Corporate Governance Social Responsibility

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Solano, Nueva Vizcaya

School of Business and Accountancy
Good Governance & Corporate Social Responsibility Summer, SY 2012-2013
Corporate Social Responsibility (CSR)

Various Definitions
Different organizations have framed different definitions - although there is considerable
common ground between them.
Corporate Social Responsibility, “What does it mean?” (By Mallen Baker: First published 8
Jun 2004).
Mallen Baker’s own definition is that; “CSR is about how companies manage the
business processes to produce an overall positive impact on society”.
The World Business Council for Sustainable Development in its publication “Making Good
Business Sense by Lord Holme and Richard Watts” used the following definition:
“Corporate Social Responsibility is the continuing commitment by business to

behave ethically and contribute to economic development while improving the
quality of life of the workforce and their families as well as of the local community
and society at large”.
The same report gave some evidence of the different perceptions of what this should
mean from a number of different societies across the world.
Definition of the community and the government from Ghana; “CSR is about capacity
building for sustainable livelihoods. It respects cultural differences and finds the
business opportunities in building the skills of employees”.
Definition from the Philippines; “CSR is about business giving back to society”.
Traditionally in the United States, CSR has been defined much more in terms of a
philanthropic model. Companies make profits, unhindered except by fulfilling their duty to
pay taxes. Then they donate a certain share of the profits to charitable causes. It is seen
as tainting the act for the company to receive any benefit from the giving. Corporate Social
Responsibility (CSR).
“Corporate Social Responsibility (CSR) refers to an organization’s commitment to

operating in an ethical way that takes into account profit, people and planet”.
Even though you may not regard your business as ‘corporate’, the term CSR is now
commonly used to describe sustainable businesses.
Jose E. Credo, BSIE-BBM-MBA Page 1

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A CSR strategy is crucial for managing the way business deals with issues such as gender
equality, managing foreign workers and well-being at work. It will help ensure business that
has a positive impact on people and the environment, wherever it operates.
What is Corporate Social Responsibility?

At its most basic, CSR covers monitoring and auditing business to show it complies with
relevant local laws and regulations. It may also include philanthropic activities.
In recent years the concept has evolved, to consider ethical and environmental concerns
when making key business decisions. This makes CSR integral to the way business
relates to the world, to everything done, and to one’s potential for success.
CSR can be defined by actions such as:

 Integrating social, environmental and economic terms into business values and
actions. Some examples: treating workers in foreign countries fairly; using
environmentally sound practices regarding energy consumption, waste and
recycling.
 Operating in an open, accountable and transparent way and showing concern for
employees and the communities and societies in which the business operate.
Example: The Company may wish to contribute to some development project in a
country, such as providing clean water or building skills in local workers or staff
working for the firm’s distributors or agents.
 Complying with local laws and regulations and avoiding corrupt practices such as
giving or taking bribes.
 Living up to Company commitments. Make sure people understand the business

culture and concern to be a ‘good corporate citizen’ overseas. This starts with
supplying quality goods and services that meet or exceed the claims the
Company make for them.
 Monitoring Company image and success in implementing its principles in export

markets. What can change or improvement for the better?
 Demonstrating good business practice: invoicing and paying bills on time,

delivering what has been promised, and exceeding expectations.

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 The Company should be aware that in some markets corruption can be a major
problem. A useful source of information on the target market is Transparency
International’s annual Corruption Index.
CSR is not just for big businesses. It is a valuable tool for creating and maintaining a
sustainable export business of any size.
History
The nature and scope of corporate social responsibility has changed over time. The
concept of CSR is a relatively new one—the phrase has only been in wide use since the
1960s. But, while the economic, legal, ethical, and discretionary expectations placed on
organizations may differ, it is probably accurate to say that all societies at all points in time
have had some degree of expectation that organizations would act responsibly, by some
definition.
In the eighteenth century the great economist and philosopher Adam Smith expressed the
traditional or classical economic model of business. In essence, this model suggested that
the needs and desires of society could best be met by the unfettered interaction of
individuals and organizations in the marketplace. By acting in a self-interested manner,
individuals would produce and deliver the goods and services that would earn them a
profit, but also meet the needs of others.
The viewpoint expressed by Adam Smith over 200 years ago still forms the basis for free-
market economies in the twenty-first century. However, even Smith recognized that the
free market did not always perform perfectly, and further stated that marketplace
participants must act honestly and justly toward each other if the ideals of the free market
are to be achieved.
In the century after Adam Smith, the Industrial Revolution contributed to radical change,
especially in Europe and the United States. Many of the principles espoused by Smith
were borne out as the introduction of new technologies allowed for more efficient
production of goods and services.
Millions of people obtained jobs that paid more than they had ever made before and the
standard of living greatly improved. Large organizations developed and acquired great
power, and their founders and owners became some of the richest and most powerful men
in the world.
Social Darwinism

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In the late nineteenth century many of these individuals believed in and practiced a
philosophy that came to be called "Social Darwinism," which, in simple form, is “the idea
that the principles of natural selection and survival of the fittest are applicable to
business and social policy”. This type of philosophy justified cutthroat, even brutal,
competitive strategies and did not allow for much concern about the impact of the
successful corporation on employees, the community, or the larger society (The law of
“Survival of the Fittest,” by Herbert Spencer; New Thesaurus Encyclopedia).
Thus, although many of the great tycoons of the late nineteenth century were among the
greatest philanthropists of all time, their giving was done as individuals, not as
representatives of their companies. Indeed, at the same time that many of them were
giving away millions of dollars of their own money, the companies that made them rich
were practicing business methods that, by today's standards at least, were exploitative of
workers.
Around the beginning of the twentieth century a backlash against the large corporations
began to gain momentum. Big business was criticized as being too powerful and for
practicing anti-social and anti-competitive practices.
Sherman Antitrust Act (1890)

Laws and regulations, such as the Sherman Antitrust Act, were enacted. It was the first
major federal action to curb the power of the great business monopolies which grew up
after the Civil War. It advocates to rein in the large corporations and to protect employees,
consumers, and society at large.
Its failure to define key terms, such as; trust, combination and restraint of trade, led to its
loopholes.
Clayton Antitrust Act (1914)

The Clayton Antitrust Act of 1914 passed by Congress to supplement the Sherman
Antitrust Act of 1890. Te Clayton Act specified illegal monopolistic practices, among them
certain forms of interlocking directorates and holding companies. It also legalized peaceful
strikes, picketing and boycotting.
In 1921, however, the Supreme Court interpreted the Act as doing no more than legalize
labor unions and not their practices.
Social Gospel (New Thesaurus Encyclopedia).

A liberal Protestant social-reform associated movement in the US in 1870-1920,
sometimes called the "social gospel," advocated greater attention to the working class
and the poor. The labor movement also called for greater social responsiveness on the

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part of business. Among the leaders were Horace Bushnell, Washington Gladden and
Walter Rauschenbusch.
CSR in 1900
Between 1900 and 1960 the business world gradually began to accept additional
responsibilities other than making a profit and obeying the law.
In the 1960s and 1970s the civil rights movement, consumerism, and environmentalism
affected society's expectations of business.
Based on the general idea that those with great power have great responsibility, many
called for the business world to be more proactive in the following aspects:
1. Ceasing to cause societal problems
2. Starting to participate in solving societal problems.
Modern Practices of CSR

Many legal mandates were placed on business related to equal employment opportunity,
product safety, worker safety, and the environment.
Furthermore, society began to expect business to voluntarily participate in solving societal

problems whether they had caused the problems or not.
This was based on the view that corporations should go beyond their economic and legal
responsibilities and accept responsibilities related to the betterment of society. This view of
corporate social responsibility is the prevailing view in much of the world today.
The sections that follow provide additional details related to the corporate social
responsibility construct.
1. Arguments for and against the CSR concept are reviewed.

2. The stakeholder concept, which is central to the CSR construct, is discussed.
3. Several of the major social issues with which organizations must deal are reviewed.
THE THREE MODELS OF CSR

(By Matt Petryni, eHow Contributor)

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Managers of some of the world's largest corporations are thinking about social
responsibility.
It's hard to miss the conversation in the business media about responsibility. While some
concept of corporate social responsibility has been around since the 1950s, businesses
have seen both an evolving conversation and a growing interest in this area of
management. Increasingly, corporations both large and small are using commitments to
social responsibility to promote their products.
Examining the three dominant models of social responsibility is one way managers and
investors can make sure not to miss out on this important conversation.
Corporate social responsibility is the commitment a company has to the community outside
of its shareholders and employees. The subject isn't without controversy, with some
claiming corporations have no role in social responsibility and others asserting that they
can't escape it.
Business researcher Elizabeth Redman proposed the three models of corporate social
responsibility as a way of understanding this often contentious conversation.
In her work on corporate social responsibility, published in the Roosevelt Review, Redman
contends that the discussion often involves one of three conceptual models for CSR: a
conflict model, an added value model and a multiple goals model.
1. Traditional Conflict Model

In the traditional conflict model for corporate social responsibility, social values and
benefits are seen as in conflict with shareholder profits.
Under this model, corporations opting to practice forms of social responsibility are
likely to see added costs for doing so. Proponents of this conceptual model
generally argue that the nature of business is one of trade-offs between economic
and moral values, and corporate managers will inevitably be forced to decide
between their social and fiduciary responsibilities or their commitment to
shareholder equity value.
2. Added Value Model

A second model for conceptualizing corporate social responsibility is to see social
and environmental commitments as a means to increase profit. While proponents of
this model tend to acknowledge that conflicts persist in business decisions, they
also believe that CSR investments are also capable of generating new revenues.

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This model tends to focus on issues like the value of CSR in attracting socially
conscious consumers, finding socially conscious employees and managing the risks
of negative press.
3. Multiple Goals Model

Finally, a third model for corporate social responsibility posts its role for social
values in corporate decisions. Under this model, corporations have goals beyond
shareholder value, including the enhancement of their community without respect to
monetary gain.
According to Redman, this model is thought to be relatively radical, though some

corporate officers have expressed support for it. Proponents of this model
emphasize quality of life as the basis of economic activity.
PROS & CONS OF CORPORATE SOCIAL RESPONSIBILITY

(By Neil Kokemuller, eHow Contributor)
Corporate social responsibility is generally perceived as a positive business ideology in the

21st century, despite some challenges. A significant expansion of basic business ethics,
CSR establishes guidelines for ethical and socially responsible behavior. It addresses how
companies that want to satisfy government and societal requirements should treat key
stakeholder groups, including customers, suppliers, employees and the community.
Pro 1: Social Responsibility and Customer Relationships

One of the foundational elements of CSR is that it causes companies to reason beyond
basic ethics to consider the benefits of active involvement in communities.
In his article "The 7 Principles of Business Integrity," business strategist Robert

Moment argues that 21st-century companies must prove themselves to customers to
build long-term, trusting relationships. They must also get involved in the community to
give back.
This community connection endears your company to the local markets in which you
operate.
Pro 2: Motivated Employees

Employees are a company's most valued asset. This is the premise of a company's
obligation to this key stakeholder group with regard to CSR compliance. This means
treating employees with respect and offering fair working conditions. It also means

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establishing fair hiring practices and promoting a non-discriminatory workplace. This

improves morale within the workplace and encourages teamwork.
Additionally, a writer on the, “As You Sow website”, stresses the importance of managing
a diverse workplace so that you can benefit from a variety of backgrounds and life
experiences.
Con 1: Expenses
The main reason any company would object to participating in CSR is the associated
costs. With CSR, you pay for environmental programs, more employee training and
efficient waste management programs.
Proponents of CSR agree that any expenses to businesses are ultimately covered by
stronger relationships with key customers.
However, David Vogel indicates in his Forbes article "CSR Doesn't Pay"; that investment
in CSR programs may not necessary result in measurable financial results.
The expense of complying with CSR expectations is a con for businesses.
Con 2: Shareholder Expectations

Another challenge for companies when considering CSR is the possible negative
perception of shareholders.
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Historically, publicly-owned companies had a primary focus of maximizing shareholder

value.
Now, they must balance the financial expectations of company owners with the social and
environmental requirements of other stakeholder groups.
Some shareholders are happy to invest in companies that operate with high integrity.
Others may not approve of the aforementioned expenses of operating under CSR
guidelines.
The Interactions of Businesses and Society by Mallen Baker

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Companies need to answer to two aspects of their operations. 1. The quality of their
management - both in terms of people and processes (the inner circle). 2. The nature of,
and quantity of their impact on society in the various areas.
Outside stakeholders are taking an increasing interest in the activity of the company. Most
look to the outer circle - what the company has actually done, good or bad, in terms of its
products and services, in terms of its impact on the environment and on local communities,
or in how it treats and develops its workforce. Out of the various stakeholders, it is financial
analysts who are predominantly focused - as well as past financial performance - on
quality of management as an indicator of likely future performance.
NEED FOR CSR AND ITS IMPORTANCE

A. The Business Need for Corporate Social Responsibility
Corporate Social Responsibility or CSR makes for eminent business sense as well
when one considers the knock-on effect that social and environmental
responsibility brings to the businesses.
For instance, corporations exist in a symbiotic relationship with their environments (the
term environment refers to all the components of the external environment and not to
ecological environment alone) where their exchange with the larger environment
determines to a large extent how well they do in their profit seeking endeavors.
When one considers the fact that the RBV or the Resource Based View of the firm is all
about how well the firm exists in harmony with its external environment and how this
exchange of inputs and outputs with the environment determines the quality of its
operations, it can be inferred that socially responsible business practices are indeed in the
interest of the firm and the argument against imposing hidden social taxes on the firms by
undertaking socially responsible business practices might not hold good in the current
business landscape.
Indeed, the world since the days of Friedman has changed so much that socially
responsible business practices ought to be the norm rather the exception and the various
readings surveyed for this paper do seem to indicate that it is high time for businesses to
engage in responsible behavior.
However, there is a tendency to treat CSR as yet another cost of business and hence be
business like about the practice. So, mainstreaming the idea might not bring the desirable
effect unless the media, the businesses, and the citizens themselves understand what is at
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stake and behave accordingly. Paying lip service or corporatizing the idea of CSR might
not be the intended outcome of the proponents and the advocacy groups that promote this
idea. Rather, a change in the mindset and attitude is what these groups have in mind when
they push for socially responsible practices. It has been mentioned elsewhere that CSR as
a concept and as a paradigm ought to be woven into the DNA of the corporations and
when the very fabric resonates with the threads of social responsibility; the goals of
conscious capitalism and compassionate corporations would be realized.
Hence, a cautionary finger wagging is due for those who believe that since the concept of
CSR has been mainstreamed, they can relax in the knowledge that corporations would do
the rest. Given the history of profit seeking and mercantilist behavior where fads and ideas
come and go but the very nature of the corporations mutates rather than undergoes a
fundamental change, we still have some distance to cover before the goals of the idea of
CSR are achieved. Further, we should not end up in a situation where the imperatives of
the 21st century force corporations to change their behavior. Instead, a voluntary mindset
change is something that is better suited given the vast resources that corporations have
and which they deploy to resist change and thwart those that push for legislation that aims
to do so.
B. The rising importance of corporate social responsibility
By Jennifer Hsu, Monday, February 22nd, 2010
Rod Lohin of the Rotman School of Management comments
Source: stock.xchng/spekulator
The tragic January 12 earthquake in Haiti has led some of the world’s largest corporations
to pledge millions of dollars towards relief efforts (e.g. General Electric’s $2.5M, Unilever
$500,000, Rogers $250,000 and RBC $100,000). Is this an example of corporate social
responsibility (CSR)? One definition describes CSR as the intentional inclusion of public

