MARY THE QUEEN COLLEGE PAMPANGA, INC.
Guagua, Pampanga
INSTITUTE OF ACCOUNTANCY
GOVERNANCE, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL
CONTROL
Course Code – Title : GBRMIC-Governance, Business Ethics, Risk
Management and Internal Control
Course Description : Governance, Business Ethics, Risk Management
and Internal Control Accounting aims to equip accountancy students the basic
knowledge, skills and perspective that are necessary in facing the challenge in
the continuously changing business environment whether it be in the public
practice sector, accounting practice, internal audit or accounting information
system management.
Module No – Title : MO3 – Securities & Exchange Commission (SEC)
Code of Corporate Governance
Time Frame : 1 week – 3 hrs
Desired Learning Outcomes
At the end of the learning session, you should be able to:
a) Understand the need for the Code of Governance for publicly -
listed companies.
b) Know the sixteen (16) governance responsibilities of the Board of
Directors of publicly-listed companies.
c) Explain the meaning of “comply and explain” approach.
d) Describe the three aspects of the Code, namely
• Principles
• Recommendations
• Explanations
e) Know what constitutes a competent board and how can it be
established.
f) Understand the composition, functions and responsibilities of the
board committees that can be established such as the
• Audit Committee
• Corporate Governance Committee
• Board Risk Oversight Committee
• Related Party Transaction Committee
g) Know how the directors can show full commitment to the
company.
h) Understand how independence and objectivity of the board can be
reinforced and enhanced
i) Describe how the performance and effectiveness of the board can
be assessed.
MARY THE QUEEN COLLEGE PAMPANGA, INC.
Guagua, Pampanga
INSTITUTE OF ACCOUNTANCY
GOVERNANCE, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL
CONTROL
Content/Discussion
CHAPTER 3 SEC CODE OF CORPORATE GOVERNANCE FOR
PUBLICLY-LISTED COMPANIES (CG Code for PLCs) Securities and Exchange
Commission SEC MC No. 19, Series of 2016
On November 10, 2016, the Securities and Exchange Commission approved the Code
of Corporate Governance for publicly-listed companies. Its goal is to help companies
develop and sustain an ethical corporate culture and keep abreast with recent
developments in corporate governance.
One of its salient provisions is for publicly-listed companies to establish a code of
business conduct and submit a new manual on Corporate Governance that would
“provide standards for professional and ethical behavior as well as articulate
acceptable and unacceptable conduct & practices”. The Board of Directors is required
to implement the code and make sure that management and employees comply with
the internal policies set.
THE BOARD’S GOVERNANCE RESPONSIBILITIES
Principles 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.
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 part transactions, and other key corporate governance concerns,
such as nomination and remuneration.
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.
MARY THE QUEEN COLLEGE PAMPANGA, INC.
Guagua, Pampanga
INSTITUTE OF ACCOUNTANCY
GOVERNANCE, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL
CONTROL
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.
Principle 10: 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 SYNERGY 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 balances development.
MARY THE QUEEN COLLEGE PAMPANGA, INC.
Guagua, Pampanga
INSTITUTE OF ACCOUNTANCY
GOVERNANCE, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL
CONTROL
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.
Board of Directors – the governing body elected by the stockholders that exercises
the corporate powers of 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 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 person 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.
Related Party – shall cover the company’s subsidiaries, as well as affiliates and any
party, that the company exerts direct or indirect control over or that exerts direct or
indirect control over the company.
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.
MARY THE QUEEN COLLEGE PAMPANGA, INC.
Guagua, Pampanga
INSTITUTE OF ACCOUNTANCY
GOVERNANCE, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL
CONTROL
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.
THE BOARD’S GOVERNANCE RESPONSIBILITIES
I. ESTABLISHING A COMPETENT BOARD
Principle 1
The company should be headed by 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 competitive 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.
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.
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.
Recommendation 1.4
The Board should have a policy on board diversity.
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.
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
member of the Board of Directors and should annually attend a training on corporate
governance.
MARY THE QUEEN COLLEGE PAMPANGA, INC.
