St. Vincent College Good Governance, Business Ethics, Risk Management, and Internal Control PDF

ST. VINCENT COLLEGE LEGANES  POTOTAN  IVISAN COO – FORM 12 SUBJECT TITLE: GOOD GOVERNANCE, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL INSTRUCTOR:...

ST. VINCENT COLLEGE LEGANES  POTOTAN  IVISAN COO – FORM 12 SUBJECT TITLE: GOOD GOVERNANCE, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL INSTRUCTOR: ANNA MARIE P. VILLAMOR-GALFO, CPA SUBJECT CODE: GOOD GOVERNANCE PRELIM MODULE Topic 1: OVERVIEW OF GOOD GOVERNANCE LEARNING OBJECTIVES: At the end of this topic, the students are expected to: 1. Understand the essence of good governance; 2. Explain the objectives of good governance; 3. Identify the primary players in good governance; 4. Understand the importance of effective corporate governance; 5. Understand the eight characteristics of good governance; 6. Understand the dimensions of good governance; 7. Understand the four basic elements of good governance; and 8. Understand the five principles of good governance. NOTES: 1.1 Governance in General Governance is a concept that refers to the actions and processes by which stable practices and organizations arise and persist. These actions and processes may operate in formal and informal organizations of any size, and they may function for any purpose. Governance can be applied to government, to corporations (profit or non-profit), to partnerships, to professionals, and to any number of humans engaged in some purposeful activity. Good governance is the process of decision-making and implementing (or not implementing) such decisions. It’s not about making ‘correct’ decisions, but about the best possible process for making those decisions. An essential characteristic of good governance is accountability, which is the willingness to accept responsibility or to account for one’s action. Page 1 of 38  ST. VINCENT COLLEGE LEGANES  POTOTAN  IVISAN 1.2 Players (Actors) in Good Governance Governance is not an exclusive domain of government and it goes beyond the realm of the State or Public Sector. It also involves the Private or the Business Sectors, and the Civil Society which comprises of schools/academe, nongovernment organizations (NGO), People’s Organization and Voluntary Organizations. The involvement of these sectors is based on their common interests and similar aspirations committed to the same public concerns. a. The State (Public Sector) The state is the principal actor of government to facilitate participation and provide an enabling environment to other elements of the society. The state provides for the legal and regulatory framework and political order within which organizations can plan and act. It encourages citizens to act by liberating them from the fear of military reprisals when they criticize government policies or serve marginalized groups. It should assure the business sector that government policies are fair and not subject to the personal interests of political officials. For the state to assist markets and communities, it must provide resources such as information, technical expertise, research and development programs, physical infrastructure, as well as grants-in-aid or incentive schemes. As part of the state, the local government performs a crucial role in the efforts of the national government in implementing its programs and projects. It is an avenue where the civil society groups at the community level can participate meaningfully in the decision making processes. By virtue of the powers and authority provided in the Local Government Code of 1991, local government formulates and defines the legal and regulatory framework which serves as the basis for the involvement and participation of the various organizations and groups in the governance of the community. The Asian Development Bank (ADB) enumerated the role of the state in relation to governance:  Creating a conducive economic environment, by: Enacting and enforcing laws that promote economic competition. Decentralizing economic decision making and stabilize inflation. Reducing public deficit and free market to set prices for privately produced goods and services.  Protecting the vulnerable, by: Ensuring the survival of pension systems. Creating or maintaining reasonable unemployment benefits. Establishing and maintaining a system of private health and social insurance. Maintaining social assistance programs for the disabled and disadvantaged.  Improving government efficiency and responsiveness, by: Attracting qualified, competent, honest and realistically paid individuals into public service. Establishing a civil service system that relies on merit-based recruitment and promotion, incentive-based compensation, and reward-oriented career paths that are clearly defined. Attracting and retaining a corps of professionals who are responsible for formulating and implementing economic policies and support them with good training, appropriate degree of independence and professional reward structures. Protecting professional civil servants from political interference in carrying Page 2 of 38  ST. VINCENT COLLEGE LEGANES  POTOTAN  IVISAN out their responsibilities. Establishing a civil service system that is flexible enough to facilitate communication between the public and private sectors.  Empowering people and democratizing the political system, by: Establishing a conducive institutional environment comprising properly functioning parliaments, legal and judicial systems, and electoral processes.  Decentralizing the administrative system, by: Responding quickly to local needs and conditions. Redistributing authority, responsibility and finances for public services among different government levels. Strengthening sub-national units of governments. Respecting traditional structures of authority as well as traditional mechanisms for resolving conflicts and managing common property in society.  Reducing gaps between rich and poor, by: Reducing social disparities.  Encouraging cultural diversity and social integration, by: Maintaining cultural identity and roots while promoting social cohesion. Ensuring political systems are accessible to all and that legal systems afford equal opportunities.  Protecting the environment, by: Integrating economic and environmental accounting. Promoting interregional equity. b. The Private (Business) Sector In governance parlance, the private/business sector serves as the engine of the society. It is an important collaborator in the economic development of the community since it generates jobs and incomes for the people in the community. Because of its financial and technical expertise, it can assist the local government in generating an economic plan for the community and in the implementation of said plan. The private sector can also provide the necessary resources for the government to enable it to pursue big and wide scale projects that are beyond the local government’s financial capability. Efficiency and economy are expected outputs or products of corporate governance. The state provides a level playing field for those able to compete, and turns its attention to the provisions of safety nets for those unable to do so. In the field of information technology, the private sector can assist the local government promote the transfer of technology such as the application of spatial planning and decision support systems for effective local governance. c. Civil Society The Civil Society consists of the citizens and groups outside government working in the public arena. It is often known as CSOs (Civil Society Organizations) and also be referred to as the Third Sector. This sector, which comprises the academe or schools, NGOs and voluntary groups, plays an important role in the facilitation and interaction among the key players of local governance. It mobilizes the various groups or organizations in the community to participate in planning and decision making process. Page 3 of 38  ST. VINCENT COLLEGE LEGANES  POTOTAN  IVISAN Within the broad view of governance, CSOs play an important role since they are often engaged in programs and delivery services in areas where government is absent or where the private sector is not interested in. They facilitate political and social integration by mobilizing and empowering people to participate in economic, social, and political activities. Civil society also plays a critical role in local governance, as it provides the forum for the airing of grievances, complaints, concerns, issues and problems among the populace. Specifically, it provides voice to the “inarticulate and the unarticulated”. It also performs some political role in the community by serving as an instrument of checks and balances on the power of the state or local government and the business sector behavior. It is seen as a claim holder of basic human rights. And most of all, it can serve as an alternative delivery mechanism for the frontline services. 1.3 Importance of Effective Corporate Governance As a result of globalization and the increasing complexity of business there is a greater reliance on the private sector as the engine of growth in both developed and developing countries. Corporations are legal entities created by societies because they are an efficient form of organization and society benefits from their existence. Corporations contribute to economic growth and development, which in turn leads to improved standards of living as well as the alleviation of poverty. The end result of all this activity is the creation of more stable political systems. The quality of corporate governance is important since it has a direct impact on: a. The efficiency with which a corporation employs assets Effective corporate governance ensures the optimal use of resources both intrafirm and inter-firm. With effective systems of corporate governance, debt and equity capital will go to those corporations capable of investing it in the most efficient manner for the production both of highly demanded goods and services as well as those with the highest rate of return. This helps to protect and nurture scarce resources thereby ensuring that societal needs are met. In all probability this will mean that incompetent managers are replaced. These efficiency effects both as to scarce resources and the quality of managers should apply whether a firm is a state owned enterprise, a private closely held firm owned by a family group, or a publicly traded corporation on a stock exchange. b. Its ability to attract low-cost capital Effective corporate governance also helps to lower the cost of capital by improving the confidence of both foreign and domestic investors that their assets will be used for the purposes agreed. c. Its ability to meet the expectations of society For long-term success, corporations must comply with the laws, regulations and expectations of societies where they operate. Many corporations take their role as corporate citizens seriously thus contributing