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interest into corporate decision making. Although CSR seems logical and appears to be
the right thing to do, there are many critics who believe the concept strays from the primary
economic role of businesses. Rod Lohin, Executive Director of the AIC Institute for
Corporate Citizenship at the Rotman School of Management, reveals why CSR is an
important success factor for businesses in today’s economy.
1. Do you believe corporate social responsibility is important?
CSR is important because businesses are based on trust and foresight. Establishing and
keeping trust with customers, communities and regulators isn’t simple and can be easily
damaged or lost. To be successful in the long-term, companies need to think beyond
what’s affecting them today to what’s going to happen tomorrow. This isn’t just about
addressing changes to technology or the needs of customers, but also taking into account
alterations in social, environmental and governance issues.
2. The need for and benefits of CSR seems to be substantial. Why don’t all
organizations practice CSR?
Most are in some way. It really depends on how you define CSR. If you focus on laws and
regulations brought forth by government, then the majority do practice CSR. However, if
you look at CSR as going above and beyond minimal requirements, then not all companies
practice CSR.
At the AIC Institute for Corporate Citizenship, we help companies identify what they can do
strategically to stretch beyond what’s typical in their industries. For example, over the last
few years we’ve helped RBC expand its sense of the issues important to the company,
and helped it develop a value-added CSR strategy to reflect the company’s new
understanding.
3. Do you see all companies going above and beyond minimal requirements in the
near future to remain competitive?
Most people in today’s society look for companies to go above and beyond. Governments
and NGOs expect this too. But an unexpected twist is that many companies are
demanding more from their suppliers too, as they’re worried about the backlash of
purchasing products and services from organizations deemed irresponsible.
For example, Walmart now requires its bidding suppliers to report many of their CSR
activities. How this will go in the long-run is still an open question. But it does give an
indication of how companies can drive positive CSR change themselves. This is a huge
switch.

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Our main focus at the AIC Institute for Corporate Citizenship is to link corporate
responsibility to long-term strategy, which often only occupies marginal discussion within
companies. Michael Porter of Harvard, one of the most prominent strategy gurus, has
been saying for years that you can’t just look at your competitors. It is absolutely essential
to look beyond your competitors and your competitive environment, and look deeply at
their social, political and environmental context to fully understand the degree of CSR
required.
CORPORATE GOVERNANCE
The theoretical basis upon which corporate governance is pursued in any legal jurisdiction
greatly influences the objectives for which the corporation is to be managed, the powers,
duties and obligations of the Board of Directors, as well as the extent of the personal
liabilities they may expose themselves to, and the rights of the persons, i.e., constituencies
or stakeholders, who would have legal standing to draw upon such duties and
responsibilities.
a. Doctrine of Maximization of Shareholder Value versus Theory on Corporate

Social Responsibility (CSR)
Maximization of Shareholder Value. – Under the Corporation Code of the Philippines,

the generally accepted goal of the corporation is one of that is based on what is termed as
the “neoclassical economic theory” of “Maximization of shareholder value,” which in the
Philippines has been expressed in the jurisprudential doctrine that the primary obligation of
directors of a corporation is “to seek the maximum amount of profits for the corporation.” It
is otherwise referred to as the “Stockholder Theory.”
The tenets of the doctrine of maximization of shareholder value had been defended by
Milton Friedman in his 1970 seminal article that was published in the New York Times,
entitled “The Social Responsibility of Business Is to Increase Profits, “where he concluded
that “there is one and only one social responsibility of businesses—to use its resources
and engage in activities designed to increase its profits so long as it stays within the rules
of the game, which is to say, engages in open and free competition without deception or
fraud.”

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Friedman discussed several grounds on his opposition to the implication that business in
general, and corporations in particular, have a “social responsibility.” That is that business
should not be only concerned with profits, but “also with promoting desirable social ends.”
Firstly, he stated that “in a free-enterprise, private-property system, a corporate executive
is an employee of the owners of the business. He has direct responsibility to his
employers. That responsibility is to conduct the business in accordance with their desires,
which generally will be to make as much money as possible while conforming to the basic
rules of the society, both those embodied in law and those embodied in ethical custom.”
Secondly he posited that businessmen are trained to make profits, and do not possess
specific competence in promoting public welfare, and that it would be specially difficult to
measure whether businessmen are complying with such duty for social responsibility. He
discussed that even if corporate executives could make such calculations, there are no
parameters under “social responsibility” theory to guide them to determine how much cost
on social activities they can impose on the corporate venture. Finally, under the rubric of
“social responsibility,” he suggested that many practices are merely self-serving or a
window-dressing activities, when in fact the real motivation was to gain an advantage to
the corporation in furtherance of profits. Implicit in Friedman’s paper was his support for
Adam Smith’s “hidden hand” principle: by allowing business freely and fully function in its
own specific competence of profit-making, then society will be better served in the long
run.
The theory of maximization of shareholder value as the one pursuit of a corporate

enterprise has been criticized to be based on a flawed premise, the supposition that it is
the capital initially invested in the corporation that creates the wealth, when in fact it is the
various sectors that work within the corporate enterprise that actually generate the wealth,
including the protection and business environment provided by government. To illustrate,
Marjorie Kelly writes in refutation to the “maximization of profits for the benefit of the
stockholders:” theory that—
To judge by the current arrangement in corporate America, one might suppose capital
creates wealth – which is odd, because a pile of capital sitting there creates nothing. Yet
capital-providers (stockholders) lay claim to most wealth that public corporations generate.
They also claim the more fundamental right to have corporations managed on their behalf.
Corporations are believed to exist for one purpose alone: to maximize returns to
shareholders. This principle is reinforced by CEOs, The Wall Street Journal, business

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schools, and the courts. It is the law of the land. Indeed, “maximizing returns to
shareholders” is universally accepted as a kind of divine, unchallengeable mandate.
One does not see rising employee income as a measure of corporate success. Indeed
gains to employees are losses to the corporation. And this betrays an unconscious bias:
that employees are not really part of the corporation. They have no claim on wealth they
create, no say in governance and no vote for by the board of directors. They’re not citizens
of corporate society, but subjects.
Investors, on the other hand, may never set foot inside “their” companies, may not know
where they’re located or what they produce. Yet corporations exist to enrich investors
alone. In the corporate society, only those who own stock can vote – like America until the
mid-1800s, when only those who land could vote. Employees are disenfranchised.
Others have argued that although management bears a fiduciary relationship to the
stockholders to run the business in their behalf, such duty to make profits cannot override
their obligations in running a company, such as to deal fairly with suppliers, to provide
good working conditions to their employees, provide safe products to customers, etc. It is
also posited that engaging in activities for the public welfare does not require such a high
degree of competence which is beyond the capabilities of the ordinary businesses were
left to themselves, they would enrich themselves while impoverishing society.
Former Dean Robert Clark of Harvard Law School, explains that the maximization of profit
theory “does not imply that corporations and their managers have only minimal legal
obligations to persons other than shareholders;” for indeed “”every major relationship
between the corporation and persons or groups it affects is subject to vast and intricate
bodies of legal doctrine and to legal enforcement mechanism.” According to him the real
meaning of the theory is that “it tells corporate managers what their residual goal is – or, in
economic jargon, what the company’s ‘objective function’ is. The duties to all other groups
need simply be satisfied – they function as constraints -0 but the duty to shareholders is
open-ended: Profits should be made as large as possible, within the constraints.” He
elucidates on the view that under the theory, “we gain a lot from strict profit maximization in
terms of private-sector performance, but we don’t really jeopardize the attainment of public
policies,” thus:

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. . . A single, objective goal like profit maximization is more easily monitored than a
multiple, vaguely defined goal like fair and reasonable accommodation of all
affected interests. It is easier, for example, to tell if a corporate manager is doing
what she is supposed to do than to tell if a university president is doing what she is
supposed to do. Since shareholders do have some effective control mechanisms
(the proxy contest, the takeover bid, and the derivative lawsuit) better monitoring
means that the corporate managers will be kept more accountable. They are more
likely to do what they are supposed to do, and do it efficiently. Better accountability
thus encourages people to participate in large organization in which claims on the
organization and the power to manage it are necessarily separated; it helps such
organizations exist and function well. Large organizations are in turn often desirable
for everyone. They increase social welfare, because without them certain large-
scale business ventures would be impossible or would be carried out in a wasteful
way.
On the other side, no one need to be made worse off by the corporation’s having a single
goal of profit maximization. The interests of non-shareholder groups like employees can be
protected by contract, common law developments, and special legislation. Negative
externalities like pollution can be corrected by tort law or pollution laws telling companies
not to pollute or taxing them when they do. The production of public goods and the
redistribution of wealth from rich to poor can be better accomplished by actual
governments, which have a more legitimate claim to do these things. And corporate
resources can still be diverted to these governmental activities, in small or great measure,
as elected representatives set fit, because governments can tax both corporations and
their shareholders. Profit maximization is therefore a legitimate and desirable goal for
business corporations.
Corporate Social Responsibility (CSR). – We shall consider for our discussions herein
the more comprehensive definition of “Corporate Social Responsibility” given by the World
Business Council for Sustainable Development, which defines CSR as “the continuing
commitment by business to behave ethically and contribute to economic development
while improving the quality of life of the workforce and their families as well as of the local
community and society at large.”
Prof. Emmanuel Q. Fernando discusses in his paper that in the Philippines, the rise of the
issue that corporations ought to have a social or public purpose came out of a sense of the

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gross imbalance in wealth within our society, where most of it is concentrated in the hands
of an elite few; and the fact that being a third-world nation, most of the great profits were
being raked in by large multinational companies at the expense of the Filipino consumers.
He observes that there are three reasons to support the claim for corporate social
responsibility. First, is due to the fact that the corporation wields great economic power
within our society rivaling that of the government: “They have the power to create great
wealth, provide jobs for the multitude, advance the frontiers of science and technology by
financing and conducting the search, either maintain the ecological balance of or pollute
the environment, create goods and services that increase the safety, health and welfare of
its consumers, provide basic needs, affect the stock market and the economy for better or
worse, and the like. Clearly, with such awesome power comes the corresponding
responsibility.”
Second, is that since corporations exists and thrive under conditions that the government
and society provides, then as a matter of gratitude, corporations must reciprocate by
undertaking social or public purpose activities. Third, every corporation is granted by the
state with a legal personality, and like any other citizen, should have duties and
responsibilities towards the community.
In two outstanding surveys on corporate social responsibility released three years apart by
The economist, there is clear evidence to support the proposition that CSR practice has
taken a central role in global executives’ management practice, and that “business
schools, for their part, are adding courses and specialized departments to keep their MBA
students happy.”
The prestigious international publication supported such phenomenon based on the

following reasons: (a) “companies are having to work harder to protect their reputation –
and by extension, the environment in which they do business” because of the series of
scandals that have hit large institutions, such an Enron, WorldCom, and the great media
and public activism that has sprang-up monitoring companies’ behavior; (b) the great
concern over the environment and global warming, which is “probably the biggest single
driver of growth in the CSR industry of late;” (c) the demand among investors who seek to
invest in areas now categorized as “socially responsible investment;” and (d) the strong
demand for CSR from the employees who “want to work at a company where they share
value and the ethos.” It thus wrote:

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CSR is now made up of three broad layers, one on top of the other. The most basic is
traditional corporate philanthropy. Companies typically allocate about 1% of pre-tax profits
to worthy causes because giving something back to the community seems “the right thing
to do”. But many companies now feel that arm’s length philanthropy – simply writing
cheques to charities – is no longer enough. Shareholders want to know that their money is
being put to good use, and employees want to be actively involved in good works.
. . . Hence the second layer of the CSR, which is a branch of risk management.
Starting in the 1980s, with environmental disasters such as the explosion at the
Bhopal pesticide factory and the Exxon Valdez oil spill, industry after industry has
suffered blows in their reputation. Big pharma was hit by its refusal to make
antiretroviral drugs available cheaply to HIV/AIDS sufferers in developing countries.
In the clothing industry, companies like Nike and Gap came under attack for use of
child labor. Food companies face a backlash over growing obesity. . .
All this is largely defensive, but companies like to stress that there are also opportunities to
be had for those that get ahead of the game. The emphasis on opportunity is the third and
trendiest layer of CSR: the idea that it can help create value. In December 2006 of the
Harvard Business Review published a paper by Michael Porter and Mark Kramer on how,
if approached in a strategic way, CSR could become part of a company’s competitive
advantage.
That is just the sort of thing chief executives like to hear. “Doing well by doing good” has
become a fashionable mantra. Businesses have eagerly adopted the jargon of
“embedding” CSR in the core of their operations, making it “part of the corporate DNA” so
that it influences decisions across the company. . . .”
But even then the special report noted that “The business of trying to be good is
confronting executives with difficult questions. Can you measure CSR performance?
Should you be co-operating with NGOs, and with your competitors? Is there really
competitive advantage to be had from a green strategy? How will the rise of companies
from China, India and other emerging markets change the game.”
b. Narrower CSR Focus: The Stakeholders Theory

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According to Prof. Fernando, the rather open-ended theory of Corporate Social

Responsibility, found its “systematic and theoretical underpinnings” by the evolvement of
the “Stakeholder Theory” for corporate governance, which takes into account ethical and
public concerns into the system of business decision-making, and not just profit making:
“The moral environment of stockholder principle was tightly constrained, focused as it was
only on the duties of management toward the stockholders to maximize the profits of the
corporation. Stakeholder theory, on the other hand, opened the door to bringing
fundamental moral principles to bear on corporate activity. For under that theory, the
obligation of business was not to seek profit for its stockholders but to coordinate
stakeholder interests.”
Prof. Nicanor S. Poblador observes that the theory “has no concept of what economists
call ‘equilibrium,’ the imaginary point towards which a system tends to gravitate. But more
seriously for the practicing manager, it provides no rational basis for action.” Thus, he
summarizes the “crux” of what is lacking in the stakeholder theory:
In more precise terms, our main concerns are twofold: (1) How do we specify the firm’s
ultimate objective or goal? (2) How can we pursue this goal in such a way to satisfy the
needs of all groups that have a stake in the enterprise? If we can come up with a precise
statement of the firm’s ultimate goal (that is, specify clearly what economists call its
“objective function”), then we have a basis for defining rationality. If we can come up with a
set of criteria for meeting the needs of all corporate stakeholders, then we have defined in
operation terms what is and what is not ethical behavior.
The essence of the first criticism against the stakeholder theory is summarized by Prof.
Fernando as follows: “And although the first stakeholder theories acknowledge the
existence of other stakeholders and the moral duties the corporation had toward them,
they did not sufficiently explain the nature of these duties, how they are to be weighed and
measured against each other in case of conflict and whether there was an ethical
difference between them.”
The second criticism to the stakeholder theory, writes Prof. Fernando, is that it asserts that
the responsibility of management towards its owners or stockholders is of a distinct or
special kind, not to be put on the same level as its responsibility towards other
stakeholders. According to him, it is this second criticism to the original version of the
stakeholder theory that prompted the emergence of intermediary theories.

