Chapter 1: Introduction to Corporate Governance shareholders, management, customers, suppliers, financiers, government and

community.
Governance – Refers to a process whereby elements in society wield power,
authority and influence and enact policies and decisions concerning public life
and social upliftment.
Purpose of Corporate Governance
-The process of decision-making and the process which decisions are
implemented through the exercise of power or authority by leaders of the  To facilitate effective, entrepreneurial and prudent management that can
country and/or organizations. deliver long-term success of the company.
 To enhance shareholders value and protect the interests of other
- Governance can be used in several contexts such as corporate governance, stakeholders by improving the corporate performance and
international governance, national governance and local governance. accountability.

Objective of Corporate Governance

Characteristics of Good Governance 1. Fair and Equitable Treatment of Shareholders - A corporate governance
structure ensures equitable and fair treatment of all shareholders of the
1. Participation - Participation by both men and women is a key cornerstone of company.
good governance. It could either be direct or through legitimate institutions or
representatives. 2. Self-Assessment - Corporate governance enables firms to assess their
behavior and actions before they are scrutinized by regulatory agencies.
2. Rule of Law - Good Governance requires fair legal framework that are
enforced impartially. It also requires full protection of human rights, particularly 3. Increase Shareholders Wealth - Another objective is to protect the long-
those of minorities term interests of the shareholders. Firms with strong corporate governance
structure are seen to have higher valuation attached to their shares by
3. Transparency - Transparency means that decisions taken, and their businessmen.
enforcement are done in a manner that follows rules and regulations.
4. Transparency and Full Disclosure - Good corporate governance aims at
4. Responsiveness - Good governance requires institutions and processes try ensuring a higher degree of transparency in an organization by encouraging full
to serve the needs all stakeholders within a reasonable timeframe. disclosure of transactions in the company accounts.
5. Consensus Oriented - Good governance requires mediation of the different Basic Principles of Effective Corporate Governance
interests in society to reach a broad consensus on what is the best interests of
the whole community and how this can be achieved.

6. Equity and Inclusiveness - Ensures that all its members feel that they have
a stake in it and do net feel excluded from the mainstream of society.

7. Effectiveness and Efficiency - Good governance means that processes and

institutions produce results that meet the needs of society while making the best
use of resources at their disposal.

8. Accountability - Accountability is a key requirement of good governance. Not

only governmental institutions but also the private sector and civil society
organization must be accountable to the public and to their institutional
stakeholders.

Corporate Governance - Defined as the system of rules, practices and

processes by which business corporations are directed and controlled. It involves
balancing the interests of a company’s many stakeholders, such as
 Directors external audit function and the
process of preparing the annual
financial statements as well as public
reports on internal control.
6. Regulators a. Set accounting and auditing
a. Board of Accountancy standards dictating underlying
financial reporting and auditing
Chapter 2: Corporate Governance Responsibilities and Accountabilities concepts; set the expectations of
audit quality and accounting quality

b. Ensure the accuracy, timeliness

b. Securities and Exchange and fairness of public reporting of
Commission financial and other information for
public companies
7. External Auditors Performs audits of company financial
statements to ensure that the
statements are free of material
misstatements including
misstatements that may be due to
fraud
8. Internal Auditors Performs audits of companies for
compliance with company policies
and laws, audits to evaluate the
efficiency of operations, and periodic
evaluation and tests of controls.

Party Overview of Responsibilities

1. Shareholders Provide effective insights through
election of board members, approval
of major initiatives such as buying or
selling stock, annual reports on
management compensation, from the
board
2. Board of Directors The major representative of
stockholders to ensure that the
organizations charter and that there
is proper accountability
3. Non-Executive or Independent Same as the entire Board of Directors
Directors
4. Management Operations and accountability.
Manage the organization effectively;
provide accurate and timely reports
to shareholders and other
stakeholders
5. Audit Committees of the Board of Provide oversight if the internal and
 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

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.

Chapter 3: Principle10: The company should ensure that material and reportable non-
financial and sustainability issues are disclosed.
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 Principle 11: The company should maintain a comprehensive and cost-efficient
competitiveness and profitability in a manner consistent with its corporate communication channel for disseminating relevant information. This channel is
objectives and the long-term best interests of its shareholders and other crucial for informed decision-making by investors, stakeholders and other
stakeholders. interested users.

