CHAPTER 1 Corporators

INTRODUCTION TO CORPORATE - Are those who compose a

GOVERNANCE corporation whether as
stockholders, shareholders or
members
R.A. No. 11232
- Revised Corporation Code of the
Incorporators
Philippines
- Natural persons who incorporate
the corporation
Corporation
- A corporation is an artificial being
created by operation of law, having
the right of succession and the
powers, attributes, and properties
expressly authorized by law or
incidental to its existence. Stockholders
- Any person, company or institution
that owns at least one share of a
Attributes of a corporation:
company’s equity
1. It is an artificial being
2. It is created by operation of law
Members
3. It has the right of succession
- Corporators of a nonstock
4. It has powers, attributes, and corporation
properties expressly authorized by
law or incidental to its existence
Board of Directors/ Trustees and
Officers
Classes of corporation:
- Has the power to manage
- Stock corporation corporations
Stock corporations are
those which have capital stock
Stakeholders
divided into shares and are
authorized to distribute to the - Any individual, organization or
holders of such shares, dividends, society at large who can either
or allotments of the surplus profits affect and/or be affected by the
on the basis of the shares held. company’s strategies, policies,
business decisions and operations
- Nonstock corporation
in general. This includes among
A nonstock corporation is one others, customers, creditors,
where no part of its income is employees, suppliers, investors, as
distributable as dividends to its well as the government and
members, trustees or officers; community in which it operates.
Provided that any profit which a
nonstock corporation may obtain
incidental to its operations shall, Purpose of a corporation
whenever necessary or proper, be
- Increase shareholder’s wealth
used for the furtherance of the
purpose/purposes for which the
corporation was organized.
Bondholders
 - Issue cash in exchange for a
predetermined payback amount
and may also receive interest
payments before maturity.
Shareholders
- Contribute money for shares of the
company with no guaranteed
payout and no maturity. However,
a company may issue periodic
dividends to shareholders.
Multinational Corporation
- has facilities and other assets in at
least one country other than its
home country. Such companies
have offices and/or factories in
different countries and usually
have a centralized head office
where they coordinate global
management.
Transnational Corporation
- is a commercial enterprise that
operates substantial facilities, does
business in more than one country
and does not consider any
particular country its national
home.
Governance
- Refers to a process whereby
elements in society wield power,
authority and influence and enact
policies and decisions concerning
public life and social upliftment.
- The process of decision-making
and the process by which
decisions are implemented (or not
implemented) through the exercise
of power or authority by leaders of
the country and/or organizations.
Characteristics of Good Governance:
(CREATERP)
1. Consensus Oriented
It requires a broad and long-term
perspective on what is needed for
sustainable human development
and how to achieve the goals of
such development. This can only
result from an understanding of the
historical, cultural and social
contexts of a given society or
community.
2. Rule of Law
It requires fair legal
frameworks that are enforced
impartially. Impartial enforcement
requires an independent judiciary
and impartial and incorruptible
police force.
3. Equity and Inclusiveness
Ensures that all members
feel that they have a stake in it and
do not feel excluded from the
mainstream of society.
4. Accountability
Not only governmental
institutions but also the private
sector and civil society
organizations must be accountable
to the public and to their
institutional stakeholders.
5. Transparency
Means that decisions taken
and their enforcement are done in
a manner that follows rules and
regulations. Information must be
freely available and directly
accessible to those who will be
affected by such decisions and
their enforcement.
6. Effectiveness and Efficiency
Means that processes and
institutions produce results that
meet the needs of society while
making the best use of resources
at their disposal.
7. Responsiveness
 Requires that institutions
and processes try to serve the
needs of all stakeholders within a
reasonable timeframe.
8. Participation
Participation by both men
4. Transparency
and women is a key cornerstone of
good corporate governance.
Participation needs to be informed
and organized. This means
freedom of association and
expression on one hand and an
organized civil society on the other
hand.
Corporate governance enables
firms to assess their behavior and
actions before they are scrutinized
by regulatory agencies to limit
exposure to regulatory risks and
fines.
and Full
Disclosure
Aims at ensuring a higher
degree of transparency in an
organization by encouraging full
disclosure of transactions in the
company accounts.

