INTRODUCTION TO GOOD GOVERNANCE

PRESENTED BY ARNOLD T. MALIBIRAN, CPA

GOVERNANCE

 a process whereby elements in society wield power, authority,

and influence, and enact policies and decisions concerning public
life and social upliftment
 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
MAJOR CHARACTERISTICS OF GOOD GOVERNANCE

1. Consensus Oriented – best interest of the whole community; broad and long-term perspective on
what is needed for sustainable human development
2. Law – impartial enforcement of legal frameworks; full protection of human rights
3. Equity and Inclusiveness – opportunities for everyone
4. Accountability – to everyone who may be affected by its decisions or actions
5. Responsiveness – serving the needs of all stakeholders within a reasonable timeframe
6. Participation – informed and organized; freedom of association and expression
7. Effectiveness and Efficiency – meeting the needs of the society and making the best use of resources
8. Transparency – freely available and directly accessible information; enough information in easily
understandable forms and media
EFFICIENCY AND EFFECTIVENESS

EFFICIENCY EFFECTIVENESS
 doing things right  doing the right
things
CORPORATE GOVERNANCE

 system of rules, practices, and processes by which business corporations

are directed and controlled
 greatly contributes to financial market stability and economic growth
 PURPOSES:
1. to facilitate effective, entrepreneurial, and prudent management that can deliver
long-term success of the company;
2. to enhance shareholders’ value and protect the interests of other stakeholders by
improving the corporate performance and accountability
BASIC OBJECTIVES OF CORPORATE GOVERNANCE

1. Fair and equitable treatment of shareholders – to safeguard equity among the

shareholders
2. Increase shareholders’ wealth – to induce potential investors
3. Self-assessment – to assess their behaviors and actions and to point out
deficiencies, loopholes, and internal issues before they are scrutinized by
regulatory agencies; to limit exposure to regulatory risks and fines
4. Transparency and full disclosure – to encourage full disclosure of transactions
in the company accounts
BASIC PRINCIPLES OF GOOD AND EFFECTIVE CORPORATE
GOVERNANCE

1.Corporate Control – if the board is doing the

right thing
2.Accountability – if the board is taking
responsibility
3.Transparency and Full Disclosure – if the board is
telling what is going on
CORPORATE GOVERNANCE REPONSIBILITIES AND
ACCOUNTABILITIES
CORPORATE GOVERNANCE REPONSIBILITIES AND
ACCOUNTABILITIES

NB:
 There are no absolute rules which must be adopted by all organizations.
 There is no simple universal formula for good governance.
 Principles and approaches must be tailored to the specific needs of an
organization at a given point in time.
ESSENCE OF GOOD CORPORATE GOVERNANCE

 to allow the board and management the freedom

to drive their organization forward and to exercise
that freedom within a framework of effective
accountability
STAKEHOLDER

 anyone who can be influenced, whether

directly or indirectly, by the actions of the
company
MANAGEMENT

 primarily responsible for the accuracy and

completeness of an organization’s financial
statements
 PARTIES INVOLVED IN CORPORATE GOVERNANCE
(R-A-M-E-N-I-B-S)
1. Regulators
a. Board of Accountancy (BOA)
 sets accounting and auditing standards dictating underlying financial reporting and auditing concepts
 sets the expectations of audit quality and accounting quality
b. Securities and Exchange Commission (SEC) – ensures the accuracy, timeliness, and fairness of public
reporting of financial and other information for public companies
2. Audit Committees of the BOD – provide oversight of the internal and external audit
function and the process of preparing the annual financial statements as well as public
reports on internal control
3. Management
 in charge of operations and accountability
 provides accurate and timely reports to shareholders and other stakeholders
 PARTIES INVOLVED IN CORPORATE GOVERNANCE
(R-A-M-E-N-I-B-S)
4. External auditors – perform audits of company financial statements to ensure that the
statements are free of material misstatements including misstatements that may be due to
fraud
5. Non-executive or independent directors
6. Internal auditors – 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
7. Board of Directors (BOD)
 major representative of stockholders
 ensures that the organization is run according to the organization’s charter and that there is proper
accountability
8. Shareholders – provide effective oversight through election of board members, approval of
major initiatives such as buying or selling stock, and annual reports on management
compensation
 CODE OF CORPORATE GOVERNANCE FOR PUBLICLY LISTED
COMPANIES

THE BOARD’S GOVERNANCE RESPONSIBILITIES

Principle 1: The company should be headed by a competent, working board to foster the
long-term success of the corporation, and to sustain its competitiveness and
profitability in a manner consistent with its corporate objectives and the long-
term best interests of its shareholders and other stakeholders.

Principle 2: The fiduciary roles, responsibilities and accountabilities of the Board as

provided under the law, the company’s articles and by-laws, and other legal
pronouncements and guidelines should be clearly made known to all directors
as well as to stockholders and other stakeholders.

Principle 3: Board committees should be set up to the extent possible to support the effective
performance of the Board’s functions, particularly with respect to audit, risk
management, related party transactions, and other key corporate governance
concerns, such as nomination and remuneration. The composition, functions and
responsibilities of all committees established should be contained in a publicly
available Committee Charter.

Principle 4: To show full commitment to the company, the directors should devote the time
and attention necessary to properly and effectively perform their duties and
responsibilities, including sufficient time to be familiar with the corporation’s
business.

Principle 5: The Board should endeavor to exercise objective and independent judgment on
all corporate affairs.

Principle 6: The best measure of the Board’s effectiveness is through an assessment process.
The Board should regularly carry out evaluations to appraise its performance as
a body, and assess whether it possesses the right mix of backgrounds and
competencies.

Principle 7: Members of the Board are duty-bound to apply high ethical standards, taking
into account the interests of all stakeholders.

DISCLOSURE AND TRANSPARENCY

Principle 8: The company should establish corporate disclosure policies and procedures that
are practical and in accordance with best practices and regulatory expectations.

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Principle 9: The company should establish standards for the appropriate selection of an
external auditor, and exercise effective oversight of the same to strengthen the
external auditor’s independence and enhance audit quality.

Principle10: The company should ensure that material and reportable non-financial and
sustainability issues are disclosed.

Principle 11: The company should maintain a comprehensive and cost-efficient

communication channel for disseminating relevant information. This channel is
crucial for informed decision-making by investors, stakeholders and other
interested users.

INTERNAL CONTROL SYSTEM AND RISK MANAGEMENT FRAMEWORK

Principle 12: To ensure the integrity, transparency and proper governance in the conduct of
its affairs, the company should have a strong and effective internal control
system and enterprise risk management framework.

CULTIVATING A SYNERGIC RELATIONSHIP WITH SHAREHOLDERS

Principle 13: The company should treat all shareholders fairly and equitably, and also
recognize, protect and facilitate the exercise of their rights.

DUTIES TO STAKEHOLDERS

Principle 14: The rights of stakeholders established by law, by contractual relations and
through voluntary commitments must be respected. Where stakeholders’ rights
and/or interests are at stake, stakeholders should have the opportunity to obtain
prompt effective redress for the violation of their rights.

Principle 15: A mechanism for employee participation should be developed to create a

symbiotic environment, realize the company’s goals and participate in its
corporate governance processes.

Principle 16: The company should be socially responsible in all its dealings with the
communities where it operates. It should ensure that its interactions serve its
environment and stakeholders in a positive and progressive manner that is fully
supportive of its comprehensive and balanced development.

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INTRODUCTION

1. The Code of Corporate Governance is intended to raise the corporate governance

standards of Philippine corporations to a level at par with its regional and global
counterparts. The latest G20/OECD1 Principles of Corporate Governance and the
Association of Southeast Asian Nations Corporate Governance Scorecard were used
as key reference materials in the drafting of this Code.

2. The Code will adopt the “comply or explain” approach. This approach combines
voluntary compliance with mandatory disclosure. Companies do not have to comply
with the Code, but they must state in their annual corporate governance reports
whether they comply with the Code provisions, identify any areas of non-
compliance, and explain the reasons for non-compliance.

3. The Code is arranged as follows: Principles, Recommendations and Explanations.

The Principles can be considered as high-level statements of corporate governance
good practice, and are applicable to all companies.

4. The Recommendations are objective criteria that are intended to identify the specific
features of corporate governance good practice that are recommended for
companies operating according to the Code. Alternatives to a Recommendation may
be justified in particular circumstances if good governance can be achieved by other
means. When a Recommendation is not complied with, the company must disclose
and describe this non-compliance, and explain how the overall Principle is being
achieved. The alternative should be consistent with the overall Principle.
Descriptions and explanations should be written in plain language and in a clear,
complete, objective and precise manner, so that shareholders and other
stakeholders can assess the company's governance framework.

5. The Explanations strive to provide companies with additional information on the

recommended best practice.

This Code does not, in any way, prescribe a “one size fits all” framework. It is
designed to allow boards some flexibility in establishing their corporate governance
arrangements. Larger companies and financial institutions would generally be
expected to follow most of the Code’s provisions. Smaller companies may decide that
the costs of some of the provisions outweigh the benefits, or are less relevant in their
case. Hence, the Principle of Proportionality is considered in the application of its
provisions.

6. The Code of Corporate Governance for publicly listed companies is the first of a
series of Codes that is intended to cover all types of corporations in the Philippines
under supervision of the Securities and Exchange Commission (SEC).

7. Definition of Terms:

Corporate Governance – the system of stewardship and control to guide

organizations in fulfilling their long-term economic, moral, legal and social
obligations towards their stakeholders.

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Organisation for Economic Co-operation and Development

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 Corporate governance is a system of direction, feedback and control using
regulations, performance standards and ethical guidelines to hold the Board and
senior management accountable for ensuring ethical behavior – reconciling long-
term customer satisfaction with shareholder value – to the benefit of all
stakeholders and society.

Its purpose is to maximize the organization’s long-term success, creating sustainable

value for its shareholders, stakeholders and the nation.

Board of Directors – the governing body elected by the stockholders that exercises
the corporate powers of a corporation, conducts all its business and controls its
properties.

Management – a group of executives given the authority by the Board of Directors

to implement the policies it has laid down in the conduct of the business of the
corporation.

Independent director – a person who is independent of management and the

controlling shareholder, and is free from any business or other relationship which
could, or could reasonably be perceived to, materially interfere with his exercise of
independent judgment in carrying out his responsibilities as a director.

Executive director – a director who has executive responsibility of day-to-day

operations of a part or the whole of the organization.

Non-executive director – a director who has no executive responsibility and does

not perform any work related to the operations of the corporation.

Conglomerate – a group of corporations that has diversified business activities in

varied industries, whereby the operations of such businesses are controlled and
managed by a parent corporate entity.

Internal control – a process designed and effected by the board of directors, senior
management, and all levels of personnel to provide reasonable assurance on the
achievement of objectives through efficient and effective operations; reliable,
complete and timely financial and management information; and compliance with
applicable laws, regulations, and the organization’s policies and procedures.

Enterprise Risk Management – a process, effected by an entity’s Board of

Directors, management and other personnel, applied in strategy setting and across
the enterprise that is designed to identify potential events that may affect the entity,
manage risks to be within its risk appetite, and provide reasonable assurance
regarding the achievement of entity objectives.2

Related Party – shall cover the company’s subsidiaries, as well as affiliates and any
party (including their subsidiaries, affiliates and special purpose entities), that the
company exerts direct or indirect control over or that exerts direct or indirect
control over the company; the company’s directors; officers; shareholders and
related interests (DOSRI), and their close family members, as well as corresponding
persons in affiliated companies. This shall also include such other person or juridical
entity whose interest may pose a potential conflict with the interest of the company.

2 Committee of Sponsoring Organizations of the Treadway Commission (COSO Framework)

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 Related Party Transactions – a transfer of resources, services or obligations
between a reporting entity and a related party, regardless of whether a price is
charged. It should be interpreted broadly to include not only transactions that are
entered into with related parties, but also outstanding transactions that are entered
into with an unrelated party that subsequently becomes a related party.

Stakeholders – any individual, organization or society at large who can either affect
and/or be affected by the company’s strategies, policies, business decisions and
operations, in general. This includes, among others, customers, creditors, employees,
suppliers, investors, as well as the government and community in which it operates.

THE BOARD’S GOVERNANCE RESPONSIBILITIES

1. ESTABLISHING A COMPETENT BOARD

Principle

The company should be headed by a competent, working board to foster the long-term
success of the corporation, and to sustain its competitiveness and profitability in a
manner consistent with its corporate objectives and the long-term best interests of its
shareholders and other stakeholders.

Recommendation 1.1

The Board should be composed of directors with a collective working knowledge,

experience or expertise that is relevant to the company’s industry/sector. The Board
should always ensure that it has an appropriate mix of competence and expertise and
that its members remain qualified for their positions individually and collectively, to
enable it to fulfill its roles and responsibilities and respond to the needs of the
organization based on the evolving business environment and strategic direction.

Explanation

Competence can be determined from the collective knowledge, experience and expertise
of each director that is relevant to the industry/sector that the company is in. A Board
with the necessary knowledge, experience and expertise can properly perform its task of
overseeing management and governance of the corporation, formulating the
corporation’s vision, mission, strategic objectives, policies and procedures that would
guide its activities, effectively monitoring management’s performance and supervising
the proper implementation of the same. In this regard, the Board sets qualification
standards for its members to facilitate the selection of potential nominees for board
seats, and to serve as a benchmark for the evaluation of its performance.

Recommendation 1.2

The Board should be composed of a majority of non-executive directors who possess the
necessary qualifications to effectively participate and help secure objective, independent
judgment on corporate affairs and to substantiate proper checks and balances.

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Explanation

The right combination of non-executive directors (NEDs), which include independent

directors (IDs) and executive directors (EDs), ensures that no director or small group of
directors can dominate the decision-making process. Further, a board composed of a
majority of NEDs assures protection of the company’s interest over the interest of the
individual shareholders. The company determines the qualifications of the NEDs that
enable them to effectively participate in the deliberations of the Board and carry out
their roles and responsibilities.

Recommendation 1.3

The Company should provide in its Board Charter and Manual on Corporate Governance
a policy on the training of directors, including an orientation program for first-time
directors and relevant annual continuing training for all directors.

Explanation

The orientation program for first-time directors and relevant annual continuing training
for all directors aim to promote effective board performance and continuing
qualification of the directors in carrying-out their duties and responsibilities. It is
suggested that the orientation program for first-time directors, in any company, be for at
least eight hours, while the annual continuing training be for at least four hours.

All directors should be properly oriented upon joining the board. This ensures that new
members are appropriately apprised of their duties and responsibilities, before
beginning their directorships. The orientation program covers SEC-mandated topics on
corporate governance and an introduction to the company’s business, Articles of
Incorporation, and Code of Conduct. It should be able to meet the specific needs of the
company and the individual directors and aid any new director in effectively performing
his or her functions.

The annual continuing training program, on the other hand, makes certain that the
directors are continuously informed of the developments in the business and regulatory
environments, including emerging risks relevant to the company. It involves courses on
corporate governance matters relevant to the company, including audit, internal
controls, risk management, sustainability and strategy. It is encouraged that companies
assess their own training and development needs in determining the coverage of their
continuing training program.