to civil society. Regrettably however, some corporations are opportunistic and seek to profit from child labor or act without regard for the environment. The latter are not merely failures of corporate governance but are symptomatic of the larger failures of government to provide the framework needed to hold corporations responsible for issues that are also important for society at large. d. Its overall performance When corporate governance is effective, it provides managers with oversight and holds boards and managers accountable in their management of corporate assets. Page 4 of 38  ST. VINCENT COLLEGE LEGANES  POTOTAN  IVISAN This oversight and accountability combined with the efficient use of resources, improved access to lower-cost capital and increased responsiveness to societal needs and expectations should lead to improved corporate performance. Effective corporate governance should make it more likely that managers focus on improving firm performance and are replaced when they fail to do so. 1.4 Eight Characteristics of Good Governance (UNDP) The United Nations Development Programme (UNDP) is the United Nation’s global development network. It was founded on November 22, 1965 with the merger of the Expanded Programme of Technical Assistance (EPTA) and the United Nations Special Fund. The UNDP advocates for change and connects countries to knowledge, experience and resources to help people build a better life. It also provides expert advice, training, and grants support to developing countries, with increasing emphasis on assistance to the least developed countries. To encourage global development, the UNDP focuses on six (6) developmental challenges, namely: a. Democratic governance b. Poverty reduction c. Crisis prevention and recovery d. Social development e. Environment and energy f. HIV/AIDS According to the UNDP, good governance has eight (8) major characteristics. Good governance is participatory, consensus oriented, accountable, transparent, responsive, effective and efficient, equitable and inclusive and follows the rule of law. It assures that corruption is minimized, the views of minorities are taken into account and that the voices of the most vulnerable in society are heard in decision-making. It must also be responsive to the present and future needs of society. Participation Participation by both men and women is a key cornerstone of good governance. All men and women should have a voice in decision-making, either directly or through legitimate intermediate institutions that represent their interests. Representative democracy, however, does not necessarily mean that the concerns of the most vulnerable in society would be taken into consideration in decision making. Participation needs to be informed and organized. This means freedom of association and expression on the one hand and an organized civil society on the other hand. Consensus oriented Good governance requires mediation of differing interests in society to reach a broad consensus on what is in the best interests of the whole community and on policies and procedures. It also requires a broad and long-term perspective on what is necessary for sustainable human development and how to achieve the goals of such development. This can be achieved by obtaining an understanding of the historical, cultural and social contexts of a given society or community. Accountability Decision-makers in government, the private sector and civil society organizations are accountable to the public and to their institutional stakeholders. Accountability is a key requirement of good governance and it varies depending on whether decisions or actions taken are internal or external to an organization or institution. In essence, an organization or an institution is accountable to those who will be affected by its decisions or actions. Nevertheless, accountability cannot be enforced without transparency and the rule of law. Page 5 of 38  ST. VINCENT COLLEGE LEGANES  POTOTAN  IVISAN Transparency Transparency means that decisions taken and their enforcement are done in a manner that follows rules and regulations. It also means that information is freely available in easily understandable forms/media and is directly accessible to those who will be affected by such decisions and their enforcement, and said people will be able to clearly see how and why a decision was made. Responsiveness Good governance requires that institutions and processes try to serve all stakeholders within a reasonable timeframe. Responsive governance engages the stakeholders in the processes of decision- and policymaking, implementation, monitoring and evaluation. It focuses plans and action of leadership on the needs of the people and involves them in identifying those needs. Most importantly, it develops structures, systems and practices that promote and support the involvement and participation of the people and ensure equal access to services by all. Effectiveness and efficiency Good governance means that processes and institutions produce results that meet the needs of the community while making the best use of available people, time and resources at their disposal. The concept of efficiency in the context of good governance also covers the sustainable use of natural resources and the protection of the environment. Equity and inclusiveness A society’s well-being results from all of its members feeling their interests have been considered in the decision making process. This requires all groups, particularly the most vulnerable, to have opportunities to participate in the process. Rule of law Good governance requires fair legal frameworks that are enforced impartially. Decisions made must be consistent with relevant legislation or regulation. It also requires full protection of human rights, particularly those of minorities. 1.5 Four Dimensions of Governance (WB) The World Bank (WB) is an international financial institution that provides loans to developing countries for capital programs. It was created at the 1944 Bretton Woods Conference, along with the International Monetary Fund (IMF). The WB and the IMF are both based in Washington D.C., and work closely with each other. The World Bank’s interest in governance derives from its concern for the sustainability of the projects it helps finance. It concluded that sustainable development can only take place if a predictable and transparent framework of rules and institutions exists for the conduct of private and public business. The essence of good governance was described as predictable, open and enlightened policy, together with a bureaucracy imbued with a professional ethos and an executive arm of government accountable for its actions. All these elements are present in a strong civil society participating in public affairs, where all members of the society act under the rule of law. Public sector management, accountability, a legal framework for development and transparency and information have been initially identified as core elements of governance by the World Bank in its 1994 report entitled “Governance: The World Bank’s Experience”. Page 6 of 38  ST. VINCENT COLLEGE LEGANES  POTOTAN  IVISAN Public-sector management This is the most readily identified dimension of the World Bank’s governance work. It aims to improve efficiency of public institutions, particularly in areas of:  Public expenditure management. Covers issues such as public investments, budget planning concerning operation and maintenance, and on strengthening the budgeting process.  Civil service reform. Assistance to borrower countries in their efforts to “redimension” the state and help the affected borrower countries manage less but manage better.  Public enterprises reform. Includes privatization of those public enterprises that were not commercially viable, improving the market and competitive conditions, and the reform of co-operation mechanisms between public enterprises and the governments in order to strengthen the management of public enterprises and so give less opportunity for politically motivated influence. Accountability Accountability is described as holding public officials responsible for their actions. Accountability works in two directions. On one hand, there is an internal effect within public institutions regarding financial accountability and the creation of internal control mechanisms. The internal effect of this form of accountability is referred to as “horizontal accountability”. On the other hand, there is also an external effect of accountability which relates to involvement of the population. Such is referred to as “vertical accountability”. One very important issue related to accountability is the fight against corruption. Legal framework for development Appropriate legal systems should be created that provide stability and predictability, which are the essential elements in creating an economic environment in which business risks may be rationally assessed. Also, laws could make an important contribution to an equitable and just society and thus to prospects for social development and poverty alleviation. Transparency and information A competitive market economy requires that various stakeholders have access to relevant, timely, and reliable information. The World Bank asserts that transparency and information would be beneficial especially in the areas of economic efficiency, prevention of corruption, and in the analysis, articulation and acceptance of governmental policy choices. 