Basic Principles of Good and effective

Corporate Governance Corporate Governance
- Is defined as the system of rules, 1. Transparency and Full
practices and processes by which Disclosure
business corporations are directed
- Is the board telling us
and controlled.
what’s going on?
- Does the board meet the
Purpose of Corporate Governance information needs of
investment communities?
- The fundamental aim of corporate
governance is to enhance - Does it safeguard integrity
shareholders’ value and protect in financial reporting?
the interests of other stakeholders
- Does the board have sound
by improving the corporate
disclosure policies and
performance and accountability.
practices?
2. Accountability
Objectives of Corporate Governance:
- Is the board being
(FIST)
responsible?
1. Fair and Equitable Treatment of
- Does the board clarify its
Shareholders
role and that of the
All shareholders deserve management?
equitable treatment and this equity
3. Corporate Control
is safeguarded by a good
governance structure in any - Is the board doing the right
organization. thing?
- Has the board built long-
term sustainable growth in
2. Increase Shareholder’s Wealth
shareholders’ value for the
Another main objective is to corporation?
protect the long-term interests of
- Does it create an
the shareholders.
environment to take risk?

3. Self-Assessment
ILLUSTRATIVE APPLICATIONS OF
THE BASIC PRINCIPLES:
1. A company should lay solid ensure compliance with
foundation for management and IFRS.
oversight.
● Listing Rule disclosure
● Formalize and disclose the requirements and to ensure
functions reserved to the accountability at a senior
board and those delegated management level for
to management. compliance.
2. Structure the board to add 6. Resect the rights of
value. shareholders and facilitate the
effective exercise of those rights
● A board should have
independent directors ● Design and disclose a
communications strategy to
● The roles of chairperson
promote effective
and chief executive officer
communication with
should not be exercise by
shareholders and
the same individual.
encourage effective
3. Promote ethical and responsible participation at general
decision-making meetings.

● Establish a code of conduct ● Request the external auditor

to guide the directors, the to attend the annual to
chief executive officer (or attend the annual general
equivalent), the chief meeting and be available to
financial officer (or answer shareholder
equivalent) and any other questions about the audit.
key executives
● Disclose the policy
7. Recognize and manage risk
concerning trading in
company securities by ● The board or appropriate
directors, officers and board committee should
employees establish policies on risk
oversight and management.
4. Safeguard integrity in financial
reporting 8. Encourage enhanced
performance
● Require the chief executive
officer (or equivalent) and ● Disclose the process for
the chief financial officer (or performance evaluation of
equivalent) to state in the board, its committees
writing to the board that the and individual dictators, and
company’s financial reports key executives.
present a true and fair view,
9. Remunerate fairly and
in all material respects, of
responsibly
the company’s financial
condition and operational ● The board should establish
results and are in a remuneration committee.
accordance with relevant
accounting standards. ● Clearly distinguish the
structure of non-executive
● The board should establish director’s remuneration from
an audit committee. that of executives.
5. Make timely and balanced 10. Recognize the legitimate
disclosure interests of stakeholders
● Establish written policies ● Establish and disclose code
and procedures designed to of conduct to guide
compliance with legal and
other obligations to
legitimate stakeholders.
 CHAPTER 2
CORPORATE GOVERNANCE
RESPONSIBILITIES AND
ACCOUNTABILITIES
Introduction
- The characteristics of good
governance are relevant to both
SME’s and large listed public
companies.
- Good corporate governance is
based on principles underpinned
by consensus and continually
developing notions of good
practice.
- “There is no simple universal
formula for good governance”.
- The essence of any system of
good corporate governance is: to
allow the board and management
the freedom to drive their
organization forward and to
exercise that freedom within a
framework of effective
accountability.
RELATIONSHIP BETWEEN
SHAREHOLDERS/ OWNER(S)
AND OTHER STAKEHOLDERS
- Governance starts with the
shareholders delegating
responsibilities through an
elected board of directors, then to
management and in turn, to
operating units with oversight and
assistance from internal auditors.
- The Board of Directors and its
audit committee are expected to
protect the shareholder’s rights.
- Governance demands
accountability back through the
system to the shareholders.
- Management and the board have
responsibilities to act within the
laws of society and to meet
various requirements of creditors,
employees and the stakeholders.
- Stakeholders have interest in the
quality of corporate governance
because it has a relationship to
economic performance and the
quality of financial reporting.
- Regulators are a response to
society’s wishes to ensure that
organizations will act responsibly
and operate in compliance with
relevant laws.
- Shareholders/owners demand
accountability on:
• Financial Performance
• Financial Transparency
• Stewardship
• Quality in Internal Control
• Composition of the board of
directors and the nature of its
activities
- The owners want an accurate
and objectively verifiable
disclosures from management.
- Management has always had the
primary responsibility for the
accuracy and completeness of
an organization’s financial
statements.
- In financial reporting, the
management’s responsibility is to:
 • Choose which accounting • Demonstrating
principles best portray the leadership.
economic substance of
2. Compliance/ Legal
company transactions.
Conformance
• Implement a system of • Understanding and
internal control that issues protecting the
completeness and accuracy organization’s financial
in financial reporting. position
• Ensure that the financial • Ensuring an effective
statements contain accurate system of internal
and complete disclosure. controls exist and is
operating as expected.

