Вы находитесь на странице: 1из 36

What is a Corporation?

To better understand the term corporation (revisit) its definition as stated in the
Corporation Code of the Philippines. A corporation is an artificial being created by
operation of law, having the right of succession and the powers, attributes and
properties expressly authorized by law or incident to its existence. (The Corporation
Code of the Philippines, Sec. 2) From the definition, we can get the following attributes of
a corporation.
Artificial Being
Which means that, by fiction of law a corporation is a juridical person whose
personality is separate and distinct from its owners. Corporation has some of the rights
that a natural person possesses. It can sue and be sued in court, it can own and dispose
properties and it is supposed to be given independence by its owners in terms of
existence. Corporation can also be convicted on criminal offenses, fraud is an example.
Created by Operation of Law
Which means it will come into existence through a charter or a grant from the
state. It cannot exist by a mere agreement or a unilateral and self declaration of
existence. Functions of corporations are governed strictly and it has to do within the
bounds of what is being provided in the corporate charter.
Right of Succession
A corporation can continue to exist even in death, incapacity or insolvency of any
stockholder or member. The corporation will not be dissolved even when there are
transfers of ownership.
Powers, Attributes and Properties
Which means it is authorized to do activities within the purpose(s) of its creation, it
has its own traits, and it operates based on what has been expressly provided in the
charter including those that are considered incident to its existence as a corporation for
example, a fishing company need not ask if they could put up a storage facility for this
purpose. These are examples of implied authority being given occasioned by the giving
of the express authority.
.. May title to.. indi ko nasama..
This refers to the party given the authority to implement the policies as
determined by the board in directing the course/business activities of the corporation
(SEC, Code of Governance). This is the group of people running the day-to-day activities
of the corporation. This team is composed of decision makers from the top to the bottom
of the corporate hierarchy. They are the ones entrusted by the stockholders to do some
maneuverings for the corporation to reach its destination. They are the decision makers
who will shape the future of the organization. The decisions that will be made by these
people may spell-out failure or success of the corporation. Examples of people who
belong to this party are the board of directors, officers, and other managers that in one
way or another influence on the way the corporation is being run.

This refers to the party who lend to the corporation goods, services or money.
Creditors may gain from corporation by way of interest for money loaned or profits for
goods sold or services rendered, thus it is important that in running the corporate affairs,
the concerns of the creditors should be taken into consideration. It is comforting in the
fact that whenever there is liquidation the first priority of payment belongs to the outside
This refers to people who invest their capital in the corporation. The people who,
in some cases considered as the first believer of what the entity can do. These are
people who bet their money and assume the high risk of having their money going down
the drain. Unlike creditors, shareholders being part-owner of the entity cannot demand
payment from the corporation. Creditors, on the other hand, can demand payment for
principal and the interest and can go to court in case the borrowing corporation cannot
pay its obligation.
These are the people who contribute their skills, abilities, and ingenuity to the
corporation. They are the ones who invested their future in the company with full trust
and confidence that the entity would make them secure. Running the corporation with
high emphasis on employees is popular in corporate world nowadays that when business
owners decide to expand or diversify they always cite the number of jobs being created.
And, when these businessmen are confronted with business challenges they always have
this question, what will happen to the employees?
Employees and corporations have symbiotic relationships. In an ideal scenarios,
employees do what is best for the corporation so that the corporation can provide them
gainful and satisfying work. Good employees can contribute would lead to profit, profit
could mean additional benefit to workers.
The party considered to be the very reason for the existence of the corporation.
They are the buyers of the corporations product or services for final consumption,
enjoyment, or maybe for the use in the production/creation of another goods. Clients or
customers should be one of the paramount considerations in the operation of a
corporation. It is important to note in this context that big businesses are directly or
indirectly touching so many peoples lives. Some of these consumers are so dependent
on what these big corporations are producing leaving them vulnerable to commercial
exploitation. To balance best the interest of the customers, first there has to be unilateral
and voluntary act of compassion by these businesses to consumers. Predatory instinct of
corporations has to be reduced if not eradicated by having a sincere and visible
operating philosophy which always place clients on the equation not just plain and
simple profit driven motives.
The government has several interests in private corporations the most apparent of
which are the taxes that the corporations are paying. Taxes make government stay afloat
and survive as highlighted in the lifeblood theory of taxation. Apart from taxes,
corporate activities help economy, in general, and the individuals, in particular. Existence
of businesses means jobs. Jobs provide income to individuals in forms of salaries.
Salaries translate to purchasing power. It is worth emphasizing that it is the duty and

responsibility of the government to provide the people the basic ways and means to
survive and the government gets the biggest help from the corporations.
Aside from those mentioned, there are services offered by private corporations
that somehow lessen the burden of the government, for example: health services,
education, vital industries like power, water and transportion. In developing countries like
Philippines, it can be expected that the government cannot provide these services to
level of competence to the greater majority. The private corporations fill the gaps in
helping the government in the delivery of these basic services to the people.
Government is also a buyer of product of some corporation. Government also set
standards and regulate important aspects of corporation activities. All these things make
the government an important stakeholder of corporations.
The public has a stake in corporations that the latter provides the citizens with the
essentials such as goods, services, employment and tax money for public programs. The
result of responsible or irresponsible conduct of these corporations can also affect public
in so many ways. For example, if a corporation is environmentally inconsiderate by
giving too much emphasis to their profit objectives, it is the public that would bear the
brunt of the consequences like pollution, calamities, diseases and many other
undesirable consequences.
Another aspect being considered are the concerns on natural resources. There is
great public interest in businesses that belong to the extractive industries like mining,
logging and petroleum exploration and extraction of exhaustible natural resources. There
is nothing wrong with all these activities so long as what is due to the general public
should be considered. In some cases, however, there is a problem of access to vital
information and given that the locations of the operations of these businesses are in the
far flung areas then the issue of access is aggravated. That is why it can be said that
sometimes there exists a "bureau industrial conspiracy" which means that there is a
connivance between the persons who decide on the part of the government and the
representatives of the big businesses seeking government approval. This scenario leaves
the people helpless in asserting their rights as stakeholders. These natural resources that
they are trying to exhaust for profit belongs to the people and it is but normal and fitting
that whatever they do the interest of the public should be considered.
Early Stage Survival
There are several theories on the aims and objectives of a corporation. However,
for an entity which has just started, the main objective would be survival especially
during the early years of its existence. Corporation should aim first for the most basic.
That is, how to gain the momentum especially when its entry is during crisis, for it to
withstand the hostile environment of commercialism.
To Increase Profit
According to Milton Friedman, the social responsibility of business is "to increase
profit". This is anchored on the argument that stockholders are the owners of the

corporation and therefore, corporate profits ultimately accrue to them. Corporate

executives and hired managers are the stockholders' agents and should operate in the
interests of their principal, the stockholders.
Stockholders are entitled to their profits as a result of a contract among the
corporate stakeholders. A stakeholder in this perspective refers to employees, managers,
customers, the local community (public) and the stockholders. Each cluster of
stakeholder has a contractual relationship with the firm, since they receive the
remuneration they mutually and freely agreed to, in a pre-established agreement or
Based on the above, giving the corporation the authority to operate carries with it
the idea that corporation should earn for the following purposes: first, to serve its
purpose of existence which is to make the stockholders happy. Second, to perform its
contractual obligation to stakeholders embedded in the grant of authority to operate.
These includes but not limited to the payment of taxes to the government, taking care of
employees within the bounds of what is legal, giving back to the community and many
others which is part of the implied agreement for its existence.
To Offer Vital Services to the General Public
There are services that are hard for the government to offer to the vast majority of
people without the help of private enterprises. The government cannot even solve by
itself the problem as basic as traffic. It is in this contrast that partnerships between the
government and the private corporations be considered to deal with some problems.
Typical example of this in Metro Manila area where traffic is almost intolerable.
Fortunately, the government got a big help from private investors in NLEX, SLEX,
Northrail, Southrail, and other semi-private infrastructures and other mass transport
system investors. Other services in which the government needs help are in the areas of
power, water, education and health services.
To Offer Goods and Services to the Mass Market
Some corporations are run not only for the sole purpose of generating profit but
also to provide service to masses. This endeavor will meet the needs of the lower income
class group by offering them something at a price they can afford. For example, cheap
and accessible transport service. Some might ask, what is the difference of this purpose
from the previous one? First they differ in the area of pricing. Pricing in vital industries
are not market-dictated. The investors are given guaranteed returns to cover for their
investment risks. And, most are government sanctioned and enjoys an almost
monopolized if not fully monopolized environment. Second, they differ in the area of
competition. In a perfectly competitive market, the services and goods are easily
obtainable because there are lots of suppliers. In the less-competitive vital industries
obtained by government contracts, regulations and/or franchises, the services and goods
are only provided buy a few or worse, by one producer.
After getting a significant understanding about the corporation and its
stakeholders, one needs to know the other players of the corporation. Shareholders,
bondholders and directors complete the cast when the corporation starts to operate.