Recommendation 1.4

The Board should have a policy on board diversity.

Explanation

Having a board diversity policy is a move to avoid groupthink and ensure that optimal
decision-making is achieved. A board diversity policy is not limited to gender diversity.
It also includes diversity in age, ethnicity, culture, skills, competence and knowledge. On
gender diversity policy, a good example is to increase the number of female directors,
including female independent directors.

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Recommendation 1.5

The Board should ensure that it is assisted in its duties by a Corporate Secretary, who
should be a separate individual from the Compliance Officer. The Corporate Secretary
should not be a member of the Board of Directors and should annually attend a training
on corporate governance.

Explanation

The Corporate Secretary is primarily responsible to the corporation and its

shareholders, and not to the Chairman or President of the Company and has, among
others, the following duties and responsibilities:

a. Assists the Board and the board committees in the conduct of their meetings,
including preparing an annual schedule of Board and committee meetings and the
annual board calendar, and assisting the chairs of the Board and its committees to
set agendas for those meetings;

b. Safe keeps and preserves the integrity of the minutes of the meetings of the Board
and its committees, as well as other official records of the corporation;

c. Keeps abreast on relevant laws, regulations, all governance issuances, relevant

industry developments and operations of the corporation, and advises the Board
and the Chairman on all relevant issues as they arise;

d. Works fairly and objectively with the Board, Management and stockholders and
contributes to the flow of information between the Board and management, the
Board and its committees, and the Board and its stakeholders, including
shareholders;

e. Advises on the establishment of board committees and their terms of reference;

f. Informs members of the Board, in accordance with the by-laws, of the agenda of
their meetings at least five working days in advance, and ensures that the members
have before them accurate information that will enable them to arrive at intelligent
decisions on matters that require their approval;

g. Attends all Board meetings, except when justifiable causes, such as illness, death in
the immediate family and serious accidents, prevent him/her from doing so;

h. Performs required administrative functions;

i. Oversees the drafting of the by-laws and ensures that they conform with regulatory
requirements; and

j. Performs such other duties and responsibilities as may be provided by the SEC.

Recommendation 1.6

The Board should ensure that it is assisted in its duties by a Compliance Officer, who
should have a rank of Senior Vice President or an equivalent position with adequate
stature and authority in the corporation. The Compliance Officer should not be a

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 member of the Board of Directors and should annually attend a training on corporate
governance.

Explanation

The Compliance Officer is a member of the company’s management team in charge of

the compliance function. Similar to the Corporate Secretary, he/she is primarily liable to
the corporation and its shareholders, and not to the Chairman or President of the
company. He/she has, among others, the following duties and responsibilities:

a. Ensures proper onboarding of new directors (i.e., orientation on the company’s

business, charter, articles of incorporation and by-laws, among others);

b. Monitors, reviews, evaluates and ensures the compliance by the corporation, its
officers and directors with the relevant laws, this Code, rules and regulations and all
governance issuances of regulatory agencies;

c. Reports the matter to the Board if violations are found and recommends the
imposition of appropriate disciplinary action;

d. Ensures the integrity and accuracy of all documentary submissions to regulators;

e. Appears before the SEC when summoned in relation to compliance with this Code;

f. Collaborates with other departments to properly address compliance issues, which

may be subject to investigation;

g. Identifies possible areas of compliance issues and works towards the resolution of
the same;

h. Ensures the attendance of board members and key officers to relevant trainings; and

i. Performs such other duties and responsibilities as may be provided by the SEC.

2. ESTABLISHING CLEAR ROLES AND RESPONSIBILITIES OF THE BOARD

Principle

The fiduciary roles, responsibilities and accountabilities of the Board as provided under
the law, the company’s articles and by-laws, and other legal pronouncements and
guidelines should be clearly made known to all directors as well as to shareholders and
other stakeholders.

Recommendation 2.1

The Board members 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

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 There are two key elements of the fiduciary duty of board members: the duty of care and
the duty of loyalty. The duty of care requires board members to act on a fully informed
basis, in good faith, with due diligence and care. The duty of loyalty is also of central
importance; the board member should act in the interest of the company and all its
shareholders, and not those of the controlling company of the group or any other
stakeholder.

Recommendation 2.2

The Board should oversee the development of and approve the company’s business
objectives and strategy, and monitor their implementation, in order to sustain the
company’s long-term viability and strength.

Explanation

According to the OECD, the Board should review and guide corporate strategy, major
plans of action, risk management policies and procedures, annual budgets and business
plans; set performance objectives; monitor implementation and corporate performance;
and oversee major capital expenditures, acquisitions and divestitures. Sound strategic
policies and objectives translate to the company’s proper identification and
prioritization of its goals and guidance on how best to achieve them. This creates
optimal value to the corporation.

Recommendation 2.3

The Board should be headed by a competent and qualified Chairperson.

Explanation

The roles and responsibilities of the Chairman include, among others, the following:

a. Makes certain that the meeting agenda focuses on strategic matters, including the
overall risk appetite of the corporation, considering the developments in the
business and regulatory environments, key governance concerns, and contentious
issues that will significantly affect operations;

b. Guarantees that the Board receives accurate, timely, relevant, insightful, concise, and
clear information to enable it to make sound decisions;

c. Facilitates discussions on key issues by fostering an environment conducive for

constructive debate and leveraging on the skills and expertise of individual
directors;

d. Ensures that the Board sufficiently challenges and inquires on reports submitted
and representations made by Management;

e. Assures the availability of proper orientation for first-time directors and continuing
training opportunities for all directors; and

f. Makes sure that performance of the Board is evaluated at least once a year and
discussed/followed up on.

Recommendation 2.4

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 The Board should be responsible for ensuring and adopting an effective succession
planning program for directors, key officers and management to ensure growth and a
continued increase in the shareholders’ value. This should include adopting a policy on
the retirement age for directors and key officers as part of management succession and
to promote dynamism in the corporation.

Explanation

The transfer of company leadership to highly competent and qualified individuals is the
goal of succession planning. It is the Board’s responsibility to implement a process to
appoint competent, professional, honest and highly motivated management officers who
can add value to the company.

A good succession plan is linked to the documented roles and responsibilities for each
position, and should start in objectively identifying the key knowledge, skills, and
abilities required for the position. For any potential candidate identified, a professional
development plan is defined to help the individuals prepare for the job (e.g., training to
be taken and cross experience to be achieved). The process is conducted in an impartial
manner and aligned with the strategic direction of the organization.

Recommendation 2.5

The Board should align the remuneration of key officers and board members with the
long-term interests of the company. In doing so, it should formulate and adopt a policy
specifying the relationship between remuneration and performance. Further, no
director should participate in discussions or deliberations involving his own
remuneration.

Explanation

Companies are able to attract and retain the services of qualified and competent
individuals if the level of remuneration is sufficient, in line with the business and risk
strategy, objectives, values and incorporate measures to prevent conflicts of interest.
Remuneration policies promote a sound risk culture in which risk-taking behavior is
appropriate. They also encourage employees to act in the long-term interest of the
company as a whole, rather than for themselves or their business lines only. Moreover, it
is good practice for the Board to formulate and adopt a policy specifying the relationship
between remuneration and performance, which includes specific financial and non-
financial metrics to measure performance and set specific provisions for employees with
significant influence on the overall risk profile of the corporation.

Key considerations in determining proper compensation include the following: (1) the
level of remuneration is commensurate to the responsibilities of the role; (2) no director
should participate in deciding on his remuneration; and (3) remuneration pay-out
schedules should be sensitive to risk outcomes over a multi-year horizon.

For employees in control functions (e.g., risk, compliance and internal audit), their
remuneration is determined independent of any business line being overseen, and
performance measures are based principally on the achievement of their objectives so
as not to compromise their independence.

Recommendation 2.6

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 The Board should have and disclose in its Manual on Corporate Governance a formal and
transparent board nomination and election policy that should include how it accepts
nominations from minority shareholders and reviews nominated candidates. The policy
should also include an assessment of the effectiveness of the Board’s processes and
procedures in the nomination, election, or replacement of a director. In addition, its
process of identifying the quality of directors should be aligned with the strategic
direction of the company.

Explanation

It is the Board’s responsibility to develop a policy on board nomination, which is

contained in the company’s Manual on Corporate Governance. The policy should
encourage shareholders’ participation by including procedures on how the Board
accepts nominations from minority shareholders. The policy should also promote
transparency of the Board’s nomination and election process.

The nomination and election process also includes the review and evaluation of the
qualifications of all persons nominated to the Board, including whether candidates: (1)
possess the knowledge, skills, experience, and particularly in the case of non-executive
directors, independence of mind given their responsibilities to the Board and in light of
the entity’s business and risk profile; (2) have a record of integrity and good repute; (3)
have sufficient time to carry out their responsibilities; and (4) have the ability to
promote a smooth interaction between board members. A good practice is the use of
professional search firms or external sources when searching for candidates to the
Board.

In addition, the process also includes monitoring the qualifications of the directors. The
qualifications and grounds for disqualification are contained in the company’s Manual
on Corporate Governance.

The following may be considered as grounds for the permanent disqualification of a

director:

a. Any person convicted by final judgment or order by a competent judicial or

administrative body of any crime that: (a) involves the purchase or sale of securities,
as defined in the Securities Regulation Code; (b) arises out of the person’s conduct as
an underwriter, broker, dealer, investment adviser, principal, distributor, mutual
fund dealer, futures commission merchant, commodity trading advisor, or floor
broker; or (c) arises out of his fiduciary relationship with a bank, quasi-bank, trust
company, investment house or as an affiliated person of any of them;

b. Any person who, by reason of misconduct, after hearing, is permanently enjoined by a

final judgment or order of the SEC, Bangko Sentral ng Pilipinas (BSP) or any court or
administrative body of competent jurisdiction from: (a) acting as underwriter,
broker, dealer, investment adviser, principal distributor, mutual fund dealer, futures
commission merchant, commodity trading advisor, or floor broker; (b) acting as
director or officer of a bank, quasi-bank, trust company, investment house, or
investment company; (c) engaging in or continuing any conduct or practice in any of
the capacities mentioned in sub-paragraphs (a) and (b) above, or willfully violating
the laws that govern securities and banking activities.

The disqualification should also apply if (a) such person is the subject of an order of
the SEC, BSP or any court or administrative body denying, revoking or suspending
any registration, license or permit issued to him under the Corporation Code,

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 Securities Regulation Code or any other law administered by the SEC or BSP, or under
any rule or regulation issued by the Commission or BSP; (b) such person has
otherwise been restrained to engage in any activity involving securities and banking;
or (c) such person is the subject of an effective order of a self-regulatory organization
suspending or expelling him from membership, participation or association with a
member or participant of the organization;

c. Any person convicted by final judgment or order by a court, or competent

administrative body of an offense involving moral turpitude, fraud, embezzlement,
theft, estafa, counterfeiting, misappropriation, forgery, bribery, false affirmation,
perjury or other fraudulent acts;

d. Any person who has been adjudged by final judgment or order of the SEC, BSP, court,
or competent administrative body to have willfully violated, or willfully aided,
abetted, counseled, induced or procured the violation of any provision of the
Corporation Code, Securities Regulation Code or any other law, rule, regulation or
order administered by the SEC or BSP;

e. Any person judicially declared as insolvent;

f. Any person found guilty by final judgment or order of a foreign court or equivalent
financial regulatory authority of acts, violations or misconduct similar to any of the
acts, violations or misconduct enumerated previously;

g. Conviction by final judgment of an offense punishable by imprisonment for more

than six years, or a violation of the Corporation Code committed within five years
prior to the date of his election or appointment; and

h. Other grounds as the SEC may provide.

In addition, the following may be grounds for temporary disqualification of a director:

a. Absence in more than fifty percent (50%) of all regular and special meetings of the
Board during his incumbency, or any 12-month period during the said incumbency,
unless the absence is due to illness, death in the immediate family or serious accident.
The disqualification should apply for purposes of the succeeding election;

b. Dismissal or termination for cause as director of any publicly-listed company, public

company, registered issuer of securities and holder of a secondary license from the
Commission. The disqualification should be in effect until he has cleared himself from
any involvement in the cause that gave rise to his dismissal or termination;

c. If the beneficial equity ownership of an independent director in the corporation or its

subsidiaries and affiliates exceeds two percent (2%) of its subscribed capital stock.
The disqualification from being elected as an independent director is lifted if the limit
is later complied with; and

d. If any of the judgments or orders cited in the grounds for permanent disqualification
has not yet become final.

Recommendation 2.7

13
 The Board should have the overall responsibility in ensuring that there is a group-wide
policy and system governing related party transactions (RPTs) and other unusual or
infrequently occurring transactions, particularly those which pass certain thresholds of
materiality. The policy should include the appropriate review and approval of material
or significant RPTs, which guarantee fairness and transparency of the transactions. The
policy should encompass all entities within the group, taking into account their size,
structure, risk profile and complexity of operations.

Explanation

Ensuring the integrity of related party transactions is an important fiduciary duty of the
director. It is the Board’s role to initiate policies and measures geared towards
prevention of abuse and promotion of transparency, and in compliance with applicable
laws and regulations to protect the interest of all shareholders. One such measure is the
required ratification by shareholders of material or significant RPTs approved by the
Board, in accordance with existing laws. Other measures include ensuring that
transactions occur at market prices, at arm’s-length basis and under conditions that
protect the rights of all shareholders.

The following are suggestions for the content of the RPT Policy:

• Definition of related parties;

• Coverage of RPT policy;
• Guidelines in ensuring arm’s-length terms;
• Identification and prevention or management of potential or actual
conflicts of interest which arise;
• Adoption of materiality thresholds;
• Internal limits for individual and aggregate exposures;
• Whistle-blowing mechanisms, and
• Restitution of losses and other remedies for abusive RPTs.

In addition, the company is given the discretion to set their materiality threshold at a
level where omission or misstatement of the transaction could pose a significant risk to
the company and influence its economic decision. The SEC may direct a company to
reduce its materiality threshold or amend excluded transactions if the SEC deems that
the threshold or exclusion is inappropriate considering the company’s size, risk profile,
and risk management systems.

Depending on the materiality threshold, approval of management, the RPT Committee,

the Board or the shareholders may be required. In cases where the shareholders’
approval is required, it is good practice for interested shareholders to abstain and let the
disinterested parties or majority of the minority shareholders decide.

Recommendation 2.8

The Board should be primarily responsible for approving the selection and assessing the
performance of the Management led by the Chief Executive Officer (CEO), and control
functions led by their respective heads (Chief Risk Officer, Chief Compliance Officer, and
Chief Audit Executive).

Explanation

14
 It is the responsibility of the Board to appoint a competent management team at all
times, monitor and assess the performance of the management team based on
established performance standards that are consistent with the company’s strategic
objectives, and conduct a regular review of the company’s policies with the management
team. In the selection process, fit and proper standards are to be applied on key
personnel and due consideration is given to integrity, technical expertise and experience
in the institution’s business, either current or planned.

Recommendation 2.9

The Board should establish an effective performance management framework that will
ensure that the Management, including the Chief Executive Officer, and personnel’s
performance is at par with the standards set by the Board and Senior Management.