PARTIES INVOLVED IN
CORPORATE GOVERNANCE: 3. Performance
THEIR RESPECTIVE BROAD • Ensuring the
ROLE AND SPECIFIC organization’s long
RESPONSIBILITIES term viability and
1. Shareholders enhancing the financial
position.
Broad Role:
• Agreeing the key
- Provide effective oversight performance indicators
through election of board (KPIs)
members, approval of major
initiatives such as buying or 3. Non-Executive or Independent
selling stock, annual reports on Directors
management compensation, Broad Role:
from the board.
2. Board of Directors - The same as the broad role of
the entire board of directors.
Broad Role:
Specific Activities:
- The major representative of
stockholders to ensure that the • to understand the
organization is run according to organization, its business,
the organization’s charter and its operating environment
that there is proper and its financial position.
accountability. • to assist management to
Specific Activities: keep performance
objectives at the top of its
1. Overall Operations agenda.
• Establishing the
organization’s vision,
mission, values and
ethical standards.
4. Management - Set accounting and auditing
standards dictating underlying
Broad Role:
financial reporting and auditing
- Operations and accountability. concepts; set the expectations of
Manage the organization audit quality and accounting
effectively; provide accurate and quality.
timely reports to shareholders
Specific Activities:
and other stakeholders.
• Conducting CPA
Specific Activities:
Licensure Board
• recommend the strategic Examinations
direction and translate the
• Approving accounting
strategic plan into the
principles
operations of the business
• Approving auditing
• manage the company’s standards
human, physical and
financial resources to b. Securities and Exchange
achieve the organization’s Commission (SEC)
objectives - run the
Broad Role:
business.
- Ensure the accuracy,
timeliness and fairness of public
5. Audit Committees of the Board reporting of financial and there
of Directors information for public
companies.
Broad Role:
Specific Activities:
- Provide oversight of the
internal and external audit • Reviewing filings with the
function and the process of SEC
preparing the annual financial
statements as well as public • Identify corporate frauds,
investigate causes and
reports on internal control.
suggest remedial actions.
Specific Activities:
7. External Auditors
• Selecting the external
Broad Role:
audit firm
- Perform audits of company
• Approving any non-audit
financial statements to ensure
work performed by the
that the statements are free
audit firm.
of material misstatements
6. Regulators including misstatements
that may be due to fraud.
a. Board of Accountancy (BOA)
Specific Activities:
Broad Role:
 • Audit of public company
financial statements

• Audits of nonpublic
company financial
statements.

8. Internal Auditors
Broad Role:
- Perform audits of companies
for compliance with company
policies and laws, audits to
evaluate the efficiency of
operations, and periodic
evaluation and tests of controls.
Specific Activities:

• Reporting results and

analyses to management
(including operational
management) and audit
committees

• Evaluating internal
controls.
 CHAPTER 3: SEC CODE OF
CORPORATE GOVERNANCE FOR
PUBLICLY-LISTED COMPANIES
Introduction
- it adopts the “comply or
explain” approach. Companies must
state whether they complied with the
provisions or not, identify areas of
non-compliance and explain the
reasons why.

On November 10, 2016, the SEC - it is arranged as follows:

approved the Code of Corporate Principles, Recommendations and
Governance for publicly-listed Explanations.
companies. Its goal is to help
→ Principles are the high
companies to develop and sustain
level statements of corporate
an ethical corporate culture and
governance and are applicable
keep abreast with recent
to all companies.
developments in CG.
→ Recommendations are
objective criteria that are
Publicly-listed companies need to intended to identify the specific
establish a code of business conduct features of C.G. that are
and submit a new manual on CG recommended for companies
that would “provide standards for operating under the code.
professional and ethical behavior as
→ Explanations provide
well as articulate acceptable and
companies with additional
unacceptable conduct and
information on the
practices”.
recommended best practice.

