AE10-GBERMIC-Module 1
AE10-GBERMIC-Module 1
AE10-GBERMIC-Module 1
COLLEGE DEPARTMENT
MODULE 1
Subject:
AE10-GBERMIC: GOVERNANCE, BUSINESS ETHICS, RISK MANAGEMENT AND
INTERNAL CONTROL
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Unit Corporate Governance
Module Introduction to Corporate Governance
Governance, Business Ethics, Risk Page |2
AE10-GBERMIC Units: 4
Management and Internal Control
Objectives:
What is 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.
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.
Definition of governance
Governance defines as the establishment of policies, and continuous monitoring of their proper
implementation, by the members of the governing body of an organization. It includes the mechanisms
required to balance the powers of the members (with the associated accountability), and their primary
duty of enhancing the prosperity and viability of the organization.
Governance refers specifically to the set of rules, controls, policies, and resolutions put in place
to dictate corporate behavior. Proxy advisors and shareholders are important stakeholders who
indirectly affect governance, but these are not examples of governance itself. The board of directors is
pivotal in governance, and it can have major ramifications for equity valuation.
In corporate world, governance refers to the framework of rules and practices by which a board
of directors ensures accountability, fairness, and transparency in a company's relationship with its all
stakeholders (financiers, customers, management, employees, government, and the community).
Since corporate governance also provides the framework for attaining a company's objectives, it
encompasses practically every sphere of management, from action plans and internal controls to
performance measurement and corporate disclosure.
Corporate Governance refers to the way in which companies are governed and to what
purpose. It identifies who has power and accountability, and who makes decisions. It is, in essence, a
toolkit that enables management and the board to deal more effectively with the challenges of running
a company.
Corporate governance ensures that businesses have appropriate decision-making processes and
controls in place so that the interests of all stakeholders (shareholders, employees, suppliers, customers
and the community) are balanced.
Governance at a corporate level includes the processes through which a company’s objectives
are set and pursued in the context of the social, regulatory and market environment. It is concerned
with practices and procedures for trying to make sure that a company is run in such a way that it
achieves its objectives, while ensuring that stakeholders can have confidence that their trust in that
company is well founded.
As the home of good governance, ICSA believes that good governance is important as it provides
the infrastructure to improve the quality of the decisions made by those who manage businesses. Good
quality, ethical decision-making builds sustainable businesses and enables them to create long-term
value more effectively.
Governance encompasses the system by which an organization is controlled and operates, and
the mechanisms by which it, and its people, are held to account. Ethics, risk management, compliance
and administration are all elements of governance.
Whatever context good governance is used, the following major characteristics should be
present:
1. Participation: Participation by both men and women is a key cornerstone of good governance.
Participation could be either director through legitimate institutions or representatives. It
important to point out that representative democracy does not necessarily mean that the
concern of the most vulnerable in society would not be taken into consideration in decision
making. Participation needs to be informed and organized This means freedom of association
and expression on one hand and an organized civil society on the other hand.
2. Rule of Law: Good governance requires fair legal frameworks that are enforced impartially. It
also requires full protection of human rights, particularly those of minorities. Impartial
enforcement of laws requires an independent judiciary and an impartial and incorruptible police
force.
3. Transparency: Transparency means that decisions taken and their enforcement are done in a
manner that follows 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. It also
means that enough information is provided and that it is provided in easily understandable
forms and media.
4. Responsiveness: Good governance requires that institutions and processes try to serve the
needs all stakeholders within a reasonable timeframe.
5. 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. It also requires a broad and long -term perspective on what is needed for
Sustainable human development and how to achieve the goals of such development. This can
only result from an understanding of the historical cultural and social contexts of a given society
or community.
6. Equity & Inclusiveness: Effectiveness Efficiency Ensures that all its members that they have stake
in it and do not feel excluded from the mainstream of society. This requires all groups. but
particularly the most vulnerable, have opportunities to improve or maintain their wellbeing.
