTS Of The Company's Performance. Shareholders and Bondholders ○ Creative Accounting ○ Risk Preferences The Exploitation Of Loopholes In Shareholders prefer riskier Financial Regulation In Order To strategies for higher returns. Gain Advantage Or Present Bondholders prefer safer Figures In A Misleadingly strategies to ensure debt Favorable Light. repayment ○ Dividend Payments SHAREHOLDERS Shareholders may push for higher legal owners of the company and have certain dividends, affecting bondholders’ risk. rights limited liability Shareholders and Directors ○ Corporate Governance Shareholders advocate for BONDHOLDERS changes creditors of the corporations Directors may take action to do not have ownership rights and do not protect their positions, even if it participate in corporate governance harms the company (entrenchment)  ○ Management Decisions Governance (Corporate Governance) Shareholders may disagree with ○ can be used to change the rules under strategic decisions that don’t which the agent operates and restore maximize value the principal’s interests. Directors may act in their own best interests rather than those of ○ Aligning Interests; Monitoring and the shareholders. Control; Accountability; & ○ Executive Compensation Transparency Concerns about excessive compensation packages ROLES approved by directors. Non Executive Directors Directors and Bankers ○ Performance Review ○ Loan Terms ○ Strategic Direction Directors seek favorable terms for ○ Time Commitment growth; Bankers impose stricter ○ Risk Management covenants. ○ People ○ Financial Disclosure ○ Professional Development Bankers require detailed financial ○ Participation In Committee Meetings info Corporate Administrator Role Directors may be reluctant. ○ Document Management ○ Debt Levels ○ Event Coordination Directors prefer higher debt for ○ Communication Facilitation expansion ○ Regulatory Compliance Bankers focus on stability. ○ Stock Option Administration Bondholders and Bankers ○ Contract Management ○ Priority of Claims ○ Board Onboarding Bankers (secured). ○ Special Projects Bondholders (unsecured) during default. Management Buy Outs And Buy-Ins ○ Management Decisions ○ Management Buyout (MBO) Bankers impose restrictions Strategic Investment Bondholders seek flexibility. Management Change Alignment ○ Executive Compensation Of Interests Fixed interest for bondholders ○ Management Buyin (MBI) Variable rates for bankers. Ownership Transition Strategic Realignment Employee Or Management Buy-Out AGENCY THEORY Executives Share Schemes provides a theoretical framework for ○ Incentivize Performance understanding the relationship between ○ Attract And Retain Talent ○ Align Interests the principal (shareholders) and agents ○ Reward Long-Term Success (managers or directors). Chief Financial Officer (Cfo) the agent represents the principal and its ○ Oversees financial operations and best interest without regard for ensures accuracy in reporting. self-interest. ○ Manages risk and financial planning. Agency Problems ○ Ensures internal controls and ○ divergence of interest between the compliance with financial regulations. principal and agent. ○ Liaises with the audit committee and Agency Loss external auditors. ○ a standard or a metric that aims to Audit Committee determine whether or not an agent ○ Oversees financial reporting acts in their principal’s best interest. compliance with regulations. and ○ the difference between the optimal ○ Reviews internal controls and risk results for the principal and the management strategies. consequences of the agent’s behavior. ○ Works with external auditors to ensure financial integrity. ○ Reports findings to the board of directors.  Internal Auditor ENRON SCANDAL ○ Evaluates the effectiveness of internal bankruptcy of the U.S. energy, controls. commodities, and services. ○ Identifies risks and recommends dissolution of Enron Corporation in 2001 mitigation strategies. and Arthur Andersen LLP, which had ○ Ensures compliance with internal been one of the largest auditing and policies and regulations. accounting companies in the world. ○ Reports to the audit committee and management. The collapse of Enron, which held more External Auditor than $60 billion in assets, involved one ○ Provides an independent audit of of the biggest bankruptcy filings in the financial statements. history of the United States, ○ Assesses internal controls related to financial reporting. ○ Ensures compliance with laws, regulations, and accounting standards. ○ Reports audit findings to the audit committee. PROMOTING ETHICAL BEHAVIOR essential for building trust and credibility within an organization 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 METROBANK INTERNAL FRAUD CASE (2017) In July 2017, Metropolitan Bank and Trust Company (Metrobank) was rocked by a significant internal fraud involving an estimated P900 million to P2.5B VP of corporate services unit, Maria Victoria Lopez, engineered the release of loans to a fake account under the name of Universal Robina Corporation. Discovered by ○ NBI Focused on the criminal aspects of the case. ○ BSP Probed into the breach of internal controls ○ AMLC Potential involvement in the investigation. CH2: ORGANIZATIONS AND THEIR STRUCTURAL AND POLITICAL ENVIRONMENT DEMOGRAPHIC STRUCTURES the composition of its workforce based on factors like age, gender, education level, experience, etc. directly impact both the organization's internal dynamics (such as productivity and innovation) and external factors (like product development and market STRATEGIC ADAPTATION competition). to remain competitive, organizations must adapt their talent management strategies to the changing demographics of both their workforce and the labor