The Code of Corporate

- it does not prescribe a “one
Governance:
size fits all” framework. Principle of
Proportionality is considered in the
application of its provisions.
- intended to raise the corporate
standards of the Philippine
corporations at par level with its
- this is the first of a series of
regional and global counterparts.
Codes that is intended to cover all
types of corporations in the country
under the SEC.
- it is drafted using key reference
materials such as the latest
G20/OECD1 Principles of Corporate
Important Terms to Remember
Governance and the ASEAN
Governance Scorecard.
Corporate Governance
 The system of stewardship and corporate entity that has diversified
control to guide organizations in activities in varied industries.
fulfilling their long-term economic,
moral, legal and social obligations
towards their stakeholders. Internal Control
Provides reasonable assurance
on the achievement of objectives
Board of Directors
through efficient and effective
The governing body that operations.
exercises the corporate powers and
conducts and controls all the
business and properties of the Enterprise Risk Management
corporation.
Designed to identify potential
events that may affect the entity,
manage risks, and provide
Management
reasonable assurance of the
Group of executives given the achievement of the company’s
authority by BOD to implement objectives.
policies.

Related Part Transactions

Independent Director
A director independent of
management and the controlling
shareholders that exercises
independent judgement in carrying
out his responsibilities.
Executive Director
Has the executive responsibility
of day-to-day operations of a part or
the whole of the organization.
Transfer of resources, services
or obligations between a reporting
entity and a related party.
Stakeholders
Any individual or organization
that can be affected by the
company’s decisions and policies.
THE BOARD’S GOVERNANCE
RESPONSIBILITIES

Non-Executive Director
Principle 1: ESTABLISHING A
Opposite of the executive
COMPETENT BOARD
director.

The company should be headed by

Conglomerate
a competent and working board to
A group of corporations foster the long-term success of the
controlled and managed by a parent corporation, and to sustain its
competitiveness and profitability in a The company should provide in
manner consistent with its corporate its Board Charter and Manual on
objectives and the long-term best Corporate Governance a policy on
interests of its shareholders. the training of directors.

Recommendation 1.1 Explanation

The board should be composed
of directors with a collective working
knowledge, experience or expertise
that is relevant to the company’s
industry.
Explanation
-Competence is relevant to the
industry that the company is in.
-A board should have the
necessary knowledge, experience,
and expertise.
-The board sets qualification
standards for its members.
-Orientation program for new
directors and relevant annual
continuing training for all directors.
Recommendation 1.4
The board should have a policy
on board diversity.
Explanation
-Board diversity policy ensures
optimal decision-making.
-It includes diversity in age,
ethnicity, culture, skills, competence
and knowledge.