these are the parties which will be having various claims over the entity. shareholders
will be having its claims in the form dividends. bondholders' claims will be in the form of
interest earned via long term agreement. And, the directors will have their eyes on their
salaries, incentives, stock options and bonuses.
To gain a better understanding, we need to discuss who they are and how they are
related to the corporation.
Shareholders or Stockholders are artificial or natural persons that are legally
regarded as owners of the corporation. Stockholders are bestowed with special privileges
depending on the class of their stockholdings. These rights may include:
1. The right to vote on matters such as elections of the board of directors.
2. The right to propose shareholders resolutions.
3. The right to receive dividends.
4. Pre-emption right which is the right to purchase new shares issued by the
company to maintain its percentage of ownership in the company. This can also
be called right to first refusal.
5. The right to liquidating dividends. That is the right to receive the companys
assets during liquidation or cessation of business.
However, stockholders right to the companys assets come only second to
the rights of the outside creditors of the company. This means that stockholders
typically may receive nothing if after the company is liquidated, there is not
enough money to pay its creditors. Shareholders play an important role in
raising capital for organization, the capital that is otherwise hard to be raised in
a proprietorship or partnership form of business organization.
Shareholders are considered principals, and the directors and officers are
considered agents under the agency theory in governance. As principals, they are
expecting that things that the agents would do would be for the paramount benefit
of the stockholders .Although directors and officers of a company are bound by the
fiduciary duties to act in the best interest of the shareholders, still the shareholders
themselves deserves an independent third party that would attest on what the
management team is doing. This is here where the external auditors would come
into the picture to lend credibility on the report prepared by management.
A bondholder is generally defines as a person or entity that is the holder of a
currently outstanding bond. A bond being a certificate of indebtedness by the
issuing corporation provides some advantages on the holder of the said
instrument. The holder has the complete authority to manage the bond in any way
that he sees fit and advantageous to him. He can sell them for it is an investment
on his part.
There are several advantages to being a bondholder rather than a shareholder of a
company. One of the major advantages is that when the company goes through a
process that involves the liquidation of assets, bondholders and other outside creditors
are given priority over stockholders, which means that the bondholders will receive

payments for the outstanding bonds before any of the stockholders receive theirs in
relation to their outstanding shares of stock. Another advantage is that bonds are not
exposed to the fluctuation of interest rates because whatever is the agreed interest rate
when the bonds were issued it will be the one to be used throughout the life of the
bonds. Interest rate is nailed so the bondholder need not worry. There is an element of
predictability of income.
The bondholder will receive regular interest payments during the life of the bond
computed at face value multiplied by the interest rate. This interest payment usually
takes place every six months and will continue to go on until the maturity of the bond.
Typically, the life of a bond would take as short as 5 years as long as 25 years. The
bondholder has a guaranteed return of the principal at some point in the future. This
makes investment in bonds rewarding on the part of the investor who can afford to have
their money in the hands of the investor for longer periods of time.
Board of Directors
BOD refers to the collegial body that exercises the corporate powers of all
corporations formed under the Corporation Code (SEC Code of Corporate Governance). It
conducts all business and controls or holds all the assets of such corporations. This body
is formed by the stockholders and they will act as the governing body of the corporation.
The BOD will be headed by the chairman of the board who is considered as the most
influential person in the corporation. The boards activities are determined by the
powers, duties and responsibilities delegated to it or conferred on it by an authority.
These issues are typically detailed in the corporations by-laws. The by-laws normally
specify the number of members of the board. It may also contain matters such as how
the board members are to be chosen including the specifics on when and where they are
going to meet to discuss things concerning the operation of a corporation.
Duties of the Boards of Directors
governing the organization by establishing broad policies and objectives;
Examples of these broad policies are as follows: investment policies that will
answer the question as to where to put excess money for additional revenue purposes;
diversification policies that will answer the question as to what type businesses that the
corporation will be getting into as additional lines of business in the near future.

Selecting, appointing, supporting and reviewing the performance of the chief

As stewards of the corporation, the board of directors is expected to be with
the chief executive in latters direct or indirect dealings with the corporation.

Ensuring the availability of adequate financial resources.

It is expected from the board that the survival and financial healthy
functioning of the entity will be on the top of their agenda. With the
coordination of people from the finance department, BOD has to make
certain that funds are available to finance the day-to-day activities of the

Approving annual budgets

Another responsibility of board of directors is to approve the annual
budget,which can be described as the reflection of organizational program
and plan into financial terms. The annual budget will more or less define the
operations of the corporation at any given year.

Accounting to the stakeholders the organizations performance

One of the most critical duty of the board of directors is to account for the
entitys performance to its stakeholders, more importantly, to the
shareholders who are the owner of the corporation. They need to inform
every stakeholder what went on at any particular given period. This can be
accomplished by providing the report on financial highlight, short and longterm plans, material investments during the period, including the financial
statements duly audited by an independent auditing firm.
International corporations have several categories depending on the
business structures, investment, and product/service offerings. Multinational
Companies (MNC) and Transnational Corporation (TNC) are two of these
categories. Both MNC and TNC
Are enterprises that manage production or delivers services in more than
one country. They are characterized as business entities that have their
management headquarters in one country, known as the home country, and
operate in several other countries, known as host countries. Industries such
as manufacturing, oil, mining, agriculture, consulting, accounting,
construction, legal, advertising, entertainment, hotels, banking and
telecommunications are often run through TNCs and MNCs.

Multinational corporations (MNC) have investment in other countries, but do not

have coordinated product offerings in each country. They are more focused on adapting
their products and service to each individual local market. Well-known MNCs are mostly
consumer goods manufacturers and quick service restaurants like Unilever, Proctor &
Gamble, McDonald's and 7-11.
Transnational corporation (TNC) has been technically defined by the United Nations
Commission on Transnational Corporations and Investment as "enterprises which own or
control production or service facilities outside the country in which they are based."
A transnational corporation is any corporation that is registered and operates in
more than one country at a time. A transnational has its headquarters in one country and
operates wholly or partially owned subsidiaries in one or more other countries. The
subsidiaries report to the central headquarters.
Compared with MNCs, transnational corporations are much more complex firms.
They have invested in foreign operations, have a central corporate facility but give
decision-making. R&D and marketing powers to each individual foreign market. Most of
them come from petroleum, I.T, consulting, pharmaceutical industries among others.
Examples are Shell, Accenture, Deloitte and Roche.

Many of them are owned by a mixture of domestic and foreign stockholders. Most
TNCs and MNCs are massive with budgets than outweigh smaller nations' gross domestic
product (GDP). For example, the combined 2011 GDP and sales revenues of top
corporations (World Bank and Fortune Global 500) showed that the sales revenues of
Royal Dutch Shell, Exxon Mobil, Wal-Mart Stores, BP and Sinopec Group was ranked 25th,
26th, 27th, 29th and 30th respectively.
Thus, TNC and MNC alike are highly influential to globalization, economic and
environmental lobbying in most countries. Because of their influence, countries and
regional political districts at times tender incentives to MNC and TNC in form of tax
breaks, pledges of governmental assistance or improved infrastructure, political favors
and lenient environmental and labor standards enforcement in order to be at an
advantage from their competitors. Also due to their size, they can have a significant
impact on government policy, primarily through the threat of market withdrawal. They
are powerful enough to initiate lobbying that is directed at a variety of business concerns
such as tariff structures, aiming to restrict competition of foreign industries.
Corporations have various motives for establishing a corporate presence in other
countries. One possible motive is a desire for growth. A corporation may have reached a
plateau meeting domestic demands and anticipate little additional growth. A new foreign
market might provide opportunities for new growth.
Other corporations desire to escape the protectionist policies of an importing
country. Through direct foreign investment, a corporation can bypass high tariffs that
prevent its goods from being competitively priced. For example, when the European
Common Market (the predecessor of the European Union) placed tariffs on goods
produced by outsiders, US corporations responded by setting up European subsidiaries.
Two other motives are more controversial. One is preventing competition. The most
certain method of preventing actual or potential competition from foreign businesses is
to acquire those businesses. Another motive for establishing subsidiaries in other nations
is to reduce costs, mainly through the use of cheap foreign labor in developing countries.
A transnational corporation can hold down costs by shifting some or all of its production
facilities abroad.
Transnational corporations with headquarters in the United States have played an
increasingly dominant role in the world economy. This dominance is the most
pronounced in the developing countries that rely primarily on a narrow range of exports,
usually primary goods. A transnational corporation has the ability to disrupt traditional
economies, impose monopolistic practices, and asserts a political and economic agenda
on a country.
Another concern with transnational corporations is their ability to use foreign
subsidiaries to minimize their tax liability. The Internal Revenue Service (IRS) must
analyze the movement of goods and services between a transnational companys
domestic and foreign operations and then assess whether the transfer price that was
assigned on paper to each transaction was fair. IRS studies indicate that US transnational
corporations have an incentive to set their transfer price so far as to shift income away
from the United States and its higher corporate tax rates and to shift deductible
expenses into the United States. Foreign-owned corporations doing business in the