market. embracing diversity and fostering an inclusive environment can enhance organizational performance SOCIO-ECONOMIC GROUPING a person's position in society formation is based on data on the person's main type of activity, occupation, occupational status, and industry in employment statistics, people are classified PRODUCT AND LABOR MARKETS based on their own activity. However, there are Product Market some exceptions: ○ where goods and services are bought ○ Children and Homemakers and sold ○ Students -- determined by what they were ○ the demand for products drives the doing at the end of the year. types of goods and services Working students over 18 are considered employed and are businesses offer classified based on their occupation. Labor Market Working students under 18 are still ○ where workers offer their skills and classified as students, except those abilities, and employers seek to hire under 16, who are always grouped with the main income earner in their them household ○ the demand for labor (workers) comes Socio-Economic Grouping: Employees from companies that need employees, ○ Upper-level employees while the supply of labor comes from ○ Lower-level employees people looking for jobs. ○ Manual workers Socio-Economic Grouping : Self-Employed ○ Self-employes w/out employees ○ Self-employed w/ employees ○ Unpaid family workers SOCIO-ECOCOMIC GROUPS upper class ○ high-income individuals with significant wealth and social status middle class ○ moderate-income individuals with a comfortable standard of living working class ○ lower-income individuals who rely on wages or salaries for their livelihood. lower class ○ Individuals living in poverty with limited resources and opportunities INCOME AND WEALTH DISTRIBUTION Performance how a nation’s total economy is dispersed ○ effectiveness with which an amongst its population. organization meets its goals and Wealth objectives ○ an accumulated store of possessions ○ culture can impact performance and financial claims through its influence on motivation, ○ may be given a monetary value if job satisfaction, and leadership prices can be determined for each of styles. the possessions ○ can be difficult when the possessions CORPORATE SOCIAL RESPONSIBILITY are such that they are not likely to be economic, legal, ethical, and offered for sale. Income discretionary expectations that society ○ a net total of the flow of payments has of organizations at a given point in received in a given time period. time ○ may or may not be indicative of what organizations have moral, ethical, and is possessed by the living. philanthropic responsibilities in addition to their responsibilities to earn a fair return for investors. ORGANIZATIONAL CULTURE “The ultimate motivation for defined as the shared values, beliefs, and corporations to practice social norms that guide the behavior of employees within an organization responsibility should not be a financial acts as a framework that influences how motivation alone, but rather inclusive employees interact, make decisions, and of moral and ethical dimension “ approach their work Business Ethics ○ focuses on the moral judgments CULTURE and behavior of individuals and the way of life, especially the general groups within organizations. customs and beliefs, of a particular group ○ may be regarded as a component of people at a particular time. of the larger study of corporate Organizational Values social responsibility. ○ fundamental beliefs that guide the Carrol and Buchholtsz’s 4 part decisions, actions, and interactions definition of CSR company ○ Economic Responsibilities ○ the cultural context in which an society’s expectation that organization operates often organizations will produce dictates its core values. goods and services that are Attitudes needed and desired by ○ employees' towards feelings work customers and sell those environment, including jobs, goods and services at a colleagues, and organization reasonable price. ○ cultural norms shape how ○ Ethical Responsibilities employees view authority, concern societal teamwork, and conflict expectations that go Behavior beyond the law ○ actions interactions individuals expectation that within company organizations are expected ○ the culture of a society often to do more than just comply dictates accepted behaviors in with the law workplace.  ○ Legal Responsibilities Contract Enforcement expectation that ○ If one party fails or refuses to meet organizations will comply its obligation under a contract, a with the laws set down by company will turn to the society to govern government's legal system of competition in the enforcement marketplace Employee Protection ○ Corporate social responsibility ○ regular employment, probationary pursue not only the goal of employment minimum employable increased revenues and age, prohibition against the profits, but also the goal of stipulation of marriage, anti-sexual community betterment harassment law, etc. Environmental Protection ETHICAL BEHAVIOR IN THE ENTERPRISE ○ government should regulate Paying attention to ethics can create industry and protect the public from goodwill for the corporation and environmental externalities. enhance the chances of success. ○ externalities Six Foundations of Trust a marketing transaction impacts a third party besides ○ CHARACTER the marketer and purchaser drives what we do when no Investor Protection one is looking. ○ government mandates that ○ ETHICS companies make financial set of rules describing information public acceptable conduct in Permission society. ○ register with the government to ○ INTEGRITY operate i.e corporations need a adhering to a moral code in charter daily decision making. Taxation ○ LAWS ○ resulting revenue collected is