Principle 2: The fiduciary roles, responsibilities and accountabilities of the INTERNAL CONTROL SYSTEM AND RISK MANAGEMENT FRAMEWORK
Board as provided under the law, the company’s articles and by-laws, and other
Principle 12: To ensure the integrity, transparency and proper governance in
legal pronouncements and guidelines should be clearly made known to all
the conduct of its affairs, the company should have a strong and effective
directors as well as to stockholders and other stakeholders.
internal control system and enterprise risk management framework.
Principle 3: Board committees should be set up to the extent possible to
CULTIVATING A SYNERGIC RELATIONSHIP WITH SHAREHOLDERS
support the effective performance of the Board’s functions, particularly with
respect to audit, risk management, related party transactions, and other key Principle 13: The company should treat all shareholders fairly and equitably,
corporate governance concerns, such as nomination and remuneration. The and also recognize, protect and facilitate the exercise of their rights.
composition, functions and responsibilities of all committees established should
be contained in a publicly available Committee Charter. DUTIES TO STAKEHOLDERS

Principle 4: To show full commitment to the company, the directors should Principle 14: The rights of stakeholders established by law, by contractual
devote the time and attention necessary to properly and effectively perform relations and through voluntary commitments must be respected. Where
their duties and responsibilities, including sufficient time to be familiar with the stakeholders’ rights and/or interests are at stake, stakeholders should have the
corporation’s business. opportunity to obtain prompt effective redress for the violation of their rights.

Principle 5: The Board should endeavor to exercise objective and independent Principle 15: A mechanism for employee participation should be developed to
judgment on all corporate affairs. create a symbiotic environment, realize the company’s goals and participate in
its corporate governance processes.
Principle 6: The best measure of the Board’s effectiveness is through an
assessment process. The Board should regularly carry out evaluations to Principle 16: The company should be socially responsible in all its dealings with
appraise its performance as a body and assess whether it possesses the right the communities where it operates. It should ensure that its interactions serve
mix of backgrounds and competencies. its environment and stakeholders in a positive and progressive manner that is
fully supportive of its comprehensive and balanced development.
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.

Board of Directors - The governing body elected by the stockholders that

exercises the corporate powers of a corporation, conducts all its business and
control 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 Directors - 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.

Chapter 3: Applying Ethics in Business

Executive Director - A Director who has executive responsibility of day-to-day
operations of a part or the whole of the organization. Ethics - derive from Greek word “ethos”, which pertain to values, norms, and
beliefs that determine how people behave everyday life. Broadly speaking,
Non-Executive Director - A director who has no executive responsibility and
ethics are belief systems and actions that guide people on how to live their lives
does not perform any work related to the operations of the corporation.
as they relate to other people around them.
Conglomerate - A group of corporations that has diversified business activities
Corporate Social Responsibility - Concerned with the responsibilities and
in varied industries, whereby the operations of such business are controlled and
obligations of businesses to people, communities and the society around them.
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.

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

Related Party - A transfer of resources, services or obligations between a

reporting entity and a related party, regardless of whether a price is charged.

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.
 Communication of the Code of Ethical Conduct

Before implementing the company's code of conduct, it must be communicated

first to all people in the organization as well as to vendors, customers, and other
interested stakeholders. The manner of communicating the ethical code is
ordinarily done through the following modes:

1. Employee orientation programs.

2. Posting in the company website.

3. Newsletters and publications.

4. Bulletins.

5. Official memoranda; and

Illegal Acts - Actions of the corporation, as a legal entity, as well as actions of
corporate officers and employees that are contrary to prevailing laws and 6. Employee manual.
government regulations. Illegal acts necessarily carry monetary penalties to the
company and erring individuals. Unethical Acts in Various Departments

1. Tax Evasion - Nonpayment of Taxes; Deliberate understatement of taxable 1. Marketing - Making a false representation or improper claim about the
income; Failure to register one’s business with BIR. features of a product.

2. Violation of labor and social security laws - Paying employee wages 2. Production - Temporary patching of a defective product rather than complete
below the minimum wage rate; Failure to pay for employees’ social security product replacement) and hiding the product defect, posing a threat to the
premiums. safety of customers.