United States have a similar incentive. Critics argue that these tax incentives also
motivate US transnational corporations to move plants and jobs overseas.
Company Overview: Walt Disney Company
The Walt Disney Company, together with its subsidiaries and affiliates, is a leading
diversified international family entertainment and media enterprise with five business
segments: media networks, parks and resorts, studio entertainment, consumer products
and interactive media.
Media Networks
Media networks comprise a vast array of broadcast, cable, radio, publishing and
digital businesses across two divisions the Disney/ABC Television Group and ESPN Inc.
In addition to content development and distribution functions, the segment includes
supporting headquarters, communications, digital media, distribution, and marketing
The Disney/ABC Television group is composed of the Walt Disney Companys global
entertainment and news television properties, owned television station group, and radio
business. This includes the ABC Television Network, ABC owned television station group,
ABC entertainment group, Disney Channels worldwide, ABC family as well as Disney/ABC
Domestic Television and Disney Media Distribution. The Companys equity interest in A&E
Television network, Music and Fusion round out the groups portfolio of media businesses.
Parks and Resorts
When Walt Disney opened Disneyland on July 17, 19.., he created a unique
destination built around storytelling and immersive experiences, ushering in a new era of
family entertainment. More than 55 years later, Walt Disney Parks and Resorts (WDP&R)
has grown into one of the worlds leading providers of family travel and leisure
experiences, providing millions of guests each year, with the chance to spend time with
their families and friends, making memories that will last forever.
At the heart (WDP&R) are five world-class vacation destinations with 11-theme parks and
44 resorts in North America, Europe, and Asia, with a sixth destination currently under
construction in Shanghai, WDP&R also includes the /Disney Cruise Line with its four
ships--- the Disney Magic, Disney Wonder, Disney Dream, and Disney Fantasy. Disney
Vacation Club with 12 properties and approaching a total of 200,000 member families,
and Adventures by Disney which provides guided family vacation experiences to
destinations around the globe.
The Walt Disney Studios
For over 90 years, The Walt Disney Studios has been the foundation on which the
Walt Disney Company was built. Today, the studio brings quality movies, music, and
stage plays to consumers throughout the world. Feature films are released under the
following banners: Disney, including the Walt Disney Animation Studios and Pixar
Animation Studios, Disney Nature, Marvel Studios, Lucasfilm, and Touchstone Pictures,
the banner under which live-action films from DreamWorks studios are distributed. The
Disney Music Group encompasses the Walt Disney Records and Hollywood Records
Labels as well as Disney Music Publishing. The Disney Theatrical Group produces and
licenses live events, including Disney on Broadway, Disney on Ice and Disney Live!

Disney Consumer Products

Disney Consumer Products (DCP) is the business segment of The Walt Disney
Company (NYSE:DIS) and its affiliates that delivers innovative and engaging product
experiences across thousands of categories from toys and apparel to books and fine art.
As the worlds largest licensor, DCP inspires the imaginations of people around the world
by bringing the magic of Disney into consumers' homes with products they can enjoy
year-round. DCP is comprised of three business units: Licensing, Publishing and Disney
Store. The licensing business is aligned around five strategic brand priorities: Disney
Media, Classics & Entertainment, Disney & Pixar Animation Studios, Disney Princess &
Disney Fairies, Lucasfilm and Marvel. Disney Publishing Worldwide (DPW) is the world's
largest publisher of children's books, magazines, and digital products, and also includes
an English language learning business, consisting of over 40 Disney English learning
centers across China and a supplemental learning book programs. DPWs growing library
of digital products includes best-selling eBook titles and original apps that leverage
Disney content in innovative ways. The Disney Store retail chain operates across North
America, Europe and Japan with more than 350 stores worldwide and is known for
providing consumers with high-quality, unique products.
Disney Consumer Products (DCP) is the business segment of The Walt Disney
Company (NYSE:DIS) and its affiliates that delivers innovative and engaging product
experiences across thousands of categories from toys and apparel to books and fine art.
As the worlds largest licensor, DCP inspires the imaginations of people around the world
by bringing the magic of Disney into consumers' homes with products they can enjoy
year-round. DCP is comprised of three business units: Licensing, Publishing and Disney
Store. The licensing business is aligned around five strategic brand priorities: Disney
Media, Classics & Entertainment, Disney & Pixar Animation Studios, Disney Princess &
Disney Fairies, Lucasfilm and Marvel. Disney Publishing Worldwide (DPW) is the world's
largest publisher of children's books, magazines, and digital products, and also includes
an English language learning business, consisting of over 40 Disney English learning
centers across China and a supplemental learning book programs. DPWs growing library
of digital products includes best-selling eBook titles and original apps that leverage
Disney content in innovative ways. The Disney Store retail chain operates across North
America, Europe and Japan with more than 350 stores worldwide and is known for
providing consumers with high-quality, unique products.
The Malaysian High Level Finance Committee Report on Corporate Governance
defined corporate governance as follows:
Corporate governance is the process and structure used to direct and manage the
business and affairs of the company towards enhancing business prosperity and
corporate accountability with the ultimate objective of realizing long-term shareholder
value while taking into account the interests of other stakeholders.

and in turn become a source of their competitive advantage. Good reputation is just one
example to these intangibles which could largely predict the future of the business.
Better relations with employees engender employees commitment. Good relations with
customers and suppliers complete the full circle of strong alliances.
Conscious Consideration of Interests of Other Stakeholders
When a company meets the objective of increasing the shareholder value, it will have
greater internally-generated resources in improving its commitment in meeting its
environmental, community and social obligations, it can pay taxes well, reward, train,
and retain key staff, and enhance employee satisfaction. A key focus area is companys

human capital, which is a lead indicator of success (Principle 1, Corporate Governance

Principle, ADB and Hermes Pension Management).
Transparency is vital with respect to good governance due to critical nature of
reporting financial and non-financial information. The aim includes maintaining investor,
consumer and other stakeholders confidence. The lack of dedication to corporate
governance policies particularly those related to transparency will drive home the point
that the company is unbalanced and the leadership is not incorporating it to the highest
level of truthfulness. Failure on transparency issues could lead to many things, scaring
off investors is just one of them, being singled out by the authority is another which
could mean the watchful eyes of the agencies will be focused on the company and many
other uncomfortable scenarios which no company wants to be in.
Information is the currency of democracy according to Thomas Jefferson.
Transparency is a thing of huge concern in government setting since it entails giving out
of information. It is crucial because nearly all the decisions of government officials are in
the interest of the public. Transparency lessens the likelihood of nepotism, corruption,
favoritism and the likes. Shortage of information about the how the government agencies
functions can make it easy to corrupt officials to cover their tracks. It can be said that the
most corrupt countries are the least transparent. Sunshine has its cleansing properties;
so let the light in.
Accountability is the recognition and assumption of responsibility for the decisions,
actions, policies, administration, governance and implementation of programs and plans
of the corporate people involved, including the obligation to report, explain and be
answerable for its resulting consequences. It is acknowledging and taking charge for and
being transparent about the impacts of the companys policies, decisions, actions,
products and its associated performance.
It is based on the premise that an accountable organization will take action to:
Set a policy based on a comprehensive and balanced understanding and
response to material stakeholders issues and concerns; the emphasis on this
premise is the overall broad philosophy and operating style of the entity itself.
Set goals and standards against which strategy and associated performance
can be measured and evaluated. This highlights the deliverables by the people
to the organization.
Disclose credible information about strategy, goals, standards and performance
to those who base their actions and decisions on this information. In this way,
there will be goal congruence in the organization.
Recall that the above premises are actually the fundamental objectives of corporate
governance: (1) improvement of stakeholders value and (2) conscious consideration of
the interests of other stakeholders.
Prudence is defined within the Code of Corporate Governance as care, caution and
good judgment as well as wisdom in looking ahead. It is the management committee

which is in corporate setting, the board of director, who will be the body responsible in
safeguarding the interests of the organization through good planning and management
of finances and other resources of the organization.
To put it into perspective, Arthur Levitt (former chairman of the US Securities &
Exchange Commission) once said, If a country does not have a reputation for strong
corporate governance practices, capital will flow elsewhere. If investors are not confident
with the level of disclosure, capital will flow elsewhere. If a country opts for lax
accounting and reporting standards, capital will flow elsewhere. All enterprises in that
country suffer the consequences. From investors perspective a simple question can be
raised, will you invest in a region or a country the track record of which in governance is
questionable? If yes, how long?
It is a well-established reality that investors would behave differently in settings in
which good governance, both in political and corporate setting, is not seriously practiced.
Investors concern will be more on short-term prosperity instead of long-term stability.
There are many countries in the world where investors are so speculative. One of
evidences of these speculative behaviours are the fact that they are now more flexible in
terms of location. For instance, HSBC, in Hong Kong, has a collapsible building; that is, it
can be dismantled, shipped out, and assembled at a place of choice. A better example is
in utility services, there was a time in Nigeria when utility companies providing power are
having their main supply of power in barges for them to easily get out of the country if
something goes wrong.
It can be deduced that good governance immeasurably benefits not only a specific
company or industry but also the country. The following are the specific benefits of good
Reduced Vulnerability
Adopting good corporate governance practices leads to an improved system of
internal control. This leads to greater accountability, protection of corporate resources
and eventually, better profit margins. Good corporate governance practices will also
pave the way for probable future development, diversification, including the capability to
attract investors, both sourced nationally and abroad. Good corporate governance will
also reduce the cost of loans and credits for corporations since companies with good
governance can be considered low-risk companies in the eyes of debt investors.
Embracing principles of good corporate governance can also play a role in
enhancing the corporate value of companies. This leads to easy access to capital in
financial markets which helps the company survive in an even more competitive
environment. Good corporate governance will also make the company more attractive in
open market. This attribute will be beneficial and will place the company at the finer end
of the bargaining in times when strategic alliances are needed. Examples of these
strategic alliances are mergers, acquisitions, corporate absorptions and buy outs,
partnerships, joint ventures and other risk mitigating initiatives.
There are a good number of benefits when an entity embraces good corporate
governance, one of which is the company need not spend more resources in compliance