an series of rules and important part of government regulations designed to budgets. express the needs of the people. POLITICAL PARTIES AND PRESSURE ○ VALUES GROUPS AND THEIR INFLUENCE ON acts that a group of people GOVERNMENT POLICY regards favorably Political Parties ○ MORALS ○ “an organized group of citizens set of rules or modes of who profess or share the same conduct on which society is political views and who by acting based. as a political unit, try to control the government” (Gilchrist) THE ROLE OF THE STATE AND ITS ○ “a political party consists of a IMPACT ON ORGANIZATIONS group of citizens, more or less Role of Government in Business organized, who act as a political ○ the the government the power to unit and who, by the use of their regulate commerce. voting power, aim to control the Consumer Protection government and carry out their ○ when a product causes harm to an general policies” (Gettell) individual, the courts may hold the vendor or responsible.  Characteristics concerned in the protection and ○ an organized group of people who advancement of a particular cause or believes in common principles and interest common goal influence public and especially ○ its objectives revolve around government policy but not to elect seeking political power through candidates to office collective efforts Economic Pressure Groups ○ employs constitutional and peaceful methods in seeking ○ Giant Private Corporations control over the government relative size and power of through election these companies can ○ while in power, it translates its sometimes rival that of the declared objectives into government. (Ex. San governmental policies Miguel Corporation) Functions And Roles ○ Professional Organizations ○ nominate candidates during powerful group bound by elections the common interests of its ○ campaign to obtain support for members. (Ex. PICPA) their candidates in the elections ○ Trade Associations ○ in the legislature, minorities form associations of businesses opposition to pressure the with common interest to government for proper protect to. (Ex. Philippine governance. Chamber of Commerce and Types Of Political Parties Industry (PCCI)) ○ MAJOR PARTIES ○ Trade Unions well-established parties that more concerned with labor typically have more resources and management. (Ex. and a broader base of support Partido ng Manggagawa ○ MINOR PARTIES AND (PM)) PARTY-LIST ORGANIZATIONS Public Pressure Groups represent specific interests or ○ represent a cluster of the public on marginalized groups and rely certain issues on the party list system to gain representation in Congres Sectoral Pressure Groups ○ REGIONAL PARTIES ○ work to protect and advance the operate at a regional or interest of specific social groups in provincial level, reflecting local a certain society. interests and concerns Religious/Attitude Pressure Groups Methods Of Influence ○ one of the most powerful groups. ○ Participation In Government ○ share universal beliefs and ○ Legislative Control objectives on one issue ○ Coalition Building ○ believe that their major role is to Influence On Government Policy mobilize support in the country for what they believe in and to support ○ Legislative Agenda for political office those who share ○ Representative Of Interests their beliefs. ○ Public Opinion And Mobilization Governmental Units ○ talks about the freedom and power of the Local Government Units PRESSURE GROUPS (LGU) to be involved in decision seeks to influence not only making. government policy but also private enterprises’ operating policy. CH3 INTERNAL AND EXTERNAL ○ Indemnification of Officers and INSTITUTIONS OF CORPORATE Directors GOVERNANCE corporation will reimburse them for expenses incurred PURPOSE OF CORPORATION and amounts paid in increase profit defending claims brought offer vital services to the general public against them for actions taken offer goods and services to the mass on behlaf of the corporation market ○ Directors’ and Officers’ exists to: Insurance (DOLI) ○ Stakeholders provides coverage for ○ Shareholder directors and officers for ○ Community personal liability arising from ○ State corporate acts covers the corporation for INTERNAL INSTITUTIONS OF indemnifying directors and CORPORATE GOVERNANCE officers. Shareholder, Director, Manager does not cover suits filed by directors or officers 2 Ways of Business Combination ○ Friendly Combination SHAREHOLDER’S LIMITATION THROUGH ○ Unfriendly (Hostile) Takeover CLASSES OF SHARES Anti-Takeover Defenses Common Stock ○ Poison Pill ○ voting power on major issues ○ White Knight or White Square ○ ownership in a portion of the ○ Greenmail company ○ Pacman Defense ○ right to transfer ownership ○ Selling the Crown Jewel ○ entitlement to dividends ○ Shark Repellent ○ opportunity to inspect corporate books and records MITIGATION AND INDEMNIFICATION OF Preferred Stock DIRECTOR AND OFFICER LIABILITY ○ ownership in a portion of the Revised Corporation Code of 2019 company ○ Liability of Directors, Trustees or ○ right to transfer ownership Officers ○ entitlement to dividends those who approve unlawful ○ opportunity to inspect corporate acts, act with gross books and records negligence or bad faith, or ○ right to sue for wrongful acts engage in conflicts of interest, are jointly and severally liable for damages suffered by the corporation, its stockholders, SUPERMAJORITIES members, and others. Requires more than a simple majority of shareholders to approve significant ○ Personal Liability of Officers corporate changes. and Directors Requires a higher percentage than a breach their duty of care and simple majority (50%), often between loyalty to the corporation 67% and 90%. commingle personal and Used for significant corporate