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Evolving Versions of the Stakeholder Theory. – The first intermediate theory, which
Prof. Fernando tags as the “Moral Minimum Stakeholder Theory,” requires that the
corporation must not behave toward the other stakeholders of the corporation below a
certain moral minimum,” which he defines as follows:
This moral minimum involves duties not to cause avoidable harm, or to honor individual
stakeholder rights or to adhere to ordinary canons of justice. It can go about its fiduciary
duty of making profit for the stockholders of the corporation so long as it does not
transgress the requirements of the moral minimum. Corporation actions, humanitarian in
character with a social or public goal, are not required, although they may be encouraged.
The second intermediate theory, which Prof. Fernando refers to as “Strategic Management
Theory,” requires that the corporation, in honoring its fiduciary duty toward stockholders to
increase profits, should treat other stakeholders strategically, which allows business then
to act within the moral minimum and even to go beyond it by undertaking humanitarian
endeavors which help solve social problems.
Even the intermediate theories have been criticized for they allow the possibility of
unethical behavior “for acting strategically is treating stakeholders only as a means
towards the end of profit. Hence, if it were not profitable to treat stakeholders ethically,
then management would soon abandon such behavior.” Thus, Prof. Fernando posits that
“even if the corporation is acting morally, it is practicing a deception. For . . . corporations
should disguise their intentions and instead make it appear to the public that they are
motivated purely by ethical considerations.” This position beckons to the “window-
dressing” complaint of Friedman against the “social responsibility” theory.
Professor Poblador echoes the observed flaws of the stakeholder theory as follows:
(a) It fails to specify corporate goals in terms of a single, well-defined variable, and
thus fail to provide a rational basis of choice: “While its concern for the interests
of all stakeholders in an enterprise is well taken, stakeholdership fails to provide
a rational basis for establishing tradeoffs among these oftentimes conflicting
interests. This puts decision makers at a loss in deciding whether one course of
action is to be preferred over another.”

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(b) This lack of proper guideline, effectively “empowers” managers to exercise their
discretion, and thus be “able to maneuver within their specified areas of
accountability and can divert corporate resources in pursuit of their own interest.
This enhances what economists call ‘agency costs.’”
(c) The theory unnecessarily politicizes the corporation by sharply drawing the
boundaries between the interest of one group and those of the others: “As a
consequence, the enterprise emerges as a zero sum game, and the
stakeholders are put in a confrontational relationship vis-à-vis one another.”
To the author, what appears from the various literature covering the evolving theories that
compete with the Stockholder Theory of the Doctrine of Maximization of Shareholder
Value, are two imperatives: (a) That the various sub-theories implementing the
Stakeholder Theory would still have the maximization of profits of the business enterprise
as the primary responsibility of the Board of Directors and Management, even as they
must consider the interests of other stakeholders: and (b) Stakeholder Theory, and its sub
theories, and in fact the whole CSR theory, appear to still be in gestation, constituting what
may be termed as “works-in-progress,” and their adoption into any legal jurisdiction would
engender a situation where corporate managers and various stakeholders would have to
sort out the financial workings of such a system of governance, to be adopted to the
peculiar national settings upon which they are to operate.
1. PREVAILING PRINCIPLE UNDER THE CORPORATION CODE
There is very little doubt that the prevailing theory on corporate governance under our
Corporation Code is the doctrine of maximization of stockholder value, where the Board of
Directors and Management owe fiduciary duties to the stockholders, and in the words of
the Supreme Court, their main obligation is “to seek the maximum amount of profits for the
corporation.” In landmark decision of Gokongwei v. Securities and Exchange Commission,
the Court characterized the fiduciary relation of the Board of Directors to the stockholders
of the company, thus:
Although in the strict and technical sense, directors of a private corporation are not
regarded as trustees, there cannot be any doubt that their character is that of a fiduciary
insofar as the corporation and the stockholders as a body are concerned. As agents
entrusted with the management of the corporation for the collective benefit of the
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stockholders, “they occupy a fiduciary relation, and in this sense the relation is one of
trust.”
There are a few indications in the Corporation Code which do recognize some duty to
other stakeholders, but only in a narrow sense. For example, in defining in statutory terms
the common law duty of diligence, Section 31 provides that when directors or trustees
willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who
are guilty of gross negligence or bad faith in directing the affairs of the corporation or
acquire any personal or pecuniary interests in conflict with their duty as directors or
trustees, they “shall be liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and other persons.” The
recognition of liability to other persons other than the stockholders or members of the
corporation has not been recognized or even operationalized, except in the area of the
application of the trust fund doctrine in favor of corporate creditors.
It may also be observed that the imposition of solidary liability on offending directors and
officers for what is primarily a corporate liability springs from the concept of “joint
tortfeasor”, and perhaps is an indication that the recognition of liability to parties outside of
the intra-corporate relationship, relates more to damages caused to the public based on
corporate torts, for non-compliance with the duty of diligence would connote more an act of
negligence or tort on the part of corporate directors and officers.
Prof. Fernando recognizes two old decisions of the Supreme Court where he posits that an
application of the stakeholder theory had in fact been done. The first in the decision in
Montelibano v. Bacolod-Murcia Miling Co., Inc., where the issue was whether it was within
the power of the Board of Directors of a sugar milling company to grant concessions to
planters which were gratuitous in nature. In upholding the validity of the board resolutions
granting further concessions to the planters, the decision held in part –
There can be no doubt that the directors of the appellee company had authority to modify
the proposed terms of the Amended Milling Contract for the purpose of making its terms
more acceptable to the other contracting parties . . . As the resolution in question was
passed in good faith by the board of directors, it is valid and binding, and whether or not it
will cause losses or decrease the profits of the central, the court has no authority to review
them.

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One may get the impression that the afore-quoted declaration of the Supreme Court,
especially on that provides that a board resolution would be valid and binding, “whether or
not it will cause losses or decrease the profits” of the milling company was a declaration
that the Board of Directors owe a “social responsibility” to uphold its contractual
concessions to the planters, even at the expense of the stockholders. This was not the
ration decidendi of Montelibano, for the quoted words on “whether or not it will cause
losses or decrease the profits of the central,” were meant to emphasize only the primacy of
the business judgment rule, which holds that the exercise by the Board of Directors of its
business judgment, absent fraud, bad faith or gross negligence, is binding on both the
stockholders and the courts; and that if a business transaction is entered into in good faith
by the Board of Directors with intentions of maximizing the profits of the company, but it
turned out later on that losses were sustained, such fact does not make the directors
personally liable for any breach of duty. Directors of companies are expected to use their
best judgment to run the affairs of the company with the objective of maximizing profits: but
they are no guarantors of profits, for the operation of any business enterprise is fraught
with risks and uncertainties, and all that is expected of Boards of Directors is to exercise
their business judgment with due diligence. Thus, the decision in Montelibano held –
“[Board of Directors] hold such office charged with the duty to act for the corporation
according to their best judgment, and in so doing they cannot be controlled in the
reasonable exercise and performance of such duty. Whether the business of a corporation
should be operated at a loss during depression, or closed down at a smaller loss, is purely
business and economic problem to be determined by the directors of the corporation and
not by the court. It is well-known rule of law that questions of policy or of management are
left solely to the honest decision of officers and directors of a corporation, and the court is
without authority to substitute its judgment of the board of director; the board is the
business manager of the corporation, and so long as its acts in good faith its orders are not
reviewable by the courts.”
The Montelibano decision took pains to show that the giving of concessions to the planters
was supported with valuable consideration received on the part of the milling company,
which included substantial extension of the terms of milling contracts. If in fact, the
concessions were given without consideration, or in pure gratuity to the planters, the
decision clearly indicated that it would have held the underlying board resolutions as being
contrary to the corporate principle that board of directors have no business giving away the

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assets of the corporation; that any act of a board that knowingly tends to minimize the
profits of the company would be ultra vires and void.
The second decision cited is that rendered in Board of Liquidators v. Heirs of Maximo M.
Kalaw, where the Board’s resolution ratifying the forward contracts to deliver copra in the
market having skyrocketed due to the ravages brought about by four typhoons, was held to
be a matter of the business judgment to be fair, thus:
Obviously, the board thought that to jettison Kalaw’s contracts would contravene basic
dictates of fairness. They did not think of raising their voice in protest against past
contracts, which brought enormous profits to the corporation. By the same token, fair
dealing disagrees with the idea that similar contracts, when unprofitable, should not merit
the same treatment. Profit or loss resulting from business ventures is not just justification
for turning one’s back on contracts entered into. The truth, then, of the matter is that – in
the words of the trial court – the ratification of the contracts was “an act of simple justice
and fairness to the general manager and the best interest of the corporation whose
prestige would have been seriously impaired by a rejection by the board of those contracts
which proved disadvantageous.
It must be posited that the main issue resolved in Kalaw was whether the member of the
Board of Directors could be held personally liable for having ratified the forward contracts
that were entered into by its General Manager, after it was obvious that servicing them
would cause severe losses to the company. Therefore, the Kalaw decision went into
verifying the nature and extent of the business judgment rule. Nonetheless, the language
of the afore-quoted portion of the decision indicates a notion of social responsibility of
Boards of Directors to engage in fair dealings with parties outside the intra-corporate
relationships, even when to do so would prejudice the profit interests of the stockholders. It
is interesting to note though, that in justifying a board resolution that sought to uphold fair
dealings with customers, the decision went out its of its way to indicate that in the end the
primary motivation for such act of fairness is still ultimately profit maximization
consideration, thus: “The truth, then, of the matter is that . . . the ratification of the contracts
was ‘an act of simple justice and fairness to the general manager and the best interest of
the corporation whose prestige would have been seriously impaired by a rejection by the
board of those contracts which proved disadvantageous.’”

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We can add the decision in Pirovano v. De la Rama Steamship Co., Inc., where the Court
upheld the validity of the board resolution which essentially donated to the surviving
children of the deceased General manager the proceeds received by the company from
the keyman insurance policy it had maintained over the life of said executive officer “out of
gratitude” for his services that saw him derive huge profits to the company.”The decision
described the essence of the transactions to be a remunerative donation by the
corporation, thus: “From the above it clearly appears that the corporation thought of giving
the donation to the children of the late Enrico Pirovano he ‘was to a large extent
responsible for the rapid and very successful development and expansion of the activities
of this company’; and also because he ‘left practically nothing to his heirs and it is but fit
and proper that this company which owes so much so much to the deceased should make
some provision to his children’, and so the donation was given ‘out of gratitude to the late
Enrico Pirovano.’ We do not need to stretch our imagination to see that a grant or donation
given under these circumstances is remunerative in nature in contemplation of law.’”
In upholding the obligation of the corporation to stick by the terms of the donation over the
objectionable resolution adopted by a new set of Board of Directors and minority
stockholders, the decision held –
There can therefore be no doubt from the foregoing relation of facts that the donation was
a corporate act carried out by the corporation not only with the sanction of its Boards of
Directors but also of its stockholders. It is evident that the donation has reached the stage
of perfection which is valid and binding upon the corporation and as such cannot be
rescinded unless there exist legal grounds for doing so. In this case, we see none. The two
reasons given for the rescission of said donation in the resolution of the corporation . . .
that the corporation had failed to comply with the conditions to which the above donation
was made subject, and that in the opinion of the Securities and Exchange Commission
said donation is ultra vires, are not, in our opinion valid and legal as to justify the rescission
of a perfected donation. . .
In finding that the donation was not ultra vires, the decision found that the articles of
incorporation expressly granted the corporation every power to “To invest and deal with
the moneys of the company not immediately required . . . and to aid in any other manner
any person, association, or corporation of which any obligation or in which any interest is
held by this corporation or in the affairs or prosperity of which this corporation has a lawful
interest.” The decision determined that acts of generosity or gratuity to employees of the

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company, which have never been questioned in the past, justify the act of gratitude given
to a deceased key officer of the company, thus: “We don’t see much distinction between
the acts of generosity or of benevolence extended to some in whom the corporation was
merely interested because of certain moral or political considerations, and the donation
which the corporation has seen fit to give to the children of the late Enrico Pirovano from
the point of view of the power of the corporation as expressed in its articles of
incorporation.” The decision went on to quote the corporate basis for upholding donations
and other forms of gratuity to directors, officers and employees:
“But although business corporations cannot contribute to charity or benevolence, yet they
are not required always to insist on the full extent of their legal rights. They are not
forbidden from recognizing moral obligations of which strict law takes no cognizance. They
are not prohibited from establishing a reputation for broad, equitable dealing which may
stand them in good stead in competition with less fair rivals. . .”
The Kalaw decision went on to say, that indeed of such act of donation were ultra vires,
then in effect the main beneficiary of why it is held for unlawful, the stockholders, have
ratified such donation, thus –
Granting arguendo that the donation given to the Pirovano children is outside the scope of
the powers of the defendant corporation, or the scope of the powers that it may exercise
under the law, or it is ultra vires act, still it may be said that the same cannot be
invalidated, or declared legally ineffective for that reason alone, it appearing that the
donation represents not only the act of the Board of Directors but of the stockholders
themselves as shown by the fact that the same has been expressly ratified in a resolution
duly approved by the latter. By this ratification, the infirmity of the corporate act, if any has
been obliterated . . .
What is clear from the Kalaw decision is the importance that the Court places on the fact
that an act of charity on the part of the Board of the company may only be to the extent
that it does not prejudice the interest of the interest of the stockholders, or that if it does,
the questioned act must receive confirmatory blessing from the stockholders. Even Section
36 of the Corporation Code recognizes formally the power of every corporation –
9. To make reasonable donations, including those from the public welfare or for
hospital, charitable, cultural, scientific, civic, or similar purposes . . .