1.6 Four Basic Elements of Good Governance (ADB) The Asian Development Bank (ADB) is a regional development bank established on December 19, 1966 that is dedicated in reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth, and regional integration. In a 1995 policy paper called “Governance: Sound Development Management”, the ADB has identified four (4) basic elements of good governance: Accountability Public officials should be answerable for government behavior and responsive to the Page 7 of 38  ST. VINCENT COLLEGE LEGANES  POTOTAN  IVISAN entity from which they derive authority. This may be achieved differently in different countries or political structures, depending on the history, cultural milieu, and value systems involved. The accountability of public-sector institutions is facilitated by evaluation of their economic and financial performance. Economic accountability relates to the effectiveness of policy formulation and implementation, and efficiency in resource use. Financial accountability, on the other hand, covers accounting systems for expenditure control, and internal and external audits. Participation Government structures should be flexible enough to offer beneficiaries and others affected the opportunity to improve the design and implementation of public programs and projects. Participation is often related to accountability but not necessarily so. In representative democracies, where citizens participate in government through the electoral process, public officials are indeed accountable ultimately to the electorate. This may not be the case, however, in other political systems. For all economies though, the benefits of participatory approaches can be significant. These include improved performance and sustainability of policies, programs, and projects as well as enhanced capacity and skills of stakeholders. Predictability Predictability refers to the existence of laws, regulations and policies to regulate society, and their fair and consistent application. It requires the state and its agencies to be bound by and answerable to the legal system in the same way as private individuals and enterprises. Rules-based systems provide a conducive environment within which economic actors plan and make investment decisions. For as long as legal frameworks help ensure that business risks can be assessed rationally, transaction costs are lowered, and governmental arbitrariness is minimized, they should prove conducive to risk taking, growth and development. Consistency of public policy is also important. Government policies affect the investment climate directly and economic actors require reasonable assurance about the future behavior of key variables such as prices, the exchange rates, and the employment levels. Transparency Transparency refers to the availability of information to the general public and clarity about government rules and regulations. Transparency in government decision making and public policy implementation reduces uncertainty and can help inhibit corruption among public official. As such, rules and procedures that are simple, straightforward, and easy to apply are preferable to those that provide discretionary powers to government officials or that are susceptible to different interpretations. 1.7 Five Principles of Good Governance (IOG) The Institute on Governance (IOG) is a Canadian non-profit organization focused on developing principles of better governance in the public sphere. In was founded in 1990 and is headquartered in Ottawa. Using as basis the UNDPs indicators of good governance, the IOG has identified five principles of governance: Legitimacy and Voice Participation – all men and women should have a voice in decision-making, either Page 8 of 38  ST. VINCENT COLLEGE LEGANES  POTOTAN  IVISAN directly or through legitimate intermediate institutions that represent their intention. Such broad participation is built on freedom of association and speech, as well as capacities to participate constructively. Consensus orientation – good governance mediates differing interests to reach a broad consensus on what is in the best interest of the group and, where possible, on policies and procedures. Direction Strategic vision – leaders and the public have a broad and long-term perspective on good governance and human development, along with a sense of what is needed for such development. There is also an understanding of the historical, cultural and social complexities in which that perspective is grounded. Performance Responsiveness – institutions and processes try to serve all stakeholders. Effectiveness and efficiency – processes and institutions produce results that meet needs while making the best use of resources. Accountability Accountability – decision-makers in government, the private sector and civil society organizations are accountable to the public, as well as to institutional stakeholders. This accountability differs depending on the organizations and whether the decision is internal or external. Transparency – transparency is built on the free flow of information. Processes, institutions and information are directly accessible to those concerned with them, and enough information is provided to understand and monitor them. Fairness Equity – all men and women have opportunities to improve or maintain their wellbeing. Rule of Law – legal frameworks should be fair and enforced impartially, particularly the laws on human rights. Exercises: Choose the correct answer: 1. The state can protect the vulnerable by doing the following, except a. Ensuring the survival of pension systems. b. Creating or maintaining reasonable unemployment benefits. c. Establishing and maintaining a system of private health and social insurance. d. Protecting professional civil servants from political interference in carrying out their responsibilities. 2. The quality of corporate governance is important since it has a direct impact on the following except: a. The efficiency with which a corporation employs assets. b. Its ability to attract low-cost capital. c. Its ability to meet the expectations of management. d. Its overall performance Page 9 of 38  ST. VINCENT COLLEGE LEGANES  POTOTAN  IVISAN 3. The United Nations Development Programme (UNDP) was founded on a. 1960 c. 1966 b. 1965 d. 1970 4. To encourage global development, the UNDP focuses on six (6) developmental challenges, but not including: a. Democratic governance c. Poverty reduction b. Crisis prevention and recovery d. Drug Addiction 5. Which statement is incorrect about good governance? a. Participation by both men and women is a key cornerstone of good governance. b. Good governance requires mediation of differing interests in society to reach a broad consensus on what is in the best interests of the whole community and on policies and procedures. c. Accountability means that decisions taken and their enforcement are done in a manner that follows rules and regulations. d. Good governance requires that institutions and processes try to serve all stakeholders within a reasonable timeframe. 6. Which statement(s) is/are correct? a. Public expenditure management covers issues such as public investments, budget planning concerning operation and maintenance, and on strengthening the budgeting process. b. Civil service reform in context of the good governance agenda meant in principle assistance to borrower countries in their efforts to “redimension” the state and help the affected borrower countries manage less but manage better. c. Both A and B are correct. d. Both A and B are incorrect. 7. Public officials should be answerable for government behavior and responsive to the entity from which they derive authority. a. Accountability. c. Participation. b. Predictability. d. Transparency. 8. Statement 1: Government structures should be flexible enough to offer beneficiaries and others affected the opportunity to improve the design and implementation of public programs and projects. Statement 2: Participation is always related to accountability. a. Statement 1 is correct. c. Both statements are correct. b. Statement 2 is correct. d. Both statements are incorrect. 9. Processes and institutions produce results that meet needs while making the best use of resources. a. Responsiveness. c. Effectiveness and efficiency. b. Equity. d. Participation. 10. Consensus orientation in good governance means that a. All men and women should have a voice in decision-making, either directly or through legitimate intermediate institutions that represent their intention. b. Good governance mediates differing interests to reach a broad consensus on what is in the best interest of the group and, where possible, on policies and procedures. Page 10 of 38  ST. VINCENT COLLEGE LEGANES  POTOTAN  IVISAN c. Leaders and the public have a broad and long-term perspective on good governance and human development, along with a sense of what is needed for such development. d. Institutions and processes try to serve all stakeholders. END OF TOPIC 1 Page 11 of 38  ST. VINCENT COLLEGE LEGANES  POTOTAN  IVISAN Topic 2: MODELS OF CORPORATE GOVERNANCE LEARNING OBJECTIVES: At the end of this topic, the students are expected to: 1. Understand and explain the three models of corporate governance; 2. Understand and explain the key players for each model; 3. Understand and differentiate the composition of the Board for each model; 4. Understand the regulatory framework behind each model; 5. Understand the objectives of the Code of Corporate Governance; 6. Explain the significance of the ASEAN Corporate Governance Scorecard; and 7. Know and analyze the Corporate Governance Scorecard of the Philippine’s Top PLCs. NOTES: 2.1 Three Models of Corporate Governance The corporate governance structure of joint stock corporations in a given country is determined by several factors: the legal and regulatory framework outlining the rights and responsibilities of all parties involved in corporate governance; the de facto realities of the corporate environment in the country; and each corporation’s articles of association. While corporate governance provisions may differ from corporation to corporation, many de facto and de jure factors affect corporations in a similar way. Therefore, it is possible to outline a "model" of corporate governance for a given country. In each country, the corporate governance structure has certain characteristics or constituent elements, which distinguish it from structures in other countries. Most experts agree that there are three models of corporate governance in developed capital markets. These are the Anglo-US model, the Japanese model, and the German model. Each model identifies the following constituent elements: key players in the corporate environment; the share ownership pattern in the given country; the composition of the board of directors (or boards, in the German model); the regulatory framework; disclosure requirements for publicly-listed corporations; corporate actions requiring shareholder approval; and interaction among key players. 