decisions business assets like mergers, acquisitions, executive fail to disclose potential or changes, and going public. actual conflicts of interest CONTRACTUAL MATTERS Markets Voting Trust Agreement ○ most important of all corporate ○ assigns voting rights to a trustee to governance institutions control voting. ○ three central and important ○ used to combine voting strenth of positions minority shareholders Product market ○ trustee has fiduciary duties to the Capital market equitable owner. Managerial labor market Shareholder Voting Rights General Public Agreement ○ ultimate institution ○ shareholders contract to vote a ○ ensure our rights as citizens are certain way. protected ○ used to gain or maintain control. ○ protect the environment and our ○ no trust agreement must be noted interest on the certificate ○ oversee external institutions of Investment Agreement corporate governance ○ formalizes a transaction between ○ guarantee that corporations and an investor and a company. their policies do not impede our: ○ protects the investor right to live Confidentiality Agreement right to self-preservation ○ requires recepient to keep right to the pursuit of proprietary information confidential. happiness ○ can only be use for evaluating business relationship ALTERNATIVE MODELS OF CORPORATE REGULATIONS EXTERNAL INSTITUTIONS OF Merit Based Regulation CORPORATE GOVERNANCE a conservative approach to improve or Regulators and Government develop the fairness between the sellers ○ articulate accurately the and buyers of securities in the capital community's voice concerning market. power relationships, responsibility, a barrier to safeguard public investors and accountability. from the dangers of acting on an impulse. responsibilities Auditors ○ authorities regulate securities offering. ○ one of the most important external ○ issuers and advisers disclose to institutions in governance. authorities. ○ ensure that firms are run efficiently ○ authorities' reviews investment merits by keeping public records of offering. accurate. ○ Independent Auditors Disclosure Based Regulation analyze and communicate provide investors with sufficient, accurate financial information to and timely disclosure of all relevant companies, potential investors, individual clients, information to allow investors to better government, both at the local evaluate the risks and merits of their and national level. investment. also engage in consultancy responsibilities services like Financial and ○ authorities regulate disclosure of investment planning, information in securities offering. I Information technology ○ issuers and adviser disclosed to consulting, and Limited legal investor. services ○ investors determine investment merits of offering.  3 PRINCIPLES Keiretsu ○ Disclosure ○ industrial linked by trading groups ensure that all material relationships and cross-shareholdings. information required by the public ○ informal alliances between more than to make investment decisions is provided accurately, in full and on two organizations. a timely basis ○ Key players: German Bank & ○ Due Diligence Corporate Shareholders inquiries are conducted to ensure that information to be disclosed is true, sufficient and timely ○ Corporate Governance timely, accurate and transparent disclosure of material information is an integral component of ensuring good corporate governance. ALTERNATIVE MODELS OF CORPORATE GOVERNANCE The Continental European Model German Model considers a broader range of stakeholders, including employees, customers, suppliers, and the community. Key players: German Bank & Corporate Shareholders carried out by two board structure ○ Supervisory Board oversees the long-term strategy, reputation and direction. assesses the actions of the management board. mostly features non-executive directors. representatives of employees and shareholders ○ Management Board oversees the running of the business and financials. looks after the company’s day-to-day operations. features executive directors. appointed by supervisory board. The Japanese Model involves a high level of ownership by banks, other affiliated companies, and keiretsu. insiders and their affiliates are the major shareholders in most Japanese corporations. Key players: Bank, Keiretsu, Management & Government CH4 CORPORATE SOCIAL RESPONSIBILITY USEFULNESS OF CORPORATE SOCIAL increasingly recognized as a strategic RESPONSIBILITY component of modern business practices, Improved Employee Relations integrating ethical and societal ○ helps retain top talent and creates considerations into corporate strategies. a positive work environment involves aligning a company’s mission and Enhanced Public Image and operations with broader social, Reputation environmental, and economic goals, ○ improves corporate reputation, aiming to balance profitability with positive attracting customers, employees, societal impact and shareholders leading to long-term benefits FORMS OF CORPORATE SOCIAL Increased Customer Satisfaction RESPONSIBILITY and Loyalty Environment-related CSR ○ enhance customer satisfaction, ○ focus on environmental leading to loyalty and market share sustainability (e.g., water growth conservation, waste management). Competitive Advantage ○ help communities live in ○ creates a competitive edge by eco-friendly environments aligning with stakeholder interests, Marketplace CSR leading to innovation and ○ ethical trading, advertising, performance improvement customer relations, and ethical Financial Performance product delivery ○ long-term financial returns from Workplace CSR CSR are realized through ○ initiatives for employee well-being, improved stakeholder relationships such as training and health and customer loyalty benefits