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10. To establish pension, retirement, and other plans for the benefit of its
directors, trustees, officers and employees . . .
but such provisions, which are certainly directed for the benefit of stakeholders other than
the stockholders, are still permeated within the “maximization of profits” central philosophy
of the Corporation Code. In other words, when the Board of Directors of a company
pursues such socio- or civic-ends, as authorized by Section 36 of the Corporation Code,
they must be within “reasonable” terms, meaning that they are entered into primarily to
engender a great capacity for the company to better earn profits, such as when charitable
works are aimed at improving the company’s goodwill and bringing greater public esteem
for its service or products; or when the pension plan do not unduly dissipate the company’s
wealth, and are extended earn the greater loyalty of the company officers and employees.
HISTORICAL BACKGROUND AND RECENT DEVELOPMENTS
Globalization in general, and the effects of the 1997 Asian Financial \crisis on the
economy, in particular, brought about the imperative need to adopt in the Philippines,
formal systems of corporate governance that ushered the introduction into our legal and
corporate systems the general principle of the Stakeholder Theory.
From the last half of the twentieth century, the Philippines has been in competition with its
Asian neighbors in attracting foreign investments, particularly from the West, as the
cornerstone of a program of economic development. The country is a signatory state to the
WTO, and member of regional economic groupings like ASEAN and APEC. Globalization
has therefore compelled the country’s government and its business enterprises to adopt
systems that conform to world-standards, particularly in the fields of trade and competition,
e-commerce, intellectual property, international accounting and anti-money laundering
systems, and certainly in the fields of corporate governance, rehabilitation and bankruptcy.
The pernicious effects of the 1997 Asian Financial Crisis that flamed across many East
Asian countries was blamed on the lack of transparency and fair dealings of business
enterprises in the Asian corporate system. In particular, the self-dealing culture that
permeated large but family-controlled companies, or the in-breeding in the Japanese
system of shibatsus, and the chaebol set-up in the South Korea, were primarily blamed in

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creating inefficiency and wastage of corporate resources and excluding minority

shareholders from partaking of their rightful share in corporate profits. The prognosis was
that unless Asian countries adopted world-class standards of corporate governance, then
Asian business enterprises would not be able to reform themselves in a manner by which
to allow local and foreign investors to have confidence in Asian corporate systems. In the
1990’s, various multi-lateral agencies, such as World Bank and OECD, started a push
towards the adoption of world-standards of corporate governance across the Asian region.
Corporate Governance in the Banking Industry – in the Philippines, calls were

made in both the public and private sectors for the reformation of corporate governance
systems that would adhere to world-class standards, particularly those being promoted by
multi-lateral agencies. But it was the BANGKO SENTRAL NG PILIPINAS (BSP), that first
formally responded to the call by promulgating a series of circulars that effected changes
in its Manual of Regulations (which shall be hereinafter referred to as “BSP Circulars on
Corporate Governance”, or simple as BSP CG Circulars”), that in effect began to
formally recognize the stakeholder theory within the banking industry, and promoted
principles of transparency, accountability and responsibility, thus:
 Power and Authority of the Board of Directors – Circular No. 283
 Directors Qualifications and Disqualifications – Circular No. 296
 Guidelines Against Unsafe and Unsound Manner of Conducting Business –
Circular No. 341
 Qualifications of Independent Directors, Disqualification Procedures,
Confirmation of Qualification – Circular No. 391
 Audit Committee, Corporate Governance Committee, And Risk Management
Committee – Circular No. 499
 Procedures For Disqualifying Directors\Officers Of Closed Banks And
Financial Institutions – Circular No. 584
 Rules On Interlocking Directors And\Or Officers – Circular No. 592
Pursuant to the rule-making powers of the Monetary Board under the New Central Bank
Act, the BSP CG Circulars constitute “subsidiary legislation,” and have the force and effect
of law.

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Corporate Governance for Public Companies – Subsequently, the Securities

and Exchange Commission (“SEC”), promulgated in April 2002, Memorandum Circular
No.2, series of 2002, officially termed as the Code of Corporate Governance (hereinafter
referred to as “SEC Code”, providing for a system of corporate governance for public
companies, which seems much patterned after the BSP CG Circulars. The SEC Code was
subsequently supplemented SEC Memorandum Circular No. 15, series of 2002 providing
for the guidelines on the nomination and election of independent directors.
Pursuant to the quasi-legislative powers granted to the SEC by the Corporation
Code, and the Securities Regulation Code, the SEC Code has the force and effect of law.
Corporate Governance for the Insurance Industry – In September, 2005,
pursuant to the power granted under the Insurance Code, the Insurance Commissioner
promulgated IC Circular No. 31-2005, entitled “Code of Corporate Governance
Principles and Leading Practices,” (hereinafter referred to as “IC Code”), to establish
within the insurance industry a similar system of corporate governance.
One of the key features in both the BSP CG Circulars and the IC Code is the requirement
for the qualification for directors appointed in the Board of banking and insurance
companies to attend an orientation seminar on corporate governance principles with duly
accredited providers. A similar practice is now being enforced for public companies
covered by the SEC Code, and there has been a formal accreditation of seminar providers,
one of the leading ones would be the Philippine Institute of Corporate Directors, which
has receive formal recognition not only by international agency, but also by the Executive
Department.
Attempts at Corporate Governance Regime for State-Owned Enterprises –

There have been calls for the promulgation of similar codes of corporations, and bills have
been introduced in Congress for such a GOCC code, but to date nothing has come out of
such plans.
On 10 April 2007, President Gloria Macapagal Arroyo issued a memorandum to the

Department of Finance and all other concerned departments, agencies and Boards of
GOCCs and GFIs directing that: (s) the DOF shall develop a performance evaluation
system for GOCCs and GFIs to be used in evaluating the yearly performance of Boards of
Directors or Boards of Trustees taking into account corporate governance principles and
best practices; (b) requiring all directors appointed to the Boards of Directors\Trustee of

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GOCCs and GFIs to take an orientation seminar on Corporate Governance to be

developed by the Department of Finance in coordination with the Institute of Corporate
Directors; and (c) for Boards of Directors\Trustees of GOCCs and GFIs to set up and
organize the appropriate board committees toward ensuring good corporate governance,
e.g., Audit Committees and Governance Committees.
Corporate Governance Scorecard Project – The Institute of Corporate
Directors (“ICD”) has been at the forefront of promoting corporate governance reforms in
the country. Through the Institutes of Directors in East Asia Network (IDEA.Net), ICD
has collaborated with similarly oriented institutes in eight other East Asian economies.
Going beyond compliance with the director training requirements, ICD initiated in 2005 the
Corporate Governance Scorecard Project (“CG Scorecard”) in the Philippines, using
the IDEA.Net template which was first implemented in Thailand, and thereafter adopted in
China, Hong Kong, and Indonesia.
The CG Scorecard Project initially began in 2005 to rate selected publicly-listed companies
through a questionnaire that carefully assessed their transparency standards and
disclosures to investors and the general public. The questionnaire used was adapted to
the Philippine regulatory and business conditions, while fully subscribing to the spirit of
globally accepted corporate governance principles. The results enabled public-listed
companies to determine what the acceptable corporate governance practices were, and
how they compare with other companies, both locally and abroad, with a view to ultimately
enhancing corporate governance practice in the Philippines to a higher level of
professionalism, consistent with international best practices.
In 2006, the Ateneo de Manila Law School (“Ateneo Law School” or “ALS”), to became
ICD’s academic institutional partner by which the actual rating of public companies could
be done, and to put greater integrity into the process where the results would be even
more acceptable to the public companies. More importantly, the Ateneo Law School, by
providing well-trained and accredited law students as independent evaluators, gave
substance to the key approach adopted by the CG Scorecard Project: that an ordinary
person in the street, with no special access to information other than what is publicly
available through company reports, websites and records with the SEC and PSE, should
be able to judge the standard of CG practice of any publicly-listed corporation company.

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In 2007, ICD took another important step to transform the CG Scorecard Project into a
more effective tool for prodding publicly-listed companies towards higher standards of
performance in corporate governance. Apart from revising the CG template based on the
experience and lessons learned from the two previous scorecard initiatives and
incorporating recommended changes coming from the public companies, ICD introduced
the self-rating option to public companies, complemented by a validation process through
the LS law students-evaluators, and which were open to regulators. More importantly, SEC
and the PSE became partners-institutions in the Project, through a Memorandum of
Agreement which was executed at formal ceremonies among the four institutional partners
on 21 August 2007. Both SEC and PSE issued covering memoranda to public companies
directing the to participate as respondents in the CG Survey using the CG Scorecard as
the survey instrument.
Dr. Jesus Estanislao, the founding Chair of ICD, formally reported on the results of the
2007 CG Scorecard Project, with comparison with those obtained in 2005 and 2006, as
follows:
a) The number of participating companies in 2007 increased markedly to 135
corporations, compared to 49 in 2005 and 65 in 2006;
b) The aggregate score for the covered publicly-listed companies in 2007 was 65%,
compared to 54% in each of 2005 and 2006, definitely showing a marked
improvement in CG practice among publicly-listed companies;
c) The character of the CG Scorecard remains steadfast:
 It reflects public perception shaped by public verifiable disclosures that
companies make (although they may or may not be factual);
 Fully consistent with OECD framework and global CG principles;
 It adopts the five major categories of the OECD Framework: rights of
shareholders (65%), equitable treatment of shareholders (81%), Role of
stakeholders (55%), and board responsibilities (5 1%), all of which showed
marked improvements from the ratings achieved in 2005 and 2005;
d) There is a significant divided in ratings between the top rated and lowest ranked
publicly-listed companies: Top 10-90% rating; Bottom 10%-42% rating;
e) The lower-ranking companies have the capacity to catch-up with the top-ranking
companies: even the 2007 top-ranking companies (which average 96%, were able
to dramatically improve their performance compared with their averages in 2005
(then at 63%) and 2006 (then at 74%).

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CORPORATE GOVERNANCE BACKGROUND, CONCEPTS AND DEFINITIONS
Although in point of time, an official agency issuance on “good corporate governance,” was
actually initiated by the BSP, when in 2001, it began to officially issue circulars to provide
for the framework of “good corporate governance” for the banking industry, in the BSP CG
Circulars. Therefore, the use of the technical term “Corporate Governance” may be
deemed to have been legally incorporated into the Philippine legal system in 2002 with the
promulgation of the SEC Code of Corporate Governance, as it defined the term as
follows –
“ . . . A 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 MARKET PLACE.”
The SEC Code was issued in accordance with State’s policy to actively promote corporate
governance reforms aimed to:
 Raised investor’s confidence
 Develop the capital market
 Help achieve high sustained growth for the corporate sector and the economy
In 2005, the IC Code gave another, and more process driven, definition of corporate
governance, to mean-
“. . . THE SYSTEM BY WHICH COMPANIES ARE DIRECTED AND MANAGED. IT
INFLUENCES HOW THE OBJECTIVES OF THE COMPANY ARE SET AND ACHIEVED,
HOW RISK IS MONITORED AND ASSESSED, AND HOW PERFORMANCE IS
OPTIMIZED.”
The IC Code is presaged with the following stated objectives, thus:

 State’s policy to “Institute Corporate Governance Reforms in order to achieve:”
 Policyholder and market investor confidence

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 Sustain the growth of the insurance industry

 Thereby contributing to the country’s economic well-being
The definition of “corporate governance” under the SEC Code adheres more to
establishing the theoretical basis of the system of corporate governance and is value-laden
by the terms found within its definition; whereas, the IC Code definition looks at corporate
governance from its process oriented point of view, and treats corporate governance as
system of management of corporate affairs. Yet, when going into the operative provisions
of both the SEC Code and the IC Code, as well as the BSP CG Circulars, they all
essentially follow the same format: provide for governance principles, then supported by
leading practices and procedures to implement the covered corporate governance
principle.
INTRODUCTION OF THE STAKEHOLDER THEORY INTO THE PHILIPPINE LEGAL

SYSTEM
a. Paradigm shift: Adoption of the Stakeholder Theory for Covered Companies
A fundamental effect of each of the three agency codes on corporate governance,
under a quasi-legislative norm, is the adoption of the Stakeholder Theory for all covered
companies, in contrast to the existing Stockholder Theory or Doctrine Maximization of
Shareholder Value.
The threshold legal issue that has to be resolved is this: Was it lawful for the BSP,
the SEC, and the IC, in the exercise of their rule-making powers, to expand the legal
constituencies of Boards of Directors of covered companies beyond the profit-
maximization doctrine provided for in the Corporation Code.
There seems to be little debate to the proposition that the BSP, the SEC, and the IC,
each have administrative powers to adopt in their respective jurisdictions the more
expansive Stakeholder Theory, based on the following grounds:
 It would surprise many practitioners to realize that there is no provision at all in the
Corporation Code that provides expressly for the Doctrine of Maximization of
Shareholder Value.
 There are provisions in the Corporation Code itself that acknowledge that Boards
of Directors of stock corporations owe certain obligations to other constituencies,
provided it is compatible with the main goal of seeking profits for the corporations.