2.2 Anglo-US Model The Anglo-US model is based on a system in which shares are owned by individual or institutional shareholders that are outsiders of the corporation. It presents a well- developed legal framework defining the rights and responsibilities of three key players under this model, namely management, directors and shareholders. Also, this model provides a comparatively uncomplicated procedure for interaction between shareholder and corporation as well as among shareholders. The Anglo-US model came about because equity financing is the most common method of raising capital or funds for corporations in the United States and United Kingdom. Not surprisingly, the US and UK are amongst the largest capital markets in the world. The term ‘capital market’ encompasses all the markets where stocks or shares, bonds, derivatives and other financial instruments are traded. The New York Stock Exchange (NYSE) and the London Stock Exchange are two of the top three largest stock exchanges in the world. Page 12 of 38  ST. VINCENT COLLEGE LEGANES  POTOTAN  IVISAN The Anglo-US model governs corporations in the US, UK, Canada, Australia, New Zealand, Philippines, and several other countries. Key Players The key players in the Anglo-US model include management, directors and shareholders (especially institutional investors). They form what is known as the “corporate governance triangle”. Recently, corporate stocks are increasingly owned by institutions instead of individual shareholders during the pre-WW2 period. The interests and interaction of these players is diagrammed as follows: Government agencies, stock exchanges, self-regulatory organizations and consulting firms which advise corporations and/or shareholders on corporate governance and proxy voting also play important roles under the Anglo-US model. The Anglo-US model is developed within the context of the free market economy and is designed to separate the control and ownership of any corporation. This significant legal distinction enables investors to contribute capital and maintain ownership in the enterprise, but at the same time avoiding legal liability for the acts of the corporation by handing over to management the actual running of the affairs of the corporation. The cost of this separation of ownership and control is called agency costs. The interests of shareholders and management do not always coincide. Laws governing corporations in countries using the Anglo-US model attempt to reconcile this conflict in several ways. Most importantly, they prescribe the election of a board of directors by shareholders and require that boards act as fiduciaries for shareholders’ interests by overseeing management on behalf of shareholders. Shareholders may exercise their voting rights without attending the annual general meeting in person. All registered shareholders receive by mail the agenda for the meeting including background information on all proposals ("proxy statement"), the corporation’s annual report and a voting card. Shareholders may vote by proxy, that is, by completing and returning the voting card by mail to the corporation. By mailing the voting card back to the corporation, the shareholder authorizes the chairman of the board of directors to act as his proxy and cast his votes as indicated on the voting card. Composition of the Board of Directors The board of directors of most companies that follow the Anglo-US model contain both insiders or executive directors and outsiders or non-executive / independent directors. An ‘insider’ is as a person who is either employed by the corporation (an executive, manager or employee) or who has significant personal or business relationships with corporate management. Conversely, an ‘outsider’ refers to a person or institution which has no direct relationship with the corporation or corporate management. Customarily, one person holds the position of chief executive officer (CEO) and chairman of the board of directors. On many accounts, however, this often led to abuses such as concentration of power in the hands of one person or a small group of persons. Moreover, the interests of outside shareholders are frequently disregarded. Page 13 of 38  ST. VINCENT COLLEGE LEGANES  POTOTAN  IVISAN Fortunately, there is already a growing trend towards the inclusion of more outside directors in the management of many corporations. Several factors contributed to an increased interest in corporate governance in the UK and US. These included the increase in institutional investment in both countries, greater governmental regulation in the US (including regulation requiring some institutional investors to vote at AGMs), excessive executive compensation at many US companies and a growing sense of loss of competitiveness when compared to German and Japanese competitors. In response, individual and institutional investors began to educate themselves about trends and organize themselves in order to represent their interests as shareholders. Amongst their findings was that in several cases, a strong relationship exists between lack of effective oversight by the board of directors and poor corporate financial performance. Moreover, they noticed that ‘outside’ directors often suffered an informational disadvantage vis-а-vis ‘inside’ directors and were therefore limited in their ability to provide effective oversight of the board. Currently, there is a trend towards an increasing percentage of ‘outsiders’ on boards of directors of UK and US corporations. The trend was influenced by factors such as the pattern of stock ownership, the growing importance of institutional investors and their voting behavior at AGMs, and recommendations of self-regulatory organizations in the UK and US. Regulatory Framework There are many laws that define relationships between management, directors and shareholders in the US and UK. In the US (and also in the Philippines), the Securities and Exchange Commission (SEC) regulates the securities industry and establishes disclosure requirements for corporations and regulates communication between corporations and shareholders as well as among shareholders. In the UK, relevant parliamentary acts and rules established by the Securities and Investment Board serve as the regulatory framework of corporate governance. The US has the most comprehensive and stringent disclosure requirements of any jurisdiction. Following the Anglo-US model, US corporations should make the following disclosures either in the annual report or in the agenda of the annual general meeting (proxy statement): a. Corporate financial data (done on a quarterly basis). b. A breakdown of the corporation’s capital structure. c. Substantial background information on each nominee to the board of directors (including name, occupation, relationship with the company, and ownership of stock in the corporation). d. The aggregate compensation paid to all executive officers (upper management) as well as individual compensation data for each of the five highest paid executive officers, who are to be named. e. All shareholders holding more than five (5) percent of the corporation’s total share capital. f. Information on proposed mergers and restructurings. g. Proposed amendments to the articles of association. h. Names of individuals and/or companies proposed as auditors. Disclosure requirements in the UK and other countries that follow the Anglo-US model are quite similar, except they generally require semi-annual reporting and less data in most categories, including financial statistics and the information provided on nominees. Corporate Actions Requiring Shareholder Approval The two routine corporate actions requiring shareholder approval under the Anglo-US Page 14 of 38  ST. VINCENT COLLEGE LEGANES  POTOTAN  IVISAN model are: a. Elections of directors. b. Appointment of auditors. Non-routine corporate actions which also require shareholder approval include: a. Establishment or amendment of stock option plans (because these plans affect executive and board compensation). b. Amendment of the articles of incorporation. c. Mergers and takeovers. d. Restructurings. In the US, shareholders do not have the right to vote on the dividend proposed by the board of directors. In contrast, shareholders in the UK do vote on the dividend proposal. The Anglo-US model also permits shareholders to submit proposals to be included on the agenda of the AGM. The shareholder proposals must relate to a corporation’s business activity. Shareholders owning at least 10% of a corporation’s total share capital may also convene an extraordinary general meeting (EGM) of shareholders. 2.3 Japanese Model The Japanese model involves a high level of ownership by banks and other affiliated companies and "keiretsu" (industrial groups linked by trading relationships and crossshareholding). The key players under this model are the bank, the keiretsu, management and the government. This model is also characterized by strong, longterm links between bank and corporation. Equity financing is also a major source of capital for Japanese corporation. However, unlike US and UK corporations, the major shareholders are insiders and their affiliates. Outside shareholders have little or no voice and there are few truly independent or outside directors. Key Players In the Japanese model, the four key players are the main bank (a major inside shareholder), affiliated company or keiretsu (a major inside shareholder), management and the government. Although there are four key players under this system, it is centered around a main bank and a financial industrial network or keiretsu. Almost all Japanese corporations have a close relationship with a main bank, as the bank provides such corporations with loans as well as services related to bond issues, equity issues, settlement accounts, and consulting services. As such, the main bank is oftentimes a major shareholder in the corporation. On the contrary, US laws prohibits one bank from providing this assortment of services. Instead, these services are usually handled by different institutions: commercial bank - loans; investment bank - equity issues; specialized consulting firms - proxy voting and other services. Government is also traditionally influential in the management of corporations through policy and regulations in governance. Such policies include representation on a corporation’s boards when such entity faces financial difficulty. The interests and interaction of the players under the Japanese model is diagrammed in the following page: Page 15 of 38  ST. VINCENT COLLEGE LEGANES  POTOTAN  IVISAN Outside Independent shareholders directors Government Keiretsu Management Bank The base of the figure, with four connecting lines, represents the linked interests of the four key players: government, management, bank and keiretsu. The open lines at the top represent the nonlinked interests of non-affiliated shareholders and outside directors, because these parties play an insignificant role. Annual reports and materials related to the AGM are available to all shareholders. Shareholders may attend the annual general meeting, vote by proxy or vote by mail. Annual general meetings, however, are almost always pro forma, and corporations actively discourage shareholder dissent. Shareholder activism is restricted by an informal yet important aspect of the Japanese system, such that the vast majority of Japanese corporations hold their annual meetings on the same day each year, making it difficult for institutional investors to coordinate voting and impossible to attend more than one meeting in person. Composition of the Board of Directors The board of directors is usually made up entirely of insiders, often the heads of the different divisions of the company. However, remaining on the board of directors is conditional on the corporation’s financial performance, therefore the bank or keiretsu may remove directors and appoint its own candidates if a corporation’s profits continue to fall. It is also quite common for the Ministry of Finance to appoint a retiring government official to a bank’s board. Japanese boards are typically larger than boards in the UK, US and Germany. The average Japanese board is comprised of 50 members. Regulatory Framework Government ministries in Japan have traditionally been extremely influential in developing