Reduced Costs and Risks Community-related CSR ○ reduces costs through tax savings ○ building strong ties with local and mitigates risks by building a communities through education strong reputation and stakeholder and health programs relationships Economic Responsibility Attracting Investors and Partners ○ focus on profit maximization, ○ strong CSR practices attract delivering quality products, and investors returning value to shareholders Community Benefits and Trust Legal Responsibility ○ CSR strengthens community ○ compliance with local, national, relations and creates a positive and international laws to maintain impact, preventing harm to society business legitimacy Ethical Responsibility ETHICAL LEADERSHIP ○ going beyond legal obligations to a leadership that is directed by respect act fairly and justly, reflecting moral for ethical beliefs and values and for principles the dignity and rights of others. Philanthropic Responsibility the understanding that positive ○ voluntary actions benefiting society, often aligned with the relationships are the gold standard for company's goals all organization effort. both VISIBLE and INVISIBLE Has values: ○ trust, respect, integrity, equity, justice, compassion  Two elements ARGUMENTS FOR PROFIT ○ Ethical leader must act and make MAXIMIZATION AS SOCIAL decision ethically as how ethical RESPONSIBILITY people in general. For Profit Maximization as Social ○ Ethical leader must also lead Responsibility ethically in the attitude, in the ways ○ Economic Efficiency they encourage and in the direction ○ Wealth Distribution in which they steer their ○ Innovation organization or institute Against Profit Maximization as Sole Responsibility ETHICAL DECISION-MAKING ○ Externalities process of evaluating and choosing ○ Short Termism among alternatives in a manner ○ Evolving Expectations consistent with ethical principles. perceive and eliminate unethical CORPORATE CITIZENSHIP options and select the best ethical a business's responsibility to alternative stakeholders and the environment A person-situation interactionist extends beyond legal obligations, model focusing on how companies voluntarily contribute to societal well-being and address issues like inequality, climate change, and ethical practices. Key principles ○ Accountability ○ Transparency ○ Sustainability PHILANTHROPY ANDSOCIAL INITIATIVES Philanthropy involves charitable donations by businesses to support causes like education, healthcare, and disaster relief. Types of social initiatives ○ Corporate Giving Financial donations to MILTON FRIEDMAN’S PERSPECTIVE charitable organizations or “Is the social responsibility of a community causes. ○ Volunteering Programs business to increase its profit?” Encouraging employees to central ideas: participate in community ○ Shareholder Primacy service ○ Legal and Ethical Boundaries ○ Cause Marketing ○ Social Responsibilities of Aligning company goals with Individuals, Not Corporations social causes to support both Modern Views: profit and social good (e.g., ○ Stakeholder Theory Corporate buy-one-give-one campaigns). ○ Social Responsibility (CSR) THEORIZING BUSINESS CITIZENSHIP ○ Related and supporting industries Business citizenship suggests that A company’s productivity can companies have civic duties. be greatly enhanced by having high-quality supporting This views businesses as part of the industries and services social fabric, requiring them to act nearby. ethically and respect the rights and responsibilities associated with their INVESTMENT SCREENING influence. the process of determining whether an Key theories organization’s values align with that of ○ Stakeholder Theory: the investors. consider the impact of their help identify firms based on actions on all stakeholders, environmental, social and corporate not just shareholders. ○ Triple Bottom Line (TBL): governance (ESG) criteria pursue sustainability in three screens are merely tools that are used areas— people, planet, and to help a fund manager or research profit—balancing economic department quantify what it means to success with social equity and be a socially responsible investment. environmental responsibility Importance ○ help analysts identify which CORPORATE PHILANTHROPY companies will gain investor’s the investments and activities a support. company voluntarily undertakes to ○ offer a standard by which investors responsibly manage and account for can judge companies and hold its impact on society. companies accountable for their Philanthropic investments and values and actions activities include: SOCIAL SCREENING OF INVESTMENTS ○ Money, Donations of products, Positive screening In-kind services ○ ‘best-in-class screening’, 4 interrelated elements of the local ○ a process that identifies companies business environment that shape that are actively making potential productivity: contributions to social or ○ Factor conditions/Available inputs environmental change of production: Negative screening Achieving high levels of ○ excludes investments in productivity depends on companies that actively work factors like presence of against the investor’s values, like a trained workers, adequate history of international bribery or physical infrastructure, corruption. available natural resources, ○ most widely used process of etc. identifying targeted investments for ○ Demand conditions a reason; it’s incredibly inclusive ‘Include the size of the local 2 screening process market, the appropriateness of product standards, and the ○ outsource the screening process sophistication of local ○ or fund manager will do it customers. themselves based on third-party ○ Context for strategy and rivalry data. The rules, incentives, and norms governing competition in a