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 The Corporation Code primarily regulates the corporate entity as a means of doing
business, and in the nature of a stock and for-profit corporation, irrespective of the
particular line of business actually undertaken, it mandates necessarily and
logically the maximization of profit doctrine to define the relationship of those within
the intra-corporate relationship, that of the Board of Directors and officers on one
end, and the corporation and the stockholders on the other end. The Corporation
Code does not attempt to regulate, much less does it prohibit the proper regulation
of, the legal relationship of the corporation, its Board of Directors and officers, with
those of other parties or stakeholders.
The Stakeholder Theory takes its essence from the underlying business enterprise of the
corporate set-up. Consequently, it is the governing agencies which are vested by their
charters the direct responsibility to evolve the policy growth and development, and provide
proper administration over the corporate players, within their respective industries.
b. The Stakeholders in the Banking Industry

BSP Circular No. 283, in defining the “General Responsibilities of the Board of
Directors” of banking institutions confirms that “the position of bank\quasi-bank\trust entity
director is a position of trust,” but goes on to provide “director assumes certain
responsibilities to different constituencies or stakeholders,” expressly enumerating
them as follows:
 Banking institution itself
 Stockholders
 Depositors and other creditors
 Management and employees
 Public at large
And further adds that “these constituencies or stakeholders have the right to expect
that the institution is being run in a prudent and sound manner.” Although the general
corporate law principle is that it is the stockholders who have a direct equitable stake in the
business enterprise and operations of the corporation, BSP Circular No. 283 expands that
to include the depositors, creditors, management, employees and the public at large, as
having a direct stake in the operations of banking institution and to “expect that the
institution is being run in a prudent and sound manner.”

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The language of BSP Circular No. 283 thereby has effectively expanded the fiduciary
obligations of the directors not only to the banking institution and its stockholders, but
practically to the entire community that its operations affect. That means that the legal
standing of such other stakeholders goes beyond the terms of the contracts they each may
have entered into with a banking institution, and that the Board of Directors’ “residual goal”,
or that every banking institution’s “objective function”, pertains to insuring to all such
stakeholders, not just the stockholders, that the bank’s operations are run in a prudent and
sound manner.
This conclusion is reinforced by the language of Section 1 of the same circular that
provides that “the powers of the board of directors as conferred by law are original and
cannot be revoked by the stockholders. The directors hold their office charged with the
duty to act for the bank\quasi-bank\trust entity in accordance with their best judgment.” The
language not only confirms the prevailing theory of “original power” embodied in Section
23 of the Corporation Code (as distinguished from the theory of “stockholders delegated
power”), but more so when taken in connection with the expanded definition of
constituencies in Section 2 of the circular, emphasizes that bank directors and officers
cannot hide behind the fiduciary obligations to the principal stockholders as a shield to not
meet their fiduciary obligations to other specified stakeholders.
This responsibility of Board of Directors of banking institutions towards an “expanded

constituencies” is strengthened by the following provisions of BSP Circular No. 283, thus:
 To ensure that the bank\quasi-bank\trust entity have beneficial influence on the
economy, the board has a continuing responsibility to provide those services and
facilities which will be supportive of the national economy.
 A director shall “act honestly and in good faith, with loyalty and in the best interest of
the institution, its stockholders, regardless of the amount of their stockholding, and
other stakeholders such as its depositors, investors, borrowers, other clients and
the general public”
 While a director should always strive to promote the interest of all stockholders, he
should also give due regard to the rights and interest of other stakeholders.

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In addition to the rather general statements or principles relating to stakeholders

enumerated above, BSP Circular No. 283 gives reference to stakeholders in only the
provision covering the selection of bank officers, thus:
“The Board of Directors shall establish an appropriate compensation
package for all personnel who shall be consistent with the interest of all
stakeholders:”
In other words, BSP Circular No. 283, apart from general principles, does not provide for
detailed provisions on how bank Boards of Directors, will operationalize their fiduciary
obligations to stakeholders other than stockholders.
BSP Circular No. 341, series of 2002, (Guidelines Against Unsafe and Unsound Manner of
Conducting Business), provides that “in determining whether a particular act or omission,
which is not otherwise prohibited by any law, rule or regulation affecting banks, quasi-
banks or trust entities, may be deemed as conducting business in an unsafe or unsound
manner, the Monetary Board, upon report of the head of the supervising or examining
department based on findings in an examination or a complaint, shall consider” as one of
the circumstances –
The act or omission has resulted or may result in material loss or damage, or
abnormal risk or danger to the safety, stability, liquidity or solvency of the
institution;
The act or omission has resulted or may result in material loss or damage or
abnormal risk to the institution’s depositors, creditors, investors, stockholders or to
the Bangko Sentral or to the public in general.
Although the BSP CG Circulars do not expressly provide for a system of hierarchy of rights
that should govern the resolution of the conflicting rights and claims of the various groups
of stakeholders, it cannot be said that they do not provide to Boards of Directors of banking
institutions a rational basis upon which to exercise their business judgment under a regime
of expanded constituencies. Aside from the fact that the banking industry has been
characterized as an industry “vested with public interest,” it is a mature industry which is

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governed by a well-defined set of rules, standards and procedures of very sophisticated

set of laws (the New Central Bank Act and the General Banking Law of 2000, to name the
leading statutory rules) and a system of jurisprudence, which operate under clear terms of
“expanded stakeholders” in defining the duties and obligations of Boards of Directors and
officers of banking institutions.
What the BSP CG Circulars achieved in the realm of corporate governance was to formally
institutionalize into the BSP’s Manual of Regulations, the Stakeholder Theory on expanded
constituencies and the global practice of good corporate governance under the direct
supervision and control of the BSP. The BSP CG Circulars therefore removed any issues
of what banking practices are mandatory, rather than merely recommendatory, to the
Boards of Directors and officers of banking institutions.
c. The Stakeholders in Public Companies
The SEC Code defines “corporate governance” as a 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 market place,” thereby
introducing the stakeholder theory into the very heart and definition of corporate
governance.
In addition, the SEC Code provides for the following duties and obligations of the Board of
Directors of a public company to its “stakeholders” as distinguished from the stockholders,
thus:
a) It contains the same provisions found in the BSP CG Circulars that as part of
“General Responsibility” –
“A director assumes certain responsibilities to different constituencies
or stakeholders, who have the right to expect that the institution is being run
in a prudent and sound manner;”
b) In enumerating the “Duties and Functions” of the Board of Directors, it provides for
an opening paragraph that holds that:

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“To insure a high standard of best practice for the company and its
stakeholders, the Board should conduct itself with utmost honesty and
integrity in the discharge of its duties, functions and responsibilities;”
c) In particular, it enumerates as one of such duties and functions of the Board the
obligation to –
“Identify the corporation’s major and other stakeholders and formulate
a clear policy on communicating or relating with them accurately, effectively
and sufficiently. There must be an accounting rendered to them regularly in
order to serve their legitimate interests;”
d) In terms of “Audit and Accountability,” the Board of Directors of a public company is

directed to –
“Maintain a sound system of internal control to safeguard stakeholders’
investment and the company’s assets;” and
e) In terms of “Disclosure and Transparency,” it mandates that:

“The Board shall therefore, commit at all times to full disclosure of
material information dealings. It shall cause the filing of all required
information for the interest of the stakeholders.”
Other than in the immediately aforequoted sections, no other section or provision of the
relatively lengthy provisions of the SEC Code are stakeholders other than stockholders
treated or referred to, and that in fact in certain financial and operational provisions, the
language of the SEC Code limits itself only to having application to stockholders.
For example, on the section on “Accountability and Audit,” the SEC Code limits
accountability of the Board to the stockholders, thus:
 The Board is primarily accountable to the shareholders, and management is

primarily accountable to the Board.

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 The board should provide the shareholders with a balanced and

understandable assessment of the corporation’s performance, position and
prospects on a quarterly basis.
Good corporate governance for public companies would now require from the Boards of
Directors and corporate officers, a more panoramic approach in decision-making and in
the very exercise of its business judgment, which must include the balancing of the
interests of various stakeholders who do not have the same priorities, towards a general
objective. Under the SEC Code, this would involve “enhancing the value of the corporation
as it competes in an increasingly global market place.” Thus, the SEC Code delineates the
duty of the Board of Directors of a public company as –
It is the Board’s responsibility to foster the long-term success of the corporation

and secure its sustained competitiveness in a manner consistent with its fiduciary
responsibility, which it should exercise in the best interest of the corporation and its
shareholders.
One wonders from the reading of the afore-quoted provisions of the SEC Code why in
setting down the responsibility of the Board of Directors of a public company to ensure the
long-term success of the company, that it would limit the exercise of its fiduciary
responsibilities only in “the best interest of the corporation and its shareholders,” not
including within its language other stakeholders.
One gets the impression from reading the provisions of the SEC Code that although there
is no doubt that it has introduced into our system of public companies the Stakeholder
Theory, it has managed to provide only for general principles and doctrines, and its
operative provisions reflect the same inadequacies or shortcoming as the theory itself has
been evaluated to possess: there seems to be difficulties on the part of SEC of putting
flesh into a general framework of stakeholder ship, and providing a system of decision-
making in cases of conflicts arising from the varied interests of the identified stakeholders.
This is understand le in the case of the SEC, because unlike the BSP and the IC whose

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industries are supported by matured set of statutory systems upon which they rely on to
operationalize the stakeholder system, public companies are governed by the Corporation
Code and the Securities Regulation Code, which still embody a bias towards the
Stockholder Theory.
The challenge therefore for corporate practitioners, governing administrative agencies, and
the courts of law, is to evolve a system of stakeholdership for public companies that take
into the circumstances prevailing in the Philippine corporate scene, which are consistent
with global standards of what constitute best corporate governance practice.
The granting under the SEC Code of “legal standing” to stakeholders, other than the
stockholders, “the right to expect that the institution is being run in a prudent and sound
manner,” although relevant in the banking industry which handles funds coming from the
public, may not always be relevant or appropriate to all public companies. Although it is
clear that stockholders have a direct stake in the operations of the corporate business
enterprise from which they draw their equity return in the form of dividends declared out of
accumulated profits (retained earnings), it is difficult to see how other stakeholders, such
as employees and suppliers should have a direct legal standing to insist upon meddling
into the business judgment of the Board of Directors of a public company in the running of
the corporate affairs and to insist upon their version of how the company should be run in a
“prudent and sound manner.” Most of stakeholders other than the stockholders have their
interest firmly planted not on the profitability of the corporation, but on the terms of the
underlying contractual relationship with the company. Worse is the aspect of having a
situation where other stakeholders’ insistence of how the company should be run conflict
with the stockholders’ expectation that profit-maximization should be the primary
motivation of the Board of Directors in making decisions on company affairs.
In addition, the provision in the SEC Code mandating that the Board of Directors of a
public company must “maintain a sound system of internal control to safeguard
stakeholders’ investment and the company’s assets,” seems to recognize that it is not only
the stockholders who have a pecuniary investment into the company, but that other
stakeholders as well. The nature of what is the nature and proper valuation of other

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“stakeholders’ investment” in the company is not defined under the SEC Code. The
concept of “stakeholders’ investment” (other than the equity interests of stockholders) is a
radical concept which has yet to be developed, since the SEC Code mandates that it is
part of the Board of Directors of a public company to safeguard and for which a regular
accounting is instructed.
Therefore, one of the major developments in Philippine corporate governance system that
can be expected to happen, whether it be in form of memorandum circular coming from the
relevant administrative agency (in this case the SEC), or jurisprudential pronouncement
from the courts based on controversies that arise from corporate governance practice, is
the resolution of what may be considered as the proprietary or pecuniary valuation of the
“legal right and standing” of stakeholders, other than stockholders, have on the corporate
business enterprise which is quite distinct and apart from the equity claims of stockholders.
The first issue is whether the legal standing granted under the SEC Code to stakeholders
other than stockholders should mean that bank directors and officers owe them the same
fiduciary duties that under common law they owe to stockholders. If so, do stakeholders,
other than stockholders, now have the same common law rights that stockholders enjoy,
such as the right to inspect and copy corporate records, and the right to file a derivative
suit.
The author’s position on the matter is that eventually the resolution of what constitutes
stakeholders’ (other than stockholders) “investment” in the company’s business enterprise
and its assets, does not amount to a proprietary or pecuniary claim, but merely defines a
standing to demand from the Board of Directors and Management of a covered company
to operate the corporate business enterprise in a manner that even as they seek the
maximization of profits, they must take into account the interests of other stakeholders.
This is more consistent with the definition of “Corporate Governance” under the SEC Code
as it recognizes the standing of all stakeholders of a public company in “ensuring that
management enhances the value of the corporation as it competes in an increasingly
global market place.” The term “enhancing the value of the corporation” goes beyond just
maximization of profits, but goes into management of the corporate business enterprise
that takes into consideration the interests of other stakeholders, such as sacrificing short-
term profits towards achieving long-term goals of efficiency and stability; of diverting some

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of the resources of the company from profit-making to funding compliance with

environmental safeguards to avoid incurring administrative penalties and\or enhancing the
corporate goodwill in the market place; and of terminating profitable arrangements with
contractors and suppliers that do not adhere to child-labor standards, to avoid public
backlash against the company’s products.
But more to the point in answering those questions is the structure of the SEC Code itself
that limits those common law rights only to stockholders under Section V thereof:
“Stockholders’ Rights and Protection of Minority Stockholders’ Interests.”
Legal practitioners on corporate governance thereby should already advise their corporate
clientele, particularly the Boards of Directors of public companies, that when it comes to
evaluating their duties and responsibilities towards stakeholders other than stockholders,
they must take already the bull by the horn, otherwise, they risk being shoved unto them a
greater form of fiduciary duty and obligation, and thereby incurring greater personal
liabilities. In other words, the provision in the SEC Code that “stakeholders or
constituencies have a right to expect that the corporation is run in a sound and prudent
manner,” is an all-encompassing norm, and subject to so much interpretation based on
who appropriates it for their own advantage and benefit.
Since Board of Directors of public companies are legally mandated under the SEC Code,
with respect to their various stakeholders, to –
 Identify company’s major and other stakeholders

 Formulate a clear policy on communicating or relating with them accurately,
effectively and sufficiently
 Render a fair accounting to them regularly in order to serve their legitimate
interests
 Develop an investor relations program that reaches out to all shareholders
and fully inform them of corporate activities

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d. Stakeholders in the Insurance Industry
The IC Code particularly defines the term “stakeholders” to refer “to the group of company
owners, officers and employees, policyholders, suppliers, creditors and the community.”
More importantly, the IC Code expressly provides that its objectives “are enhance the
corporate accountability of insurers and intermediaries, promote the interest of their
stakeholders specifically those of the policyholders, claimants and creditors.”
Other than the foregoing provisions, the IC Code treats of stakeholders only in the
following case:
 “Establish an appropriate compensation package for all personnel that are

consistent with the interest of all its stakeholders;”
 “Act honestly, in good faith, and with loyalty to the best interest of the
institution, its stockholders, (regardless of the amount of their stockholding)
and other stakeholders such as its policyholders, investors, borrowers, other
clients and the general public;”
 “A director must always act in good faith with care which an ordinarily
prudent man would exercise under similar circumstances, while a director
shall always strive to promote the interest of all stockholders. He shall also
give due regard to the rights and interests of other stakeholders;”
 “Corporate Independence shall be maintained so as not to compromise the
interests of policyholders, claimants, creditors, minority shareholders and
other stakeholders;”
 “The Board must maintain an effective communications policy that enables
both the Board and management to communicate effectively with its
shareholders, stakeholders and the general public. This policy must
effectively interpret the operations of the company to the shareholders and
must accommodate feedback from them, which should be factored into the
company’s business decisions.”