Explanation

Results of performance evaluation should be linked to other human resource activities

such as training and development, remuneration, and succession planning. These should
likewise form part of the assessment of the continuing fitness and propriety of
management, including the Chief Executive Officer, 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,
including setting up a mechanism for monitoring and managing potential conflicts of
interest of Management, board members, and shareholders. 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, compliance and internal audit, and reviewing the
corporation’s human resource policies, conflict of interest situations, compensation
program for employees and management succession plan.

Recommendation 2.11

The Board should oversee that a sound enterprise risk management (ERM) framework
is in place to effectively identify, monitor, assess and manage key business risks. The
risk management framework should guide the Board in identifying units/business lines
and enterprise-level risk exposures, as well as the effectiveness of risk management
strategies.

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

15
 The Board should have a Board Charter that formalizes and clearly states its roles,
responsibilities and accountabilities in carrying out its fiduciary duties. The Board
Charter should serve as a guide to the directors in the performance of their functions
and should be publicly available and posted on the company’s website.

Explanation

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

3. ESTABLISHING BOARD COMMITTEES

Principle

Board committees should be set up to the extent possible to support the effective
performance of the Board’s functions, particularly with respect to audit, risk
management, related party transactions, and other key corporate governance concerns,
such as nomination and remuneration. The composition, functions and responsibilities
of all committees established should be contained in a publicly available Committee
Charter.

Recommendation 3.1

The Board should establish board committees that focus on specific board functions to
aid in the optimal performance of its roles and responsibilities.

Explanation

Board committees such as the Audit Committee, Corporate Governance Committee,

Board Risk Oversight Committee and Related Party Transaction Committee are
necessary to support the Board in the effective performance of its functions. The
establishment of the same, or any other committees that the company deems necessary,
allows for specialization in issues and leads to a better management of the Board’s
workload. The type of board committees to be established by a company would depend
on its size, risk profile and complexity of operations. However, if the committees are not
established, the functions of these committees may be carried out by the whole board or
by any other committee.

Recommendation 3.2

The Board should establish an Audit Committee to enhance its oversight capability over
the company’s financial reporting, internal control system, internal and external audit
processes, and compliance with applicable laws and regulations. The committee should
be composed of at least three appropriately qualified non-executive directors, the
majority of whom, including the Chairman, should be independent. All of the members
of the committee must have relevant background, knowledge, skills, and/or experience

16
 in the areas of accounting, auditing and finance. The Chairman of the Audit Committee
should not be the chairman of the Board or of any other committees.

Explanation

The Audit Committee is responsible for overseeing the senior management in

establishing and maintaining an adequate, effective and efficient internal control
framework. It ensures that systems and processes are designed to provide assurance in
areas including reporting, monitoring compliance with laws, regulations and internal
policies, efficiency and effectiveness of operations, and safeguarding of assets.

The Audit Committee has the following duties and responsibilities, among others:

a. Recommends the approval the Internal Audit Charter (IA Charter), which formally
defines the role of Internal Audit and the audit plan as well as oversees the
implementation of the IA Charter;

b. Through the Internal Audit (IA) Department, monitors and evaluates the adequacy
and effectiveness of the corporation’s internal control system, integrity of financial
reporting, and security of physical and information assets. Well-designed internal
control procedures and processes that will provide a system of checks and balances
should be in place in order to (a) safeguard the company’s resources and ensure
their effective utilization, (b) prevent occurrence of fraud and other irregularities,
(c) protect the accuracy and reliability of the company’s financial data, and (d)
ensure compliance with applicable laws and regulations;

c. Oversees the Internal Audit Department, and recommends the appointment and/or
grounds for approval of an internal audit head or Chief Audit Executive (CAE). The
Audit Committee should also approve the terms and conditions for outsourcing
internal audit services;

d. Establishes and identifies the reporting line of the Internal Auditor to enable him to
properly fulfill his duties and responsibilities. For this purpose, he should directly
report to the Audit Committee;

e. Reviews and monitors Management’s responsiveness to the Internal Auditor’s

findings and recommendations;

f. Prior to the commencement of the audit, discusses with the External Auditor the
nature, scope and expenses of the audit, and ensures the proper coordination if
more than one audit firm is involved in the activity to secure proper coverage and
minimize duplication of efforts;

g. Evaluates and determines the non-audit work, if any, of the External Auditor, and
periodically reviews the non-audit fees paid to the External Auditor in relation to the
total fees paid to him and to the corporation’s overall consultancy expenses. The
committee should disallow any non-audit work that will conflict with his duties as
an External Auditor or may pose a threat to his independence3. The non-audit work,
if allowed, should be disclosed in the corporation’s Annual Report and Annual
Corporate Governance Report;

3
As defined under the Code of Ethics for Professional Accountants

17
 h. Reviews and approves the Interim and Annual Financial Statements before their
submission to the Board, with particular focus on the following matters:

• Any change/s in accounting policies and practices

• Areas where a significant amount of judgment has been exercised
• Significant adjustments resulting from the audit
• Going concern assumptions
• Compliance with accounting standards
• Compliance with tax, legal and regulatory requirements

i. Reviews the disposition of the recommendations in the External Auditor’s

management letter;

j. Performs oversight functions over the corporation’s Internal and External Auditors.
It ensures the independence of Internal and External Auditors, and that both
auditors are given unrestricted access to all records, properties and personnel to
enable them to perform their respective audit functions;

k. Coordinates, monitors and facilitates compliance with laws, rules and regulations;

l. Recommends to the Board the appointment, reappointment, removal and fees of the
External Auditor, duly accredited by the Commission, who undertakes an
independent audit of the corporation, and provides an objective assurance on the
manner by which the financial statements should be prepared and presented to the
stockholders; and

m. In case the company does not have a Board Risk Oversight Committee and/or
Related Party Transactions Committee, performs the functions of said committees as
provided under Recommendations 3.4 and 3.5.

The Audit Committee meets with the Board at least every quarter without the presence
of the CEO or other management team members, and periodically meets with the head
of the internal audit.

Recommendation 3.3

The Board should establish a Corporate Governance Committee that should be tasked to
assist the Board in the performance of its corporate governance responsibilities,
including the functions that were formerly assigned to a Nomination and Remuneration
Committee. It should be composed of at least three members, all of whom should be
independent directors, including the Chairman.

Explanation

The Corporate Governance Committee (CG Committee) is tasked with ensuring

compliance with and proper observance of corporate governance principles and
practices. It has the following duties and functions, among others:

a. Oversees the implementation of the corporate governance framework and

periodically reviews the said framework to ensure that it remains appropriate in
light of material changes to the corporation’s size, complexity and business strategy,
as well as its business and regulatory environments;

18
 b. Oversees the periodic performance evaluation of the Board and its committees as
well as executive management, and conducts an annual self-evaluation of its
performance;

c. Ensures that the results of the Board evaluation are shared, discussed, and that
concrete action plans are developed and implemented to address the identified
areas for improvement;

d. Recommends continuing education/training programs for directors, assignment of

tasks/projects to board committees, succession plan for the board members and
senior officers, and remuneration packages for corporate and individual
performance;

e. Adopts corporate governance policies and ensures that these are reviewed and
updated regularly, and consistently implemented in form and substance;

f. Proposes and plans relevant trainings for the members of the Board;

g. Determines the nomination and election process for the company’s directors and
has the special duty of defining the general profile of board members that the
company may need and ensuring appropriate knowledge, competencies and
expertise that complement the existing skills of the Board; and

h. Establishes a formal and transparent procedure to develop a policy for determining

the remuneration of directors and officers that is consistent with the corporation’s
culture and strategy as well as the business environment in which it operates.

The establishment of a Corporate Governance Committee does not preclude companies

from establishing separate Remuneration or Nomination Committees, if they deem
necessary.

Recommendation 3.4

Subject to a corporation’s size, risk profile and complexity of operations, the Board
should establish a separate Board Risk Oversight Committee (BROC) that should be
responsible for the oversight of a company’s Enterprise Risk Management system to
ensure its functionality and effectiveness. The BROC should be composed of at least
three members, the majority of whom should be independent directors, including the
Chairman. The Chairman should not be the Chairman of the Board or of any other
committee. At least one member of the committee must have relevant thorough
knowledge and experience on risk and risk management.

Explanation

The establishment of a Board Risk Oversight Committee (BROC) is generally for

conglomerates and companies with a high risk profile.

Enterprise risk management is integral to an effective corporate governance process

and the achievement of a company's value creation objectives. Thus, the BROC has the
responsibility to assist the Board in ensuring that there is an effective and integrated
risk management process in place. With an integrated approach, the Board and top
management will be in a confident position to make well-informed decisions, having
taken into consideration risks related to significant business activities, plans and
opportunities.

19
 The BROC has the following duties and responsibilities, among others:

a. Develops a formal enterprise risk management plan which contains the following
elements: (a) common language or register of risks, (b) well-defined risk
management goals, objectives and oversight, (c) uniform processes of assessing
risks and developing strategies to manage prioritized risks, (d) designing and
implementing risk management strategies, and (e) continuing assessments to
improve risk strategies, processes and measures;

b. Oversees the implementation of the enterprise risk management plan through a

Management Risk Oversight Committee. The BROC conducts regular discussions on
the company’s prioritized and residual risk exposures based on regular risk
management reports and assesses how the concerned units or offices are addressing
and managing these risks;

c. Evaluates the risk management plan to ensure its continued relevance,

comprehensiveness and effectiveness. The BROC revisits defined risk management
strategies, looks for emerging or changing material exposures, and stays abreast of
significant developments that seriously impact the likelihood of harm or loss;

d. Advises the Board on its risk appetite levels and risk tolerance limits;

e. Reviews at least annually the company’s risk appetite levels and risk tolerance limits
based on changes and developments in the business, the regulatory framework, the
external economic and business environment, and when major events occur that are
considered to have major impacts on the company;

f. Assesses the probability of each identified risk becoming a reality and estimates its
possible significant financial impact and likelihood of occurrence. Priority areas of
concern are those risks that are the most likely to occur and to impact the
performance and stability of the corporation and its stakeholders;

g. Provides oversight over Management’s activities in managing credit, market,

liquidity, operational, legal and other risk exposures of the corporation. This
function includes regularly receiving information on risk exposures and risk
management activities from Management; and

h. Reports to the Board on a regular basis, or as deemed necessary, the company’s

material risk exposures, the actions taken to reduce the risks, and recommends
further action or plans, as necessary.

Recommendation 3.5

Subject to a corporation’s size, risk profile and complexity of operations, the Board
should establish a Related Party Transaction (RPT) Committee, which should be tasked
with reviewing all material related party transactions of the company and should be
composed of at least three non-executive directors, two of whom should be
independent, including the Chairman.

Explanation

20
 Examples of companies that may have a separate RPT Committee are conglomerates and
universal/commercial banks in recognition of the potential magnitude of RPTs in these
kinds of corporations.

The following are the functions of the RPT Committee, among others:

a. Evaluates on an ongoing basis existing relations between and among businesses and
counterparties to ensure that all related parties are continuously identified, RPTs
are monitored, and subsequent changes in relationships with counterparties (from
non-related to related and vice versa) are captured. Related parties, RPTs and
changes in relationships should be reflected in the relevant reports to the Board and
regulators/supervisors;

b. Evaluates all material RPTs to ensure that these are not undertaken on more
favorable economic terms (e.g., price, commissions, interest rates, fees, tenor,
collateral requirement) to such related parties than similar transactions with non-
related parties under similar circumstances and that no corporate or business
resources of the company are misappropriated or misapplied, and to determine any
potential reputational risk issues that may arise as a result of or in connection with
the transactions. In evaluating RPTs, the Committee takes into account, among
others, the following:

1. The related party’s relationship to the company and interest in the transaction;
2. The material facts of the proposed RPT, including the proposed aggregate value
of such transaction;
3. The benefits to the corporation of the proposed RPT;
4. The availability of other sources of comparable products or services; and
5. An assessment of whether the proposed RPT is on terms and conditions that are
comparable to the terms generally available to an unrelated party under similar
circumstances. The company should have an effective price discovery system in
place and exercise due diligence in determining a fair price for RPTs;

c. Ensures that appropriate disclosure is made, and/or information is provided to

regulating and supervising authorities relating to the company’s RPT exposures, and
policies on conflicts of interest or potential conflicts of interest. The disclosure
should include information on the approach to managing material conflicts of
interest that are inconsistent with such policies, and conflicts that could arise as a
result of the company’s affiliation or transactions with other related parties;

d. Reports to the Board of Directors on a regular basis, the status and aggregate
exposures to each related party, as well as the total amount of exposures to all
related parties;

e. Ensures that transactions with related parties, including write-off of exposures are
subject to a periodic independent review or audit process; and

f. Oversees the implementation of the system for identifying, monitoring, measuring,

controlling, and reporting RPTs, including a periodic review of RPT policies and
procedures.

Recommendation 3.6

All established committees should be required to have Committee Charters stating in

plain terms their respective purposes, memberships, structures, operations, reporting

21
 processes, resources and other relevant information. The Charters should provide the
standards for evaluating the performance of the Committees. It should also be fully
disclosed on the company’s website.

Explanation

The Committee Charter clearly defines the roles and accountabilities of each committee
to avoid any overlapping functions, which aims at having a more effective board for the
company. This can also be used as basis for the assessment of committee performance.

4. FOSTERING COMMITMENT

Principle

To show full commitment to the company, the directors should devote the time and
attention necessary to properly and effectively perform their duties and responsibilities,
including sufficient time to be familiar with the corporation’s business.

Recommendation 4.1

The directors should attend and actively participate in all meetings of the Board,
Committees, and Shareholders in person or through tele-/videoconferencing conducted
in accordance with the rules and regulations of the Commission, except when justifiable
causes, such as, illness, death in the immediate family and serious accidents, prevent
them from doing so. In Board and Committee meetings, the director should review
meeting materials and if called for, ask the necessary questions or seek clarifications and
explanations.

Explanation

A director’s commitment to the company is evident in the amount of time he dedicates

to performing his duties and responsibilities, which includes his presence in all meetings
of the Board, Committees and Shareholders. In this way, the director is able to
effectively perform his/her duty to the company and its shareholders.

The absence of a director in more than fifty percent (50%) of all regular and special
meetings of the Board during his/her incumbency is a ground for disqualification in the
succeeding election, unless the absence is due to illness, death in the immediate family,
serious accident or other unforeseen or fortuitous events.

Recommendation 4.2

The non-executive directors of the Board should concurrently serve as directors to a

maximum of five publicly listed companies to ensure that they have sufficient time to
fully prepare for meetings, challenge Management’s proposals/views, and oversee the
long-term strategy of the company.

Explanation

Being a director necessitates a commitment to the corporation. Hence, there is a need to

set a limit on board directorships. This ensures that the members of the board are able
to effectively commit themselves to perform their roles and responsibilities, regularly

22
 update their knowledge and enhance their skills. Since sitting on the board of too many
companies may interfere with the optimal performance of board members, in that they
may not be able to contribute enough time to keep abreast of the corporation’s
operations and to attend and actively participate during meetings, a maximum board
seat limit of five directorships is recommended.