nation or region have a fundamental influence on productivity. CORPORATE SOCIAL INITIATIVES Corruption in International Corporate Community Involvement Business ○ differs from philanthropic activities ○ corruption wastes valuable since it allows stakeholders to resources that international aid enter the company’s infrastructure, organizations have available and human resources, and business make donor nations hesitant to operations continue their donations. Social Accountability ○ a concept that revolves around the responsibility of organizations to operate ethically, transparently, and in alignment with social and environmental standards. Corporate Greenwashing ○ a false, misleading or deceptive conduct by companies which can cause people and investors to believe their business are more climate friendly than they really are. CSR IN THE GLOBAL CONTEXT Multinationals and Less Developed Countries ○ Microsoft’s 4Afrika Initiative provides a set of programs to empower African youth, entrepreneurs, developers and business and civic leaders. ○ Apple’s 100-kilowatt rooftop solar project at an educational premise for disadvantaged children in Philippines. ○ Mcdo Donated $500,000 in 2023 to support those impacted by the earthquake in Turkey. International business, morality and the common good ○ in the absence of an international enforcement agency, multinational corporations operating in a competitive international environment cannot be said to have a moral obligation to contribute to the international common good, provided that interactions are nonrepetitive and provided effective signals of agent reliability are not possible. CH5: AGENCY PROBLEM IN CORPORATE LEGAL RECOURSE FOR BREACHES OF GOVERNANCE: ACCOUNTABILITY OF DUTY MANAGERSAND STOCKHOLDERS Shareholders can hold managers accountable through: Derivative Lawsuits AGENCY PROBLEM ○ Shareholders can sue on behalf of arises due to conflicts between managers the company if they believe (agents) and shareholders (principals) managers breached their dutiesm like engaging in self-dealing or FIDUCIARY DUTIES OF MANAGERS reckless behavior Duty of Care Civil and Criminal Penalties ○ managers must make informed ○ Managers may face civil penalties and prudent decisions. like fines or restitution. In extreme ○ thorough research before making cases, criminal charges can be business decisions brought against managers (e.g., Duty of Loyalty Enron and WorldCom scandals). ○ managers must avoid conflicts of interest and prioritize the STOCKHOLDER ACCOUNTABILITY company’s goals over personal the mechanisms and processes by which stockholders gain. exercise influence over a company’s management to Duty of Good Faith ensure that the corporation is run in their best ○ managers must act honestly and interests. with integrity Voting Rights ○ make decisions in the best ○ legal rights given to stockholders to interests of the company. vote on critical corporate matters, such as electing the board of ENFORCEMENT MECHANISMS FOR directors, mergers, or significant business changes MANAGERS' DUTIES ○ MAJORITY VOTING key mechanisms to ensure managers comply with their candidate with the most votes fiduciary duties wins Board Oversight ○ SUPERMAJORITY VOTING ○ The board of directors monitors more than a simple majority managers’ performance. (e.g., 66%) for major decisions ○ Establishes subcommittees (e.g., like mergers. audit, compensation) to ensure ○ IN-PERSON VOTING accountability. during annual stockholders’ Performance-Based Compensation meetings. ○ Aligns managers’ financial ○ REMOTE VOTING (PROXY incentives with company VOTING) performance. authorize another person to Internal and External Audits vote on their behalf, typically ○ Internal audits ensure compliance done via proxy statements. with company policies. ○ External audits provide Proxy Contest independent reviews of financial ○ occur when a group of statements. shareholders attempts to change Whistleblower Programs company management by ○ Allows employees to report convincing fellow shareholders to unethical behavior without fear of vote for their proposed board retaliation. candidates or proposals ○ Sarbanes-Oxley Act enforces ○ Types whistleblower protections Control Contest Issue Contest  Derivative Actions executives in the event of a ○ a lawsuit filed by shareholders on takeover behalf of the corporation against ○ Stockholders' Role third parties, often insiders Stockholders vote on (directors or officers), for harm whether to approve or done to the corporation. reject takeover offers, ○ Conditions for filing particularly in hostile Shareholders must first takeovers attempt to persuade the Tender Offer board to file the suit ○ when a company or individual If the board refuses, makes a public offer to purchase shareholders can bring the some or all of the shares of lawsuit themselves, claiming another company at a specified the board's inaction harms the price, usually at a premium above company. the market price. Class Actions Markets for Corporate Control ○ a lawsuit filed by a group of ○ the environment in which shareholders (or other ownership and control of a stakeholders) who have suffered corporation can change hands similar harm, usually in cases of through mergers, acquisitions, or securities fraud or other mechanisms misrepresentation. ○ Common Scenarios Securities Fraud KEY REGULATORY BODIES GOVERNING -investors sue after PHILIPPINE BUSINESSES purchasing stocks at inflated prices based on misleading information. Outside Forces: Regulators, Government Misleading Corporate Enforcement Disclosure -claims against Securities and Exchange Commission management for acting in (SEC) their interest rather than ○ Oversees corporate governance, shaIf management