Guagua, Pampanga
INSTITUTE OF ACCOUNTANCY
GOVERNANCE, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL
CONTROL
I. ESTABLISHING CLEAR ROLES AND RESPONSIBILITIES OF THE BOARD
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 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.
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.
Recommendation 2.3
The Board should be headed by a competent and qualified Chairperson.
Recommendation 2.4
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.
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.
Recommendation 2.6
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.
Recommendation 2.7
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.
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.
MARY THE QUEEN COLLEGE PAMPANGA, INC.
Guagua, Pampanga
INSTITUTE OF ACCOUNTANCY
GOVERNANCE, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL
CONTROL
Recommendation 2.9
The Board should establish an effective performance management framework that will
ensure that the Management, including the CEO and personnel’s performance is at par
with the standards set by the Board and Senior Management.
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.
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.
Recommendation 2.12
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.
II. ESTABLISHING BOARD COMMITTEES
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.
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 responsibilties.
Recommendation 3.2
The Board should establish an Audit Committee to enhance its oversight capability
over the country’s financial reporting, internal control system, internal and external
audit processes, and compliance with applicable laws and regulations.
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.
MARY THE QUEEN COLLEGE PAMPANGA, INC.
Guagua, Pampanga
INSTITUTE OF ACCOUNTANCY
GOVERNANCE, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL
CONTROL
Recommendation 3.4
Subject to a corporation’s size, risk profile and complexity of operations, the Board
shoul 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.
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.
Recommendaiton 3.6
All established committees should be required to have Committee Charters stating in
plain terms their respective purposes, memberships, structures, operations, reporting
processes, resources and other relevant information.
III. FOSTERING COMMITMENT
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.
Recommendation 4.1
The directors should attend and actively participate in all meetings of the Board,
Committees, and Shareholders in person or through the 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.
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, challeng Management’s proposals/views, and oversee the
long-term strategy of the company.
Recommendation 4.3
A director should notify the Board where he/she is an incumbent director before
accepting a directorship in another company.
IV. REINFORCING BOARD INDEPENDENCE
Principle 5
The board should endeavor to exercise an objective and independent judgment on all
corporate affairs.
MARY THE QUEEN COLLEGE PAMPANGA, INC.
Guagua, Pampanga
INSTITUTE OF ACCOUNTANCY
GOVERNANCE, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL
CONTROL
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.
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.
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.
Recommendation 5.4
The positions of the Chairman of the Board and Chief Executive Officer should be held
by separate individuals and each should have clearly defined responsibilities.
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.
Recommendation 5.6
A director with a material interest in any transaction affecting the corporation should
abstain from taking part in the deliberation for the same.
Recommendation 5.7
The non-executive directors (NEDs) should have separate periodic meetings with the
external auditor and heads of the internal audit, compliancde 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.
V. ASSESSING BOARD PERFORMANCE
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.
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.
MARY THE QUEEN COLLEGE PAMPANGA, INC.
Guagua, Pampanga
INSTITUTE OF ACCOUNTANCY
GOVERNANCE, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL
CONTROL
Recommendation 6.2
The Board should have in place a system that provides, at the minimum, criteria and
process to determine the performancde of the Board, the individual directors,
committees and such system should allow for a feedback mechanism from the
shareholders.
VI. STRENGTHENING BOARD ETHICS
Principle 7
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.
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.
VII. 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.
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.
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.
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.
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.
MARY THE QUEEN COLLEGE PAMPANGA, INC.
Guagua, Pampanga
INSTITUTE OF ACCOUNTANCY
GOVERNANCE, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL
CONTROL
Recommendation 8.5
The company should disclose its policies govering Related Party Transactions (RPTs)
and other unusual or infrequently occuring transactions in their Manual on Corporate
Governance.
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.
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.
VIII. 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 should be
recommended by the Audit Committee, approved by the Board and ratified by the
shareholders.
Recommendation 9.2
The Audit Committee Charter includes a disclosure of its responsibility on assessing
the intergrity and independence of the external auditor.
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.
References:
Corporate Governance, Business Ethics, Risk Management and Internal Control
2019-2020 Edition by Ma. Elenita Balatbat Cabrera, Gilbert Anthony B. Cabrera