with the regulatory and other financial institutions necessary since all these things are
already integrated in companys operating approach.
Companies that are known for good governance practices do not need to sell
themselves that hard for the investors to fuse in their investments either as equity or as
debt investors. In the context of investment, everything could raise and fall in credibility
and reputation. When a company is credible, investors trust comes next, where
investors trust is in, money follows, when there is money, there is flexibility. It is in
having that flexibility in a competitive world that could spell out the difference between
failure and success.
Observed evidence and studies conducted in recent years back the idea that it
pays to have good corporate governance. It was found out that more than 84%
of the global investors are willing to pay a higher price or a premium for the
shares of a well-governed company over one considered poorly governed given
all financial figures comparably equal. The issue is reliability of company
provided-information. This is one convincing fact that embracing corporate
governance principles and practices affects corporate financial and nonfinancial value of the enterprise.
In traditional (neo-classical) approach, corporation is treated as a single entity. It
is often called holistic approach. It is one of the features of a sole proprietorship.
Owner-managers have no conflicts of interest. In big companies, we almost
always have the separation of owners and managers. Financial manager should
work in the best interests of the owners by taking actions that increase the
value of the company. However, weve also seen that in large corporations
ownership can be spread over a huge number of stockholders.
If we assume that stockholders buy stocks because they gain financially, then
the answer is obvious, good decisions increase the value of the stock and bad
decisions decrease the value of the stock. It follows that the financial manager
acts in the stockholders best interest by making decisions that increase the
value of stocks. The goal of financial management is to maximize the correct
value per share of the existing stock.
The separation of stockholders and management has some advantages. It
allows share ownership to change without interfering so much with the
operations of the business. It allows the company to hire professional managers.
This dispersion of ownership means that managers, not owners can control the
firm. But, it brings problems if the managers and owners objectives are not the
same and whether management really acts in the best interest of the owners.

The goal of maximizing the value of the stock avoids the problems associated
with the sometimes conflicting parochial goals. There is no ambiguity in the
criterion and there is no short run and long run issue. We explicitly mean that
our goal is to maximize the current stock value. By this we mean that they are
only entitled to what is left to the employees, suppliers and creditors (and
anyone else with a legitimate claim) are paid their due. If any of these groups
go unpaid, the stockholders get nothing. Because the goal of financial
management is to maximize the value of stocks, we need to learn how to

identify those investments and financing arrangements that favorably impact

the value of the stock.
Agency Relationship and Costs
The connection between owners and managers is called an principal-agent problem
and the conflict is called an agency relationship. Such relationship exists whenever
someone (the principal) hires another (the agent) to represent his interests. The
shareholders are the principals; the managers are their agents. Shareholders want
management to increase the value of the firm, but managers may have their own axes to
grind or nests to feather. Agency costs are incurred when (1) managers do not attempt
to maximize firm value and (2) shareholders incur costs to monitor the managers and
influence their actions. More generally, the term agency costs refers to the costs of the
conflict of interest between stockholders and management. Of course, there are no costs
when the shareholders are also the managers.
Agency costs can be indirect or direct. An indirect agency cost is a lost opportunity
such as the one we have just described. Direct agency costs come in two terms. The first
type is a corporate expenditure that benefits management but costs the stockholders.
Perhaps, the purchase of a luxurious and unneeded corporate jet would fell under this
heading. The second type of direct agency cost is an expense that arises from the need
to monitor management actions. Paying outside auditors to assess the accuracy of
financial statement information could be one example.
Goals of Financial Management
Assuming that we restrict ourselves to for profit businesses, the goal of financial
management is to make money or add value for the owners. This goal is a little vague, of
course, so we examine some different ways of formulating it in order to come up with a
more precise definition. Such a definition is important because it heads to an objective
basis for making and evaluating financial decisions.
If we were to consider possible financial goals, we might come up with some ideas
like the following:
1. To survive
2. To avoid financial distress and bankruptcy
3. To beat the competition
4. To maximize sales or market shares
5. To maximize costs
6. To maximize profits
7. To maintain a steady earnings growth.
What would be the management goal if they have no control at all? One of main
answer comes from outside the mainstream economy. It is the idea that mangers prefer
the company to be bigger than more profitable. So mangers left to themselves would
tend to maximize the amount of resources over which they have control or, more
generally, corporate power or wealth. This goal could lead to an overemphasis on
corporate size or growth.
Our discussion shows that management may tend to overemphasize organizational
survival to protect job security. Also, management may dislike outside interference, so
independence and corporate self-sufficiency may be important goals.

Do Managers Act in the Stockholders Interest?

Principal-agent problems would be easier to resolve if everyone had the same
information. That is rarely the case in finance. Managers, shareholders, and lenders may
all have the same information about the value of a real or financial asset, and it may be
many years before all the information, the perfect information is revealed. Financial
managers need to recognize these information asymmetries and find ways to reassure
investors that there are no nasty surprises on the way.
Whether managers will, in fact, act in the best interests of stockholders depends
on two factors, first, how closely the management goals aligned with stockholder goals?
This question relates to the way managers are compensated. Second, can management
be replaced if they do not pursue stockholders goals? This issue relates to the control of
the firm. As we will discuss, there are a number of reasons to think that even in the
largest firms, management has a significant incentive to act in the interest of the
Managerial Compensation
Management will frequently have a significant economic incentive to increase
share value for two reasons. First, managerial compensation, particularly at the top, is
usually tied to financial performance in general and enhancements to share value in
particular. For example, managers are frequently given the option to buy stocks at a
bargain price. The more the stock is worth, the more valuable is this option. In fact,
options are increasingly being used to motivate employees of all types, not just top
The second incentive managers have relates to job prospects. Better performers
within the firm will tend to get promoted. More generally, those managers who are
successful in pursuing stockholder goals will be in greater demand in the labor market
and thus command higher salaries. In fact, managers who are successful in pursuing
stockholder goals can reap enormous rewards.
Control of the Firm
Control of the firm ultimately rests with stockholders. They elect the board of
directors who in turn, hire and fire the management. An important mechanism by which
unhappy stockholders can to replace existing management is called a proxy fight. A
proxy is the authority to vote someone elses stock. A proxy fight develops when a group
solicits proxies in order to replace the existing board and thereby replace existing
Another way that management can be replaced is by takeover. Those firms that
are poorly managed are more attractive as acquisitions than well-managed firms
because a greater profit potential exists. Thus, avoiding a takeover by another firm gives
management another incentive to act in the stockholders interests.
Management and stockholders are not the only parties with an interest in the
firms decisions. Employees, customers, suppliers and even the government all have a
financial interest in the firm. Taken together, these various groups are called
stakeholders in the firm. In general, a stakeholder is someone other than a stockholder
or creditor who potentially has a claim on the cash flows of the firm. Such groups will
also attempt to exert control over the firm, perhaps to the detriment of the owners.


Agency theory suggests that the firm can be viewed as a loosely defined contract
between resource providers and the resource controllers. It is a relationship that came
into being occasioned by the existence of one or more individuals, called principals,
employing one or more other individuals, called agents, to carry out some service and
then entrust decision-making rights to the agents. Agency theory argues that in the
modern corporation, in which share ownership is publicly or widely-held, managerial
actions sometimes depart from those required to maximize shareholder returns. In
agency theory language, the owners are principals and the managers are agents, and
there is an agency loss necessary, the extent of which, is the benefits that should have
accrued to the owners had the owners been the ones who exercised direct control of the
The agency loss can be reduced through the installation of some mechanism like
providing financial incentives for executives and managers for their efforts of putting
priority on maximizing the shareholders wealth. This system includes shares options for
senior executives at discounted prices. This way the senior executives interest will be
aligned to that of the shareholders. Other similar systems tie executive compensation
and levels of benefits to the shareholders returns and have part of executive
compensation deferred to the future. This is to provide executive rewards on for the longrun value maximization of the corporation. This system would deter short-run executive
mentality of harvest and enjoy while available and other actions which harms
corporate value.
In similar terms, the related theory of organizational economics, is concerned in
anticipating managerial opportunistic behavior which includes policy skirting and
indulging in excessive privileges at the expense of shareholder interests. The key
structural mechanism to restrain such managerial opportunism is the board of
directors. This body should provide a monitoring of managerial actions on behalf of
shareholders. Such impartial review will only take place when the chairman of the board
is independent of executive management. Where the chief executive officer is also
chairman of the board of directors, the objectivity of the board will possibly be
compromised. Agency and organizational economics theories predict that when the CEO
also holds the dual role of chair, then the interests o f the owners will be sacrificed to a
certain degree in favour of management, that is, there will be managerial opportunities
and agency loss. This loss is way above the owners normal benefits had they been the
ones performing the agents functions of running the day-to-day corporate activities.
As said earlier, corporation is a form of business organization where a principalagent relationship exists, the shareholder being the principal and the board of directors,
executive and managers as the agents. This unique relationship also presents a very
unique effect in the context of corporate governance. The following are the effects of
agency in corporate governance.
Conflict of Interest
Principal and agent have diverse interests, and the separation of ownership and
control provides potential for different interests to surface. Shareholders lack direct
control of corporations, especially those which are publicly-traded corporations. Board of
directors, on the other hand, has the direct control on the activities of these enterprises
being the ones entrusted by the shareholders to decide on corporate affairs. In the above