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On the premise that the IC Code had been patterned after the SEC Code, as in fact it
copies some of the key provisions of the SEC Code, one may get the impression that the
language of the IC Code when it comes to defining, in broad terms, the duties and
responsibilities of the Board of Directors to stakeholders, takes a parallel approach in
distinguishing between the primary duty it has to stockholders, and only what seems to be
a secondary duty to all other stakeholders. Thus, “while a director shall always strive to
promote the interest of all stockholders,” he must (only) “give due regard to the rights and
interests of other stakeholders.” A closer look at the provisions of IC Code would not
support such an impression.
Firstly, the afore-quoted provisions where the IC Code ever refers to stakeholders just
happen to be the only provisions also that refer to stockholders, unlike in the SEC Code
where various provisions are limited to defining the obligations of the Board of Directors
only to stockholders, especially when it comes to financial matters.
Secondly, unlike the BSP CG Circulars and the SEC Code, the IC Code begins with an
opening paragraph that is meant all its provisions applicable to all its stakeholders, thus:
Pursuant to the national policy to institute corporate governance reforms in order to

achieve policyholder and market investor confidence; sustain the growth of the
insurance industry, thereby contributing to the country’s economic well-being.
The objectives of this circular are to enhance the corporate accountability of

insurers and intermediaries, promote the interests of their stakeholders specifically
those of the policyholders, claimants and creditors.
Thirdly, the IC Code defines the role of the Board of Directors in terms of their obligations
to the insurance industry, and therefore primarily driven toward promoting the best interest
of those stakeholders who are most affected, thus:
 Directors sitting on the board in any insurance entity shall be possessed of

the necessary skills, competence and experience, in terms of management
capabilities preferably in the field of insurance or insurance-related
disciplines. In view of the judiciary nature of insurance obligations, directors
shall also be persons of integrity and credibility.

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 As a custodian (SIC) of public funds, insurance corporations and insurance

intermediaries shall ensure that their dealings with the public are always
conducted in a fair, honest, and equitable manner.
As in the case of the banking industry therefore, the IC Code seeks to implement a
mature system of stakeholdership that comes with the nature of the insurance
industry. And unlike in the case of the SEC Code, both the IC Code and the BSP CG
Circulars do not require of the Boards of Directors of covered companies to have to
identify their stakeholders or the nature of their “investments” in the companies, for
by the nature of their businesses, and the governing laws on each of such
industries, the Board of Directors know, or ought to know, fully well the sectors of
the public other than their stockholders, who are affected directly by their
operations.
e. Common Law Duty of Directors to Corporate Creditors under the Trust Fund Doctrine
An area where corporate practice and jurisprudence have evolved a system of

stakeholdership that promotes the interests of corporate creditors to those of the
stockholders would be in the area of the Trust Fund Doctrine.
The limited liability feature of the corporation brings with it the enforcement under common
law of the trust fund doctrine: since stockholders are entitled to the profits of the
corporation, then it also means that they must sustain the losses incurred from operations;
consequently, since the creditors of the corporation have no legal right to enforce their
claims against stockholders when the corporate assets are insufficient, it becomes
necessary that during the life of the corporation, no asset will be returned to the
stockholders outside of distribution of profits (dividends from unrestricted retained
earnings), to ensure that all corporate assets are first available and applied to answer all
liabilities of the corporation.
The definition of the trust fund doctrine that has been much adhered to in Philippine
jurisdiction is one given by Fletcher: “The capital stock of a corporation, or the assets of an
insolvent corporation representing its capital, is a trust fund for the benefit of the
company’s creditors.”

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Our Supreme Court had formally adopted the principle of the doctrine in Philippine Trust
Co. v. Rivera, when it held that: “It is established doctrine that subscriptions to the capital
of a corporation constitute a fund to which the creditors have a right to look for satisfaction
of their claims and that the assignee is insolvency can maintain an action upon any unpaid
stock subscription in order to realize assets for the payment of its debts.”
Garcia v. Lim Chu Sing, held that “the capital stock of a corporation is a trust fund to be
used more particularly for the security of creditors of the corporation, who presumably deal
with it on the credit of its capital stock.”
The doctrine itself has, to a great extent, been marginalized in the United States, mainly
because of its misleading name; nevertheless, in Philippine jurisdiction, our own Supreme
Court seems to accept the doctrine as a given.
Under aegis of the Corporation Code, the Supreme Court in Boman Environmental
Development Corp. v. Court of Appeals, reaffirmed the application of the doctrine in our
jurisdiction when it held that –
The requirement of unrestricted retained earnings to cover the shares is based on the trust
fund doctrine which means that the capital stock, property and other assets of a
corporation are regarded as equity in trust for the payment of corporate creditors. The
reason is that creditors of a corporation are preferred over the stockholders in the
distribution of corporate assets among the stockholders without first paying corporate
creditors. Hence, any disposition of corporate funds to the prejudice of creditors is null and
void.
In Commissioner of Internal Revenue v. Court of Appeals, the Court reiterated that “under
the trust fund doctrine, the capital stock, property and other assets of the corporation are
regarded as equity in trust for the payment of the corporate creditors.”
Finally, the SEC Rules Governing Redeemable and Treasury Shares (1982), expressly
adopts the doctrine as follows: “The outstanding capital stock of a corporation, including
unpaid subscriptions, shall constitute a trust fund held by the corporation for the benefit of

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its creditors which shall not be returned to the stockholders by repurchase of shares or
otherwise, except in the manner as provided for under the Corporation Code and these
rules.”
An examination of the various cases on the matter shows that the trust fund doctrine
usually applies in four cases:
a) Where there has been a distribution or an attempt to distribute corporate properties,

or a return of the capital or portion thereof, to stockholders, without providing for the
payment of creditors;
b) Where it had released the subscribers to the capital stock from their subscriptions
without valuable consideration;
c) Where it has transferred the corporate property in fraud of its creditors; and
d) Where the corporation is insolvent.
In each of the afore-enumerated cases, the action of the Board of Directors would be void
as being violative of the rights of the corporate creditors, and for which they can be made
personally liable, as was the judgment in Steinberg v. Velasco.
Inherent in the trust fund doctrine is the principle of the legal preference in payment from
corporate properties of the creditors’ vis-à-vis equity investors. Since creditors place no
stake in the corporate operations and their rights are based on contract, then the corporate
venture must in case of insolvency, devote and prefer all corporate assets towards the
payment of its creditors. On the other hand, since the equity investors clearly undertook to
place their investment to the risk of the venture, they can only receive a return of the
investment only from the remaining assets of the venture, if any, after the payment of all
liabilities to creditors. The closest injunction in the Corporation Code upholding the
principles of the doctrine would be Section 122 thereof governing dissolution of
corporations and their liquidation when it provides that “except by decrease of capital stock
and as otherwise allowed by this Code, no corporation shall distribute any of its assets or
property except upon lawful dissolution and after payment of all its debts and liabilities.”
Only recently, in Ong Yong v. Tiu, the Supreme Court reiterated its support of the trust
fund doctrine and although the suit involved parties to subscription agreement, it prohibited
the rescission of a subscription agreement even when there was substantial breach
thereof, because it would undermine the protection accorded to the creditors of the

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corporation. In other words, even courts who are deciding intra-corporate disputes have an
obligation to ensure that corporate creditors are protected by the terms of settlement of the
issues.
F. Other Areas In Corporate Law Where Stakeholdership Principles Have Evolve
Other area where a sense of stakeholdership principle has evolved in Philippine Corporate
Law is when it comes to the welfare of company employees. One of them is the principle
first enunciated in A. C. Ransom Labor Union-CCLU v. NLRC, where the Court first
enunciated the principle that the highest officer of a corporation should stand liable with the
corporate employer for the labor claims of illegally dismissed employees, when there are
no enough corporate assets to fully satisfy those claims.
In A.C. Ransom Labor Union-CCLU v. NLRC, the Court in interpreting he Labor \code held
that since a corporate employer is an artificial person, it must have an officer who can be
presumed to be the employer, being the “person acting in the interest of employer” as
provided in the Labor Code. Therefore, A.C. Ransom held that “the responsible officer of
the employer corporation can be held personally, not to say even criminally, liable for non-
payment of backwages; and that in the absence of definite proof as to the identity of an
officer or officers of the corporation directly liable for failure to pay backwages, the
responsible officer is the president of the corporation jointly and severally with other
presidents of the same corporation.”
It must be noted, however, that the Supreme Court has now and then, not on a consistent
basis, rejected the universal application of the A.C. Ransom doctrine for being contrary to
the main Corporate Law principle expressed under Section 31 of the Corporation Code,
that imposes personal liability on a corporate director or officer only when he is shown to
have acted with fraud, bad faith or gross negligence. Thus, it has been held that only the
responsible officer of a corporation who had a hand in illegally dismissing an employee
should be held personally liable for the corporate obligations arising from such act; and for
the separate juridical personality of a corporation to be disregarded as to make the highest
corporate officer personally liable on labor claims, the wrong doing must be clearly and
convincingly established.

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g. Corporate Responsibility in the Realm of Corporate Tort or Negligence
The term “doctrine of corporate responsibility” has formally entered into Philippine
jurisprudence in the recent decision in Professional Services, Inc. v. Court of Appeals,
where the Supreme Court held the hospital corporation liable for the medical malpractice
or professional negligence of a physician, who was a member of its medical staff, thus –
The challenged Decision also anchors its ruling on the doctrine of corporate responsibility.
The duty of providing quality medical service is no longer he sole prerogative and
responsibility of the physical. This is because the modern hospital now tends to organize a
highly-professional medical staff whose competence and performance need also to be
monitored by the hospital commensurate with its inherent responsibility to provide quality
medical care. Such responsibility includes the proper supervision of the members of its
medical staff. Accordingly, the hospital has the duty to make a reasonable effort to monitor
and oversee the treatment prescribed and administered by the physicians practicing in its
premises.
Unfortunately, the term doctrine of corporate responsibility was used in Professional

Services, Inc., to mean “corporate negligence doctrine . . . These special tort duties arise
from the special relationship existing between a hospital or nursing home and its patients,
which are based on the vulnerability of the physically or mentally ill persons and their
inability to provide care for themselves.
“Corporate tort” as an independent source of liability that is not based on any fiduciary
relationship, has long been recognized in our jurisdiction, as to make the corporate
principal and the corporate actor jointly and severally liable as joint-tortfeasors.
In Sergio F. Naguiat v. NLRC, although admitting that “our jurisprudence is wanting as to

the definite scope of ‘corporate tort’,” nevertheless sought to encompass corporate tort to
“consists in violation of a right given or the omission of a duty imposed by law . . , tort is a
breach of a legal duty.” In that case, for failure of the corporate employer to grant
separation pay to employees in case of closure or cessation of operations of
establishments or undertaking not due to serious business losses or financial reverses as
mandated in Article 283 of the Labor Code, the Court held the corporate employer liable
for tort, including its stockholders who was actively engaged in the management or
operation of the business.

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The basis of liability for corporate tort is the act of negligence committed by an officer or
authorized agent of the corporation on behalf of the corporate business enterprise, rather
than a breach of a fiduciary obligation owed to the victim of the negligent act. Although it is
true that violation of the common duty of diligence would make the corporation and the
acting director or officer liable, such liability pertains to a breach of duty to a stakeholder,
unlike tort liabilities which may arise in relation to a stranger to the corporation who has
suffered damage by virtue of a negligent corporate act. Also, mere negligence causing
damage to a person or entity is actionable in corporate torts situation, in violation of
Corporation Code, the level of negligence has to be “gross negligence.’
Nevertheless, the “doctrine of corporate responsibility” espoused in Professional Services,

Inc., properly characterizes the “fiduciary duty” that a corporation that opens its facilities to
the public, has to a group of stakeholder which has been referred to as “the public” or “the
community.” It means therefore that apart from public utilities and common carriers, any
another company that by the nature of its business or operations, caters to the demands or
needs of the public, such as a hospital corporation, assume a fiduciary obligation to the
public of to the community that it serves to look at their safety and well-being. Thus, the
Court held that in the case of a corporate hospital, “the duty of providing quality medical
service is no longer the sole prerogative and responsibility of the physician” because “the
modern hospital now tends to organize a highly-professional medical staff whose
competence and performance need also to be monitored by the hospital commensurate
with its inherent responsibility to provide medical care.”
Statutory and Common law Backdrop for Philippine Corporate Governance
As may be obvious from the definitions under both the SEC Code and the IC Code, and as
clearly set out by their operative provisions, corporate governance principles and leading
practices essentially cover the exercise by the Board of Directors of a company of its
power to manage corporate affairs and the duties it assumes towards the persons and
entities to which it owes fiduciary obligations.
To properly understand the systems of corporate governance introduced under the agency
codes, it would be necessary to understand the source of the power and competence of
the Board of Directors, their constituencies, and the objectives that each board is
mandated to achieve, under Philippine Corporate law setting.