fails to securities market disclose material Bangko Sentral ng Pilipinas (BSP) information that negatively ○ Regulates banking and financial impacts shareholders institutions. Corporate Takeovers Department of Trade and Industry (DTI) ○ Types ○ Enforces consumer protection, ○ promotes fair trade. Friendly Takeover Hostile Takeover Anti-Competition Enforcement ○ Defensive Strategies by Philippine Competition Commission (PCC) Companies ○ Investigates monopolistic and Poison Pill: Strategy anti-competitive practices such as where a company makes cartels, abuse of market its stock less attractive by dominance, and predatory pricing. diluting share value or ○ Enforces penalties for agreements issuing more shares. that restrict market competition, Golden Parachute: including price-fixing, bid rigging, Offering lucrative and output restrictions. compensation packages to ○ Philippine Competition Act (RA 10667).  Anti-Competitive Behavior Key Consumer Rights ○ Cartels: Agreements among ○ Right to Information: Accurate competing firms to fix prices or limit and clear labeling about products production. and services ○ Abuse of Dominant Position: A ○ Right to Safety: Protection company using its market power to against dangerous goods that may restrict competition or exploit pose harm to consumers consumers (e.g., setting ○ Right to Choose: A variety of excessively high prices). products and services at Price-Fixing: Companies colluding competitive prices. to set prices above competitive ○ Right to Redress: Mechanisms levels, harming consumers for consumers to seek compensation for defective Regulation Against Tax Evasion And products or services. Financial Crimes Bureau of Internal Revenue (BIR) LEGISLATIVE ○ Responsible for collecting taxes, Sarbanes-Oxley Act Of 2002 ensuring compliance with the NIRC established sweeping auditing and ○ Cracks down on tax evasion financial regulations for public companies through audits, investigations, and help protect shareholders, employees, prosecutions of businesses and and the public from accounting errors and individuals. fraudulent financial practices ○ National Internal Revenue Code enforced by the Securities and Exchange (RA 8424). Commission (SEC) ○ Tax Evasion: Under reporting of Focuses on income, overstating deductions, or ○ Increasing criminal punishment failing to file tax returns. ○ Accounting regulation Anti-Money Laundering Council (AMLC) ○ New protections ○ Investigates financial transactions ○ Corporate responsibility related to money laundering, improve the reliability of public companies' terrorism financing, and other financial reporting as well as restore financial crimes. investor confidence in the wake of ○ Anti-Money Laundering Act (RA high-profile cases of corporate crime. 9160). Key provisions and requirements ○ Money Laundering: The process ○ Corporate Responsibility for of making illegally gained money Financial Reports appear legal through complex CEOs and CFOs must review financial transactions all financial reports and that the reports are "fairly Ensuring Product Safety And Fair Trade presented" and don't contain misrepresentations. For Consumers ○ Management Assessment of Department of Trade and Industry (DTI) Internal Controls ○ Protects consumer rights by Requires companies to enforcing product quality and publish details about their safety standards. internal accounting controls ○ Ensures businesses provide and their procedures for accurate labeling, honest financial reporting as part of advertising, and non-deceptive their annual financial reports sales practices. ○ Consumer Act of the Philippines (RA 7394)  Benefits Japan: Japanese Corporate Governance ○ spur better financial practices that Code would benefit companies and their requires companies to appoint stakeholders. independent directors to the board. ○ improve financial management these directors offer unbiased oversight ○ increased investor confidence and improve decision-making. Critisms emphasizes greater transparency in ○ many excecutives felt unfairly financial reporting and corporate burdened due to the dishonest and disclosures negligent acts of a few others ○ politically motivated ○ take too much executive time and INFORMATION ENHANCERS, PROVIDERS that costly compliance costs AND GATEKEEPERS Impact of Sarbanes-Oxley Act of 2002 Gatekeepers to Corporate Governance ○ independent third-party persons or ○ Top Executive Accountability entity whose cooperation is reduced the agency problem, important because they have the ensuring that management's capability to at least deter, if not decisions align more closely prevent misconducts of with shareholder interests ○ Enhanced Transparency and corporations. Oversight Investment Bankers creation of the Public ○ acts as an agent for corporation Company Accounting issuing securities. Oversight Board (PCAOB) ○ Roles: ensures independent Origination (Investigation, oversight of auditors, Analysis and Research) preventing conflicts of interest. Underwriting (Public Cash Offering) United Kingdom: The UK Corporate Distribution Governance Code STOCK EXCHANGES adopts a "comply or explain" principle. companies are expected to adhere to the an entity which offers trading services code's guidelines or explain why they do and facilities for stock brokers and not. traders, to buy and sell shares of stock stresses the importance of non-executive and other securities. directors roles: ○ Raise Capital European Union: EU Shareholders' Rights ○ Mobilize Savings Directive and Audit Reforms ○ Facilitates Growth Rights Directive ○ Distributes Profit ○ Enhances shareholders' ability to ○ Improves Corporate Governance exercise their rights making a greater ○ Creates Opportunities for Small