Recommendation 4.3

A director should notify the Board where he/she is an incumbent director before
accepting a directorship in another company.

Explanation

The Board expects commitment from a director to devote sufficient time and attention
to his/her duties and responsibilities. Hence, it is important that a director notifies
his/her incumbent Board before accepting a directorship in another company. This is
for the company to be able to assess if his/her present responsibilities and commitment
to the company will be affected and if the director can still adequately provide what is
expected of him/her.

5. REINFORCING BOARD INDEPENDENCE

Principle

The board should endeavor to exercise an objective and independent judgment on all
corporate affairs.

Recommendation 5.1

The Board should have at least three independent directors, or such number as to
constitute at least one-third of the members of the Board, whichever is higher.

Explanation

The presence of independent directors in the Board is to ensure the exercise of

independent judgment on corporate affairs and proper oversight of managerial
performance, including prevention of conflict of interests and balancing of competing
demands of the corporation. There is increasing global recognition that more
independent directors in the Board lead to more objective decision-making, particularly
in conflict of interest situations. In addition, experts have recognized that there are
varying opinions on the optimal number of independent directors in the board.
However, the ideal number ranges from one-third to a substantial majority.

Recommendation 5.2

The Board should ensure that its independent directors possess the necessary
qualifications and none of the disqualifications for an independent director to hold the
position.

Explanation

23
Independent directors need to possess a good general understanding of the industry
they are in. Further, it is worthy to note that independence and competence should go
hand-in-hand. It is therefore important that the non-executive directors, including
independent directors, possess the qualifications and stature that would enable them to
effectively and objectively participate in the deliberations of the Board.

An Independent Director refers to a person who, ideally:

a. Is not, or has not been a senior officer or employee of the covered company unless
there has been a change in the controlling ownership of the company;

b. Is not, and has not been in the three years immediately preceding the election, a
director of the covered company; a director, officer, employee of the covered
company’s subsidiaries, associates, affiliates or related companies; or a director,
officer, employee of the covered company’s substantial shareholders and its related
companies;

c. Has not been appointed in the covered company, its subsidiaries, associates,
affiliates or related companies as Chairman “Emeritus,” “Ex-Officio”
Directors/Officers or Members of any Advisory Board, or otherwise appointed in a
capacity to assist the Board in the performance of its duties and responsibilities
within three years immediately preceding his election;

d. Is not an owner of more than two percent (2%) of the outstanding shares of the
covered company, its subsidiaries, associates, affiliates or related companies;

e. Is not a relative of a director, officer, or substantial shareholder of the covered

company or any of its related companies or of any of its substantial shareholders.
For this purpose, relatives include spouse, parent, child, brother, sister and the
spouse of such child, brother or sister;

f. Is not acting as a nominee or representative of any director of the covered company

or any of its related companies;

g. Is not a securities broker-dealer of listed companies and registered issuers of

securities. “Securities broker-dealer” refers to any person holding any office of trust
and responsibility in a broker-dealer firm, which includes, among others, a director,
officer, principal stockholder, nominee of the firm to the Exchange, an associated
person or salesman, and an authorized clerk of the broker or dealer;

h. Is not retained, either in his personal capacity or through a firm, as a professional

adviser, auditor, consultant, agent or counsel of the covered company, any of its
related companies or substantial shareholder, or is otherwise independent of
Management and free from any business or other relationship within the three years
immediately preceding the date of his election;

i. Does not engage or has not engaged, whether by himself or with other persons or
through a firm of which he is a partner, director or substantial shareholder, in any
transaction with the covered company or any of its related companies or substantial
shareholders, other than such transactions that are conducted at arm’s length and
could not materially interfere with or influence the exercise of his independent
judgment;

24
 j. Is not affiliated with any non-profit organization that receives significant funding
from the covered company or any of its related companies or substantial
shareholders; and

k. Is not employed as an executive officer of another company where any of the

covered company’s executives serve as directors.

Related companies, as used in this section, refer to (a) the covered entity’s
holding/parent company; (b) its subsidiaries; and (c) subsidiaries of its holding/parent
company.

Recommendation 5.3

The Board’s independent directors should serve for a maximum cumulative term of nine
years. After which, the independent director should be perpetually barred from re-
election as such in the same company, but may continue to qualify for nomination and
election as a non-independent director. In the instance that a company wants to retain
an independent director who has served for nine years, the Board should provide
meritorious justification/s and seek shareholders’ approval during the annual
shareholders’ meeting.

Explanation

Service in a board for a long duration may impair a director’s ability to act
independently and objectively. Hence, the tenure of an independent director is set to a
cumulative term of nine years. Independent directors (IDs) who have served for nine
years may continue as a non-independent director of the company. Reckoning of the
cumulative nine-year term is from 2012, in connection with SEC Memorandum Circular
No. 9, Series of 2011.

Any term beyond nine years for an ID is subjected to particularly rigorous review, taking
into account the need for progressive change in the Board to ensure an appropriate
balance of skills and experience. However, the shareholders may, in exceptional cases,
choose to re-elect an independent director who has served for nine years. In such
instances, the Board must provide a meritorious justification for the re-election.

Recommendation 5.4

The positions of Chairman of the Board and Chief Executive Officer should be held by
separate individuals and each should have clearly defined responsibilities.

Explanation

To avoid conflict or a split board and to foster an appropriate balance of power,

increased accountability and better capacity for independent decision-making, it is
recommended that the positions of Chairman and Chief Executive Officer (CEO) be held
by different individuals. This type of organizational structure facilitates effective
decision making and good governance. In addition, the division of responsibilities and
accountabilities between the Chairman and CEO is clearly defined and delineated and
disclosed in the Board Charter.

25
 The CEO has the following roles and responsibilities, among others:

a. Determines the corporation’s strategic direction and formulates and implements its
strategic plan on the direction of the business;

b. Communicates and implements the corporation’s vision, mission, values and overall
strategy and promotes any organization or stakeholder change in relation to the
same;

c. Oversees the operations of the corporation and manages human and financial
resources in accordance with the strategic plan;

d. Has a good working knowledge of the corporation’s industry and market and keeps
up-to-date with its core business purpose;

e. Directs, evaluates and guides the work of the key officers of the corporation;

f. Manages the corporation’s resources prudently and ensures a proper balance of the
same;

g. Provides the Board with timely information and interfaces between the Board and
the employees;

h. Builds the corporate culture and motivates the employees of the corporation; and

i. Serves as the link between internal operations and external stakeholders.

The roles and responsibilities of the Chairman are provided under Recommendation 2.3.

Recommendation 5.5

The Board should designate a lead director among the independent directors if the
Chairman of the Board is not independent, including if the positions of the Chairman of
the Board and Chief Executive Officer are held by one person.

Explanation

In cases where the Chairman is not independent and where the roles of Chair and CEO
are combined, putting in place proper mechanisms ensures independent views and
perspectives. More importantly, it avoids the abuse of power and authority, and
potential conflict of interest. A suggested mechanism is the appointment of a strong
“lead director” among the independent directors. This lead director has sufficient
authority to lead the Board in cases where management has clear conflicts of interest.

The functions of the lead director include, among others, the following:

a. Serves as an intermediary between the Chairman and the other directors when
necessary;
b. Convenes and chairs meetings of the non-executive directors; and
c. Contributes to the performance evaluation of the Chairman, as required.

Recommendation 5.6

26
 A director with a material interest in any transaction affecting the corporation should
abstain from taking part in the deliberations for the same.

Explanation

The abstention of a director from participating in a meeting when related party

transactions, self-dealings or any transactions or matters on which he/she has a
material interest are taken up ensures that he has no influence over the outcome of the
deliberations. The fundamental principle to be observed is that a director does not use
his position to profit or gain some benefit or advantage for his himself and/or his/her
related interests.

Recommendation 5.7

The non-executive directors (NEDs) should have separate periodic meetings with the
external auditor and heads of the internal audit, compliance and risk functions, without
any executive directors present to ensure that proper checks and balances are in place
within the corporation. The meetings should be chaired by the lead independent
director.

Explanation

NEDs are expected to scrutinize Management’s performance, particularly in meeting the

companies’ goals and objectives. Further, it is their role to satisfy themselves on the
integrity of the corporation’s internal control and effectiveness of the risk management
systems. This role can be better performed by the NEDs if they are provided access to
the external auditor and heads of the internal audit, compliance and risk functions, as
well as to other key officers of the company without any executive directors present.
The lead independent director should lead and preside over the meeting.

6. ASSESSING BOARD PERFORMANCE

Principle

The best measure of the Board’s effectiveness is through an assessment process. The
Board should regularly carry out evaluations to appraise its performance as a body, and
assess whether it possesses the right mix of backgrounds and competencies.

Recommendation 6.1

The Board should conduct an annual self-assessment of its performance, including the
performance of the Chairman, individual members and committees. Every three years,
the assessment should be supported by an external facilitator.

Explanation

Board assessment helps the directors to thoroughly review their performance and
understand their roles and responsibilities. The periodic review and assessment of the
Board’s performance as a body, the board committees, the individual directors, and the
Chairman show how the aforementioned should perform their responsibilities
effectively. In addition, it provides a means to assess a director’s attendance at board
and committee meetings, participation in boardroom discussions and manner of voting
on material issues. The use of an external facilitator in the assessment process increases

27
 the objectivity of the same. The external facilitator can be any independent third party
such as, but not limited to, a consulting firm, academic institution or professional
organization.

Recommendation 6.2

The Board should have in place a system that provides, at the minimum, criteria and
process to determine the performance of the Board, the individual directors, committees
and such system should allow for a feedback mechanism from the shareholders.

Explanation

Disclosure of the criteria, process and collective results of the assessment ensures
transparency and allows shareholders and stakeholders to determine if the directors are
performing their responsibilities to the company. Companies are given the discretion to
determine the assessment criteria and process, which should be based on the mandates,
functions, roles and responsibilities provided in the Board and Committee Charters. In
establishing the criteria, attention is given to the values, principles and skills required
for the company. The Corporate Governance Committee oversees the evaluation
process.

7. STRENGTHENING BOARD ETHICS

Principle

Members of the Board are duty-bound to apply high ethical standards, taking into
account the interests of all stakeholders.

Recommendation 7.1

The Board should adopt a Code of Business Conduct and Ethics, which would provide
standards for professional and ethical behavior, as well as articulate acceptable and
unacceptable conduct and practices in internal and external dealings. The Code should
be properly disseminated to the Board, senior management and employees. It should
also be disclosed and made available to the public through the company website.

Explanation

A Code of Business Conduct and Ethics formalizing ethical values is an important tool to
instill an ethical corporate culture that pervades throughout the company. The main
responsibility to create and design a Code of Conduct suitable to the needs of the
company and the culture by which it operates lies with the Board. To ensure proper
compliance with the Code, appropriate orientation and training of the Board, senior
management and employees on the same are necessary.

Recommendation 7.2

The Board should ensure the proper and efficient implementation and monitoring of
compliance with the Code of Business Conduct and Ethics and internal policies.

Explanation

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 The Board has the primary duty to make sure that the internal controls are in place to
ensure the company’s compliance with the Code of Business Conduct and Ethics and its
internal policies and procedures. Hence, it needs to ensure the implementation of said
internal controls to support, promote and guarantee compliance. This includes efficient
communication channels, which aid and encourage employees, customers, suppliers and
creditors to raise concerns on potential unethical/unlawful behavior without fear of
retribution. A company’s ethics policy can be made effective and inculcated in the
company culture through a communication and awareness campaign, continuous
training to reinforce the code, strict monitoring and implementation and setting in place
proper avenues where issues may be raised and addressed without fear of retribution.

DISCLOSURE AND TRANSPARENCY

8. ENHANCING COMPANY DISCLOSURE POLICIES AND PROCEDURES

Principle 8

The company should establish corporate disclosure policies and procedures that are
practical and in accordance with best practices and regulatory expectations.

Recommendation 8.1

The Board should establish corporate disclosure policies and procedures to ensure a
comprehensive, accurate, reliable and timely report to shareholders and other
stakeholders that gives a fair and complete picture of a company’s financial condition,
results and business operations.

Explanation

Setting up clear policies and procedures on corporate disclosure that comply with the
disclosure requirement as provided in Rule 68 of the Securities Regulation Code (SRC),
Philippine Stock Exchange Listing and Disclosure Rules, and other regulations such as
those required by the Bangko Sentral ng Pilipinas, is essential for comprehensive and
timely reporting.

Recommendation 8.2

The Company should have a policy requiring all directors and officers to disclose/report
to the company any dealings in the company’s shares within three business days.

Explanation

Directors often have access to material inside information on the company. Hence, to
reduce the risk that the directors might take advantage of this information, it is crucial
for companies to have a policy requiring directors to timely disclose to the company any
dealings with the company shares. It is emphasized that the policy is on internal

29
 disclosure to the company of any dealings by the director in company shares. This
supplements the requirement of Rules 18 and 23 of the Securities Regulation Code.

Recommendation 8.3

The Board should fully disclose all relevant and material information on individual
board members and key executives to evaluate their experience and qualifications, and
assess any potential conflicts of interest that might affect their judgment.

Explanation

A disclosure on the board members and key executives’ information is prescribed under
Rule 12 Annex C of the SRC. According to best practices and standards, proper
disclosure includes directors and key officers’ qualifications, share ownership in the
company, membership of other boards, other executive positions, continuous trainings
attended and identification of independent directors.

Recommendation 8.4

The company should provide a clear disclosure of its policies and procedure for setting
Board and executive remuneration, as well as the level and mix of the same in the
Annual Corporate Governance Report. Also, companies should disclose the
remuneration on an individual basis, including termination and retirement provisions.

Explanation

Disclosure of remuneration policies and procedure enables investors to understand the

link between the remuneration paid to directors and key management personnel and
the company’s performance.

The Revised Code of Corporate Governance requires only a disclosure of all fixed and
variable compensation that may be paid, directly or indirectly, to its directors and top
four management officers during the preceding fiscal year. However, disclosure on
board and executive remuneration on an individual basis (including termination and
retirement provisions) is increasingly regarded as good practice and is now mandated in
many countries.

Recommendation 8.5

The company should disclose its policies governing Related Party Transactions (RPTs)
and other unusual or infrequently occurring transactions in their Manual on Corporate
Governance. The material or significant RPTs reviewed and approved during the year
should be disclosed in its Annual Corporate Governance Report.

Explanation

A full, accurate and timely disclosure of the company’s policy governing RPTs and other
unusual or infrequently occurring transactions, as well as the review and approval of
material and significant RPTs, is regarded as good corporate governance practice geared
towards the prevention of abusive dealings and transactions and the promotion of
transparency. These policies include ensuring that transactions occur at market prices
and under conditions that protect the rights of all shareholders. The said disclosure

30
 includes directors and key executives reporting to the Board when they have RPTs that
could influence their judgment.

Recommendation 8.6

The company should make a full, fair, accurate and timely disclosure to the public of
every material fact or event that occurs, particularly on the acquisition or disposal of
significant assets, which could adversely affect the viability or the interest of its
shareholders and other stakeholders. Moreover, the Board of the offeree company
should appoint an independent party to evaluate the fairness of the transaction price on
the acquisition or disposal of assets.