industrial policy. The ministries also wield enormous regulatory control. However, in recent years, several factors have weakened the development and implementation of a comprehensive industrial policy. First, due to the growing role of Japanese corporations at home and abroad, policy formation became fragmented due to the involvement of numerous ministries, most importantly, the Ministry of Finance and the Ministry of International Trade and Industry. Second, the increasing internationalization of Japanese corporations made them less dependent on their domestic market and therefore somewhat less dependent on industrial policy. Third, the growth of Japanese capital markets led to their partial liberalization and an opening, albeit small, to global standards. While these and other factors have limited the cohesion of Japanese industrial policy in recent years, it is still an important regulatory factor, especially in comparison with the Anglo-US model. The primary regulatory bodies in Japan are the Securities Bureau of the Ministry of Finance, and the Securities Exchange Surveillance Committee, which was established under the support of the Securities Bureau. The Securities Exchange Surveillance Committee is responsible for monitoring corporate compliance and investigating violations. Page 16 of 38  ST. VINCENT COLLEGE LEGANES  POTOTAN  IVISAN Disclosure requirements in Japan are also rigorous, but not as stringent as in the US. Following the Japanese model, Japanese corporations are required to disclose a wide range of information in the annual report or agenda for the annual general meeting, such as: a. Financial data on the corporation (done on a semi-annual basis). b. Data on the corporation’s capital structure. c. Background information on each nominee to the board of directors (including name, occupation, relationship with the corporation, and ownership of stock in the corporation). d. Aggregate data on compensation, namely the maximum amount of compensation payable to all executive officers and the board of directors. e. Ten (10) largest shareholders of the corporation. f. Information on proposed mergers and restructurings. g. Proposed amendments to the articles of association. h. Names of individuals and/or companies proposed as auditors. Corporate Actions Requiring Shareholder Approval The three routine corporate actions requiring shareholder approval under the Japanese model are: a. Payment of dividends and allocation of reserves. b. Election of directors. c. Appointment of auditors. Other common corporate actions which also require shareholder approval include: a. Capital authorizations. b. Amendments to the articles of association and/or charter (for example, a change in the size and/or composition of the board of directors, or a change in approved business activities). c. Payment of retirement bonuses to directors and auditors. d. Increase of the aggregate compensation ceilings for directors and auditors. Non-routine corporate actions which also require shareholder approval include: a. Mergers. b. Takeovers. c. Restructurings. Traditionally, Japanese law did not permit shareholders to put resolutions on the agenda for the annual meeting. It was only because of an amendment to the Commercial Code that allowed a registered shareholder holding at least 10 percent of a company’s shares to propose an issue to be included on the agenda for the AGM or EGM. 2.4 German Model Under the German model, banks hold long-term stakes in corporations and their representatives serve on corporate boards. However, they serve on boards continuously, not just during times of financial difficulty as in Japan. Moreover, there is a two-tiered board system consisting of a management board and a supervisory board. The management board is made up of inside executives of the company, while the supervisory board is composed of outsiders such as labor representatives and shareholder representatives. The two boards are completely separate, and therefore, no one can serve simultaneously on a corporation’s management board and supervisory board. The size of the supervisory board is set by law and cannot be changed by the shareholders. Also in the German model, there are voting right Page 17 of 38  ST. VINCENT COLLEGE LEGANES  POTOTAN  IVISAN restrictions on the shareholders (e.g., shareholders can only vote a certain share percentage regardless of their share ownership). Bank financing is preferred over equity financing for most German corporations. As such, the German corporate governance model is designed towards preserving relationships between banks and corporations. The German model governs German, Austrian, French and Belgian corporations. Key Players The key players under the German model are the banks and to a lesser extent, corporate shareholders. As with the Japanese model, banks under this model also play a multi-faceted role as shareholder, creditor, depository and voting agent among others. More importantly, unlike the Anglo-US and Japanese models, there is mandatory inclusion of labor/employee representatives on supervisor boards under the German corporate governance model. In Germany, corporations are also shareholders, sometimes holding long-term stakes in other corporations, even where there is no industrial or commercial affiliation between the two. This is somewhat similar, but not parallel, to the Japanese model, yet very different from the Anglo-US model where neither banks nor corporations are key institutional investors. The majority of German shares are issued in bearer (not registered) form. Corporations with bearer shares are required to announce their annual general meeting in an official government bulletin and forward the annual report and agenda for meeting to custody banks. The banks forward these materials to the beneficial owners of the shares. This often complicates the procedure for receipt of materials, especially for foreign shareholders. In Germany, most shareholders purchase shares through a bank, and banks are permitted to vote for the shares they hold on deposit. The beneficial shareholder grants a general power of attorney to the bank, and the bank is permitted to vote the shares for a period up to 15 months. The corporation sends the meeting agenda and annual report to its custody bank. The bank forwards these materials and its (the bank's) voting recommendations to the German shareholder. If the beneficial shareholder does not provide the bank with his/her specific voting instructions, the bank may vote the shares according to its own interpretation. This leads to a potential conflict of interest between the bank and the beneficial shareholder. It also increases the potential voting power of the bank, because some shareholders might not provide specific voting instructions and the bank may exercise the votes according to its interpretation. Because the level of individual share ownership in Germany is very low, this is not a huge problem. Nevertheless, it reflects a certain pro-bank and antishareholder tendency of the system. Other obstacles to shareholder participation include the above-mentioned legality of voting right restrictions, and the fact that shareholders may not vote by mail. As noted above, shareholders must either attend the meeting in person or to be represented in person, i.e., by their custodian bank. Despite these limitations, minority German shareholders are not inactive. In fact, they often oppose management proposals and present a wide range of counterproposals and proposals at the AGMs and EGMs of many German corporations each year. Composition of the Board of Directors As mentioned earlier, corporations following the German model are governed by a twotiered board structure: a supervisory board and a management board. The supervisory board (“Aufsichtsrat”) appoints and dismisses the management board, approves major management decisions; and advises the management board. It contains no “insiders” and is composed of labor/employee representatives and Page 18 of 38  ST. VINCENT COLLEGE LEGANES  POTOTAN  IVISAN shareholder representatives. The management board (“Vorstand”) is responsible for daily management of the company. It is composed solely of “insiders” or executives. The Industrial Democracy Act and the Law on Employee Co-determination regulate the size and determine the composition of the supervisory board in terms of the number of members elected by labor/employees and the number elected by shareholders. The numbers of members of the supervisory board is set by law. In small corporations (with less than 500 employees), shareholders elect the entire supervisory board. In medium-size corporations (defined by assets and number of employees), employees elect one-third of a nine-member supervisory board. In larger corporations, employees elect one-half of a 20-member supervisory board. The German model differs from the Anglo-US model and the Japanese model in that the size of the supervisory board is set by law and cannot be changed. Also, the supervisory board includes labor/employee representatives. While the supervisory board includes no “insiders”, it does not necessarily include only “outsiders”. The members of the supervisory board elected by shareholders are usually representatives of banks and corporations which are substantial shareholders. It would be more appropriate to define some of these as “affiliated outsiders”. Regulatory Framework Germany has various federal laws with regards corporate governance, such as the Stocks Corporation Law, Stock Exchange Law and Commercial Law, to name a few. Disclosure requirements in Germany are also relatively stringent, but not as compared to those of the US. German corporations are required to disclose a wide range of information in the annual report or agenda for the annual general meeting, including: a. Financial data on the corporation (done on a semi-annual basis). b. Data on the corporation’s capital structure. c. Limited information on each supervisory board nominee (including name, hometown and occupation/affiliation). d. Aggregate data for compensation of the management board and supervisory board. e. Any substantial shareholder holding more than five (5) percent of the corporation’s total share capital. f. Information on proposed mergers and restructurings. g. Proposed amendments to the articles of association. h. Names of individuals and/or companies proposed as auditors. Corporate Actions Requiring Shareholder Approval The routine corporate actions requiring shareholder approval under the German model are: a. Allocation of net income (payment of dividends and allocation to reserves). b. Ratification of the acts of the management board for the previous fiscal year. c. Ratification of the acts of the supervisory board for the previous fiscal year. d. Election of the supervisory board. e. Appointment of auditors. Approval of the acts of the management board and supervisory board are basically a “seal of