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1. The “Corporate Package”
The corporate vehicle has indubitably become the prevalent business medium for
important business endeavors in our country because it offers the following features:
Strong Juridical Personality

Centralized management
Limited liability to investors
Free- transferability of units of ownership
Corporate Governance is essentially based on, and treats of, the corporate feature of
“Centralized Management” and its accompanying common law doctrine of “Business
judgment Rule.”
A corporation’s management is centralized in the Board of Directors. Shareholders are not

agents of the corporation, nor can they bind the operations, unlike in a partnership setting,
where each partner may bind the partnership, even without the knowledge of the partners.
Therefore, in its legal relationship, a corporation presents a more stable and efficient
system of governance and dealings with third parties, since management prerogatives are
centralized in its Board. By imposition of law, and except in particularly designated
instances, stockholders are bound by the management decisions and transactions of the
Board of Directors of the corporation.
2. Power of Board Directly vested by law: Doctrine of Centralized management
Although the members of the Board of Directors of every stock corporation will normally be
elected into office by the stockholders, and under the provisions of the Corporation Code,
and that the power to remove directors is vested in the stockholders, nonetheless directors
are not agents of the stockholders, nor are the power of the Board considered to be
delegated powers of the stockholders. This doctrine of “directly vested authority” which
considers the Board powers as directly vested by law and not merely being delegated
power from the stockholders, is the dominant rule in Philippine Corporate Law, as affirmed
by section 23 of the Corporation Code, thus:
Sec.23.The Board directors of trustees, Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all
business conducted and all property of such corporations controlled and held by
the board of directors or trustees to be elected from among the members of the
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corporation, who shall hold office for one (1) year and until their successors are
elected and qualified.128
The opening phrase of Section 23 thus; “Unless otherwise provided in this code,” clearly
indicates that the section grants the totality of corporate powers to the Board of Directors,
namely:
Exercise all Corporate Powers

Conduct all Corporate Businesses
Control and Hold All Corporate Property
Except only for the particular instances found in the Corporation Code that requires
stockholders’ ratification. More importantly, Section 23 denies the suggestion that the
Board of Directors act merely as a collective agent of the stockholders who have voted
them into power, for it clearly rejects the central doctrine in the Law on Agency that the
agent is merely a representative of the principal and acts under the complete will of his
principal.129 In short, the Board of Directors are not constituted, and do not act, as agents
of the stockholders. The board is the agent of the corporation, as a principal separate
juridical personality.
As early as in 1918, in Raminez v. The Orientalist Co.,130 The supreme Court refused to
recognize any veto power on the part of the stockholders vis-à-vis the power of the Board
of Directors, thus:
Both upon principle and authority it is clear that any action or resolution of the
stockholders, whatever its character, must be ignored. The functions of the stockholders of
a corporation are, it must be remembered, of a limited nature. The theory of a corporation
is that the stockholders may have all the profits but shall turnover the complete
management of the enterprise to their representatives and agents, called directors.
Accordingly, there is little for the stockholders to do beyond electing directors, making by-
laws, and exercising certain other special powers defined by law. In conformity with this
idea it is settled that contracts between a corporation and third persons must be made by
the directors and not by the stockholders. The corporation, in such matters, is represented
by the former and not by the latter. . . This conclusion is entirely accordant with the
provisions of [now Sec. 23 of Corporation Code] already referred to. It results that where a
meeting of the stockholders is called for the purpose of passing on the proprietary of
making a corporate contract, its resolutions are at most advisory and not in any wise
binding on the board.131

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In San Miguel Corp. v Kah,132 the court in refusing to accept the proposition that a director
elected into the Board by a group of stockholders is not legally obliged to vote in board
deliberation accordance with the wishes of such stockholders, held: “The proposition is
not only logically indefensible, non sequitur , but also constitutes an erroneous conception
of a director’s role and function, it being plainly a director’s duty to vote according to his
own independent judgment and his own conscience as to what is in the best interests of
the company”133
Although stockholders are deemed to be the “owners” of the corporation, the nature of
their ownership is limited to that of being “beneficial owners”: It is to their benefit that the
entire corporate business enterprise is being operated and managed. Under such set-up,
and this is clear from the afore-quoted language of Section 23, the Board of Directors
constitute the “trustee” of the corporate business enterprise and all its assets, i.e., they
hold “naked or legal title” to all the corporate enterprise and assets. The Board of Directors
therefore owes fiduciary duties and obligations to the stockholders, not as agents of the
latter, but as trustees who must act with diligence and loyalty towards the best interests of
the beneficial owners of the corporate business enterprise, the stockholders.
The theory that “the corporate business enterprise and assets constitute the corpus of a
trust relationship,” with the Board of Directors assuming the position of trustees, has lately
began to take jurisprudential expression, although still not universally accepted i9n the
Philippine Corporate Law. Indeed, in the leading case of Gokongwei,jr. v. Securities and
Exchange Commission, the court in 1979 had taken a rather infirm manner of
characterizing the role of the Board of Directors as trustees of the corporate business
enterprise and its underlying assets, thus
Although in the strict and technical sense, directors of a private corporation are not
regarded as trustees, there cannot be any doubt that their character is that of a fiduciary
insofar as the corporation and the stockholders as a body are concerned. As agents
entrusted with the management of the corporation for the collective benefit of the4
stockholders, “they occupy a fiduciary relation, and in this sense the relation is one of
trust.” “The ordinary trust relationship of directors of a corporation and stockholders”,
according to Ashman v. Miller, “is not a matter of statutory or technical law. It springs from
the fact that directors have the control and guidance of corporate affairs and property and
hence of the property interests of the stockholders. Equity recognizes that stockholders are
proprietors of the Corporate interests and are ultimately the only beneficiaries thereof.***.
”134

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In 1993, in Prime White Corp. v. Intermediate Appellate Court, 135 the court took a more
straight forward quotation from the Gokongwei,jr. decision that adopted only the portion
where it held that directors are truly trustees of the stockholders, thus
A director of a corporation holds a position of trust and as such, he owes a duty of loyalty
to his corporation. . . As corporate managers, directors are committed to seek the
maximum amount of profits for the corporation. This trust relationship “is not a matter of
statutory or technical law. It springs from the fact that directors have the control and
guidance of corporate affairs and property and hence of the property interests of the
stockholders.
2.1 Treatment of Agency Codes of the Principle of Centralized Management
Corporate governance principles under the SEC Code, the BSP CG Circulars and the
IC Code, do not digress from the principle of Centralized management embodied under
the Corporation Code. In fact, it is the primary objective of each of those agency codes
to institutionalize within their respective areas of jurisdiction the primacy of the Board of
Directors on the governance of the company.
BSP Circular No. 283, s. of 2001, as it details the power and authority of the Board of
Directors for a banking institution, copies directly the wordings of Section 23 of the
Corporation Code, and then adds in clear terms the principle of “original; authority”,
thus –
Power and Authority of the Board of Directors
The corporate powers of a bank/quasi-bank/trust entity shall be exercised, its

business conducted and all its property shall be controlled and held by its Board of
Directors. The powers of the Board of Directors as conferred by law are original and
cannot be revoked by the stockholders. The directors hold their office charged with
the duty to act for the bank/quasi-bank/trust entity in accordance with their best
judgment.137
Section 2 of the BSP Circular No. 283 demands from the board of Directors of every
banking institution, to discharge the following general responsibilities:

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The board is primarily responsible for corporate governance of the

bank/quasi-bank/trust entity
To ensure good governance, the board of Directors should establish
strategic objectives, policies and procedures that will guide and direct the
activities of the bank/quasi-bank/trust entity, and the means to attain the
same.
It must establish the mechanism for monitoring Management’s performance
While the management of the day-to-day affairs of the Institution is the
responsibility of the management team, the Board of Directors, is however,
responsible for the monitoring and overseeing Management action
It may be the true that the Board of Directors may still retain the services of experts and
good counsel, but the section emphasizes that the “buck stops” with the Board, and it
cannot escape liability for failing to discharge such direct duties but alleging it had left the
matter to Management and experts consultants. This point is driven home by the following
provision of the section: “While the Management of the day-to-day affairs of the Institution
is the responsibility of the management team, the Board of Directors, is however,
responsible for the monitoring and overseeing Management action.”
This configuration of primacy of board power and responsibility in corporate governance is

also the central theme under the SEC Code for public companies, which provides that
The Board of Directors (Board) is primarily responsible for the governance of the
corporation. It needs to be structured so that it provides an independent check on
management, As such, it is vitally important that a number of board members be
independent from management.138
The SEC Code defines “Management” to refer to “the body given the authority to
implement the policies determined by the board id directing the course/business activity/ies
of the corporation,” and may give the impression that the role of the Board of Directors in
public companies is merely to set the policies, the operative provisions nonetheless
demonstrate beyond doubt that the SEC Code has instituted in clear terms the principle of
“command responsibility” on the Boards of public companies, when it provides specifically
that:

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The board of Directors (Board) is primarily responsible for the governance of

the corporation
It needs to be structured so that it provides an independent check on
management140
As such it is vitally important that a number of the board members be
independent from management141
It is the Boards responsibility to foster the long term success of the
corporation and secure its substantial competitiveness in a manner
consistent with its fiduciary responsibility, which it should exercise in the
best interest of the corporation and its shareholders142
To ensure good governance of the corporation, the Board should establish
the corporation’s vision and mission, strategic objectives, policies and
procedures that may guide and direct the activities of the company and the
means to attain the same as well as the mechanism for monitoring
Management’s performance143
While the management of the day-to-day affairs of the Institution is the
responsibility of the management team, the Board of Directors, is however,
responsible for the monitoring and overseeing Management action144
When it comes to “Accountability and Audit”, it provides unmistakably that
“The Board is primarily accountable to the Shareholders and Management is
primarily accountable to the Board ”145
The SEC Code follows the language as that appearing in the BSP CG Circulars, of laying
down general principles of corporate governance, and details of the procedures and
processes that must be followed by the Board and its key members/officers to meet the
primacy of its obligations to be “responsible for the governance of the corporation” and
discharge its accountability directly to the stockholders.
The same principle is reiterated in the IC Code which provides that “Every company
should be headed by an effective Board to lead and control the company and ensure
it success.”146 More importantly the IC Code defines the “Board of Directors” as “the
collegial body that exercises the corporate powers of all corporations formed under the
Corporation Code. It conducts all business and controls or holds all properties of such
corporations”147
The IC Code while embodying the same principle of primacy of the Board in the pursuit of
corporate governance for insurance companies and intermediaries, adopts the same

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definition of “Management” to mean “the body given the authority to implement the policies
determined by the Board in directing the course/business activity/ies of the corpoation” 148
which harks back to the antediluvian notion that the role of the board is merely to lay down
policies, and the hard work of governing pertains primarily to Management. Nonetheless, it
is clear from the statement of general principles, as well as in the providing for the general
responsibilities of the Board of Directors in the insurance industry, that the IC Code seeks
to establish the same format of “command responsibility” on the Board thus:
Every company should be headed by an effective Board to lead and control

the company and ensure its success-
o Provide entrepreneurial leadership of the company within framework of
prudent effective controls which enable risks to be assessed and
managed
o Set the companies’ strategic aims
o Ensure that the necessary financial and human resources are in place
for the company to meet its objectives and review management
performance
o Set the companies’ values and standards
o Ensure that its obligation to shareholders and others are understood
and met149
The IC Code then operationalizes in detailed sets of duties and responsibilities how the
Board of Directors of an insurance company or intermediary is to discharge its various
responsibilities, using clear descriptive words detailing the tasks to be performed. After
going through the detailed Board and its individual governance is placed clearly on the
shoulder of the Board of Directors of every insurance company or intermediary.
The agency codes on corporate governance therefore do not move away from the
Corporation Code’s primary doctrine of centralized management and that in fact they not
only reiterate it, but actually spell out in details, under principles of best practice, how the
Board of directors of Covered corporations are to properly exercise their primary and
directly-vested powers of corporate governance. In essence, the agency codes reiterate as
a principle of good corporate governance that Boards of Directors of covered companies
must realize that they assume their office saddled with great responsibilities, as the direct
possessors of all corporate powers of the company, and they cannot escape such
responsibilities, by merely relying upon their Management to assume their roles, duties
and responsibilities.

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Although the corporate governance principles under each of the administrative circulars
did not deviate from the core of the Corporation Code’s principle of Centralized
Management “good corporate governance principle,” what the administrative circulars
achieve, which is short of revolutionary, is not only increase the coverage of such duties to
a larger pool of “stakeholders”, but more so to “enhance” the duties and responsibilities,
and thereby increase the possibilities of personal liabilities, of Board of Directors of
covered companies. In other words, the agency codes managed to change the very
configurations of the Business Rule in their respective spheres of jurisdictions.
THE BUSINESS JUDGEMENT
a. Rationale for Business Judgment Rule
One of the advantageous features of the corporation is that is acts in the business world
through a centralized management, which promotes efficiency and prevents confusions
arising from diffused corporate powers, and to allow proper pin-pointing of responsibilities.
Investors and creditors of the corporation, as well as those who deal or affected by its
operations, can rely upon the law-directed fact that the corporation shall be bound only
through its Board of Directors, or representatives duly authorized by the Board. In any
organizational set-up, the congruence of authority and responsibility in the same person,
committee, or board always promotes efficiency. This is the rationale for the business
judgment rule.
Montelibano V. Bacolod-Murcia Co., Inc.,150 had earlier established the principle that when
a resolution is “passed in good faith by the board of directors, it is valid and binding, and
whether or not it will cause losses or decrease the profits of the central, the court has no
authority to review the, “151 adding that”[i]t is a well-known rule of law that questions of
policy or management are left solely to the honest decision of officers and directors; the
board is the business manager of the corporation, and so long as it acts in good faith its
orders are not reviewable by the courts.” 152
Gamboa V. Victoriano,153 held that courts cannot supplant the direction of the Board on
administrative matters as to which they have legitimate power of action, and contracts
which are intra vires entered into by the Board are binding upon he corporation and courts
will not interfere unless such contracts are so unconscionable and oppressive as to
amount to a wanton destruction of rights of the minority.