7. Effectiveness & 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.
The concept of efficiency in the context of good governance also covers the sustainable use of
natural resources and the protection of the environment.
Corporate governance is defined as the system of rules, practices and processes by which
business corporations are directed and controlled. It basically involves balancing the interests of a
company's many stakeholders, such as shareholders, management, customers, suppliers, financiers,
government and the community.
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.
The corporate governance structure specifies the distribution of rights and managers,
shareholders, and other stakeholders, and spells out the rules and procedures for making decisions on
corporate affairs. By doing this, it also provides the structure through which the objectives are set and
the means of attaining those objectives and monitoring performance.
1. explicit and implicit contracts between the company and the stakeholders for distribution of
responsibilities, rights, and rewards,
Most companies strive to have a high level of corporate governance. For many shareholders, it is
not enough for a company to merely be profitable; it also needs to demonstrate good corporate
citizenship through environmental awareness, ethical behavior, and sound corporate governance
practices. Good corporate governance creates a transparent set of rules and controls in which
shareholders, directors, and officers have aligned incentives.
2. Self-Assessment: Corporate governance enables firms to assess their behavior and actions
before they are scrutinized by regulatory agencies. Business establishments with a strong
corporate governance system are better able to limit exposure to regulatory risks and fines. An
active and independent board can successfully point out deficiencies or loopholes in the
company operations and help solve issues internally on a timely basis.
3. Increase Shareholders' Wealth: Another corporate governance's main objective is to protect the
long-term interests of the shareholders. Firms with strong corporate governance structure are
seen to have higher valuation attached to their shares by businessmen. This only reflects the
positive perception that good corporate governance induces potential investors to decide to
invest in a company.
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.
Effective corporate governance is transparent, protects the rights of shareholders and includes
both strategic and operational risk management. It is concerned in both the long-term earning potential
as well as actual short- term earnings and holds directors accountable for their stewardship of the
business.
The basic principles of effective corporate governance are threefold as presented below:
Positive answers to the following questions indicate a firm's conformance and compliance with
the basic principles of good corporate governance:
B. Accountability
Has the board built long -term sustainable growth in shareholders' value for the
corporation?
Does it create an environment to take risk?
Application of the Basic Principles of Corporate Governance and Best Practices Recommendation
1. A company should lay solid Formalize and disclose the functions reserved to the board and
foundation for management those delegated to management.
and oversight. It should
recognize and publish the
respective O and responsibilities
of board and management.
2. Structure the board to add a.A board should have independent directors.
value Have a board of an b.The roles of chairperson and chief executive officer should not
effective composition, size and be exercised by the same individual.
commitment to adequately c. The board should establish a nomination committee
discharge its responsibilities and
duties.
3. Promote ethical and a. Establish a code of conduct to guide the directors, the chief
responsible decision making. executive officer (or equivalent), the chief financial officer (or
Actively promote ethical and equivalent) and any other key executives as to:
responsible decision-making.
The practices necessary to maintain confidence in the
company's integrity
The responsibility and accountability of individuals for
reporting and investigating reports of unethical practices
b. Disclose the policy concerning trading in company securities by
directors, officers and employees.
Governance
4. Safeguard integrity in financial a. Require the chief executive of (equivalent) and the chief
reporting. Have a structure financial officer (or equivalent) to state in writing to the board
independently verify and that the company's financial reports present a true and fair
safeguard the integrity of the view, in all material respects of the company's financial
company's financial reporting. condition and operational results and are in accordance with
relevant accounting standards.
b. The board should establish an audit committee.
c. Structure the audit committee so that it consists of:
Only non-executive or independent directors;
An independent chairperson who is not chairperson of the
board;
At least three (3) members.
5. Make timely and balanced a. Establish written policies and procedures designed to ensure
disclosure Promote timely and compliance with IFRS.
balanced disclosure of all b. Listing Rule disclosure requirements and to ensure
material matters concerning the accountability at a senior management level for compliance.
company.