involvement of shareholders in key investors corporate decisions. ○ Facilitates Raising Capital for the Audit Reforms Government ○ Strengthens the independence and ○ Indicator of Economy quality of the audit process FINANCIAL PRESS newspapers, magazines, TV channels, broadcast programs and other media specializing in financial news and updates CH6: STANDARDS SETTING, BEST CORPORATE GOVERNANCE: PRACTICES, AND CORPORATE LEGISLATIVE INITIATIVES AND GOVERNANCE REFORM PROPOSALS INSTITUTIONAL INVESTORS shape frameworks guiding corporate entities that pool money from behavior numerous investors to purchase large enhance accountability and stakes in companies, enabling them to transparency exert considerable influence over Sarbanes-Oxley Act (SOX) corporate management and decision ○ Enacted in 2002 in response to making. corporate scandals ○ Mutual Funds and Unit Investment ○ Aimed to restore investor Trust Funds (UITFs) confidence ○ Insurance Companies Higgs Report Key Roles And Responsibilities ○ Published in 2003, focused on UK 1. Active Ownership and Shareholder corporate governance Engagement ○ Aimed to improve board 2. Influencing Corporate Governance effectiveness 3. Monitoring and Oversight ○ Emphasized independence of 4. Driving Corporate Social non-executive director; Suggested Responsibility (CSR) and ESG revisions to governance codes; Initiatives Introduced "Comply or Explain" 5. Collaborative Influence framework 6. Regulatory and Legal Influence Revised Corporation Code of the Philippines (2019) STANDARD-SETTING ORGANIZATION ○ modernized corporate governance A group that creates rules or rules. guidelines for people or companies in ○ Centralized Management a specific field or industry to follow Board oversight with stakeholder consideration. doing things the same way and can ○ CSR work together more easily Focus on public welfare. Standards body ○ Minority Shareholder’s Rights Key Aspects Stronger protections and ○ Developing Governance Codes and enforcement Principles OECD Principles of Corporate ○ Providing Guidance on Specific Issues Governance ○ Promoting Transparency and ○ global guidelines for effective Disclosure governance systems ○ Encouraging Compliance ○ Updating Standards ○ Accountability & Transparency ○ Facilitating Global Convergence Timely disclosures. International Organization for ○ Shareholder Rights Standardization (ISO) Ensure equitable treatment. ○ creates guidelines for various ○ Board Responsibility industries Effective corporate ○ organizations can improve their management. processes and ensure that they are meeting customer needs ISO 9001 ○ outlines requirements for a quality management system ensures that customers get consistent, good quality products and services CROSS LISTING CONVERGENCE OF NATIONAL when a company in one country STANDARDS becomes listed on more than one creating a common set of rules for how companies are exchange or an exchange in another run and report their financial information, so everyone follows the same guidelines country. Process of Convergence of National To be approved for cross-listing Standards ○ must meet the same requirements as Setting Standards any other listed member of the Adopting Best Practices exchange with regard to accounting Reforming Governance Policies Prospects of Convergence ○ includes the initial filing and ongoing ○ Global Consistency filings with regulators, a minimum ○ Improved Transparency number of shareholders, and minimum ○ Enhanced Efficiency capitalization. ○ Increased Trust Benefits of cross-listing Standard Setting ○ Market Segmentation ○ the cornerstone of the convergence Targets foreign investors, process. reducing capital costs ○ involves developing guidelines and ○ Enhanced Disclosure principles that organizations must Improves transparency and follow to ensure consistency and media coverage. reliability in their governance and ○ Increased Liquidity reporting practices Allows trading in multiple currencies and time zonest. INTERNATIONAL ORGANIZATION ○ Investor Protection International Organization for Signals commitment to higher Standardization (ISO) gavemance standards, ○ develops and publishes international building trust. standards that ensure the quality, Challenges of cross-listing safety, and efficiency of products, ○ Exposure to Risks services, and systems Cross-listed companies face International Financial Reporting higher vulnerability to political Standards (IFRS) and economic instability in ○ provides a global framework for foreign markets financial reporting, ensuring that ○ Legal and Regulatory issues financial statements are consistent, Different exchanges have transparent, and comparable across different listing requirements, international boundaries. disclosure standards, and American Institute of Certified Public reporting rule Accountants (AICPA) factors ○ organization sets ethical standards for ○ subject to the Corporate Governance the accounting profession and U.S. laws and regulations applicable in the auditing standards for private other countries companies, non-profit organizations, ○ subject to the analysis of financial and federal, state, and local institutions like underwriters, auditors, governments. ○ subject to increased securities International Organization for analysis, which means that future Standardization (ISO) income forecasts will be calculated ○ board sets high-quality ethical more accurately standards for professional accountants worldwide, including the International Code of Ethics for Professional Accountants. PHILIPPINE ORGANIZATION CORPORATE GOVERNANCE REFORM Philippine Financial Reporting Regulatory Compliance Standards (PFRS) ○ Ensuring that organizations comply ○ issued by the Financial Reporting