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Philippine Stock Exchange, inc. v. Court of Appeals,154 also seems to establish another
theoretical basis for the business judgment rule vis-à-vis the power control of the State,
based on the recognition of the corporation merely as an association of individuals who,
through the Board, do not give up through the medium of the corporation their
management prerogatives on business matters, thus:
A corporation is but an association of individuals, allowed to transact under an assumed

corporate name, and with a district legal personality. In organizing itself as a collective
body, it waives no constitutional immunities and perquisites appropriate to such a body. As
to its corporate management decision, therefore, the state will generally not interfere with
the same. Questions of policy and management are left to the honest decision of the
officers and directors of a corporation, and the courts are without authority to substitute
their board is the business managers of the corporation and so long as it acts in good faith,
its orders are not reviewable by the courts.155
The business judgment rule thereby emphasizes not only a point of supreme corporate
power, but necessarily also the highest corporate responsibility expected from the Board of
Directors.
b. Coverage of Business Judgment
From the foregoing, it can be seen that the business judgment rule actually has two (2)
applications, namely:
(a) Resolutions and transactions entered into by the Board of Directors within
the powers of the corporation cannot be reversed by the courts not even
on the behest of the stockholders of the corporation; and
(b) Directors and officers acting within such business judgment cannot be
held personally liable for the consequences of such acts.
The second branch of the business judgment rule is that corporate officers cannot be held
personally liable for corporate debts or obligations incurred in the exercise of the business
judgment. However, when directors or trustees violate their duties, the can be held
personally liable, thus:
(a) When the director willfully and knowingly vote for patently unlawful acts of
the corporsation;156
(b) When he is guilty of gross negligence or bad faith in directing the affairs
of the corporation;157 and
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(c) When he acquires any personal or pecuniary interest in conflict with his
duty as such directors. 158
Likewise, the above-enumerated exceptions when directors, trustees and corporate

officers may be held personally liable for corporate acts, provide also the three (3)
instances when courts are authorized to supplant the decision of the board, which is
deemed to be biased and may prove detrimental to the corporation.
c. General Rule Is that Directors and Officers Cannot Be Held Personally

Liable for Corporate Acts and Contract
The second branch of the business judgment rule provides that directors and officers of a
corporation in exercising their business discretion in entering into contracts and
undertaking transaction for the corporation cannot be held personally liable for the
resulting liabilities which must pertain to the corporation, nor for the damages or losses
sustained, except when they have knowingly given their approval to patently unlawful act
or are guilty of fraud, gross negligence or bad faith. Since the Board of Directors and their
officers are considered agents insofar as the corporation is concerned, the business
judgment doctrine flows from leading doctrine in the Law on Agency, that agents who acts
in behalf of the not incur liabilities arising from the contract and transactions they entered
into for and in behalf of the principal, except when they have acted in excess of their
powers, or are guilty of fraud, negligence or bad faith in performing their duties under the
agency arrangement.
The doctrine of non-personal liability of directors and officers under the second branch of
the business judgment rule flow from two policy considerations. Firstly, that if the system
would make directors and officers liable for corporate debts and liabilities, then no sane
individual would ever accept being elected to the board of any company or be appointed
an officer, for fear that their personal assets would be exhausted from claims of corporate
creditors. Secondly, no matter how perfect the person of the corporation may be endowed
by the State, it still must be managed and operated by fallible human beings; and
therefore, it is an accepted business risk that some of the transactions and contacts, as
well as their execution and compliance, human error or some form of negligence would
come in. A system cannot impose officers when business risks and valuation have, and
must, accept that mistakes and losses would be incurred in the usual course of business
operations; and it is only when such damage or losses are caused by fraud, gross
negligence or bad faith, items which are humanly possible to avoid, can personal liability
visit upon the individual at fault.
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The common law measure of compliance with the duty of diligence has been expressed
into statutory norm under Section 31 of the Corporation Code, thus:
SEC. 31. Liability of directors, trustees or officers. — Directors or trustees

who willfully and knowingly vote for or assent to patently unlawful acts of the
corporation or who are guilty of gross negligence or bad faith in directing the
affairs of the corporation or acquire any personal or pecuniary interest in
conflict with duty as such directors or trustees shall be liable jointly and
severally for all damages resulting there from suffered by the corporation, its
stockholders or members and other persons.
When read properly, the language of Section 631 actually provides for a general principle
of non-liability for directors and officers of corporations, and only when burden of proof has
been mustered that a director of officer has willfully and knowingly voted for an patently
unlawful act, or guilty of gross negligence, bad faith or fraud can such individual be held
liable for breach of the duty of diligence. In other words, it is very difficult to impose
personal liability on directors and officers for corporate contracts and transactions, since
the general rule is that acting within their business judgment, they are deemed insulated
from personal liability. Thus, the Court in Carag V. NLRC, 159 posited succinctly: “{[W]hen is
a director personally liable for the debts of the corporation? The rule is that a director is not
personally liable for the debts of the corporation, which has a separate legal personality of
its own. Section 31 of the Corporation Code lays down the exception to the rule…” 160
The decision in Carag reiterated the very high wall that must be scaled in order to make a
director personally liable, as an exception to the doctrine of separate juridical personality:
To hold a director personally liable for debts of the corporation, and thus pierce the veil of
corporate fiction, the bad faith or wrongdoing of the director must be established clearly
and convincingly. Bad faith is never presumed. Bad faith imports a dishonest purpose. Bad
faith means breach of know duty through some ill motive or interest. Bad faith partakes of
the nature of fraud…
X x x .For a wrongdoing to make a director personally liable for debts of the

corporation, the wrongdoing approved or assented to by director must be a patently
unlawful act. Mere failure to company closure or dismissal of employees does not amount
to a patently unlawful act. Patently unlawful acts are those declared unlawful by law
which imposed penalties for commission of such unlawful acts. There must be a law
declaring the act unlawful and penalizing the act.

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It was the decision in the leading case of Board of liquidators. Kalaw,162 that set well-nigh
standard of determining when directors are guilty of “bad faith,” when it held –
Rightfully has it been said that bad faith does not simply connote bad judgment or
negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of
wrong; it means breach of a known duty thru some motive or interest or ill will; it partakes
of the nature of fraud. 163
The meaning and coverage of “bad faith”, equating to fraud, has consistently been
reiterated by the supreme Court up to contemporaneous times. 164 in fact, in 1994 Tramat
Mercantile, inc. v. Court of Appeals,165 the Supreme Court issued a jurisprudential formula
on determining when directors and officers can held personally liable for corporate debts
and liabilities, thus:
Personal liabilities of a corporate director, trustee or officer along

(although not necessarily) with the corporation may so validity attach, as a
rule, only when –
1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad
faith or gross negligence in directing its affairs, or (c) conflict of interest,
resulting in damages to the corporation, its stockholders of other persons;
2. He consents to the issuance of watered stocks or who, having knowledge
thereof does not forthwith file with the corporate secretary his written
objection thereto;
3. He agrees to hold himself personally and solitarily liable with the
corporation;
4. He is made, by a specific provision of law, to personally answer for his
corporate action.166
The Tramat formula for director or officer personal liability has since been adhered to
faithfully and consistently in an unbroken line of decisions of the Supreme Court. As the
formula is worked, it really gives the general rule that directors and officers are not
personally liable for corporate debts and all other claims against the corporation; and the
language use of “only when” and enumerates only four instances when personal liability
may attach, clearly demonstrate that the enumerated instances are exclusive.
It is the common law doctrine of will-nigh insulating corporate directors from personal
liability in the exercise of their business judgment in corporate matters that has

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engendered a sense of being “untouchable” when it comes to fulfilling their fiduciary

obligations to the corporation take their responsibilities with a sense of smugness, that the
Board meetings occurring at most once a month, it is expected that the job of running the
operations of the company must lie squarely on the shoulder of Management, headed by
the President. Directors, who think of themselves, as sharing their name, reputation and
experience with corporation, as merely advisers of corporate wisdom: their obligation is not
involve themselves in the running of the day-to-day affairs of the company, but to set down
policies which Management must implement, and on rare occasion decide on important
transactions that require their prior approval.
Posttests
1. Define corporate social responsibility by Mallen Baker.

2. Explain the meaning of the definition of CSR from the Philippines.
3. Compare the Philippine and United States definitions of CSR.
4. Explain the traditional/classical economic model of business as expressed by Adam
Smith.
5. What changes were contributed by the industrial revolution after Adam Smith?
6. Explain Social Darwinism.
7. What is the Sherman Antitrust Act of 1890?
8. What is the Clayton Antitrust Act of 1914?
9. What is the Social Gospel movement?
10. Discuss CSR during the period from 1900 up to 1970.
11. Discuss the three models of CSR.
12. Discuss the PROS & CONS of CSR.
13. Discuss the Interactions of Businesses and Society by Mallen Baker.
14. Do you believe corporate social responsibility is important? Explain.
15. If the need for and benefits of CSR seems to be substantial, Why don’t all
organizations practice CSR?
16. Do you see all companies going above and beyond minimal requirements in the
near future to remain competitive?
17. What are the various THEORIES OF CORPORATE GOVERNANCE?
18. Discuss the three (3) reasons to support the claim for corporate social responsibility
by Prof. Emmanuel Q. Fernando.
19. Explain the Moral Minimum Stakeholder Theory.
20. Enumerate the three (3) failures of the stakeholders’ theory by Professor Poblador.

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21. Discuss Memorandum Circular No.2, series of 2002, officially termed as the Code
of Corporate Governance.
22. Discuss the IC Circular No. 31-2005.
23. Discuss the report of Dr. Jesus Estanislao, the founding Chair of ICD, on the results
of the 2007 CG Scorecard Project.
24. Discuss the Securities and Exchange Commission Code about Corporate
Governance.
25. What was principle first enunciated in A. C. Ransom Labor Union-CCLU v. NLRC?
26. Compare the BSP Code, SEC Code and IC Code concerning Corporate
Governance.
27. Explain the Case Sergio F. Naguiat v. NLRC.
28. Explain the Trust Fund Doctrine.
29. Explain the SEC Rules Governing Redeemable and Treasury Shares of 1982.
30. Discuss the Case of the Commissioner of Internal Revenue v. Court of Appeals.
31. Discuss the Case of A. C. Ransom Labor Union-CCLU v. NLRC on corporate laws.
32. Expound the doctrine of corporate responsibility.
33. -40. Explain the following:
33.1. Integrating social, environmental and economic terms into business values
and actions.
33.2. Operating in an open, accountable and transparent way and showing
concern for employees and the communities and societies in which the
business operate.
33.3. Complying with local laws and regulations and avoiding corrupt practices.
33.4. Living up to Company commitments.
33.5. Make sure people understand the business culture and concern to be a
‘good corporate citizen’ overseas.
33.6. Monitoring Company image and success in implementing its principles in
export markets.
33.7. Demonstrating good business practice: invoicing and paying bills on time,
delivering what has been promised, and exceeding expectations.
33.8. The Company should be aware that in some markets corruption can be a
major problem.

Corporate Governance Social Responsibility

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Corporate Governance Social Responsibility

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Aldersgate College

Solano, Nueva Vizcaya

Good Governance & Corporate Social Responsibility Summer, SY 2012-2013

Corporate Social Responsibility (CSR)

“Corporate Social Responsibility is the continuing commitment by business to

“Corporate Social Responsibility (CSR) refers to an organization’s commitment to

Jose E. Credo, BSIE-BBM-MBA Page 1

Good Governance & Corporate Social Responsibility Summer, SY 2012-2013

What is Corporate Social Responsibility?

CSR can be defined by actions such as:

 Living up to Company commitments. Make sure people understand the business

 Monitoring Company image and success in implementing its principles in export

 Demonstrating good business practice: invoicing and paying bills on time,

Jose E. Credo, BSIE-BBM-MBA Page 2

Good Governance & Corporate Social Responsibility Summer, SY 2012-2013

Jose E. Credo, BSIE-BBM-MBA Page 3

Good Governance & Corporate Social Responsibility Summer, SY 2012-2013

Sherman Antitrust Act (1890)

Clayton Antitrust Act (1914)

Social Gospel (New Thesaurus Encyclopedia).

Jose E. Credo, BSIE-BBM-MBA Page 4

Good Governance & Corporate Social Responsibility Summer, SY 2012-2013

1. Ceasing to cause societal problems

2. Starting to participate in solving societal problems.

Modern Practices of CSR

Furthermore, society began to expect business to voluntarily participate in solving societal

1. Arguments for and against the CSR concept are reviewed.

THE THREE MODELS OF CSR

Jose E. Credo, BSIE-BBM-MBA Page 5

Good Governance & Corporate Social Responsibility Summer, SY 2012-2013

1. Traditional Conflict Model

2. Added Value Model

Jose E. Credo, BSIE-BBM-MBA Page 6

Good Governance & Corporate Social Responsibility Summer, SY 2012-2013

3. Multiple Goals Model

According to Redman, this model is thought to be relatively radical, though some

PROS & CONS OF CORPORATE SOCIAL RESPONSIBILITY

Corporate social responsibility is generally perceived as a positive business ideology in the

Pro 1: Social Responsibility and Customer Relationships

In his article "The 7 Principles of Business Integrity," business strategist Robert

Pro 2: Motivated Employees

Jose E. Credo, BSIE-BBM-MBA Page 7

Good Governance & Corporate Social Responsibility Summer, SY 2012-2013

establishing fair hiring practices and promoting a non-discriminatory workplace. This

The expense of complying with CSR expectations is a con for businesses.

Con 2: Shareholder Expectations

Good Governance & Corporate Social Responsibility Summer, SY 2012-2013

Historically, publicly-owned companies had a primary focus of maximizing shareholder

The Interactions of Businesses and Society by Mallen Baker

Jose E. Credo, BSIE-BBM-MBA Page 9

Good Governance & Corporate Social Responsibility Summer, SY 2012-2013

NEED FOR CSR AND ITS IMPORTANCE

Good Governance & Corporate Social Responsibility Summer, SY 2012-2013

B. The rising importance of corporate social responsibility

By Jennifer Hsu, Monday, February 22nd, 2010

Rod Lohin of the Rotman School of Management comments

Jose E. Credo, BSIE-BBM-MBA Page 11

Good Governance & Corporate Social Responsibility Summer, SY 2012-2013

1. Do you believe corporate social responsibility is important?

Jose E. Credo, BSIE-BBM-MBA Page 12

Good Governance & Corporate Social Responsibility Summer, SY 2012-2013

a. Doctrine of Maximization of Shareholder Value versus Theory on Corporate

Maximization of Shareholder Value. – Under the Corporation Code of the Philippines,