approval” or “vote of confidence”. If shareholders wish to take legal action against individual members of either board or against either board as a whole, they refrain from ratifying the acts of the board for the previous year. In contrast with the Anglo-US and the Japanese models, shareholders do not possess the authority to alter the size or composition of the supervisory board because it is determined by law. Page 19 of 38  ST. VINCENT COLLEGE LEGANES  POTOTAN  IVISAN Other common corporate actions which also require shareholder approval include: a. Capital authorizations (which automatically recognize preemptive rights, unless revoked by shareholder approval). b. Affiliation agreements with subsidiaries. c. Amendments to the articles of association and/or charter (for example, a change of approved business activities). d. Increase of the aggregate compensation ceiling for the supervisory board. Non-routine corporate actions which also require shareholder approval include: a. Mergers. b. Takeovers. c. Restructurings. Shareholder proposals are common in Germany. Following announcement of the agenda for the meeting, shareholders may submit in writing two types of proposals. These are: a. Shareholder counterproposal – it opposes the proposal made by the management board and/or supervisory board in an existing agenda item and presents an alternative. For example, a counterproposal would suggest a dividend higher or lower than that proposed by the management board, or an alternative nominee to the supervisory board. b. Shareholder proposal – it requests the addition of an issue not included on the original agenda. Examples of shareholder proposals include: alternate nominees to the supervisory board; authorization of a special investigation or audit; suggestions to abolish voting rights restrictions; and recommendations for changes to the capital structure. Provided that such proposals meet legal requirements, the corporation is required to publish these shareholder proposals in an amended agenda and forward them to shareholders prior to the meeting. 2.5 Corporate Governance in the Philippines The term “corporate governance” may be deemed to have been legally incorporated into the Philippine legal system in 2002 with the promulgation of the SEC Code of Corporate Governance. Corporate Governance is 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. The objective of corporate governance is to maximize the organization’s long-term success, creating sustainable value for its shareholders, stakeholders and the nation. To promote the development of a strong corporate governance culture and raise the corporate governance standards on Philippine Corporations to a level at par with its regional and global counterparts, the Securities and Exchange Commission (SEC) in 2016 issued SEC Memorandum Circular No. 19, otherwise known as the “Code of Corporate Governance for Publicly-Listed Companies” or “CG Code for PLCs”, and in 2019 issued SEC Memorandum Circular No. 24, otherwise known as the “Code of Corporate Governance for Public Companies and Registered Issuers”. Both of these Codes supersedes the Revised Code of Corporate Governance under SEC Memorandum Circular No. 6, series of 2009. Page 20 of 38  ST. VINCENT COLLEGE LEGANES  POTOTAN  IVISAN 2.6 Corporate Governance Code The CG Code for PLCs and CG for PCs and RIs were drafted based on the latest G20/OECD Principles of Corporate Governance and the Association of Southeast Asian Nations Corporate Governance Scorecard. It covers all types of corporations in the Philippines under supervision of the SEC. The G20 or Group of Twenty is an international forum for the governments and central bank governors from 20 major economies. It was founded in 1999 with the aim of studying, reviewing and promoting high-level discussion of policy issues pertaining to the promotion of international financial stability. The G20 membership comprises a mix of the world’s largest advanced and emerging economies, representing about two-thirds of the world’s population, and 85% of global gross domestic product. The members of the G20 are Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, the United States and the European Union. The Organization for Economic Cooperation and Development (OECD), on the other hand, is a unique forum where the governments of 35 democracies market economies work with each other, as well as with more than 70 non-member economies to promote economic growth, prosperity, and sustainable development. Founded in 1961, the organization provides a setting where governments can compare policy experiences, seek answers to common problems, identify good practice and coordinate domestic and international policies. Both the CG Code for PLCs and CG Code for PCs and RIs are arranged as follows:  Principles. These are high-level statements of corporate governance good practice, and are applicable to all companies.  Recommendations. These are objective criteria that are intended to identify the specific features of corporate governance good practice that are recommended for companies operating according to the Code. Alternatives to a Recommendation may be justified in particular circumstances if good governance can be achieved by other means. When a Recommendation is not complied with, however, the company must disclose and describe such noncompliance, and explain how the overall Principle is being achieved. Moreover, the alternative must be consistent with the overall Principle.  Explanations. These provide companies with additional information on the recommended best practice. The CG for PLCs and CG for PCs RIs provide the following “Principles”: 1. The company should be headed by a competent, working board to foster the long term success of the corporation, and to sustain its competitiveness and profitability in a manner consistent with its corporate objectives and the long-term best interests of its shareholders and other stakeholders. 2. The fiduciary roles, responsibilities and accountabilities of the Board as provided under the law, the company’s articles and by-laws, and other legal pronouncements and guidelines should be clearly made known to all directors as well as to stockholders and other stakeholders. 3. Board committees should be set up to the extent possible to support the effective performance of the Board’s functions, particularly with respect to audit, risk management, related party transactions, and other key corporate governance concerns, such as nomination and remuneration. The composition, functions and responsibilities of all committees established should be contained in a publicly available Committee Charter. 4. To show full commitment to the company, the directors should devote the time and attention necessary to properly and effectively perform their duties and Page 21 of 38  ST. VINCENT COLLEGE LEGANES  POTOTAN  IVISAN responsibilities, including sufficient time to be familiar with the corporation’s business. 5. The Board should endeavor to exercise objective and independent judgment on all corporate affairs. 6. The best measure of the Board’s effectiveness is through an assessment process. The Board should regularly carry out evaluations to appraise its performance as a body, and assess whether it possesses the right mix of backgrounds and competencies. 7. Members of the Board are duty-bound to apply high ethical standards, taking into account the interests of all stakeholders. 8. The company should establish corporate disclosure policies and procedures that are practical and in accordance with best practices and regulatory expectations. 9. The company should establish standards for the appropriate selection of an external auditor, and exercise effective oversight of the same to strengthen the external auditor’s independence and enhance audit quality. 10. The company should ensure that material and reportable non-financial and sustainability issues are disclosed. 11. The company should maintain a comprehensive and cost-efficient communication channel for disseminating relevant information. This channel is crucial for informed decision-making by investors, stakeholders and other interested users. 12. To ensure the integrity, transparency and proper governance in the conduct of its affairs, the company should have a strong and effective internal control system and enterprise risk management framework. 13. The company should treat all shareholders fairly and equitably, and also recognize, protect and facilitate the exercise of their rights. 14. The rights of stakeholders established by law, by contractual relations and through voluntary commitments must be respected. Where stakeholders’ rights and/or interests are at stake, stakeholders should have the opportunity to obtain prompt effective redress for the violation of their rights. 15. A mechanism for employee participation should be developed to create a symbiotic environment, realize the company’s goals and participate in its corporate governance processes. 16. The company should be socially responsible in all its dealings with the communities where it operates. It should ensure that its interactions serve its environment and stakeholders in a positive and progressive manner that is fully supportive of its comprehensive and balanced development. 2.7 ASEAN Corporate Governance Scorecard The corporate governance initiative of the Association of Southeast Asian Nations (ASEAN) is one of several regional capital market integration initiatives of the ASEAN Capital Markets Forum (ACMF). It is led by the Securities Commission of Malaysia and is supported by the Asian Development Bank (ADB) through its regional technical assistance (TA). ADB has supported ASEAN regional capital market integration through a series of regional TA projects since 2005, and has supported this initiative through the regional TA “Promoting an Interlinked ASEAN Capital Market” since 2011. The initiative’s objectives are: a. To raise the corporate governance standards and practices of ASEAN publicly listed Companies (PLCs). b. To give greater international visibility to well-governed ASEAN PLCs and showcase them as investable companies. c. To complement other ACMF initiatives and promote ASEAN as an asset class. Six ASEAN countries — Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam — agreed to participate in this initiative. Principles behind the ASEAN Corporate Governance Scorecard The development of the Scorecard was guided by the following principles: Page 22 of 38  ST. VINCENT COLLEGE LEGANES  POTOTAN  IVISAN a. The Scorecard should reflect global principles and internationally recognized good practices in corporate governance applicable to PLCs and, in some instances, may exceed the requirement and standards recommended in national legislation. b. The Scorecard should not be based on the lowest common denominator, but should aim to encourage PLCs to adopt higher standards and aspirations. c. The Scorecard should be universal