3. Insider Trading - Corporate officers buy and sell company shares by taking 3. Research and Development - Divulging confidential information on the
advantage of information that is not yet disclosed to the public. ingredients of the company's product.

4. Patent Infringement - Making and/or sell a product that is patented by 4. Human Resource - Falsifying employee competence and qualifications.
another company (without having paid a franchise fee).
5. Internal Audit - Due to internal auditors' close relationships with managers
5. Money Laundering - Concealing and converting money obtained from illegal ("familiarity threat"), they did not report audit findings to the audit committee.
source in order to show that is was generated legally.
6. Procurement - Procurement manager buys materials needed by employing
6. Violation of Environmental Laws - Not implementing anti-pollution organization from his/her own trading firm at a high purchase cost.
devices; Letting factory and other wastes flow into bodies of water.
7. Accounting - Understating the bad debts expense in order to show high net
7. Cybercrimes - Obtaining sensitive information including passwords about a income because bonuses and incentives are based on reported profit.
person with his/her consent.
8. Board of Directors/ Senior Management - Approving a major project on
Conflict of interest - Arises when an officer or employee of the employing which they have a business interest or commission. -Using company vehicles for
organization takes advantage of his/her position to improperly obtain an unjust personal use.
advantage over the interest of the employing organization.

Unethical acts - when someone intentionally fails to do the right thing.

The Company’s Code of Ethical Conduct

1. Company Profile
2. Objectives of the code of ethical conduct

3. Ethical principles adapted by the company

4. List of instances of unethical acts

5. Process for identifying the threats or risks of unethical acts

6. Process for determining whether the threats are significant

7. Resolving ethical conflicts

8. Reporting of ethical issues and concerns

9. Sanctions for violations of the code of ethical conduct

10. Approval of the code of ethical conduct

The following specific unethical behaviors and unethical actions are also
reflected and prohibited in the code of ethical conduct:
Chapter 4: Introduction to Risk Management
1. Divulging of confidential information and trade secrets - Corporate
officers and employees are prohibited from disclosing or divulging to anyone, According to the Committee of Sponsoring Organizations of the Treadway
family member or otherwise, confidential information pertaining to the company Commission (COSO) risk is the possibility that an event will occur and
and trade secrets. adversely affect the achievement of enterprise objectives and likelihood that an
event will occur
2. Personal use of company vehicles and equipment - Company vehicles
and equipment must only be used for official purposes. Internal Events – Events that occur within the company

3. Unauthorized commissions and consulting fees - Payments of Event Potential Impact

commissions are to be accepted only by company officers and employees when 1. Internal Fraud - Financial Loss
duly authorized. - Damage to the reputation of the
company
4. Conflicts of interests and outside business of officers and employees 2. Machine Breakdown - Disruption in the production process
- The board of directors approves the major projects of the company such as - Failure to deliver finished goods to
construction of production facilities and factory buildings. customers
3. Accident in the Factory - Physical Injuries, loss of lives
5. Reimbursement of personal expenses - Company officers are often - Increase in medical assets
reimbursed for business expenses that they have incurred in the performance of 4. Violation of Laws and Regulations - Fines and Penalties
their official duties. However, there are cases when these officers submit official - Potential criminal prosecution of
receipts for personal expenses to be included in their reimbursements. erring corporate officers and
employees
6. Prohibition on bribery - Bribery is the giving or offering of any item of value
to influence the actions of a government official or personnel.
External Events – Events that occur outside the company

Event Potential Impact

1. Economic Recession - Decline in sales revenue and
operating profit
 - Possible closure of the business 3. Health and Safety Risks – Risk that unforeseen events could results to
2. Entry of more competitors in the - Loss of market share injuries, illnesses, or even loss of lives.
market - Decline in sales revenue
3. Bankruptcy of a major customer - Failure to collect receivables 4. Environmental Risk – Risk that the company may fail to control or minimize
- Decline in cash balance factory wastes, emissions, and other pollutants arising from its business
4. Pandemic and natural calamities - Disruption in business operations activities.
- Decline in revenue and profit
- Possibility of closure of the business 5. Strategic Risk – Risk of selecting an inappropriate corporate strategy or the
failure of implementing an appropriate one.

