Corporate Governance Notes

Corporate Governance
OVERVIEW
May 2001
 BangkoSentral ng Pilipinas (BSP) issued Circular 283 mandating the adoption of good
corporate governance practices by members of the boards of directors of banks and non bank
financial institution under its jurisdiction.
1980
April 2002
 Securities and Exchange Commission (SEC) came out with its Code of Corporate
Governance
 registered and listed corporations ( local and foreign corporation)
July 2002
 Insurance Commission (IC) promulgated the Code of Corporate Governance for all life and
non life Insurance companies and Intermediaries.
June 2004
 Energy Regulatory Commission (ERC) launched its program to promote good corporate
governance in distribution utilities
2009 – SEC revised Corporate Governance
2019 – SEC revised Corporate Governance
2018– ASEAN Corporate Governance
Soon it will mandated
 to small and medium sized enterprises (SMEs)
 family corporations
Advantages to Institutionalized CG
1 Best global practices dictate it
2 Necessary in a globalized and competitive economy
3 Contributes to the enhancement of shareholder value
4 Contributes to the nation’s economic competitiveness
Corporate Governance
 Is the set of processes, customs, policies, laws and institutions affecting the way a
corporation is directed, administered or controlled.
 It includes the relationships among the many stakeholders involved and the goals for which
the corporation is governed.
 Ensure the accountability of certain individuals in an organization.
 A system whereby shareholders, creditors and other stakeholders of a corporation are assured
that management enhances the value of the corporation as it completes in an increasingly
global market place. – SEC
 Relationship of a company to its shareholders, or more broadly as its relationship to society –
Financial Times
 Promoting corporate fairness, transparency and accountability. – J. Wolfenshon-president of
World Bank
 Professor Kenneth Scott of Stanford Law School
o Force that bears on the decision-making of the firm
o Encompass not only the control risk of stockholders but also the contractual covenant
insolvency powers of debt holders, the commitments entered into by employees,
customers and suppliers, the regulations issued by government agencies and the
statues enacted by parliamentary bodies.
 Organization for Economic Cooperation and Development (OECD)
o As the system by which business corporations are directed and controlled.
o specifies the distribution of rights and responsibilities among different participants in
the corporation.
o spells out the rules and procedures for making decision on corporate affairs
o provides structure through which the company set its objectives, and the means to
attain objectives and monitor performance.
The relationship between Board of Directors and Management

Board of directors (BOD)
 is an elected group of individuals that represent shareholders.
 is a governing body that typically meets at regular intervals to set policies for corporate
management and oversight.
 makes decisions as a fiduciary behalf of shareholders.
A fiduciary
 is a person or organization that acts on behalf of another person or persons, putting their
clients' interest ahead of their own, with a duty to preserve good faith and trust.
 Being a fiduciary thus requires being bound both legally and ethically to act in the other's
best interests.
- The board oversees the decisions taken by the management

- ratifies them along with acting as the final arbiters of the strategic direction and focus that the
company is heading into
- responsible for the actions of the management
- the management needs to take the board into confidence about its decisions.
- neither the management nor the board can exist without each other and hence both need each
other to attain the common goal of the organization.
Corporate management
 is the group of senior executives and managers who are responsible for leading, directing and
administrating an organization.
 works as a team to lead and direct the company’s work toward the executive-level goals.
Relationship conflict
 happens because the board has a top view of the organization and the management has a
deeper insight.
Principal-agent problem
 Shareholders invest their savings or capital in a company.
 The company then deploys the capital to fund its operations. This allows the corporation and
its shareholders’ investments to grow.
 is a conflict in priorities between a person or group and the representative authorized to act
on their behalf. An agent may act in a way that is contrary to the best interests of the
principal
Agent - is a person who has been legally empowered to act on behalf of another person or an
entity.
Principal - individual party or parties, the owner of a private company
Agency cost
 the principal cannot constantly monitor the agent’s actions.
 The risk that the agent will shirk a responsibility, make a poor decision, or otherwise act in a
way that is contrary to the principal’s best interest
 Additional agency costs can be incurred while dealing with problems that arise from an
agent's actions.
Three Principal Groups of Corporation

1. Management
2. Board of Directors
a. Audit
b. Compensation
c. Corporate Governance
3. Shareholders

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Corporate Governance

The relationship between Board of Directors and Management

- The board oversees the decisions taken by the management

Three Principal Groups of Corporation

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