Chapter 3 - Governance business ethics risk PDF

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Chapter 1: Introduction to Corporate GovernanceGovernance – refers to a process whereby elements in society wield power, authority and influence and enact policies and decisions concerning public life and social upliftment.It comprises all the processes of governing – whether undertaken by the gover...

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Chapter 1: Introduction to Corporate Governance 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. It comprises all the processes of governing – whether undertaken by the government of a country, by a market or by a network – over a social system and whether through the laws, norms, power or language of an organized society. Governance therefore means the process of decision-making and the process by which decisions are implemented (or not implemented) through the exercise of power or authority by leaders of the country and / or organizations. Governance can be used in several contexts such as corporate governance, international governance, national governance, and local governance.

Characteristics of Good Governance Participation by both men and women is a key cornerstone of good governance. Participation could be either direct or through legitimate institutions or representatives Rule of Law- good governance requires fair legal frameworks that are enforced impartially. It also requires fair legal frameworks that enforced impartially. It also requires full protection of human rights, particularly those of minorities. Transparency – means that decisions taken and their enforcement are done in a manner that follow rules and regulations. It means that information is freely available and directly accessible to those who will be affected by such decisions and their enforcement Responsiveness- Good governance requires that institutions and processes try to serve the needs all stakeholders within a reasonable timeframe Consensus Oriented – Good governance requires mediation of the different interests in society to reach a broad consensus on what is in the best interest of the whole community and how this can be achieved. Equity and Inclusiveness- Ensures that all its members feel that they have a stake in it and do not feel excluded from the mainstream of society. 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. Accountability-Accountability is a key requirement of good governance. Corporate Governance: An overview Corporate governance is defined as the system of rules, practices and processes by which business corporation are directed and controlled.

Corporate governance – is a topic that has received growing attention in the public in recent years as policy makers and others become more aware of the contribution good corporate governance makes to financial market stability and economic growth. Good corporate governance is all about controlling one’s business and so is relevant, and indeed vital, for all organizations, whatever size or structure. Good corporate governance is all about controlling one’s business and so is relevant. And indeed vital, for all organizations, whatever size or structure. Purpose of corporate governance -

Is to facilitate effective, entrepreneurial and prudent management that can deliver long-term success of the company. In simple terms, the fundamental aim of corporate governance is to enhance shareholders’ value and protect the interests of other stakeholders by improving the corporate performance and accountability.

Objective of Corporate governance 1.Fair and Equitable Treatment of Shareholders A corporate governance structure ensures equitable and fair treatment of all shareholders of the company. 2. Self-Assessment Corporate governance enables firms to assess their behavior and actions before they are scrutinized by regulatory agencies. 3. Increase Shareholders’ Wealth Another corporate governance’s main objective is to protect the long-term interests of the shareholders. 4. Transparency and Full Disclosure Good corporate governance aims at ensuring a higher degree of transparency in an organization by encouraging full disclosure of transactions in the company accounts. Basic Principles of Effective Corporate Governance Effective corporate governance is transparent, protects the rights of shareholders and includes both strategic and operational risk management. A. Transparency and Full Disclosure Does the board meet the information needs of investment communities? Does It safeguard integrity in financial reporting? Does the board have sound disclosure policies and practices? B. Accountability Does the Board clarify its role and that of management? Does is promote objective, ethical and responsible decision making? Does it lay solid foundations for management oversight?

Does the composition mix of board membership ensure an appropriate range and mix of expertise, diversity, knowledge and added value? Is the organization’s senior official committed to widely accepted standards of correct and proper behavior? C. Corporate Control Has the board built long-term sustainable growth in shareholders’ value for the corporation? Does it create an environment to take risk? Does it encourage enhanced performance? Does it recognize and manage risk? Does it remunerate fairly and responsibly? Does it recognize the legitimate interests of stakeholders? Are conflicts of interest avoiding such that the organization’s best interest prevails at all times? Chapter 2: Corporate Governance Responsibilities and Accountabilities RELATIONSHIP BETWEEN SHAREHOLDERS/OWNER(S) AND OTHER STAKEHOLDERS

While shareholders/owners delegate responsibilities to various parties within the corporation, they also require accountability as to how well the resources that have been entrusted to management and the board have been used. For example, the owners want accountability on such things as:     

Financial performance Financial transparency – financial statements that are clear with full disclosure and that reflect the underlying economics of the company Stewardship, including how well the company protects and manages the resources entrusted to it. Quality of internal control Composition of the board of directors and the nature of its activities, including information on how well management incentive systems are aligned with the shareholders’ best interests.

From financial reporting perspective, it is management’s responsibility to: -

Choose which accounting principles best portray the economic substance of company transactions Implement a system of internal control that assures completeness and accuracy in financial reporting

Parties involved in corporate governance: their respective broad role and specific responsibilities: 1. Shareholder Broad Role: Provide effective oversight 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 Broad Role: The major representative of stockholders to ensure that the organization is run according to the organization’s charter and that there is proper accountability. Specific activities include among others: A. Overall objectives  Establishing the organization’s vision, mission, values and ethical standards.  Delegating an appropriate level of authority to management.  Demonstrating leadership.  Assuming responsibility for the business relationship with CEO including his or her appointment, succession, performance remuneration and dismissal.  Overseeing aspects of the employment of the management team including management remuneration, performance and succession planning.  Recommending auditors and new directors to shareholders.  Ensuring effective communication with shareholders other stakeholders.  Crisis management.  Appointment of the CFO and corporate secretary. B. Performance  Ensuring the organization’s long-term viability and enhancing the financial position.  Formulating and overseeing implementation of corporate strategy.