Types of Risk 6. Reputation Risk – Risk that reputation or image of the company will be
damaged due to reasons such as improper acts of corporate officers, poor
Financial Risks – Likelihood that the company might incur a financial loss, or financial performance, and bad news about the company,
suffer a decline in profit, capital, investment, or cash flows, on account of the
occurrence of events or transactions.

1. Credit Risk – Risk that a counterparty such as a customer or a borrower Two important risks that are related to the work of professional accountants:
might fail to pay its account on the due date.
1. Financial Reporting Risk – Possibility that the financial statements of the
2. Liquidity Risk – Risk that the business will be unable to meet its financial company will be incorrect due to errors, lapses, or failure to apply accounting
obligations as they fall due because of insufficient cash. standards.

3. Market Risk – Risk of volatility in the market brought about by factors of 2. Fraud Risk – Risk arising from deceptive and international acts that result to
interest rate, foreign currency, and market prices. loss of company assets, resources and reputation.

A. Interest Rate Risk – Potential decline in earning and capital arising Enterprise Risk Management – Process, effected by an entity’s board of
from changes in interest rates in the market. directors’ management, and other personnel, applied in strategy setting and
across the enterprise.
B. Foreign Currency Risk – Risk that fluctuations in exchange rates
could affect the profit of the business.

C. Price Risk – Risk that changes in specific prices could affect the profit Roles in the Risk Management Process
or cash flow of the business.
1. Board of Directors – Conducts an oversight of the effectiveness of the
Business Risk – Possibility that the business may not be able to generate company’s risk management process. Risk Oversight – Periodic review and
sufficient revenue, or an increase in production and increased operating costs monitoring of the process being used by management in addressing and
might occur. controlling risks.

2. Management – Implements specific risk mitigation and control procedures in

managing the various types of risks affecting the company.
Nonfinancial Risks – Do not have an immediate direct financial impact to the
business. 3. Internal Auditors – Conducts examinations of the risk management process
for the purpose of determining its effectiveness over time.
1. Operational Risk – Risk that business operations will be disrupted due to
inadequate or failed systems, processes, people, breaches in internal controls, or 4. Other Personnel – Implement specific tasks and duties pertaining to the
other unforeseen catastrophes. processes within their departments.

2. Legal or Compliance Risk – Risk that the company might fail to comply with Risk Appetite – Level of risk that the company can accept in pursuit of its
applicable laws and regulations such as tax laws, labor laws, corporation law, objectives.
anti-money laundering law and environmental laws.
Steps in the Risk Management Process d. Avoid – Avoiding a risk may be the right response when management
thinks that mere reducing it is not enough.
1. Setting of Business Objectives
5. Implement the risk response.
A. Strategic Objectives – High level goals aligned with and support the
organization’s mission and long-term vision. 6. Monitor the risk management process

B. Operational Objectives – Goals that are related to the effective and Risk Management Framework
efficient use of corporate resources.
1. ISO 31000-Risk Management – Series of risk management standards
C. Reporting Objectives – Goals relating to the reliability and formulated by the international organization for Standardization. It provides a set
transparency of corporate reports such as financial and nonfinancial of principles and guidelines for the design, implementation, and evaluation of
reports. the risk management process for companies across different industries.

D. Compliance Objectives – Goals relating to compliance and 2. COSO Enterprise Risk Management (COSO ERM) – Original Framework
conformity with applicable laws and regulatory requirements. was published in 2004. Established in order to study the causes of fraudulent
financial reporting during the latter part of the 1980s.
2. Identify the Risks

Risk Identification – Risks or threats to the achievement of those objectives

are identified.

Risk Matrix – A comprehensive listing of all risks affecting the company.

3. Assess the Risk

Two Dimensions of risk:

1. The probability that something can go wrong

2. The negative consequence of impact if that event occurs

Hence Identified risks should be assessed in terms of

1. Likelihood or occurrence – Probability that the event will occur.

2. Impact – Significance or magnitude of the negative effect of the risk to
the company.

4. Respond to the assessed risks

a. Accept – Tolerate or accepting that risk is permissible only if it is of

minor effect to the business or if its likelihood is remote

b. Reduce – Risks that are likely to happen or those that are expected to
have a significant impact to the business cannot be simply accepted.

c. Share – The appropriate response might be to share or transfer the

risks to some other entity such as an insurance company