and applicable to different markets in ASEAN. d. The Scorecard should be comprehensive in coverage, capturing the salient elements of corporate governance. e. The Scorecard should enable gaps in corporate governance practices among ASEAN PLCs to be identified and should draw attention to good corporate governance practices. f. The methodology should be robust to allow the accurate assessment of the corporate governance of PLCs beyond minimum compliance and box ticking. g. There should be extensive and robust quality assurance processes to ensure the independence and reliability of the assessment. The OECD Principles of Corporate Governance, given their global acceptance by policy makers, investors, and other stakeholders, were used as the main benchmark for the Scorecard. Consequently, many of the items in the Scorecard may be best practices that go beyond the requirements of national legislation. The experts also drew from the existing body of work and ranking initiatives in the region, including those of institutes of directors, shareholder associations, and universities, to guide the initial inclusion of items in the Scorecard. The Scorecard covers the following five areas of the OECD principles, with their corresponding weight:  Rights of shareholders 10%  Equitable treatment of shareholders 15%  Role of stakeholders 10%  Disclosure and transparency 25%  Responsibilities of the board 40% 6 2.8 Philippine Corporate Governance Scorecard The Philippines officially launched its participation in the ASEAN Corporate Governance Scorecard on 11 September 2012. Orientation sessions on the Scorecard were held for evaluators and compliance officers to prepare both stakeholders for the new challenges ahead. The assessment involved selecting and validating the top 100 publicly listed companies (PLCs), based on market capitalization, and submitting their scores to the ASEAN Capital Markets Forum (ACMF). The average corporate governance score of Philippine PLCs is 48.9%. Among the five corporate governance categories, Philippine PLCs score highest in Equitable Treatment of Shareholders (71.4%), followed by Rights of Shareholders (56.0%), and Disclosure and Transparency (54.3%). The categories in which Philippine PLCs score below 50% are Role of Stakeholders (28.0%) and Responsibilities of the Board (40.9%). Exercises: Choose the correct answer: 1. Which statement(s) is/are correct regarding the Anglo-US Model of corporate governance? a. It is based on a system in which shares are owned by individual or institutional shareholders that are outsiders of the corporation. b. It came about because debt financing is the most common method of raising capital or funds for corporations in the United States and United Kingdom. c. Both A and B. d. Neither A nor B. Page 23 of 38  ST. VINCENT COLLEGE LEGANES  POTOTAN  IVISAN 2. The board of directors of most companies that follow the Anglo-US model contain a. Executive directors. c. Both A and B. b. Non-executive directors. d. Neither A nor B. 3. Following the Anglo-US model, US corporations should make which of the following disclosures either in the annual report or in the agenda of the annual general meeting? a. Corporate financial data (done on a semi-annual basis). b. A breakdown of the corporation’s capital structure. c. The aggregate compensation paid to all executive officers as well as individual compensation data for each of the ten highest paid executive officers, who are to be named. d. All shareholders holding more than ten percent of the corporation’s total share capital. 4. Which is not a key player under the Japanese Model of corporate governance? a. Bank. c. Management. b. Independent director. d. Government. 5. Statement 1: Almost all Japanese corporations have a close relationship with a main bank, as the bank provides such corporations with loans as well as services related to bond issues, equity issues, settlement accounts, and consulting services. Statement 2: US laws allows one bank from providing an assortment of services to a single corporation. a. Statement 1 is correct. c. Both statements are correct. b. Statement 2 is correct. d. Both statements are incorrect. 6. Following the Japanese model, Japanese corporations are required to disclose a wide range of information in the annual report or agenda for the annual general meeting, such as the following with the exception of: a. Aggregate data on compensation, namely the maximum amount of compensation payable to all executive officers and the board of directors. b. Five largest shareholders of the corporation. c. Information on proposed mergers and restructurings. d. Names of individuals and/or companies proposed as auditors. 7. Under the German Model of corporate governance, the ‘management’ board is composed of a. Inside executives. b. Both inside executives and outsiders. c. Outside executives. d. Inside executives and representatives from a bank. 8. To promote the development of a strong corporate governance culture and raise the corporate governance standards on Philippine Corporations to a level at par with its regional and global counterparts, the Securities and Exchange Commission (SEC) in November 2016 issued SEC Memorandum Circular No. 19, otherwise known as the a. SEC Code of Corporate Governance. b. Revised Code of Corporate Governance. c. Code of Corporate Governance for Publicly-Listed Companies. d. Code of Corporate Governance for Publicly- and Privately-Listed Companies. Page 24 of 38  ST. VINCENT COLLEGE LEGANES  POTOTAN  IVISAN 9. The ASEAN Corporate Governance Scorecard does not cover which area? a. Role of stakeholders. c. Rights of customers. b. Disclosure and transparency. d. Responsibilities of the Board. 10. The development of the ASEAN Corporate Governance Scorecard was guided by which principle? a. The Scorecard should reflect local principles. b. The Scorecard should be based on the lowest common denominator. c. The Scorecard should be national. d. The Scorecard should be applicable to different markets in ASEAN. END OF TOPIC 2 Page 25 of 38  ST. VINCENT COLLEGE LEGANES  POTOTAN  IVISAN Topic 3: GOVERNANCE RESPONSIBILITIES OF THE BOARD LEARNING OBJECTIVES: At the end of this topic, the students are expected to: 1. Understand the composition of the Board; 2. Understand the role of independent directors; 3. Explain the functions and duties of the board of directors; 4. Understand the qualifications and grounds for disqualifications of board of directors; and 5. Identify the functions of the Chairman of the Board, the CEO, the corporate secretary, the corporate treasurer, and the compliance officer. NOTES: 3.1 Overview of Board and Management The Board of Directors or simply the Board represents the governing body elected by the stockholders that exercises the corporate powers of a corporation, conducts all its business and controls its properties. The board is the primary conductor of corporate governance. They serve as the bridge between the owners and employees of a corporation. They make the strategic, long-term decisions that shape a corporation's structure and integrity. In relation to setting the policies for the accomplishment of the corporate objectives, the Board appoints high level management officials and provide an independent check on them. Management is the body given the authority by the Board of Directors to implement the policies it has laid down in the conduct of the business of the corporation. These officials have a great deal of authority and responsibility, and can ultimately determine the success or failure of a company. The company should be headed by a competent, working board to foster the longterm success of the corporation, and to sustain its competitiveness and profitability in a manner consistent with its corporate objectives and the long-term best interests of its shareholders and other stakeholders. The Board should be composed of directors with a collective working knowledge, experience or expertise that is relevant to the company’s industry/sector. The Board should always ensure that it has an appropriate mix of competence and expertise and that its members remain qualified for their positions individually and collectively, to enable it to fulfill its roles and responsibilities and respond to the needs of the organization based on the evolving business environment and strategic direction. 3.2 Composition of the Board Directors shall be elected for a term of one (1) year from among the holders of stocks registered in the corporation’s books. Each director shall hold office until the successor is elected and qualified. A director who ceases to own at least one (1) share of stock of the corporation shall cease to be such. The Board should be composed of a majority of non-executive directors who possess the necessary qualifications to effectively participate and help secure objective, independent judgment on corporate affairs and to carry out proper checks and balances. The right combination of non-executive directors (NEDs), which include independent directors, and executive directors, ensures that no director or small group of directors can dominate the decision-making process. Further, a board composed of Page 26 of 38  ST. VINCENT COLLEGE LEGANES  POTOTAN  IVISAN a majority of NEDs assures protection of the company's interest over the interest of the individual shareholders. An executive director (ED) is a director who has executive responsibility and of day-to-day operations of a part or the whole of the organization. He may be the head of a department or unit of the corporation or performs any work related to its operation (e.g., vice president of sales). Obviously, a non-executive director (NED) is any director who has no executive responsibility and does not perform any work related to the operations of the corporation. An independent director (ID) is a person who, aside from his fees and shareholdings, is independent of management and the controlling shareholder, and is free from any business or other relationship which could, or could reasonably be perceived to, materially interfere with his exercise of independent judgment in carrying out his responsibilities as a director. Independent Directors The Board should have at least two (2) independent directors, or such number as to constitute at least one-third of the members of the Board, whichever is higher. The presence of independent directors (IDs) in the Board ensures the exercise of independent judgment on corporate affairs and proper oversight of managerial performance, including prevention of conflict of interests and balancing of competing demands of the corporation. There is increasing global recognition that more IDs in the Board lead to more objective decision-making, particularly in conflict of interest situations. In addition, experts have recognized that there are varying opinions on the optimal number of IDs in the board. However, the ideal number ranges from one-third to a