Recommendation 1.2
Recommendation 1.5
The board should be composed
of a majority non-executive directors. The board should ensure that it
is assisted in its duties by a
Corporate Secretary.
Explanation
-Right combination of Non-
Explanation
executive directors and Independent
directors. Some of the Corporate
Secretary’s duties and
-A board should be majorly
responsibilities:
composed of NEDs to assure
protection of the company’s interest. - assists the board and the
board committees.
-The company determines the
qualifications of the NEDs. - safekeeps and preserves
the integrity of the minutes of the
meetings.
Recommendation 1.3
 - keeps abreast on relevant
laws, regulations, all governance
issuances, and industry
developments and operations.
Recommendation 1.6
The board should ensure that it
is assisted in its duties by a
Compliance Officer.
Explanation
Some of the Compliance officer’s
duties and responsibilities:
- ensures proper onboarding of
new directors.
- monitors, reviews, evaluates
and ensures the compliance by the
corporation, its officers and directors
with the relevant laws, this Code,
and other Rules and Regulations.
_____________________________
Principle 2: ESTABLISHING CLEAR
ROLES AND
RESPONSIBILITIES
OF THE BOARD
Recommendation 2.1
The board should act on a fully
informed basis, in good faith, with
due diligence and care, and in the
best interest of the company and all
shareholders.
Explanation
- Duty of Care and Duty of
Loyalty are the two key elements of
the fiduciary duty of board members.
Recommendation 2.2
The board should oversee the
development of and approve the
company’s objectives and strategy,
and monitor their implementation.
Explanation
- The board should review and
guide corporate strategy, major
plans of action, risk management
policies and procedures, and annual
budgets and business plans.
- Sound strategic policies and
objectives translates to proper
identification and prioritization of its
goals and guidance.
Recommendation 2.3
The board should be headed by
a competent and qualified
Chairperson.
Explanation
Some of the roles and
responsibilities of the Chairman:
- makes certain that the meeting
agenda focuses on strategic matters.
- guarantees that the Board
receives accurate, timely, relevant,
insightful, concise, and clear
information.
- facilitates discussions on key
issues by fostering an environment
conducive for constructive debate.
 -ensures that the board
sufficiently challenges and inquires
on reports submitted and
representations by Management.
Recommendation 2.4
The board should be responsible for
ensuring and adopting an effective
succession planning program for
officers and management.
Explanation
- Succession Planning’s main
goal is the transfer of company
leadership to highly competent and
qualified individuals.
- For any potential candidate, a
professional development plan is
defined.
Recommendation 2.5
The board should align the
remuneration of key officers and
board members. In doing so, a policy
specifying the relationship between
remuneration and performance
should be formulated and adopted.
Explanation
Key considerations in determining
proper compensation:
- level of remuneration is
commensurate to the responsibilities
of the role
- no director should participate in
deciding on his remuneration
- remuneration pay-out
schedules should be sensitive to risk
outcomes.
Recommendation 2.6
The board should have and
disclose in its Manual on CG a
formal and transparent board
nomination and election policy.
Explanation
-It is the board’s responsibility to
develop a policy on board
nomination. It should encourage
shareholders’ participation and
promote transparency of the whole
process indicated.
-Some of the grounds for the
permanent and temporary
disqualification of a director are
stated (they’re long, check them out
in the book).
-
Recommendation 2.7
The board should have the
overall responsibility in ensuring that
there is group-wide policy and
system governing related party
transactions and other infrequently
occurring transactions which pass
certain thresholds of materiality.
Explanation
- the director should ensure the
integrity of the related party
transactions.
-the board should initiate policies
that are towards prevention of abuse
and promotion of transparency. One
such measure is the ratification by
shareholders.
Some suggestions for the content of
RPT Policy:
-definition of related parties
-coverage of RPT policy
-guidelines in ensuring arm’s-
length terms
-adoption of materiality
thresholds
Whistle-blowing mechanisms
Recommendation 2.8
The board should be primarily
responsible for approving the
selection and assessing the
performance of the Management led
by the CEO, and control functions
led by their respective heads.
Explanation
-it is the responsibility of the
board to appoint a competent
management team at all times,
monitor and assess performance of
the management team and conduct
a regular review of the company’s
policies with the management team.
Recommendation 2.9
The board should establish an
effective performance management
framework that will ensure that the
Management and personnel’s
performance is at par with the
standards set by the Board and
Senior Management.
Explanation
-results of performance
evaluation should be linked to other
human resource activities. These
should likewise form part of the
assessment of the continuing fitness
and propriety of management and
personnel in carrying out their
respective duties and
responsibilities.
Recommendation 2.10
The board should oversee that
an appropriate internal control
system is in place. The board should
also approve the Internal Audit
Charter.
Explanation
-in the performance of the
board’s oversight responsibility, the
minimum internal control
mechanisms may include overseeing
the implementation of the key control
functions such as risk management
and compliance and internal audit.
Recommendation 2.11
The board should oversee that a
sound enterprise risk management
framework is in place to effectively
identify, monitor, assess and
manage key business risks.
Explanation
-risk management policy is part
and parcel of a corporation’s
corporate strategy. The board is
responsible for defining the
company’s level of risk tolerance and
providing oversight over its risk
management policies and
procedures.

Recommendation 2.12
The board should have a Board
Charter that formalizes and
accountabilities in carrying out its
fiduciary duties. This Charter should
serve as a guide for the directors
and should be publicly available and
accessible.

Explanation
-The Board Charter guides the
directors on how to discharge their
functions. It provides standards for
evaluating the performance of the
Board. The Charter also contains the
roles and responsibilities of the
Chairman.