situation, it can never be avoided that sometimes problems arise when the agent makes
decisions that result in the quest of goals that conflict with those of the shareholders.
Managerial Opportunism
Managerial opportunism refers to the act by the agent of taking advantage on
things that are within his control by virtue of the rights given to him by the principal.
Sometimes, the uncalibrated and unchecked enjoyment of corporate resources and
capabilities contradicts the idea of increasing the shareholders and firms value.
Excessive monetary benefits like bonuses and privileges, routine efforts of trying to
secure comfortable position like undue diversification to increase compensation and to
reduce employment risk, are just some of examples of managerial opportunism.
Incurrence of Agency Cost
As mentioned earlier, agency presents conflicts of interest because agents might
do things which are detrimental to the maximization of shareholders wealth. To counter
this, the principal needs to sacrifice resources for him to closely monitor and control
agents behaviour. These costs are called agency cost, which refers to the sum of
incentive costs, supervision and monitoring costs, enforcement costs and other agency
losses incurred by principals in trying to ensure that agents operating style is consistent
with the aim of maximizing the shareholders and the firms value.
Shareholder Activism
Shareholders can call together to discuss the corporations'. They can vote as a
block to elect their candidates to the board. Institutional activism will also offer on
companies with good corporate governance since this type of activism carries with it the
capability to give incentives when agents perform well. Another issue that is connected
to shareholder activism is share ownership. Having some board members, executives
and managers that are at the same time shareholders may cause alignment of interest
with other plain shareholder. This is especially applicable with institutional investors. The
increasing pressure and power of institutional owners to discipline ineffective top-level
managers will now definitely influence the firm's choice of strategies to be employed in
internal governance.
Managerial Defensiveness
This is in relationship to issues of takeovers whereby management will employ
some tactics to discourage takeovers and buyouts. These tactics may involve asset
restructuring via termination of investments, changes in financial restructuring of the
firm such as acquisition of own shares in open market, presenting bad takeover scenarios
to the shareholders for them not to approve takeover. Normally, in a takeover, the nonperforming executives and managers are dismissed from their jobs. This anti-takeover
tactics are discussed in a different chapter of this book.
Concept of Goal Congruence
Goal congruence is the harmony and alignment of goals of both principal and the
agent which is consistent with the overall objectives of the organization. While it is true
that in agency relations, the presence of self-interested behaviors is a given.
Nevertheless, managers can be encouraged to act as shareholder's best interests by
giving incentives which will compensate them for good performance on one hand at the
same time give them disincentives on their poor performance on another.
Corporate Governance of Oracle Corporation

The board of oracle corporation has throughout its history developed corporate
governance practices to fulfill its responsibility to oracle corporation shareholders. The
corporation and activities of the company's board of directors, the approach to public
disclosures and the availability of ethics and business conduct resources for employees
exemplifies the company's commencement to good corporate governance practices,
including compliance with new standards.
The board has adopted the following corporate and committee guidelines to help
ensure it has the necessary authority and procedures in place to oversee the work of
management and to exercise independence in evaluating oracle corporation's business
operations. These guidelines allow the board to align the interests of directors and
management with those of oracle corporation's shareholders. All guidelines are subject
to future refinement or
changes as the Board may find necessary or advisable for Oracle Corporation in order to
achieve the above objectives.
Oracle continuously applies good corporate governance principles to multiple areas
of the Company in addition to those guidelines. Oracle has had a Code of Ethic and
Business Conduct since 1996.
Pay Dependents on Profit level
When management is rewarded based on the level of profits made, naturally
members of management will make every effort to achieve high profits levels for them to
earn more. This system is the most effective way to increase not only the value of
shareholders wealth but also the value of the firm, both in tangible and intangible
context. The flip side this scheme, however, is that it encourage the use of creative
accounting and reporting practices to attain certain profit objectives. For example, the
infamous corporate scandals, the mark to market accounting used by Enron Corporation
is one of the most glaring of these creative practices.
Share Incentives
This can be done when a company is a publicly-listed company and managers are
given a chance to subscribe shares of the company at a discounted price. Managers will
have something to protect and it can be naturally expected that they will venture into
projects which will improve the firms value. In this system, there is commonality of stake
between the plain shareholders, and those executives and managers that are at the
same time shareholders. Duality of capacities of executives and managers are not
without disadvantages, intricacies on shareholders at the same time agents will be
discussed further in agency problem in a succeeding chapter of this book.
Shareholders Intervention
There is now a visible shift of character of shareholders by a large scale.
Shareholders of today are now more active than before. They now dip their hands more
unlike before when some of them will just wait on what the board will present on the
table. Some shareholders are now active institutional investors who will definitely
exercise a more direct influence over the performance of the enterprise. They are now
taking an active role by scrutinizing performance of the company, and are very swift in
their efforts of lobbying with other small shareholders when they believe poor service or
any mismanagement by the directors is happening.

It is the above characters that will make board, executives, and managers more
connections on the way they manage and decide things. It will make their decisions more
leaning in favour of shareholders knowing that somebody is watching over their
shoulders. Somebody keenly monitoring on the operating philosophies they employ.
Threat of being fired
The shareholders who have ultimate control over of the corporation can take a
straight and hostile approach by threatening the board, executives and managers with
removal from office if they place their personal interests over that of shareholders and
that of maximizing the value of the firm. The increase in numbers of institutional
investors has enhanced the shareholders power to discharge directors since they are
able not only to dominate but also lobby other shareholders in decision making.
Takeover Threat
It is but normal for board, executives, and managers to move heaven and earth to
avoid or discourage corporate takeovers as they are aware that their job would at least
be at risk if not to be lost totally if takeover takes place. To push for goal congruence,
that is to have things in accordance with welfare of shareholders and enhancement of
firms value, the shareholders can easily make a threat to accept takeover proposal if
their set objectives are not met by the agents (board, executives, and managers) in
A Non-Executive Director is a member of the board of directors of the company
who does not take part on the executive function of the management team. This director
is not an employee of the company or connected with it in any other way. He is separate
from the inside directors who are members of the board who also serve or previously
served as executive manager of the company.
Fundamentally the non-executive directors role is to give a meaningful
contribution to the board by providing objective criticism. At present, it is widely
accepted that non-executive directors have an important contribution to make for the
proper administration of companies and, therefore, on the company at a larger context.
Non-executive director should bring an independent judgement to bear on issues of
strategy, performance, and resources including key appointments and standards of
conduct. (Taken from the Cadbury report).
As an outsider, the non-executive director may have an impartial, clearer, and
wider view of external factors affecting the company and its business environment than
the executive directors.
The normal role of an executive director in strategy
development is therefore to offer a creative contribution and to act as a constructive
reviewer in looking at the goals and plans developed by the chief executive and his
executive team.

Non-executive director should continually face and contribute in the development of the
companys long-term goals and visions. Together with the other directors and officers of
the company, he is expected to participate in setting long-term broad operational
principles and policies that benefits the stakeholders in areas that concerns on company
stability, increasing the firms value, and ultimately, In increasing share holders value.
Establishing Networks
One of the important functions of the non-executive director is to represent the
company in some external corporate undertakings. It is the job of the non-executive
director (NxD) to connect the company to the outside world and in the process, gain
benefit from networks of businesses. This network of businesses are no doubt beneficial
to the organization since this could spark certain avenues for alliances which the most
effective way to survive in a very competitive environment
Monitoring Performance
Non-executive directors should take responsibility for monitoring the performance
of executive management, more particularly on matters relating to the progress made
towards realizing the established company strategies. Non-executive directors should not
be concern only on strategy alone. Included in his responsibility is to monitor and
examine the performance of management in meeting agreed goals and objectives of the
company. Succession planning is also part of his responsibilities but taking into
consideration the sensitivity of the matter he should do it more carefully with the
concurrence of the other directors and officers.
It is the duty of the whole board to ensure that the company report properly to its
shareholders, this can be done by presenting a true, fair and real reflection on how the
company was administered at any given time, included in this report is financial
performance and highlights that are deemed necessary, including the assurance that the
internal control systems are in place and monitored routinely and thoroughly. A nonexecutive director has an important role to play in fulfilling this responsibility whether or
not a formal audit committee of the board has been established.
The chief financial officer (CFO) is a corporate officer principally accountable for
managing the financial risks of the corporation. This officer is also responsible for
financial planning and record-keeping, as well as financial reporting to higher
management. He will be the one who will direct the corporations finances. In
corporations large and small, a CFO is needed to handle both the cash inflow and outflow
and to create reports about the corporations spending. Keeping track on the working
capital requirements of the company to meet short-term and daily requirements on
operation are also responsibilities of the CFO.
In large corporations, the primary duties of CFO may be to supervise and manage a
large accounting department, while coming up with ways to maximize profit to the
company. A CFO, might for example, evaluate the way in which employees work to
determine the way to most efficiently get work done for the least amount of money.
These responsibilities however can be shared with other corporate heads or with general
managers or lower level supervisors.
CFOs have different specific roles depending on so many things: industry,
peculiarity, corporate structure, profile of investors (e.g. majority family-owned),