Approving the plan, budget and corporate policies. Agreeing key performance indicators (KPIs) Monitoring/assessing assessment, performance of the organization, the board itself, management and major projects.  Overseeing the risk management framework and monitoring business risks.  Monitoring developments in the industry and the operating environment.  Oversight of the organization, including its control and accountability systems.  Approving and monitoring the progress of major capital expenditure, capital management and acquisitions and divestitures. C. Compliance/Legal Conformance  Understanding and protecting the organization’s financial position.  Requiring and monitoring legal and regulatory compliance including compliance with accounting standards, unfair trading legislations, occupational health and safety and environmental standards.  Approving annual financial reports, annual reports and other public documents/sensitive reports.  Ensuring and effective system of internal controls exists and is operating as expected. 3. Non-Executive or Independent Directors Broad Role: The same as the broad role of the entire board of directors. Specific activities include among others:  To understand the organization, its business, its operating environment and its financial position  To apply expertise and skills in the organization’s best interests  To assist management to keep performance objectives at the top of its agenda  To understand that his/her role is not to act as auditor, nor to act as a member of the management team  To respect the collective, cabinet nature of the board’s decisions  To prepare for and attend board meetings  To seek information on a timely basis to ensure that he/she is in a position to contribute to the discussion when a matter comes before the board, or alert the chairman in advance to the need for further information in relation to a particular matter, and  To ask appropriate questions relative to operations 4. Management Broad Role: Operations and accountability. Manage the organization effectively; provide accurate and timely reports to shareholders and other stakeholders. Specific activities include among others:  Recommend the strategic direction and translate the strategic plan into the operations of the business  Management the company’s human, physical and financial resources to achieve the organization’s objectives – run the business  Assume day to day responsibility for the organization’s conformance with relevant laws and regulations and its compliance framework   

Develop, implement and manage the organization’s risk management and internal control framework  Develop, implement and update policies and procedures  Be alert to relevant trends in the industry and the organization’s operating environment  Provide information to the board  Act as conduit between the board and the organization  Developing financial and other reports that meet public, stakeholder and regulatory requirements 5. Audit Committees of the Board of Directors Broad Role: 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. Specific activities include among others:  Selecting the external audit firm  Approving any non-audit work performed by the audit firm  Selecting and/or approving the appointment of the Chief Audit Executive (Internal Auditor)  Reviewing and approving the scope and budget of the internal audit function  Discussing audit findings with internal auditor and external auditor and advising the board (and management) on specific actions that should be taken 6. Regulators: a. Board of Accountancy Broad Role: Set accounting and auditing standards dictating underlying financial reporting and auditing concepts; set the expectations of audit quality and accounting quality. Specific activities include among others:  Conducting CPA Licensure Board Examinations  Approving accounting principles  Approving auditing standards  Interpreting previously issued standards implementing quality control processes to ensure audit quality  Educating members on audit and accounting requirements b. Securities and Exchange Commission Broad Role: Ensure the accuracy, timeliness and fairness of public reporting of financial and other information for public companies. Specific activities include among others:  Reviewing filling with the SEC  Interacting with the Financial Reporting Standards Council in setting accounting standards  Specifying independence standards required of auditors that report on public financial statements  Identify corporate frauds, investigate causes, and suggest remedial actions 7. External Auditors Broad Role: Perform audits of company financial statements to ensure that the statements are free of material misstatements including misstatements that may be due to fraud. Specific activities include among others: 

 Audit of public company financial statements  Audits of nonpublic company financial statements  Other services such as tax or consulting 8. Internal Auditors Broad Role: Perform audits of companies for compliance with company policies and laws, audits to evacuate the efficiency of operations, and periodic evaluation and tests of controls. Specific activities among others:  Reporting results and analyses to management (including operational management) and audit committees  Evaluating internal controls

Chapter 3: SEC CODE OF CORPORATE GOVERNANCE FOR PUBLICLY-LISTED COMPANIES (“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 and practices”. The Board of Directors is required to implement the code and make sure that management and employees comply with the internal policies set. While many companies have already developed their Code of Business Conduct and Ethics, the real challenge is in its implementation and monitoring compliance. The SEC Code of Corporate Governance is published in this book, not only to acquaint readers particularly future professionals and businessmen of these rules and regulations but also to serve as reference and guidelines to currently existing publicly-listed corporations. (Source:www.sec.gov.ph) CODE OF CORPORATE GOVERNANCE FOR PUBLICLY-LISTED COMPANIES The Board’s Governance Responsibilities Principle 1: The company should be headed by a competent. Working hard 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 bylaws, and other legal pronouncements and guidelines should he 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. Principle 9: The company should establish standards for appropriate selection of an external auditor, and exercise effective oversight of the same to strengthen the external auditor’s independence and enhance the quality. Principle 10: The company should ensure that material and reportable nonfinancial and sustainability issues are disclosed, Principle 11: The company should maintain a comprehensive and cost-efficient communication channel disseminating relevant information. This channel is crucial for informed decision-making by investors, stakeholders and other Interested users. INTERNAL CONTROL SYSTEM 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 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 he 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 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.

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/OECDI 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 noncompliance, and explain the reasons for noncompliance. 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 Recommendation are objective criteria that are intended to identify 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...