Explanation

The disclosure on the acquisition or disposal of significant assets includes, among

others, the rationale, effect on operations and approval at board meetings with
independent directors present to establish transparency and independence on the
transaction. The independent evaluation of the fairness of the transparent price ensures
the protection of the rights of shareholders.
Recommendation 8.7

The company’s corporate governance policies, programs and procedures should be

contained in its Manual on Corporate Governance, which should be submitted to the
regulators and posted on the company’s website.

Explanation

Transparency is one of the core principles of corporate governance. To ensure the better
protection of shareholders and other stakeholders’ rights, full disclosure of the
company’s corporate governance policies, programs and procedures is imperative. This
is better done if the said policies, programs and procedures are contained in one
reference document, which is the Manual on Corporate Governance. The submission of
the Manual to regulators and posting it in companies’ websites ensure easier access by
any interested party.

9. STRENGTHENING THE EXTERNAL AUDITOR’S INDEPENDENCE AND IMPROVING

AUDIT QUALITY

Principle 9

The company should establish standards for the appropriate selection of an external
auditor, and exercise effective oversight of the same to strengthen the external auditor’s
independence and enhance audit quality.

Recommendation 9.1

The Audit Committee should have a robust process for approving and recommending
the appointment, reappointment, removal, and fees of the external auditor. The
appointment, reappointment, removal, and fees of the external auditor should be
recommended by the Audit Committee, approved by the Board and ratified by the
shareholders. For removal of the external auditor, the reasons for removal or change
should be disclosed to the regulators and the public through the company website and
required disclosures.

31
Explanation

The appointment, reappointment and removal of the external auditor by the Board’s
approval, through the Audit Committee’s recommendation, and shareholders’
ratification at shareholders’ meetings are actions regarded as good practices.
Shareholders’ ratification clarifies or emphasizes that the external auditor is
accountable to the shareholders or to the company as a whole, rather than to the
management whom he may interact with in the conduct of his audit.

Recommendation 9.2

The Audit Committee Charter should include the Audit Committee’s responsibility on
assessing the integrity and independence of external auditors and exercising effective
oversight to review and monitor the external auditor’s independence and objectivity
and the effectiveness of the audit process, taking into consideration relevant Philippine
professional and regulatory requirements. The Charter should also contain the Audit
Committee’s responsibility on reviewing and monitoring the external auditor’s
suitability and effectiveness on an annual basis.

Explanation

The Audit Committee Charter includes a disclosure of its responsibility on assessing the
integrity and independence of the external auditor. It establishes detailed guidelines,
policies and procedures that are contained in a separate memorandum or document.
Nationally and internationally recognized best practices and standards of external
auditing guide the committee in formulating these policies and procedures.

Moreover, establishing effective communication with the external auditor and requiring
them to report all relevant matters help the Audit Committee to efficiently carry out its
oversight responsibilities.

Recommendation 9.3

The company should disclose the nature of non-audit services performed by its external
auditor in the Annual Report to deal with the potential conflict of interest. The Audit
Committee should be alert for any potential conflict of interest situations, given the
guidelines or policies on non-audit services, which could be viewed as impairing the
external auditor's objectivity.

Explanation

The Audit Committee, in the performance of its duty, oversees the overall relationship
with the external auditor. It evaluates and determines the nature of non-audit services, if
any, of the external auditor. Further, the Committee periodically reviews the proportion
of non-audit fees paid to the external auditor in relation to the corporation’s overall
consultancy expenses. Allowing the same auditor to perform non-audit services for the
company may create a potential conflict of interest. In order to mitigate the risk of
possible conflict between the auditor and the company, the Audit Committee puts in
place robust policies and procedures designed to promote auditor independence in the
long run. In formulating these policies and procedures, the Committee is guided by
nationally and internationally recognized best practices and regulatory requirements or
issuances.

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10. INCREASING FOCUS ON NON-FINANCIAL AND SUSTAINABILITY REPORTING

Principle 10

The company should ensure that the material and reportable non-financial and
sustainability issues are disclosed.

Recommendation 10.1

The Board should have a clear and focused policy on the disclosure of non-financial
information, with emphasis on the management of economic, environmental, social and
governance (EESG) issues of its business, which underpin sustainability. Companies
should adopt a globally recognized standard/framework in reporting sustainability and
non-financial issues.

Explanation

As external pressures including resource scarcity, globalization, and access to

information continue to increase, the way corporations respond to sustainability
challenges, in addition to financial challenges, determines their long-term viability and
competitiveness. One way to respond to sustainability challenges is disclosure to all
shareholders and other stakeholders of the company’s strategic (long-term goals) and
operational objectives (short-term goals), as well as the impact of a wide range of
sustainability issues.

Disclosures can be made using standards/frameworks, such as the G4 Framework by

the Global Reporting Initiative (GRI), the Integrated Reporting Framework by the
International Integrated Reporting Council (IIRC) and/or the Sustainability Accounting
Standards Board (SASB)’s Conceptual Framework.

11. PROMOTING A COMPREHENSIVE AND COST-EFFICIENT ACCESS TO RELEVANT

INFORMATION

Principle 11

The company should maintain a comprehensive and cost-efficient communication

channel for disseminating relevant information. This channel is crucial for informed
decision-making by investors, stakeholders and other interested users.

Recommendation 11.1

The company should include media and analysts’ briefings as channels of

communication to ensure the timely and accurate dissemination of public, material and
relevant information to its shareholders and other investors.

Explanation

The manner of disseminating relevant information to its intended users is as important

as the content of the information itself. Hence, it is essential for the company to have a
strategic and well-organized channel for reporting. These communication channels can
provide timely and up-to-date information relevant to investors’ decision-making, as
well as to other interested stakeholders.

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INTERNAL CONTROL SYSTEM AND RISK MANAGEMENT FRAMEWORK

12. STRENGTHENING THE INTERNAL CONTROL SYSTEM AND ENTERPRISE RISK

MANAGEMENT FRAMEWORK

Principle

To ensure the integrity, transparency and proper governance in the conduct of its
affairs, the company should have a strong and effective internal control system and
enterprise risk management framework.

Recommendation 12.1

The Company should have an adequate and effective internal control system and an
enterprise risk management framework in the conduct of its business, taking into
account its size, risk profile and complexity of operations.

Explanation

An adequate and effective internal control system and an enterprise risk management
framework help sustain safe and sound operations as well as implement management
policies to attain corporate goals. An effective internal control system embodies
management oversight and control culture; risk recognition and assessment; control
activities; information and communication; monitoring activities and correcting
deficiencies. Moreover, an effective enterprise risk management framework typically
includes such activities as the identification, sourcing, measurement, evaluation,
mitigation and monitoring of risk.

Recommendation 12.2

The Company should have in place an independent internal audit function that provides
an independent and objective assurance, and consulting services designed to add value
and improve the company's operations.

Explanation

A separate internal audit function is essential to monitor and guide the implementation
of company policies. It helps the company accomplish its objectives by bringing a
systematic, disciplined approach to evaluating and improving the effectiveness of the
company’s governance, risk management and control functions. The following are the
functions of the internal audit, among others:

a. Provides an independent risk-based assurance service to the Board, Audit

Committee and Management, focusing on reviewing the effectiveness of the
governance and control processes in (1) promoting the right values and ethics,
(2) ensuring effective performance management and accounting in the
organization, (3) communicating risk and control information, and (4)
coordinating the activities and information among the Board, external and
internal auditors, and Management;

34
 b. Performs regular and special audit as contained in the annual audit plan and/or
based on the company’s risk assessment;

c. Performs consulting and advisory services related to governance and control as

appropriate for the organization;

d. Performs compliance audit of relevant laws, rules and regulations, contractual

obligations and other commitments, which could have a significant impact on
the organization;

e. Reviews, audits and assesses the efficiency and effectiveness of the internal
control system of all areas of the company;

f. Evaluates operations or programs to ascertain whether results are consistent

with established objectives and goals, and whether the operations or programs
are being carried out as planned;

g. Evaluates specific operations at the request of the Board or Management, as

appropriate; and

h. Monitors and evaluates governance processes.

A company’s internal audit activity may be a fully resourced activity housed within the
organization or may be outsourced to qualified independent third party service
providers.

Recommendation 12.3

Subject to a company’s size, risk profile and complexity of operations, it should have a
qualified Chief Audit Executive (CAE) appointed by the Board. The CAE shall oversee and
be responsible for the internal audit activity of the organization, including that portion
that is outsourced to a third party service provider. In case of a fully outsourced internal
audit activity, a qualified independent executive or senior management personnel
should be assigned the responsibility for managing the fully outsourced internal audit
activity.

Explanation

The CAE, in order to achieve the necessary independence to fulfill his/her

responsibilities, directly reports functionally to the Audit Committee and
administratively to the CEO. The following are the responsibilities of the CAE, among
others:

a. Periodically reviews the internal audit charter and presents it to senior

management and the Board Audit Committee for approval;

b. Establishes a risk-based internal audit plan, including policies and procedures,

to determine the priorities of the internal audit activity, consistent with the
organization’s goals;

c. Communicates the internal audit activity’s plans, resource requirements and

impact of resource limitations, as well as significant interim changes, to senior
management and the Audit Committee for review and approval;

35
 d. Spearheads the performance of the internal audit activity to ensure it adds value
to the organization;

e. Reports periodically to the Audit Committee on the internal audit activity’s

performance relative to its plan; and

f. Presents findings and recommendations to the Audit Committee and gives

advice to senior management and the Board on how to improve internal
processes.

Recommendation 12.4

Subject to its size, risk profile and complexity of operations, the company should have a
separate risk management function to identify, assess and monitor key risk exposures.

Explanation

The risk management function involves the following activities, among others:

a. Defining a risk management strategy;

b. Identifying and analyzing key risks exposure relating to economic,

environmental, social and governance (EESG) factors and the achievement of the
organization’s strategic objectives;

c. Evaluating and categorizing each identified risk using the company’s predefined
risk categories and parameters;

d. Establishing a risk register with clearly defined, prioritized and residual risks;

e. Developing a risk mitigation plan for the most important risks to the company,
as defined by the risk management strategy;

f. Communicating and reporting significant risk exposures including business risks

(i.e., strategic, compliance, operational, financial and reputational risks), control
issues and risk mitigation plan to the Board Risk Oversight Committee; and

g. Monitoring and evaluating the effectiveness of the organization's risk

management processes.

Recommendation 12.5

In managing the company’s Risk Management System, the company should have a Chief
Risk Officer (CRO), who is the ultimate champion of Enterprise Risk Management (ERM)
and has adequate authority, stature, resources and support to fulfill his/her
responsibilities, subject to a company’s size, risk profile and complexity of operations.

Explanation

The CRO has the following functions, among others:

36
 a. Supervises the entire ERM process and spearheads the development,
implementation, maintenance and continuous improvement of ERM processes
and documentation;

b. Communicates the top risks and the status of implementation of risk

management strategies and action plans to the Board Risk Oversight Committee;

c. Collaborates with the CEO in updating and making recommendations to the

Board Risk Oversight Committee;

d. Suggests ERM policies and related guidance, as may be needed; and

e. Provides insights on the following:

Risk management processes are performing as intended;

Risk measures reported are continuously reviewed by risk owners for
effectiveness; and
Established risk policies and procedures are being complied with.

There should be clear communication between the Board Risk Oversight Committee and
the CRO.

CULTIVATING A SYNERGIC RELATIONSHIP WITH SHAREHOLDERS

13. PROMOTING SHAREHOLDER RIGHTS

Principle

The company should treat all shareholders fairly and equitably, and also recognize,
protect and facilitate the exercise of their rights.

Recommendation 13.1

The Board should ensure that basic shareholder rights are disclosed in the Manual on
Corporate Governance and on the company’s website.

Explanation

It is the responsibility of the Board to adopt a policy informing the shareholders of all
their rights. Shareholders are encouraged to exercise their rights by providing clear-cut
processes and procedures for them to follow.

Shareholders’ rights relate to the following, among others:

 Pre-emptive rights;
 Dividend policies;
 Right to propose the holding of meetings and to include agenda items
ahead of the scheduled Annual and Special Shareholders’ Meeting;
 Right to nominate candidates to the Board of Directors;
 Nomination process; and

37
  Voting procedures that would govern the Annual and Special
Shareholders’ Meeting.

The right to propose the holding of meetings and items for inclusion in the agenda is
given to all shareholders, including minority and foreign shareholders. However, to
prevent the abuse of this right, companies may require that the proposal be made by
shareholders holding a specified percentage of shares or voting rights. On the other
hand, to ensure that minority shareholders are not effectively prevented from exercising
this right, the degree of ownership concentration is considered in determining the
threshold.

Further, all shareholders must be given the opportunity to nominate candidates to the
Board of Directors in accordance with the existing laws. The procedures of the
nomination process are expected to be discussed clearly by the Board. The company is
encouraged to fully and promptly disclose all information regarding the experience and
background of the candidates to enable the shareholders to study and conduct their own
background check as to the candidates’ qualification and credibility.

Shareholders are also encouraged to participate when given sufficient information prior
to voting on fundamental corporate changes such as: (1) amendments to the Articles of
Incorporation and By-Laws of the company; (2) the authorization on the increase in
authorized capital stock; and (3) extraordinary transactions, including the transfer of all
or substantially all assets that in effect result in the sale of the company. In addition, the
disclosure and clear explanation of the voting procedures, as well as removal of
excessive or unnecessary costs and other administrative impediments, allow for the
effective exercise of the shareholders’ voting rights. Poll voting is highly encouraged as
opposed to the show of hands. Proxy voting is also a good practice, including the
electronic distribution of proxy materials.

The related shareholders’ rights and relevant company policies should be contained in
the Manual on Corporate Governance.

Recommendation 13.2

The Board should encourage active shareholder participation by sending the Notice of
Annual and Special Shareholders’ Meeting with sufficient and relevant information at
least 28 days before the meeting.

Explanation

Required information in the Notice include, among others, the date, location, meeting
agenda and its rationale and explanation, and details of issues to be deliberated on and
approved or ratified at the meeting. Sending the Notice in a timely manner allows
shareholders to plan their participation in the meetings. It is good practice to have the
Notice sent to all shareholders at least 28 days before the meeting and posted on the
company website.

Recommendation 13.3

The Board should encourage active shareholder participation by making the result of
the votes taken during the most recent Annual or Special Shareholders’ Meeting publicly
available the next working day. In addition, the Minutes of the Annual and Special
Shareholders’ Meeting should be available on the company website within five business
days from the end of the meeting.

38
Explanation

Voting results include a breakdown of the approving and dissenting votes on the
matters raised during the Annual or Special Stockholders’ Meeting. When a substantial
number of votes have been cast against a proposal made by the company, it may make
an analysis of the reasons for the same and consider having a dialogue with its
shareholders.

The Minutes of Meeting include the following matters: (1) A description of the voting
and the vote tabulation procedures used; (2) the opportunity given to shareholders to
ask questions, as well as a record of the questions and the answers received; (3) the
matters discussed and the resolutions reached; (4) a record of the voting results for each
agenda item; (5) a list of the directors, officers and shareholders who attended the
meeting; and (6) dissenting opinion on any agenda item that is considered significant in
the discussion process.