government intervention, and whether the company listed or not both in local stock
exchange or international exchanges. However the following roles cut across corporate
CFOs around the world.
Implements Internal Controls
A CFO will be the one responsible for conveying the important financial controls to
a company. These controls features should the effective administration of cash flow and
overhead expenses, establishing credit policies for customers and working with major
vendors to attain more favorable payment terms, and implementing measures for
assessing and evaluating optimal inventory levels. At a higher level, a CFO should also
develop effective controls that provide supervision against fraudulent activities.
Supervises Major Impact Projects
Outside of implementing and monitoring company controls relating finance, an
effective CFO also handles and supervises those projects that require significant
quantitative and qualitative interpretations and analysis in order to reach an
understanding of the options that are available. For example, a CFO will take
responsibility for developing a companys annual budget, work together with the
business owners and divisions or department managers to ensure that the final financial
product accurately and objectively projects the real requisites of the business. A CFO
might also carry out a meticulous analysis of a companys future capital investment
requirements as a prerequisite in securing additional financing.
Develops Relations with Financing Resources
One of the most important responsibilities of an effective CFO is to institute good
working relationships with banks and other financial institutions that may impact on the
companys ability to finance operations. Specific activities in this area may include
regular meetings with officers of the companys banks(s) to review ongoing operations,
discussing possible future loan transactions, revisiting loan covenants if there is any,
negotiating more favorable terms for bank lines of credit, and discussions with private
investors on how additional capital might be invested into the enterprise.
Advisor to Management
An effective CFO is also an important member of the management teams of some
emerging companies. Because of his financial sharpness and General Business
knowledge, a good CFO van facilitate and help business owners, executives and other
top managers make the substantial connection between a companys operations and its
financial performance that are reflected in the actual figures and also with that of
Drives Major Strategic Issues
A good CFO can also be expected to take part in important role on getting involved
on some major strategic decisions that will have an impact on the companys long term
future. These issues include the hatching of the company acquisition strategy which in
the end would help fuel and boost the companys additional growth. Keeping an eye on
diversification of a particular product lines, business activities, and Portfolio is the part of
CFOs concern. A CFO would also play a significant role in any endeavour the purpose of
which is to seek investment from the public or financial markets especially in times when
company is having an initial public offering.
Risk Manager

The CFO is in the best position to foresee risks considering that they have this rare
perspective on how the company operates. CFO are close to the internal control system
and financial reports which pass through many organizational areas. CFOs are high
risking officer doing real and actual things in the industry. The views are not just only
tree top, their views are real and they are in proximity of hard figures that could back
their decisions
The CFOs viewpoint on risk can be a helpful source to the board of directors and
the CEO as well as other senior officers as they manage the corporate affairs. The CFO
may be in the best position to anticipate high risks transactions and the adverse
consequences of the changing external environment. This unique capability of CFOs
however is only valuable if the CFO is communicating well with the CEO, the board and
the other officers of the organization.
Relationship Role
More often the CFO is the nucleus in an organisation with many connections. The
CFO will work together with the CEO, the board of directors the audit committee, the
internal auditor and the external auditor. Strong verbal and written communication skills
are indispensable if the nucleus is to support the connections effectively. CFO serves the
bridge between these a variety of parties within the organization.
Objective referee
CFOs needs to demonstrate impartiality such as when advising the CEO or the
board of directors on accounting matters. The skill to present important financial issues
is an invaluable resource but it should always be in the context that it is not being done
to favor somebody. CFOs are not valued by board of directors or audit committees on
attributes or tendencies of boosting financial figures with sacrificed transparency.
In consonance with the principle of good corporate governance, board of directors,
audit committees and CEOs need to understand all sides of a financial accounting or
disclosure issues so they can make an informed and rational decision. The CFO can and
should be a trusted adviser in matters of financial reporting.
The audit committee is an essential component in the overall good governance
system. The objectives of this committee should be geared toward carrying out practical
progressive changes in the functions and expectations placed on corporate boards. One
of the fundamental principle of an effective audit committee is that committee should be
independent from the operational aspects of the company. This means that a company's
senior management should not be audit committee members. The senior management
however has to be given the opportunity for important communication with the audit
Understanding the Audit Committee's Responsibilities
An audit committee should be engaged mainly in an oversight function and is
ultimately responsible for the company's financial reporting processes and the quality of
its financial reporting. For the committee to carry out the said responsibilities, the
committee must have a working knowledge on the company's goals and its long term
plans and visions including the issues the company is facing in trying to achieve this
objectives. Examples of issues that audit committee should consider:
-Risk identification and response
-Pressure to manage earnings
- Internal control and company growth.

Risk Identification and Response

To be effective, an audit committee must have an understanding of the risks the
company faces and more importantly, the company's internal control system for
identifying and mitigating those risks. Risks that could affect the company and that the
audit committee should be conscious about include:
External Risk (Independent)
Rapid Technological Changes
Audit committee should always be on the lookout for the company not to be left
behind due to advancement of technology. The new rule in this modern time is embrace
things brought about by technology and be a survivor.
Downturns in the Industry
The product that the company is selling may have passed already its maturity
stage and it is already its way down. The audit committee should have a clear picture of
the "what if scenario" of the entity. A very good example, Nokia, began as a textile
company then went into electronics and then from electronics migrated to wireless
devices (mobile phone) but they missed the next boat.
Unrealistic earnings expectations by analysts
An audit committee is expected to be not just composed and collected but also
less aggressive when it comes to expectations of business outcomes. Audit commitees
should be associated with conservative and realistic information, and thus they should
deal figures from the realist point of view. They should reasonably know how much meat
within a cup of soup because this would be the real basis in putting up plans for the
company's future.
Operating/Internal Risk
Recurring organizational changes, turnover of key personnel are some of the
danger signs that the audit committee cannot afford to neglect. Things like these hamper
the operational momentum of the company rendering it slow in its progress in achieving
its vision.
Another internal risk worthy of consideration is the complexities of transactions,
complex organizational structure, swift growth, performance- based compensation that
are excessively inappropriate, exposure to currency differences on foreign currency
denominated loans, and financial results that are abnormally different from that of the
Information and Control Risk
The audit committee, in carrying out its responsibility has to address the following
concerns which are considered as perennial in most organizations: unsuitable control
environment that are sometimes "toned at the top." Another is the lack of sincere
management supervision and inappropriate management override of existing controls
which is by description, the best habitat for abuse. Timeliness is another concern since
information needs to be communicated early enough to the stakeholder for these
information to be useful.

Who is responsible for financial reporting? The responsibility for financial reporting
is vested in three groups;
1. The BOD the companys board of directors including the audit committee
2. Finance and Accounting financial management including the financial auditors
3. Auditor the independent auditors
While it is true that this triumvirate forms a three-legged stool there is a need to
emphasize that the audit committee must take the lead in the financial reporting
process, since the audit committee is the extension of the full board and hence the
ultimate monitor of the process. An audit committee that functions well could definitely
send a strong message and partial assurance to the other stakeholders that the system
is in place and it is protecting the organization both in short and in long-term basis
Auditing is a systematic process by which a competent, independent person,
objectively obtains and evaluate evidence regarding assertions about economic actions
and events to ascertain the degree of correspondence between those assertions and
established criteria and communicate the results to interested users (American
Accounting Association).
Need for external auditor
There is a need for independent auditor because of the apparent separation of
ownership and management. Audit services are used extensively by business
organization to cast away doubts on the information given by the management which
are also generated under its direct control. There exist information risk. Business
structures are becoming more complex which increases the possibility that unreliable
information might be led not only to decision makers but more importantly to the
Factors that contribute to information risk
1. Remoteness of Information Providers to Information Users
This makes first-hand knowledge difficult to obtain by some stakeholders
because they are divorced form management. Complex corporate structures, less
involvement by the shareholders in day-to-day operations or decisions as well as
geographical dispersion are just some of the factors that widen the distance
between the information user and provider.
2. Bias of Information Provider
There is an assumed conflict of interest between the shareholder and
management regarding financial information. Financial statements and other
financial information serve as the report card of management of its stewardships,
the only report card prepared by the one being graded. Having said this,
information may be presented in favor of the provider when his goals are different
with some stakeholders.
3. The Volume of Data
When business grow, possibly thousands if not millions of transactions
are processed daily through the use of sophisticated computer programs or via
manual system. There is this possibility therefore that improperly recorded
information may be buried in the records leaving the overall results inaccurate if
not misleading, trained professionals therefore are needed in the area.