substantial majority. The Board should ensure that its independent directors possess the necessary qualifications and none of the disqualifications for an independent director to hold the position. The independent directors (IDs) need to possess a good general understanding of the industry that the company engages in. Further, it is worthy to note that independence and competence should go hand-in-hand. It is therefore important that the non-executive directors, including IDs, possess the qualifications and stature that would enable them to effectively and objectively participate in the deliberations of the Board. An ID refers to a person who, ideally: a. Is not, or has not been a senior officer or employee of the covered company unless there has been a change in the controlling ownership of the company; b. Is not, and has not been in the two (2) years immediately preceding the election, a director of the covered company; a director, officer, employee of the covered company's subsidiaries, associates, affiliates or related companies; or a director, officer, employee of the covered company's substantial shareholders and its related companies; c. Has not been appointed in the covered company, its subsidiaries, associates, affiliates or related companies as Chairperson "Emeritus," "Ex-Officio" Directors/Officers or Members of any Advisory Board, or otherwise appointed in a capacity to assist the Board in the performance of its duties and responsibilities within two (2) years immediately preceding his election; d. Is not an owner of more than two percent (2%) of the outstanding shares of the covered company, its subsidiaries, associates, affiliates or related companies; e. Is not a relative of a director, officer, or substantial shareholder of the covered company or any of its related companies or of any of its substantial shareholders. For this purpose, relatives include spouse, parent, child, brother, sister and the spouse of such child, brother or sister; f. Is not acting as a nominee or representative of any director of the covered company or any of its related companies; Page 27 of 38  ST. VINCENT COLLEGE LEGANES  POTOTAN  IVISAN g. Is not a securities broker-dealer of listed companies and registered issuers of securities. "Securities broker-dealer" refers to any person holding any office of trust and responsibility in a broker-dealer firm, which includes, among others, a director, officer, principal shareholder, nominee of the firm to the Exchange, an associated person or salesman, and an authorized clerk of the broker or dealer; h. Is not retained, either in his personal capacity or through a firm, as a professional adviser, auditor, consultant, agent or counsel of the covered company, any of its related companies or substantial shareholder, or is otherwise independent of Management and free from any business or other relationship within the two (2] years immediately preceding the date of his election; i. Does not engage or has not engaged, whether by himself or with other persons or through a firm of which he is a partner, director or substantial shareholder, in any transaction with the covered company or any of its related companies or substantial shareholders, other than such transactions that are conducted at arm's length and could not materially interfere with or influence the exercise of his independent judgment within the two (2) years immediately preceding the date of his election; j. Is not affiliated with any non-profit organization that receives significant funding from the covered company or any of its related companies or substantial shareholders; and k. Is not employed as an executive officer of another company where any of the covered company's executives serve as directors. The Board's independent directors should serve for a maximum cumulative term of nine (9] years. After which, the independent director should be perpetually barred from reelection as such in the same company, but may continue to qualify for nomination and election as a non-independent director. In the instance that a company wants to retain an independent director who has served for nine (9) years, the Board should provide meritorious justification/s and seek shareholders'/members' approval during the annual shareholders'/members' meeting. Service in a board for a long duration may impair a director's ability to act independently and objectively. Hence, the tenure of an Independent Director (ID] is set to a cumulative term of nine (9) years. The IDs who have served for nine (9) years may continue as a nonindependent director of the company. Any term beyond nine (9) years for an ID is subjected to particularly rigorous review, taking into account the need for progressive change in the Board to ensure an appropriate balance of skills and experience. However, the shareholders/members may, in exceptional cases, choose to re-elect an ID who has served for nine (9] years. In such instances, the Board must provide a meritorious justification for the re-election and seek shareholders'/members' approval during the annual shareholders'/members' meeting. Board Composition for Corporations Vested with Public Interest The board of the following corporations vested with public interest shall have independent directors constituting at least twenty percent (20%) of such board: a. Corporations covered by Section 17.2 of Republic Act No. 8799, otherwise known as “The Securities Regulation Code”, namely those whose securities are registered with the SEC, corporations listed with an exchange or with assets of at least Fifty million pesos (P50,000,000.00) and having two hundred (200) or more holders of shares, each holding at least one hundred (100) shares of a class of its equity shares. Page 28 of 38  ST. VINCENT COLLEGE LEGANES  POTOTAN  IVISAN b. Banks and quasi-banks, non-stock savings and loan associations (NSSLAs), pawnshops, corporations engaged in money service business, pre-need, trust and insurance companies, and other financial intermediaries. c. Other corporations engaged in business vested with public interest similar to those above, as may be determined by the SEC. 3.3 Responsibilities, Duties, and Functions of the Board and its Directors The Company should have a policy on the training of directors, including an orientation program for first-time directors and relevant annual continuing training for all directors. The orientation program for first-time directors and relevant annual continuing training for all directors aim to promote effective board performance and continuing qualification of the directors in carrying out their duties and responsibilities. The orientation program ensures that new members are appropriately apprised of their duties and responsibilities, before beginning their directorships, and throughout their tenure. The orientation program covers SEC-mandated topics on corporate governance and includes an introduction to the company's business, Articles of Incorporation and Bylaws, and Code of Business Conduct and Ethics. Corporations should provide in its Board Charter and Manual on Corporate Governance a policy on the training of directors, including an orientation program for first-time directors and relevant annual continuing training for all directors. The orientation program for first-time directors and relevant annual continuing training for all directors aim to promote effective board performance and continuing qualification of the directors in carrying-out their duties and responsibilities. It is highly desirable for first-time directors to undergo at least eight (8) hours orientation program. The annual continuing training program should at least be four (4) hours, and it should ensure that the directors are continuously informed of the developments in the business and regulatory environments, including emerging risks relevant to the company. Said trainings should also include courses on corporate governance matters relevant to the company, including audit, internal controls, risk management, sustainability and strategy. Specific Responsibilities, Duties, and Functions of the Board The Board has the responsibility to foster the long-term success of the corporation and to sustain its competitiveness and profitability in a manner consistent with its corporate objectives and the best interests of its shareholders. In the process, the Board should formulate the corporation’s vision, mission, strategic objectives, policies and procedures that shall guide its activities, including the means to effectively monitor management’s performance. The Board should conduct itself with honesty and integrity in the performance of the duties and functions, which amongst others, include the following: a. Act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the company and all shareholders. b. Oversee the development of and approve the company’s business objectives and strategy, and monitor their implementation, in order to sustain the company’s long- term viability and strength. c. Ensure and adopt an effective succession planning program for directors, key officers and management to ensure growth and a continued increase in the shareholders’ value. d. Align the remuneration of key officers and board members with the long-term interests of the company. Page 29 of 38  ST. VINCENT COLLEGE LEGANES  POTOTAN  IVISAN e. Have and disclose in its Manual on Corporate Governance a formal and transparent board nomination and election policy. f. Ensure that there is a group-wide policy and system governing related party transactions (RPTs) and other unusual or infrequently occurring transactions, particularly those which pass certain thresholds of materiality. g. Approve the selection and assessing the performance of the Management led by the Chief Executive Officer (CEO), and control functions led by their respective heads (Chief Risk Officer, Chief Compliance Officer, and Chief Audit Executive). h. Establish an effective performance management framework that will ensure that the Management, including the Chief Executive Officer, and personnel’s performance is at par with the standards set by the Board and Senior Management. i. Oversee that an appropriate internal control system is in place, including setting up a mechanism for monitoring and managing potential conflicts of interest of Management, board members, and shareholders. j. Oversee that a sound enterprise risk management (ERM) framework is in place to effectively identify, monitor, assess and manage key business risks. k. Have a Board Charter that formalizes and clearly states its roles, responsibilities and accountabilities in carrying out its fiduciary duties. l. Establish board committees that focus on specific board functions to aid in the optimal performance of its roles and responsibilities. m. Endeavor to exercise an objective and independent judgment on all corporate affairs. n. Ensure that its independent directors possess the necessary qualifications and none