Recommendation 13.4

The Board should make available, at the option of a shareholder, an alternative dispute
mechanism to resolve intra-corporate disputes in an amicable and effective manner.
This should be included in the company’s Manual on Corporate Governance.

Explanation

It is important for the shareholders to be well-informed of the company’s processes and

procedures when seeking to redress the violation of their rights. Putting in place proper
safeguards ensures suitable remedies for the infringement of shareholders’ rights and
prevents excessive litigation. The company may also consider adopting in its Manual on
Corporate Governance established Alternative Dispute Resolution (ADR) procedures.

Recommendation 13.5

The Board should establish an Investor Relations Office (IRO) to ensure constant
engagement with its shareholders. The IRO should be present at every shareholders’
meeting.

Explanation

Setting up an avenue to receive feedback, complaints and queries from shareholders

assure their active participation with regard to activities and policies of the company.
The IRO has a designated investor relations officer, email address and telephone
number. Further, creating an Investor Relations Program ensures that all information
regarding the activities of the company are properly and timely communicated to
shareholders.

DUTIES TO STAKEHOLDERS

14. RESPECTING RIGHTS OF STAKEHOLDERS AND EFFECTIVE REDRESS FOR VIOLATION

OF STAKEHOLDER’S RIGHTS

Principle

39
 The rights of stakeholders established by law, by contractual relations and through
voluntary commitments must be respected. Where stakeholders’ rights and/or interests
are at stake, stakeholders should have the opportunity to obtain prompt effective
redress for the violation of their rights.

Recommendation 14.1

The Board should identify the company’s various stakeholders and promote cooperation
between them and the company in creating wealth, growth and sustainability.

Explanation

Stakeholders in corporate governance include, but are not limited to, customers,
employees, suppliers, shareholders, investors, creditors, the community the company
operates in, society, the government, regulators, competitors, external auditors, etc. In
formulating the company’s strategic and operational decisions affecting its wealth,
growth and sustainability, due consideration is given to those who have an interest in
the company and are directly affected by its operations.

Recommendation 14.2

The Board should establish clear policies and programs to provide a mechanism on the
fair treatment and protection of stakeholders.

Explanation

In instances when stakeholders’ interests are not legislated, companies’ voluntary

commitments ensure the protection of the stakeholders’ rights. The company’s Code of
Conduct ideally includes provisions on the company’s policies and procedures on
dealing with various stakeholders. The company’s stakeholders include its customers,
resource providers, creditors and the community in which it operates. Fair, professional
and objective dealings as well as clear, timely and regular communication with the
various stakeholders ensure their fair treatment and better protection of their rights.

Recommendation 14.3

The Board should adopt a transparent framework and process that allow stakeholders
to communicate with the company and to obtain redress for the violation of their rights.

Explanation

The company’s stakeholders play a role in its growth and long-term viability. As such, it
is crucial for the company to maintain open and easy communication with its
stakeholders. This can be done through stakeholder engagement touchpoints in the
company, such as the Investor Relations Office, Office of the Corporate Secretary,
Customer Relations Office, and Corporate Communications Group.

15. ENCOURAGING EMPLOYEES’ PARTICIPATION

Principle

A mechanism for employee participation should be developed to create a symbiotic

environment, realize the company’s goals and participate in its corporate governance
processes.

40
Recommendation 15.1

The Board should establish policies, programs and procedures that encourage
employees to actively participate in the realization of the company’s goals and in its
governance.

Explanation

The establishment of policies and programs covering, among others, the following: (1)
health, safety and welfare; (2) training and development; and (3) reward/compensation
for employees, encourages employees to perform better and motivates them to take a
more dynamic role in the corporation. Active participation is further fostered when the
company recognizes the firm-specific skills of its employees and their potential
contribution in corporate governance. The employees’ viewpoint in certain key
decisions may also be considered in governance processes through work councils or
employee representation in the board.

Recommendation 15.2

The Board should set the tone and make a stand against corrupt practices by adopting
an anti-corruption policy and program in its Code of Conduct. Further, the Board should
disseminate the policy and program to employees across the organization through
trainings to embed them in the company’s culture.

Explanation

The adoption of an anti-corruption policy and program endeavors to mitigate corrupt

practices such as, but not limited to, bribery, fraud, extortion, collusion, conflict of
interest and money laundering. This encourages employees to report corrupt practices
and outlines procedures on how to combat, resist and stop these corrupt practices. Anti-
corruption programs are more effective when the Board sets the tone and leads the
company in their execution.

Recommendation 15.3

The Board should establish a suitable framework for whistleblowing that allows
employees to freely communicate their concerns about illegal or unethical practices,
without fear of retaliation and to have direct access to an independent member of the
Board or a unit created to handle whistleblowing concerns. The Board should be
conscientious in establishing the framework, as well as in supervising and ensuring its
enforcement.

Explanation

A suitable whistleblowing framework sets up the procedures and safe-harbors for

complaints of employees, either personally or through their representative bodies,
concerning illegal and unethical behavior. One essential aspect of the framework is the
inclusion of safeguards to secure the confidentiality of the informer and to ensure
protection from retaliation. Further, part of the framework is granting individuals or
representative bodies confidential direct access to either an independent director or a
unit designed to deal with whistleblowing concerns. Companies may opt to establish an
ombudsman to deal with complaints and/or established confidential phone and e-mail
facilities to receive allegations.

16. ENCOURAGING SUSTAINABILITY AND SOCIAL RESPONSIBILITY

41
Principle

The company should be socially responsible in all its dealings with the communities
where it operates. It should ensure that its interactions serve its environment and
stakeholders in a positive and progressive manner that is fully supportive of its
comprehensive and balanced development.

Recommendation 16.1

The company should recognize and place an importance on the interdependence

between business and society, and promote a mutually beneficial relationship that
allows the company to grow its business, while contributing to the advancement of the
society where it operates.

Explanation

The company’s value chain consists of inputs to the production process, the production
process itself and the resulting output. Sustainable development means that the
company not only complies with existing regulations, but also voluntarily employs value
chain processes that takes into consideration economic, environmental, social and
governance issues and concerns. In considering sustainability concerns, the company
plays an indispensable role alongside the government and civil society in contributing
solutions to complex global challenges like poverty, inequality, unemployment and
climate change.

42
 BUSINESS E TH IC S

.
(£:{pectecf Leamino Outcomes
Afte r studying the chapter, you should be abl e
to ...
1. Explain wha t busines s ethics is

2. Dis cus s the pur pos es of business eth ics

3. Describe the sco pe and impact of bus ines s

eth ics on
a) the eco nom y
b) soc iety
c) env iron men t
d) bus ines s managers

4. Explain the ethical challenges in tod ay's wor1

d
 Business Ethics 105

Exc~pt for some country's organizations, professionals which have formulated

CHAPTER 6 and 1m~lemented their Code of Ethics, the business world today does not have
one umversal ·standard code of ethics. Each man has to evaluate a situation
according_ to his own beliet Often, because there is no code of ethics to guide
BUSINESS ETHICS them, businessmen take actions that may be wrong. Therefore, one of the specific
purposes of business ethics is to assist the business world in formulating codes of
conduct - personal, company and professional - which can be used as a guide
BASIC CONCEPT OF BUSINESS ETHICS in formulating business plans and strategies and in,making business decisions.
f al conduct behavior and judgment in,
Business ethics refers to s~nd ard s O mor d . ht d~cisions while engaging in SCOPE AND IMPACT OF BUSINESS ETIDCS
. · I k ng the mora. 1 an rig II' a roduct and providing --
. busmess. 1t mvo ve~ ma 1 a
such business activities as manufacturing and se mg P •b·t·ty h Business ethics covers aJI conduct, behavior and judgment in business. This
• h' · of corporate respons1 1 1 w ere
service to customers. Business et 1cs 1s an area . . includes the slightest deviation· from what is right to ill(1gal and dishonest acts
businesses are legally bound and socially obligated to conduct busmess m ·an that are punishable by law. It involves making the right choices while engaging
ethical manner. in -,such business activities as manufacturing and selling a product or selling and
rendering a service.
Business ethics is based on the personal values and standards of each person
engaged in business. Generally, actions that are not forbidden by law are ethical. In some cases,
however, what is legal (not forbidden by law) may be unethical. Business ethics
PURPOSES OF BUSINESS ETillCS therefore GOvers even acts that may be legal but which are wrong because they
violate ethici;il principles.
Main Purpose
Business ethics is based on the personal values and· standards of each person
The main purpose ofbusiness ethics is to help business and would-be business to engaged in business. Since individual values differ, what is ethic~I or unethical in
determ!ne what busi~ess practices are right and what are wrong. Hopefully; they making profit also varies from person to person. And here lt~_s the pro~lem.
are _g?mg to use this knowledge to guide them in making the right business There is still no uniform standards of right and wrong from which all busmess
dec1s1ons. may base their actions.

Special Purpose The -businessman who provides fair business competition is the ·most likely t~
observe the business ethical ·rules of conduct, behavior and judgment. Fair
"" business competition means achieving success solely by offeri~g better,prod~~ts,
There ar~ other purposes iwhich are corollary to the ma1·n
purposes include the following: purpose. These services and terms than the competitor. It is a fonn of ?usmess compet1t1on
where.success is gained by the merits of one's goods or services.
I. ;ro make businessmen realize that th
to the actions of other people and t hey_ cannot e~ploy double standards
o t ear own actions
2. To show businessmen that com . ·
be right because they see other·~o~ practices which they have thought to
usmessmen doin 1·t .
3. To serve as a standard 'd g , are really wrong.
b or I eat upon wh' h b .
ased. . . ic usiness conduct sho~_ld be
106 Chapter 6 Business Ethics 107

Economic lmp11ct • reveal the fact to his superior h

interests conflict with th
h'
fwhene~er is personal business of financial
. . .• t ti ·ouoh the wages it payshar to its ose o t e company;
A business has un economic 11npnct on socie Y 11 . 0 d • . 't
employees the materials that it buys from their suppliers an tie
1
1 prices_f ch ges • be actively c~ncerned with the difficulties and problems of subordinates
•
,ts · • .. • · 1 • t 011
customers. It would have II pos1t1ve soc1a 1111p11c . . its employees
. . I t ey .are t~eat_ thhemffairly and by example, lead them effectively, assuring to ali
paid fair living wages and benefits. It will have II pos1t1ve effect ? its Supphe~s
11
t e rig to reasonable access and appeal to superiors;
that they paid fairly und on time for their supplies. The effe~l on 1ls customers IS
positive if the business gives them good value for the pnce they pay for the • recog?ize that his subordinates have a right to information on matter
products and services. affecting the~, a~d ~ak~ pro.vision for its prompt communication unless
such c~mmun1cat1on 1s likely to undermine the security and efficiency of
Social lmpt1ct the busmess;

The social impact of corporate governance contributes to the ethical, climate of • fullr evaluate the likely effects on employees and the community of the
society. If businesses offor bribes to secure work or other benefits, engage in bu~mess plans for the future before taking a final decision and
accolm~ing fraud or breach regulatory and legal limitations on their operatiol')s, •
the ethics of society suffer. In addition to a deteriorating ethical environmeht • cooperate with his colleagues and not attempt to secure personal
such_ as corruption may unfairly raise the price of goods for consumers or th; advantage at their expense,
quality of the product or service compromised.
ETHICA~ CHALLENGES IN TODAY'S WORLD
Environmental Impact

Environmental protection is a key area of business . · fl • In an article, "Ethical Challenges in Today's World" written by Ms. Mercedes B.
·
Busmesses · 1ement good environmental I' · m uence on soc,etv
tiint 11np .,, . Suleik published in the Business Mirror on February 13, 2018 the author
efficiently, reduce waste and in general lighten th ~o ic1~s to use energy_ more expressed her insights on "Business Ethics" where an inherent conflict between
reduce their internal costs and promote a p 't' ei~ environmental footprint can ethics and the pursuit of profit is more pronounced.
. . .. of 8 business leados1 1veft image of their co mpany. The
environmental 1111tiatives O
similar action for an increased beneficial effi etr hen for~e competitors to take Cited in this article is the message of Pope Francis in his Ecumenical, Evangeli
ec on t e environment. • Gaudium
Impact on Buslnes:,· Managers
"Humanity is experiencing a turning point in its history as can he seen
The concepts and principles for the ethical conduc . . , , from the advances occurring in the sciences and technology. We are in
th e managers of the business enterprise Th h t 111 business are relegated to age of knowledge and information and thal'lhis has led to new and often,
I
to ac_t in the best interest of the business: he~:~: t ~ugh the manager is expected anonymous kind\' ofpower. We have today an economy ofexclusion and
that is contrary to the law or to hH> conscience. tot e expected to act in a manner inequality".
In particular, a manager should: "In a ,\ystem that idolizes increa.~ed p~ofit, everything ~ha~ standy in its
way is pushed aside. Behind this all1~~de lurks _a re1ect10n of eth~cs.
• acknowledge that his role is to . , Ethics has come to be viewed with der1S1on as bemg count~rpro1uc11ve.
community; serve the business cnt . Ethics is felt to be a threat because it condemns the mampu/at,on and
erpr1se and the
• avoid. all abuse of execufive power f, ,, and that ethics. leads to a call for a commilled
d e basemenI oifth..,, per•·on ..
. h
response, wh1c ,, ,•,, outside oifthe categones ofthe marketplace,
prest1ge; , or personal
gain, advantag~, or
108 Chapter 6 -
She also quo~ed Pope Benedict XVl's Encyclical Caritas in Veritate
_

"Humanity has a mission and the means to transform· ~he world in justice
and love in .human relations, even in the social and economic field
Market economics must be underpinned by c0mm_itments to particular
moral goods .and a certain version ·of the human person: if·it is to serve
rather than ~ndermine humanity's com-mon good The economy needs
et~ics in ?rder to function correctly ·- not an ethics which is people~
oriented " ·

. RE:yt~W QUESTIONS
Questions
• I

1. What does business ethics mean?.

2. What is the main objective . of obse~in. ... . . . . : . . .

.?
. ss.
. . g ethical hehav1or. in· bu s1ne
.
3 • Name the other pu . . .
. . rpose of.business ethic s.
4. ~a t is the scope of b . ._
· . _ s
u. 1ne.ss eth ic.s? •
J
'

5.-.. Explain the economic im . .

·. . . p.act of observin. . ..
6 ·· . _g ~u~m~ss eth · · .
..
. ,What is the impact 'o f bus . ltcs.
mess eth. . , . .
. _· . . . tcs to .society. in .
7. Explrun how busme • · general?·
· ss managers could ,
. act ethi - II
. . . '
8· Describe th • h - ea y.
, e m erent conflict b . .
- . . etwe.en eth·ics and .. .
.. ;
PUrsUtt · of profit.
-
 lc·o. M.M:oN uN,ETH·1cAL
'

P,RACTI-CE:S Q,F B.U SI.NESS

ESTABLISHMENTS
. . .
· P,xpected £'earnin9 Outcomes
After studying_the:chapter, you should .be' able to ...