4. Complexities in Transactions
Changing and new relationship in business leads to some innovations
ion accounting and reporting process. Transactions nowadays are getting
complicated and becoming more difficult to record and alone be understood by the
stakeholders. Examples of these are derivatives, futures, multi-level mortgages in
securities, reinsurances, different valuations and other complex transaction in the
financial markets which the board of directors and other decision makers in the
company might venture into.
Auditing is an endeavor of assuring the readers of the financial statements with
confidence in the figures of financial statements. This is highlighted by the accountancy
professions meaning of an audit. Audit of financial statements which is an exercise, the
objective of which is to permit auditors to express an opinion as to whether the financial
statements give a true and fair view of the affairs of an entity at a given period in
accordance with the relevant frameworks and standards (reworded from International
Standard on Auditing (ISA) 2000, Objective and General Principles Governing on Audit of
Financial Statements).
The logic behind this definition is that the auditors opinion will lend and add some
credibility to the financial statements. It is expected that the auditor, as an independent
expert on financial preparation and reporting, should conduct the examination
exhaustively for him to have good backings on the opinion he will be expressing in the
independent audit report.
Auditors Duties
In most countries, the auditor has a legal duty to make a report to the enterprise
on the fact and fairness of the entitys annual accounts. This report should state the
auditors opinion on whether the statements have been prepared in accordance with the
relevant standards more importantly on relevant legislation and whether they present a
true and fair view of the profit or loss at any given period. The responsibility to report on
the truth and fairness of the financial statements rests with the management, the auditor
therefore has a responsibility to form an opinion on certain other matters and to report
any reservations that he has on the reports. In the audit report, these reservations can
be seen in the qualifications of opinion by the auditor.
In the conduct of an audit, the auditor must consider whether the following are
1. Proper accounting records kept by the company.
2. Financial statement figures that agree with accounting records.
3. Adequacy of notes to financial statement and other disclosures necessary.
4. Compliance with relevant laws and standards of financial accounting and
In three (3) of the above, the auditor is impliedly given the right to access to any
information or material that is relevant to examination of the financial statements. In
addition, the auditor has a duty to review the other information issued alongside the
audited financial statements. There is, however, no guarantee that the statements are
free from misstatements and errors, this is partly because the auditor is only required to
form an opinion for him to discharge his duties. This must be understood that the audit is
not designed to discover errors, irregularities and fraud. Activities in external auditing are

only designed to form an opinion, not a conclusion; it can only give reasonable
assurance, not absolute assurance.
Based on the preceding terms, it can be summarized that the external auditor is
there to attest to the data and other information prepared by the management in
accordance with some legal and other established criteria. The criteria in the Philippine
setting are provided by Philippine Financial Reporting Standards and other standards.
The overall role of the external auditor is to express an opinion on the financial
statements provided by the management. This means that an external auditor lends
credibility to financial statements which are to be used by shareholders and other
Supplemental Readings
Corporate Governance Awards
Received by Premier Philippine Corporations
Manila Water
Source: www.manilawater.com
Corporate Governance Asia Annual Recognition Awards 2009
Manila Water was cited as one of the best in Corporate Governance in the
Philippine in the Corporate Governance Asia Annual Recognition Awards for 2009. This is
the third straight year that Manila Water was cited by Corporate Governance Asia. The
awarding was held last June 26, 2009 at JW Marriott Hotel in Hong Kong.
Gold Award for ICDs CorpGov Scorecard Project
For the third straight yea, Manila Water has been recognized as one of the best in
Corporate Governance in the last Corporate Governance Scoreboard Institute of
Corporate Directors (ICD). Given in the last ICDs Annual Dinner last may 27, 2009, the
Gold Award was received by Manila Waters president Jose Rene Almendras.
The Asset Magazines Annual Governance Index
Manila Water has been named the best company in the Philippines, in terms of
Corporate Governance in The Asset Magazines annual Corporate Governance Index
2008. The results were published in the November 2008 issue of the asset.
The publications basis for corporate governance standards is The Combined Code
Principles of Good Governance and Code of Best Practice derived by the committee on its
final report and from the Cadbury and Greenbury Reports. It also based it on the White
Paper on Corporate Governance in Asia produced by the Organization of Economic
Cooperation and Development (OECD). As in previous years, The Asset invited
companies to present their annual results in complying with best practices.
Corporate Governance Asia Annual Recognition Awards 2008
Manila Water was one of the recipients of the Corporate Governance Asia Annual
Recognition Awards for 2008. This marks the second straight year that Manila Water was

cited by Corporate Governance Asia. This year, Corporate Governance Asia included the
following items to its criteria for the award:
Rights of shareholders
Disclosure and transparency
Board and management discipline

Audit and remuneration committee

Independent, non executive directors
Public impression
Investor relations
Corporate governance as a business proposition
Corporate social responsibility and environmental practices

2007 Corporate Governance Scorecard Project

Manila Water received two awards at the Institute of Corporate Directors (ICD)
Annual Dinner on May 28, 2008. Manila Water was among the twenty companies given
an award for gathering the highest ratings in the 2007 Corporate Governance Scorecard
Project, jointly conducted by the ICD, Philippine Stock Exchange and Securities and
Exchange Commission among 134 publicly-listed companies. From its average rating of
71% in 2006 Corporate Governance Scorecard Project where Manila Water ranked 7 th out
of 64 listed companies, Manila Waters rating jumped to 85% in 2007.
Manila Water was also one of 11 companies to receive a citation for its active
participation in the ICD Companies Circle, composed of publicly-listed companies who
have committed to strengthen corporate governance practices in the country. The
Companies Circle meets monthly and undertakes projects such as the review of the SEC
Code of Corporate Governance and the SEC Manual of Corporate Governance.
Corporate Governance Asia Annual Recognition Awards 2007
Manila Water was one of the recipients of the Corporate Governance Asia Annual
Recognition Awards in 2007. The award was given to Manila Water in recognition of its
continuing commitment of the development of corporate governance in the region.
Corporate Governance Asia is the only journal currently specializing in corporate
governance in the region. It evaluated the performance of key companies and listed
those that have contributed significantly to the overall development of corporate
governance during the past year. In the Philippines, seven companies were chosen.
Along with Manila Water, Ayala Corporation, Globe, MetroBank, PLDT, San Miguel
Corporation and SM Investments were also cited.
According to Corporate Governance Asia, the annual recognition awards recognize
Asian companies that demonstrate excellence in corporate governance with Asian values
and spirit.

The criteria for the award are as follows:

The awardee must have a previous publicly-acclaimed track record for corporate
governance (This can come in the form of other CG-related awards).

The awardee must have been involved in a specific publicly-known

activity/activities (legislation, surveys, studies, etc.) directly related to improving or
enhancing the standards of corporate governance during the past 12 months; and
The awardee must have implemented significant and specific CG-related reforms
during the past 12 months.

2007 Asiamoney Award

In January 2007, Manila Water was voted 2nd Best Over-all for Corporate
Governance in the Philippines for 2006 in a survey conducted by Asiamoney. The criteria
for the survey were disclosure and transparency, responsibilities of management and the
board of the directors, shareholders rights and equitable treatment, and investor
relations. Manila Water considered the high rating as a significant achievement for the
company especially since it was evaluated only months after its listing in March 2006.
Further, Manila Water is the only medium-sized company among the seven Philippine
awardees. The rest of the awardees were large-cap stocks.
Asiamoney, a leading financial publication, conducted the survey among CEOs,
CFOs, and senior executives from fund management and specific fund companies in the
Asia-Pacific region, UK, and USA, as well as heads of research and senior analysts in
brokerages across the region. Asiamoney received a total of 88 valid responses from 76
different institutions. Seventeen Philippine companies were cited in the survey, with
Manila Water coming after PLDT. Manila Waters parent company Ayala Corporation was
voted third best.
2006 Corporate Governance Scorecard Project
Manila Water racked seventh in the 2006 Corporate Governance Scorecard Project
for Publicly-Listed Companies conducted by the institute of Corporate Directors. This
marked the first time that Manila Waters was rated by the Scorecard Project as it was
listed only on March 2006, making ranking so high even more of an achievement.
The Scorecard Project involves an annual rating of the corporate governance practices of
local publicly-listed companies. 68 companies listed companies were rated for 2006. The
project was conducted under the suspires of the Capital Markets Development Council
and the Presidents Governance Advisory Council. The criteria for the project are rights of
shareholders, equity of shareholders, role of stakeholders, disclosure and transparency,
and board responsibility.
SM Investments
Source: www.sminvestments.com
Corporate Governance Asia Annual Recognition Awards
In recognition of its continuing commitment to the development of corporate
governance in the region, SMIC has been chosen as one of the recipients of the
Corporate Governance Asia Annual Recognition Awards for two successive years, 2007
and 2008. Corporate Governance Asia is the only journal currently specializing in
corporate governance in the region. The annual recognition awards recognize Asian
companies that demonstrate excellence in corporate governance with Asian values and
spirit. To this end, Corporate Governance Asia evaluated the performance of listed
companies to determine which companies have contributed significantly to the over-all
development of corporate governance for a given year. In the Philippines, seven
companies were chosen in 2007 and eight in 2008.

In 2007, the criteria for the award were as follows:

The awardee must have a previous publicly-acclaimed track record for
corporate governance (This can be in the form of either CG-related awards);
The awardee must have been involved in specific publicly-known
activity/activities (legislation, surveys, studies, etc.) directly related to
improving or enhancing the standards of corporate governance during the past
12 months; and
The awardee must have implemented significant and specific CG-related
reforms during the past 12 months.