1. To familiarize yours~lf of the-qommon unethical practices of business

establishments such as ·
• Misrepresentation and
• Over-Persuasion
2. Describe how direct misrepresentation is ·committed ·by lousiness
firms such as .
.a} deceptive packag:in.g /

b) mis-branding '.o nn·lslabeling. .

c) ·f.a1se and misleading advertising
d) adulteration
e) weight unoerst~tement
f) measureoll'ent understatement
. ' g) quantity.understatemen~, I

3. .Oes'cribe how indirect misrepresentation is done by business firms

such as .
~ . caveat.emptor · . . . . . .
b) deliberate withholding of mform~t1on
c) · passive.~eception
4. o~.scrib~ how over-p~r~u,si_on becomf3s unethical.
5. Describe,some un~thical. corporate practices of the
of
a.)' ·board directors . ·· . . . . · ..
b) execrutjve·officers and lower level manager
c). employees
 Common Unethical Practices of Business Establishments 11 I

· and nothing but the truth" if it greatly exaggerates the virtues of a

product and tells only half of the truth or else sings praises to its non-
CHAPTER 7 existent virtues. If advertising does not provide a useful service anymore ·
to the customers, it can becoine the agent of misrepresentation.
COMMON UNETHICAL PRACTICES Examples are:
OF BUSINESS ESTABLISHMENTS
a. Advertisements with pictures or statements that convey exaggerateq
impression of the produds reliability or.quality.
COMMON UNETHICAL PRACTICES OF BUSINESS b: Advertisement that claims that the product is the "fastest selling
brand" or the "product of the year".
ESTABLISHMENTS
c. Advertisements using fictitious-or obsolete testimonials.
Unethical problems in business ethics occur in many fornis and types. The most
common of these uneth.ical practices of business establishments are Adulteration. ,Adulteration is the unethical practice of debasing a pure or
misrepresentation and over-persuasion. genuine commodity by imitating or · counterfeiting it,. by adding
something to increase its bulk or voluine, or by substituting an inferior
Misreprese11tation may be classified into two types: direct misrepresentation and. product for a superior one for the purpose of profit ?r gain. Jt i~ unethical
indirect misrepresentation. · because an inferior product is passed off as a supenor one. This does.?ot
meet the standard for fair service, that is achieving success by offermg
Direct Misrepresentatio11 is characterized by actively misrepresenting about 'the better service (in the· form of a superior product and terms of payment)
product or customers. This includes: · than the competitor.
Deceptive Packaging. Deceptive packaging takes many forms and is of Weight understatement or Short weigJ,ing. In ~hort weighin~, t~e
· many types. One. type is th~ practice of placing the product in containers mechanism of the weighing scale is tampered with or somethmg ts
?f exaggerated sizes and misleading shapes to give a false impression of unobtrusively attached to it so that the scale regi~ters mor~ tha~ the
its actual contents.
. An example
. of this type of. dee ept·tve pac kagmg· 1s· actual weight. An example is a foot pedal with a cot~cealed stnng tied to
slack-fill
I · packagmg where containers like cartons t· d
, m cans an certam . the weighing scale. The modus operan1i of sellers ts to use two sets of
p ast1cs are filled only up to eighty-five to ninet" ft . f th . scales one which gives the correct weight and has been sealed_by. the
capacity. J ·- 1ve percent o eir
authorities and another which looks ident_ical ~ut re~isters more weight
than the product. Short weighing is practiced m sellmg products wh~re
Misbranding or Mislabeling. Misbrandin . . . prices depend on the weight such as sugar, meat, fish, vegetables, fruits,
false statements on the label of d g ts the practice of makmg
a pro uct or making 't . . ·1 nails, etc.
to a well-known product for the· pur ose . . t s contamer s1m1 ar
the quality and/or quantity of a prod p t b ~f deceiving the customer as to M1 un"e•statement or Sl,ort measurement. In short
uc emg sold. 1r.1.easuremen1 11 ' •·
suring stick or standard ts
•
~horter than the reaI
measuremen, t the. mea h' • h'tea I pract'tee 1s
·
!"alse or Misleading Advertising Ad . . · II r in volume than the standard. T ts unet
it conveys ~he right informatio~. It ~:rt;~mg s_en:es a useful purpose if IengtI1 or sma e . f h d td d ·t
found in selling situations where the pnce o e pro uc ~pen s on s
people are mformed about the availabili e P_rtnc1pal means by which . lling cloth or textiles, electnc cords or wires or on its
new products. However, advertisin doe ty, nature and uses of old ·and length sue h as se · · · .
volume such as selling rice by the sack.
g snot always tell the "whole truth
 Commo_n Unethical Practices of Business Establishments 113
112 Chapter 7 ·
Quantity understatement or Short numbering. In thi~ u~etical pr~~t~~• . Over-Persuasion
the seller gives the customer less than the. nUt~be~ as e or or pa1 or. ..
Short numbering is often practiced in sellin~ situations where the product Persuas!on i~ the process ~f appealing to the emotions ·of a prospective customer
being sold is in such a shape or is packed _ma manner that would make and urgtng hm~ to buy a? item of me~c~andise he 11eeds. Persuasion is legitimate
counting the product difficult or inconvem~nt. For example: a cu_stomer and ,nec~ssa~ 111 the sell mg of goods 1f 1t is done in the interest of a buyer such as
.who is not vigilant may receive less quantity than what he 1s _entitled to persuadtng him to _get a hospitalization insurance policy. However, persuasion
when buying toilet paper, bond paper, carbon paper, paper chp~, thumb used for-the sole benefit of selling a product without considering the interest of
tacks, matches and toothpicks which are sold by the box: or package. the buyer is not ethical. The common instances of over-persuasion include the
following examples: .
Indirect Misrepresentation , is characterized by omitting adverse or unfavorable .
information about the product or service. Among the most common practices 1. Urging a customer to satisfy aJow priority need for merchandise.
involving indirect misrepresentations are caveat emptor, deliberate withholding •
of information and business ignorance. 2. Playing upon intense emetional agitation to convince a person to
buy. - . .
Caveat emptor is a practice very common among salesmen. Translated 1
caveat. empt or ~eans "I et the buyer beware". Under this concept, the .' , 3. Convincing a person to buy what he does not need just because he
sell~r 1s not obligated to reveal any defect in the product or service he is has the capacity or money to do so.
sellmg. It is responsibility of the customer to determine for himself 'the
defects of the product. ·
CORPORATE ETHICS
C~ea~ emp~or is indirect misrepresentation and unethical· because· a '
se er is a witness for the goods he is sellin H 'ti . , ' Unethical Practices of Corporat~ Management
features, uses and ualities A
truth and nothing ~ut the ~rut~}
emptor unethical is the willin
;~::s:i/
. . ~- _e test1 ies t? its nature,
IS his obligation to "tell the
f h product. What makes caveat
Practices of corp.orate management that involve ethical considerations may be
classified into two: practices of the Bo..ird of Directors ,and practices of executive'
taking advantage of the buye~'~e~s t e_ seller t? generate profit ~y officers. In many cases, the practices may apply to both categories of corporate
deception which is also lying. ac of mformatJon. This is passiv.e manageQient and the only dividing line is in the financial magnitude and
implications of a particular corporate management practice.
Deliberate Withholding 0'Jr l nJormatwn
,r. • F II •
caveat emptor is unethical the d l"b · 0 owmg the argument that ~ome Unethical Practices of the Boa~d of Directors
information in a business ~ran t~ ' e~ate withholding of significant
tra
. n_s~cfion 1s
· ",air sac ion
· where one of the a ? 1s also ~.met h'1cal. No business· 1. Plain Graft
Is g1vmg away or receiving in retur~. rt1es does not exactly know what ~e
Some of the Boarcl of Directors help ' themselves to the earnings that
Passive deception. Dire t . · otherwise would go other stockholders. This is ddne by ·voting for
wh 'I . d' . c m1srepresentati • . ' themselves and the executive officers huge per diems, large salaries, big
no~e~tl ,rect mi~representation or passiv odn. give~ business a bad name
e ess contributes to th • e ecept1on is ' t b • · bonuses that do not commensurate to the vah1e of their services. They
are out to mak f: e impression that b . no as o v1ous, 1t can also reduce the earnings -going to the other shareholders by
because the bues" a ast buck. Business ,·goo usmessmen are, liars and .
messm · ranc · ' ·authorizing purchases of ~oods and services for the company's use at a
complete informatio than is unable to provid el is passive deception price higher than normal, in ".onsideration of a certain percentage of the ·
. n at the latter needs t e t le customer wrth the
0
make a fair decision: . purchase value or commission accruing to them.
 114 Chapter 7 Common Unethical Practices of Business Establishments 115

2. Interlocking Directorship
. · f d by a person who holds
Interlocking directorship 1s often prac ice . th t do business w'th 1 them on ~ompany time such as having the company janitors water and
directorial positions in two or more coFpo~ation . a_
each other. This practice may involve conflict of mtereSt a~d can resu_lt
to disloyal selling. Disloyal sellin~ happens_ w~e? this person 1s
compelled to decide which of the two corporation s mterest should be
protected . or upheld. Thus, whatever decisions the per.son makes, he
betrays the trust reposed on him by the shareholders of either of the two
companies.
· 3. Insider Trading
Insider trading occurs when a broker or another person with access to
confidential information uses that information to trade in shares and
securities of a corporation, thus giving him an unfair advantag~ over the
other purchasers of these securities. . thievery.
2. Having employees do work unrelated to the business. Executive officers
and lower managers ask company employees
·· ·
to do personal .
thmgs for
mo~ their.lawns, having the maintenance men do house or appliance
repairs for th~m, and having subordinate employees secure a license or
type letters pertaining to their other businesses.
3. Loose or ineffective controls. Man~gers do not provide adequate controls
to remove temptation and to prevent or discourage- employees from
enga~ing in unethical practices. A manager has the moral obligation to
provide the proper control atmosphere so that his subordinates will not
be tempted to commit dishonest acts. A manager indirectly betrays the
trust placed on him by higher executive officers if the administrative and
accounting controls in his office are so weak or effective tl}at employees
are given the opportlmity to misappropriate funds or engage in petty

4. Negligence of Duty 4. Unfair labor practices. The labor code lists the following as unfair labor
practices committed by an employer on employees · or a group of
A more common. failure of the members of the Board of Directors than employees who have organized themselves into a union.
brea~h of trust 1s neglect of duties when they fail to attend board a. To interfere with, restrain or coerce employees in tl1e exercise of
meet~ngs regul~rly. It is only in regular attendance that they can protect their right to self-organization;
the nghts ~nd mterests of the shareholders and their non-attendance of b. To require as a condition of employment that a person or an
bhoard meet~ngs c_o~ld result to betrayal of trust of the parties who elected employee shall not join a labor organization or shall withdraw from
t em to their pos1t1ons. ·
one to Which he belongs;
Some Unethical Practices of Executive Officers d L c. To contract out services or functi.ons being performed by uRion
. an ower Level Managers
members when such will interfere with, restrain or coerce employees
To a lesser exterit, executive officers ma als . . in the exercise of their rights to self org\}nization;
the unethical practices of the members 0yf th oBguilty of UI~eth1cal practices. All
d. To initiate, dominate, assist or otherwise in with the formation or
• • ·
act1v1t1es they are also capable of enga . . e hoard of Directors d'1scussed are
. . . gmg m t ough p h · administration of any labor organization, including the giving of'
because of certain limits to their auth .ty U . er aps to a less~r degree
• on · neth1cal · · · flna11cial or other support to it;
common to executive officers and lower 1 . 1 practices that are more
. e. To discriminate with regard to wages, hours of work, and other terms
I. Claiming a vacation trip 10 be a b. .. . or conditions .of employment in order to encourage or discourage
Pres,'dent r.eports .his
. usmess trip Th p . membership in any labor organization.
. .
personal vaca 10n 111 Eur · e . resident or .a Vice
t' .
as~ b usmess tnp so he can get re· b ope ~r m the Unitt!d States f. To dismiss, discharge, or otherwise prejudice or discriminate, against
those of his family's. im ursement for his expenses including an employee for haviRg given or being about to give testimony under
the Labor Code;
 Common Unethical Practices of Business Establishments 117
116 Chapter 7 . .
· '..~ ?me Une~hical Practices of Employees
_ _ . collectively a prescribed by the Labor
g. To violate the duty to bargain
Code; . . · ffi There are some employees who are not mindful of_their moral obligations to their
. . ·. fees to the union or its o 1cers or ' employers. They take.advantage of their position and the trust of their employees
h. To pay negotiation or attorneys f issue in collective 'bargaining by committing unethical practices harmful to 'their employers' interest these
agents as part of the settlement 0. any , _ _
or any other dispute; _· unethical practices may be classified i_nto conflict of interest and dishonesty.
i. To violate or refuse to comply with voluntary a~bitration ~wards or 1
1. Conflicts of Interest
decisions relati~g to the implementation or mterpretatlon of a
collective bar gaining agreement;
A conflict of interest arises when an employee who is d,uty bound to
j. To vioiate a eollective bargaining agreement. protect and promote the interests of his employer violates this obligation
by getting himself into a situation where ·his decision or actuation is
5 . . Making false claims about losses to free themselves from payinf:; the influenced by what he can gain personally from it rather than what his
c9mpensation and benefits provided by law. There are employers who employer can gain' from it. Some common examples of conflicts of
claim non-existent losses s.o they can be exempted from paying the interest are:
minimum wage and emergency-cost-of-\iving allowances required by
law. a. An employee who holds a significant interest or shares of stock of a ·
, competitor, supplier, customer or dealer favors this party to the
6. Making employees sign documents showing that they are receiving fully prejudice of his employer.
wha~ ~hey a,:e ~ntitled to uhder the law when in fact they are only
-recen:mg a fraction of what they are supposed to get. b. The employee accepts cash, a gift or a lavish entertainment or a loan
from a supplier, customer, competitor or l:OOtractor. In this situation,
. '
the decision or action of the employee is influenced by his being
7. Sexual Hara_ssment. · _Work, education or training-related sexual
harassment 1s committed by an ernploye I · indebted for a favor or loan from a party with whom the. company is
. r, .emp oyee, manager, doing business. He, therefore, cannot act impartially.
su~erv1sor, agent of the employer, teacher, instructor, professor coach
tramer or any other person who, having authori . • ' c. The employee , uses or discloses confidential company information
ascendency over another in a k . . ty, mfluence or moral for his or someone else's personal gain. An example is revealing his
demands requests or otllerw~or or t~a,ning or education environment,
, se requ1res sexual fa ti h h employer's formula or menu for a well-liked food'to a competitor.
regardless of whether the demand . vor rom t e ot er,
is accepted or not by the object. ' requeSt or requirement for submission d. _ The employee engages in the same type. of business as his employer.
He may attend to his business only after office hours because he has
somebody to mind it for him but it is still unethical. An example is
an auditor employee! full-time in a public accounting firm · but
· maintains his own auditing office ":here he works after office hours.
e. The employee uses for his own benefit a business opportunity, in
which his employer has or might be expected to have an inte~est. '
118 · Chapter 7
' r

- -:::;;:p

Basiness-e,tnics-rS7ml just limited to business tr~nsactions .with ·outside

. parties. Jt also covers employ~e-employer re-lationship, e~peciaHy wi~h
i;:espect ~o ari employee's·honesty as he carries· out' his assigned duties in
th.e office. E}{.-ample·s of dishonest
. a~ts of employees are: - ' '
'

- ----~~_a.__;T~kmg
. -.
<tt!ic~e supplies home for per,sonat use . . \
. . . .

b. P-a~~i~g ~n. expense- account through the use of fake- receipts when
ela1m11;1g ~e1mburser.nents. . -
c. • Taki.rig credit for another employee's idea·
/
 CHAPTER 5

INTRODUCTION TO ETHICS
INTRODUCTION TO
INTRODUCTION
ETHICS
Ethics can be defined broadly as a set of moral principles or values that govern
the actions and decisions of an individual or group. While personal ethics vary
from individual to individual at any point in time, most people within a society
are able to agree about what is considered ethical and unethical behavior. In fact,
{£zyectecfLeaming Outcomes a society passes laws that define what its citizens consider to be the more extreme
fonns of unethical behavior.
After studying the chapter, you should be able to ...
Each ofus has such a set of values, although we may or may not have considered
1. Define Ethics, them explicitly. Philosophers, religious organizations, and other groups have
defined in various ways ideal sets of moral principles or values. Examples of
2. Enumerate and describe the basic characteristics and values prescribed sets of moral principles or values at the implementation .level include
.associated with ethical behavior. laws and regulations, church doctrine, code of business ethics for professional
groups such as CPAs, and codes of conduct within individual organizations.
3 . . Apprecic!te why ethical behavior in personal, professional and
business dealings is necessary~ Ethics is a topic that is receiving a great deal of attention throughout our society
today. This attention is an indication of both the importance of ethical behavior to
4. Understand the reasons why people act unethically, maintaining a civil society, and a significant number of notable instances of
unethical behavior. Much of what is considered unethical in a particular society
5. G_
ive and explain the categories of ethical principles. is not specifically prohibited. So how do we know whether we are acting
ethically? Who decides what standards of conduct are appropriate? Is any type of
6. Give and describe the ethical principles related to behavior "ethical" as long as it does not violate a law or a rule of one's
profession?
a) Persor,al ethics
b) Professional ethics
It is common for people to differ in their moral principles or values. Even if two
c) Business ethics
people agree on the ethical principles that detennine ethical behavior, it is
unlikely that they will agree on the relative importance of each principle. These
7. Explain why professional ethics is important d h d f differences result from all of our life experiences. Parents, teachers, friends and
conduct should be adopted an w Y a co e o
employers are known to influence our values, but so do television, team sports,
life successes and failures, and thousands of other experiences.
 Introduction to Ethics 97
96 Chapter 5
Respect for Others
CHARACTERISTICS AND VALUES ASSOCIATED WITH ETIDCAL
BEHAVIOR dDemonstrate
t · f respect
f 11 for human digm·ty , privacy,
· and t he rig
· ht to self-
°
~ ehrmhm~ ifion ~ people; be courteous, prompt, and decent; provide others
The following list of ethical principles incorporates the characteriSt ics and values ~•t t e m ormati~n they need to make informed decisions about their own
that most people associate with ethical behavior. hves; do not patronize, embarrass, or demean .

Integrity Responsible Citizenship

Be principled, honorable, upright, courageous and act on convictions; do not <?bey just la~s;_ if all law unjust, openly protest it; exercise all democratic
be twofaced or unscrupulous, or adopt an end-justifies-the means philosophy ~•ghts and . prtv1leg~ responsibly by par;ticipation (voting and expressing
that ignores principle. in.formed v~ews), social_ consciousness, and public service; when in a position
of l~~dershtp _or auth~nty, openly respect and honor democratic processes of
Honesty dec1S1on makmg, avoid unnecessary ·secrecy or concealment of information,
and assure that others have all the information they need to make intelligent
Be truthful, sincere, forthright, straightforward, frank, candid; do not cheat
choices arid exercise their rights. _
. steal, lie, deceive or act deviously. '
Pursuit of Excellence
Trustworthiness and Promise Keeping
Pursue excellence in all matters; in ~eeting your personal and professional
Be worthy of trust, 'keep promises, full commitments, abide by the spirit as
responsibilities, be diligent, reliable, industrious and committed; perform all
well as the letter ?f an agreement; do not interpret agreements in an
tasks to the best of your ability, develop and maintain a high degree of
unreasona?ly technical or legalistic manner in order to rationalize
competence, be well informed and well prepared; do not be content with
noncompliance or create excuses and justification for breaking commitments.
mediocrity; do not "win at any cost".
Loyalty_ (Fidelity) and Confidentiality
Accountabilit y
Be faith~ul and l_oyal to family, friends, employers, client and cou . .
use or disclose information learned in confidence· . Be accountable, accept re~ponsibility for decisions, for the foreseeable
ti . ntry, do not
safeguard the influences and conflicts of interest. ' m a pro ess1onal context, consequences of actions and inactions, and for setting an example of others.
Parents, teachers, employers, many professionals and public officials have a
Fairness ar_,d Openness special obligation to lead by example, to safeguard and advance the integrity
and reputation of their families, companies, professions and' the government
Be fair and open~minded, be willing to d . '. itself; an ethically sensitive individual avoids even the appearance of
change positions and beliefs, demonstrat a m1t err?r and, w~er~ appropriate, impropriety, and takes whatever actions are necessary to correct or prevent
treatment of individuals, and tolerance ~ a commitment to Justice, the equal
inappropriate conduct of others.
overreach or take advantage of another' ?r akcceptan_ce of diversity; do n·o t
s m1sta es or diversities.
Caringfor Others
Be caring, kind, and compassionate· 1 •
h I h .
e pt ose m need and avoid harming' sothe~.
tare be . .
g1vmg, be of service to others;
 98 Chapter 5
WHY IS ETHICAL BEHAVIOR NECESSARY?
°
Ethical behavior is n~cessary for a society to function in an rd erly manner. It
can be argued that ethics is the glue that holds a society toge th er .. Wh~t would
happen if for example we could not depend on the people we deal w_ith to be
honest. If parents, teachers, employees, siblings, co-wo~kers and f~ien?s all
consistently lied, it would be almost impossible for effective communication to
occur.
The need for ethics in society is sufficiently important that many commonly held
ethical values ·are incorporated into laws. For example, laws dealing with driving
while intoxicated and selling drugs concern responsible citizenship and respect
for other. Similarly, if a company sells a defective product, it can be held
accountable if harmed parties choose to sue throughout the legal system .
A considerable portion of the ethical values of a society cannot be incorporated
into laws because of the judgmental nature of certain values. Looking at the
h~nesty principle, it is practical to have 'laws that deal with cheating, stealing,
lymg, or deceiving othe.rs. It is far more difficult to establish meaningful laws
that d_eal with many aspects of principles such as integrity, loyalty and pursuit of
excellence. That does not imply that these principles are less important for an
orderly society.
Bu~iness decisions i,nflue~ce employees, customers, suppliers and competitors,
wh1_le company operations affect communities, governments and the
environment.
WHY DO PEOPLE ACT UNETHICALLY?
Mo_st people define unethical behavior as conduct that differs from th
believe would have been appropriate given the circumstances E e way ~hey
for ourselves what we consider unethical behavior b th f; . ach of us decides
It is important to understand what causes p 1' 0 0 ~ ourselves and other.
decide is unethical. eop e to act 111 a manner that we
There are two primary reasons why people act unethically:
I. the person's ethical standards are diffi
whole, or erent from those of society as a
2. the person chooses to act selfishly.
Introduction to Ethics 99
In many instances-, both reasons exist.
1. Person's Ethical Standards differ from General Society
E~~re7e examples of people whose behavior violates almost everyone's
et ica standards are drug dealers, bank robbers, and larcenists. Most
people who commit such acts feel no remorse when they are
apprehended; because their ethical standards differ from those of society
as a whole. ·
There are also many far less extreme examples when violate our ethical
values. When people cheat on their tax returns, treat other people with
hostility, lie on employment applications, or perform below their
competence level as employees, most of us regard that as unethical
behavior. If the other person has decided that this behavior is ethical and
acceptable, there is a conflict of ethical values that is unlikely to be
resolved.
2. The Person Chooses to Act Selfishly
A considerable portion of unethical behavior results from selfish
behavior. The Pork Barrel Scam and the other political scandals resulted
from the desire for political power and wealth; cheating on tax returns
and expense reports is motivated by financial greed; performing below
one's competence and cheating on tests are typically due· to laziness. In
each case, the person knows that the behavior is inappropriate, but
chooses to do it anyway because of the personal sacrifice needed to act
ethically.
CATEGORIES OF ETHICAL PRINCIPLES
Principles of Personal Ethics include among others
• Basic justice, fairness
• Respect for the right of others
• Concern for the right of others
Concern for the well-being on welfare of others
•
• Benevolence, trustworthiness, honesty
• Compliance with the law
100 Chapter 5 Introduction to Ethics 101

Carel~ ~ork or lack of int~grity of ~ professional may lead the public

Profess ional Ethics inclutk amo~g otl,ers to a
public
negativ e view toward the entire profession. All professionals must have
• · Integrity, impartiality, objectivity ~fiden ce of t~e publi~ to be successful. Consequently, the member
s of the
• Professional competence ns. act m unison by deriving their respective code of conduct .
different professio
• Confidentiality
Code of Good Gowrnance for the Profeaion In tht Phlllpplnt1 (E.O. No. 220, June 23, 2003)
• Professional behavior and the 42 Professional
Thia Code 19 adoptld by tht Prof111lon1I Ragulllion Commiulon (PRC)
• Avoidance of potential or apparent conflict of interest Regulatory _Boards to ~ver an environment of good governance in which all FUipino professionals shal
good governance llld code
perform their tasks. While each profession may adopt and enfon:e its own code of
various codes. This Code
Busines s Ethics include among otl,ers of ethics, it is generally 1'800glized that there is a general commonality anong the
could be used by al
which COY8lll the common principles underlying the 'codes cl various· professions
I profjlSSionals who face critical ethical questions in their work.
• Fair competition
General Prlnclpll of Profesalonal Conduct
• Global as well as domestic justice to a;t ethically, but also
Profllsaionals are required not only to have an ethical commitment, a personal resolve
• Social responsibility ethical awareness and ethical competenc y. Ethical awareness refers to the ability to discern
have both
moral reasoning
• Concern for environment bltMen 1911 and wrong, while ethical competency pertains to the abiity to engage in sound
and conaider carefully the rnplicalions of alternative actions.

The focus of this book is on Business Ethics. Specific Prlnclple ol Profaealonal Conduct
1, Service to Oth.-1
and public welfare. To
The Need for Professional Ethics Profeesionals are committed to a life d service to others. They protect life, property,
be prepared for heroic sacrifJCe and genuine setflessnes s in carrying out their
serve others, they shall
professional duties even at the expense of personal gain.
one must
To understand the imp.ortance of a Code of Ethics to professionals, 2. lntllgrtty and Objectivity
understand tile nature of a profession as opposed to other vacation. ities .with the higiest
To maintain llld broaden public confidence , professionals shall perform their responsibil
e of any professional
unse of integrity llld irroued with nationalism and spiritual values. In the performanc engaging in any
There is no_ universall_y accepted de~n!t~on of what constitutes a professi
on; yet, service, they shall at al times, main objectivity, be free of conflicts of interest, and refrain from avoid making any
been recogniz ed as professi ons activity that would prejudice their abilties to carry out their duties ethically. They shall
for generations, certain types of actJVJt1es have iapresentalion that would tikely cause a reasonable pe1SOn to misunderst.r1d or to be
deceived.
while others have not.
3. Proflulonal Compellnce
i.e., knowledge, technical skills,
discipli nes In providing professional services, a certain level of competence is necessary,
Medicine, law, engine~ring, architecture_and th~ology are examples of and experience . Professiona ls shall, therefore, undertake only those prof8$ional S81Vices that they
long accorde d professi onal status. Public accounting is relative) ~ attitudes
ca, ~ deliver with professiona l competenc e. to
Corollary_ this, it is ~heir_express obligation to keep up .
• . Y new as ,ar as and upgrade their level of
th e ran k .mg . of th e pro fiess1ons 1s concerned but it has ac h.1eved w1·d espread with new knowledge and techniques in their field, continually mprove their skills
. m . recent decades . program.
recogmt. 10n competence and take pat in a lifelong continuing educat1~n
. ..
~ Solldriy 'llld Teanwork
a deep .spmt of
. . Each profession shall nurture and support one organization for all its members. :O,OUgh ambition_and
All the recognized professions have several common h 80lidarlty., .each member should put the broader interest cl _the profession _above ones personal
important of these characteristics are: c aractenst1cs. The most member sh~I effectively
1)18ference. Througl teanw,ior1( within a cohesive profess1011al orgarnzallon, each
SOC1al and
oblerve ethical practices and pursue continuing professional development as well as deepen ones
( l) a responsibil_ity to serve the public civic responsibility.
. .
(2) a complex body of knowledge 5.. 8oc:ial and Qvlc Reaponllblllty
n of the broader interest of
Profess' als hall always cany out their professiona l duties with due ~ideratio
(3) standards of admission to the profession ~ 8 theref serve their clients/employers and the publics with professKlfla l concern and 1n
(4) a need for public confidence ~ shall, :ilh ...~·responsi·bilities .to society
the piJbhc.consistent "' • .,,r . ·.
As responsible Filipino citizens, they shall a::tively
a manner
contribute to the attainment of the country's nat1011al objectives.
102 Chapter 5

I. Global Compltitivenea · mic interconnected world. ~ or she shall

Every professional shaft remain open to challenges of 8 ~ore ~~~ practiceS fully aligned ,with ~ I best
rise up to global standards a,x1 malntan levels of PfVt8SSIOll
practices.
7. Equality of All Profeuion1 stri t be fair in their dealings with one
All prdessionaJs shall treat their ~I~ .with ~
another. No one group of professK>11als is supenor
~t!~ers.v:u O
professionals perform an equally
the PRC all professions are equal and, therefore,
important, yet distinct service to society. In the eyes of . ,
fMKY one shall treat one other professionals with respect and fairness.

· . · r. p r. ·onaJs are shown in:

Examples of Code of Conduct and Ethics 1or roiess,
Appendix A - For Professional Teachers
Appendix B - For Internal Auditors
Appendix C - For Management Accountants
'
Examples of Code of Business Conduct and Ethics for Private Enterprises are
presented in_:
Appendix. 0-Telecommunications Company
Appendix E - Manufacturing Company
Appendix F - Commercial ·sank

REVIEW QUESTIONS

Questions

I. Define .. Ethics''.
2. What is the basic purpose of a code of ethics for a profession?

3. Name and explain the characteristics and values associated with ethical
behavior.

4. Explain why ethical behavior is necessary.

s. What are some of the reasons why people act unethically?

6.' Describe some the princip~es and or values that are related to
a. Personal ethics
b. Professional ethics
c. Business ethics

7. Explain why ethical behavior is necessary 10 the practice of one's

profossior..