2008, Corporate Governance Asia included the following criteria for the award:
Rights of shareholders
Disclosure and transparency
Board and management discipline
Audit and remuneration committee
Independent, non-executive directors
Public impression
Investor relations
Corporate governance as business proposition
Corporate social responsibility

The Asset
The SMIC has been cited as 2nd Best in Corporate Governance in the Philippines in
2008 and 3rd Best in 2007 by The Asset, one of Asias leading finance monthly
publications circulated worldwide, mostly to major institutional investors invested in Asia.
The Asset conducted a survey among listed companies in the Philippines and evaluated
each companys financial highlights, board of directors, Audit Committee, Risk
Management Committee, corporate social responsibility, investor relations and digital
communications. The Asset also consulted institutional investors, sell-side analysts and
its board of editors through The Asset Benchmark Surveys or in the course of the Triple A
According to The Asset, The Best in Corporate Governance Award is given to the
companies that have gone beyond regulatory compliance to promote a corporate culture
that is transparent, investor-friendly and that takes cognizance of the rights of minority
shareholders. The award is also given to companies who have taken the lead in engaging
with the community they operate within in a socially responsible way.
Finance Asia
SMIC was awarded 4th Most Commitment to Corporate Governance in the
Philippines in 2007 and 8th in 2008. Finance Asia is one of the regions leading financial
publishing companies based in Hong Kong and covering Asias financial and capital
markets. It conducts an annual Best Managed Company poll among investment
professionals and financial analysts. Respondents are asked to rank companies in 10
Asian countries on the basis of over-all management, corporate governance, investor
relations and their commitment to strong dividend payments.

On the space provided, supply the word/phrase being described and/defined:
1. ____________As attribute of the corporation which means that, a corporation continue
to exist even in death, incapacity, or insolvency of any stockholder or member.
2. ____________Refers to the party given the authority to implement the policies
determined by the board in directing the course of business activities.
3. ____________Stakeholders who invested their capital in the corporation.
4. ____________According to Ambrose Bierce, it is an ingenious way of obtaining profit
without individual responsibility.
5. ____________Who said that the social responsibility of the corporation is to increase
6. ____________They are natural or artificial persons considered as the owners of the
7. ____________The collegial body that exercises the corporate powers of all corporation
under the corporation code.
8. ____________This refers to the system whereby shareholders, creditors and other
stakeholders of a corporation ensure that management enhances the value of the
corporation as it competes in an increasingly global marketplace.
9. ____________The openness of information that is due to be made known by the
10. ___________Recognition or assumption of responsibility for decisions, actions, policies,
the administration, governance and implementation of programs and plans.
Multiple Choice
1. The basic premise on accountability is that accountable organization will
a. all choices below
b. set a policy based on balance understanding and response to material
stakeholders issues and
c. disclosed credible information
d. set goals and standards against which strategy and associated performance can
be measured and evaluated.
2. Which one is not a benefit of good governance?
a. improves marketability
b. reduce the vulnerability of companies
c. reduction of corporate value
d. improves companys credibility
3. The primary inside stakeholder of a corporation
a. bondholder
b. board of directors
c. shareholders
d. public
4. Which one is not the role of non-executive director?
a. monitoring of performance
b. audit
c. implements internal control
d. setting of strategy

5. Which one is not a role of CFO?

a. supervises major impact projects
b. relationship role
c. risk manager
d. none of the above
6. The following are the external risk (independent) that the audit committee should
consider except
a. downturns in the industry
b. rapid technological changes
c. unrealistic earnings expectation
d. turnover of key personnel
7. Which of the following would contribute to information risk?
a. unsuitable control environment
b. lack of sincere management supervision
c. inappropriate management override
d. all of the above
8. Which one is/are not part of corporate governance?
a. BOD
b. CFO
c. CEO
d. All of the above
e. None of the above
9. Which one is not among the incentives and disincentives of agency under principalagent relationship?
a. Managerial defensiveness
b. Share incentives
c. Threat of being fired
d. takeover threat
10. Which is not among the effects of agency in governance?
a. conflict of interest
b. managerial opportunism
c. incurrence of agency cost
d. all of the above
e. none of the above
On the space provided write A for stakeholders; B for agency issues and problem; C for
attributes of corporation; D for responsibility of CFO/CEO.

_____implement internal control
_____conflict of interest
_____managerial opportunism
_____develop relations with financing sources
_____advisor to management

8. _____managerial defensiveness
9. _____management
10. ____audit
Internet Exercise
Locate the website of the World Council for Corporate Governance and work on the
1. What are the mission, vision and objectives of the WCFCG?
2. What was the 2005 London Declaration?
3. Explain the acronym PREEMPTIVE.
Multiple Choice
1. One of the tasks for financial managers when identifying projects that increase firm
value is to identify those projects where
a. benefits are at least equal to the projects costs.
b. taking the project will increase the book value of the firms ordinary shares.
c. taking the project will decrease the book value of the firms debt outstanding.
d. none of the above
2. Which form of invested capital is subject to most of the firms business and financial
a. debt capital
b. equity capital
c. borrowed capital
d. intellectual capital
3. The rules dictating voting procedures and other aspects of corporate governance for a
corporation are
a. the minutes of the board of directors meeting
b. the articles of incorporation
c. the Corporate Governance Institute of the Philippines
d. the Securities and Exchange Commissions Rules for Corporate Governance.
4. The ultimate owner(s) of a corporation are
a. the national government
b. the debt holders
c. the equity holders
d. the executive staff of the corporation
5. Agency costs refers to
a. the costs associated with managing the demands of governance agencies.
b. the costs involved when converting an entity from a proprietorship to a
c. the costs that arise due to conflicts of interest between shareholders and
d. none of the above
6. Managers of firms should only take actions that:

a. increase the value of the firms future cash flows

b. they expect will increase the firms share price
c. have benefits which are at least as great as the cost of those actions
d. all of the above
7. Which of the following parties have the proper incentives to make risky, value increase
investments for the firm?
a. suppliers
b. creditors
c. shareholders
d. manager who are only compensated with a salary
8. Shareholders can attempt to overcome agency problems by all but the following:
a. incurring costs to monitor managers
b. paying managers a good salary
c. relying on market forces to exert managerial discipline
d. paying the manager a proportion of the profits that the firm generates
9. Which of the following is one of the most expensive methods for the firm to overcome
agency costs?
a. let the Securities and Exchange Commission inform the firm of a problem
b. proper design of an executives compensation contract
c. monitor the executives work
d. require executives to own a large proportion of their firms outstanding shares
10. Which of the following is the best bounding expenditure to help limit agency costs?
a. auditing the managers work on a monthly basis
b. a contract where by the manager will forfeit a portion of his deferred
compensation in the event of
poor performance
c. granting the manager a large number of options that will become valuable if the
firms performs well
d. paying the manager a bonus if the firm performs well
11. A root cause of firm agency costs is
a. managerial carelessness
b. a managerial owning too much of his firms stock
c. a managers concern for his personal well-being
d. the various BIR and SEC filing requirements
12. Which of the following is a strength of the corporate form of business?
a. Limited life of the business
b. Unlimited access to capital
c. Unlimited liability
d. Double taxation of income
13. Which of the following is not a strength of the corporate form of business?
a. Unlimited life of the business
b. Unlimited access to capital
c. Unlimited liability
d. individual contracting

14. Shareholders are said to have a residual claim on the firms assets. What does this
a. Shareholders have limited liability in their investment
b. Shareholders do not receive any payoff from the firm until all creditors are paid
c. Shareholders are allowed to recover their investment first if the firm experiences
financial distress
d. Shareholders have priority in electing the board of directors for the firm
15. What is a fiduciary?
a. Someone who performs ratio analysis for a corporation
b. Someone who Invest and managers money on someone elses behalf
c. Someone who manages the release of a initial public offering
d. Someone who evaluates the performance of individual bonds
16. What is the proper goal for management of a firm?
a. Maximize shareholder wealth
b. Maximize net income or earnings
c. Maximize sales revenue
d. Minimize expenses
17. What is a basic guide for financial decision making?
a. Make decision where the benefits exceed the costs
b. Make decision where the total benefits exceed the total costs
c. Make decision where the average benefits the fixed costs
d. Make decision where the average benefits the average costs
18. Which of the following describes the collective action problem?
a. When the CEO fails to represent the interest of shareholders in daily decision of
the firm
b. When the shareholders of a firm fail to act in their own best interest
c. When the managers of a firm lack incentive to maximize shareholders wealth
d. When a individual stockholder spends time and resources monitoring managers,
bearing the cost, while the benefits go to all the shareholders in the firm
19. You were just hired as the CEO of a company. Your primary objectives should be
a. to maximize the companys earnings
b. to maximize profits
c. to maximize the companys price of ordinary shares
d. to eliminate the companys competitors
20. What should be the objective of a focus on stakeholders?
a. Maximize the stakeholders interest
b. In situation of conflict pick stakeholders interests over shareholders interests
c. Preserve stakeholders interests
d. Disregard shareholders interests all together
21. Which of the following encourage managers to act in the shareholders interest?
a. Performance-based compensation
b. Audits
c. Threat of hostile takeovers

d. all of the above

22. Why do shareholders bear most of the risk of running a firm?
a. They only have a residual claim on the firms cash flows
b. They receive a salary from the company
c. They are guaranteed a fix payout each quarter
d. Shares can be taken away at any time without notice
23. What do we call the possible conflict of interest between shareholders and
a. Agency problem
b. Stakeholder problem
c. Double taxation
d. Shareholders
24. Investors expect management to do all of the following except
a. consult them on ethical decision
b. increase sales
c. boost the companys profit
d. increase the return to the investors
e. make sensible financial decision
25. What are the responsibilities of the board of directors in a corporation?
a. Hire and fire managers
b. Manage day-to-day operations
c. Amend the firms articles of incorporation when necessary
d. Hire and fire entry level employees