7. Recognize and manage risk. a. The board or appropriate board committee should establish
Establish a sound system of risk policies on risk oversight and management.
oversight and management and b. The chief executive officer (or equivalent) and the chief
internal control. financial officer (or equivalent) should state the board in writing
that:
The statement given in accordance with best practice
recommendation 4-a (the integrity of financial
statements) is founded on a sound system of risk
management and internal compliance and control which
implements the policies adopted by the board;
The company's risk management and internal compliance
and control system is operating efficiently in all material
respects.
8. Encourage enhanced Disclose the process for performance evaluation of the board, its
performance. Fairly review and committees and individual directors, and key executives.
actively encourage enhanced
board and management
effectiveness.
10. Recognize the legitimates of Establish and disclose a code of conduct to guide compliance with
stakeholder’s interests of legal and other obligations to legitimate stakeholders.
stakeholders. Recognize legal
and other obligations to all
legitimate stakeholders.
The board of directors is the primary direct stakeholder influencing corporate governance.
Directors are elected by shareholders or appointed by other board members, and they represent
shareholders of the company. The board is tasked with making important decisions, such as corporate
officer appointments, executive compensation, and dividend policy. In some instances, board obligations
stretch beyond financial optimization, as when shareholder resolutions call for certain social or
environmental concerns to be prioritized.
Boards are often made up of inside and independent members. Insiders are major shareholders,
founders, and executives. Independent directors do not share the ties of the insiders, but they are
chosen because of their experience managing or directing other large companies. Independents are
considered helpful for governance because they dilute the concentration of power and help align
shareholder interest with those of the insiders.
The board of directors must ensure that the company's corporate governance policies
incorporate the corporate strategy, risk management, accountability, transparency, and ethical business
practices.
Bad corporate governance can cast doubt on a company's reliability, integrity, or obligation to
shareholders—all of which can have implications on the firm's financial health. Tolerance or support of
illegal activities can create scandals like the one that rocked Volkswagen AG starting in September 2015.
The development of the details of "Diesel gate" (as the affair came to be known) revealed that
for years, the automaker had deliberately and systematically rigged engine emission equipment in its
cars in order to manipulate pollution test results, in America and Europe. Volkswagen saw its stock shed
nearly half its value in the days following the start of the scandal, and its global sales in the first full
month following the news fell 4.5%.
Public and government concern about corporate governance tends to wax and wane. Often,
however, highly publicized revelations of corporate malfeasance revive interest in the subject. For
example, corporate governance became a pressing issue in the United States at the turn of the
21st century, after fraudulent practices bankrupted high-profile companies such
as Enron and WorldCom.
It resulted in the 2002 passage of the Sarbanes-Oxley Act, which imposed more stringent
recordkeeping requirements on companies, along with stiff criminal penalties for violating them and
other securities laws. The aim was to restore public confidence in public companies and how they
operate.
1. Companies do not cooperate sufficiently with auditors or do not select auditors with the appropriate
scale, resulting in the publication of spurious or noncompliant financial documents.
2. Bad executive compensation packages fail to create an optimal incentive for corporate officers.
3. Poorly structured boards make it too difficult for shareholders to oust ineffective incumbents.
Reference:
Corporate Governance, Business Ethics, Risk Management and Internal Control, 2019-2020
Edition, Ma. Elenita Balata Cabrera and Gilbert Anthony B. Cabrera
Instructions:
1. Use extra papers for you answer.
2. Activity task must be neat and presentable.
3. Handwritten.
4. Avoid erasures.
PRECAUTIONS: None
ASSESSMENT METHOD: Written work criteria checklist
CRITERIA SCORING
Did I . . . 1 2 3 4 5
1. Focus – The single controlling point made with an awareness of task
about a specific topic.
2. Content – The presentation of ideas developed through facts,
examples, anecdotes, details, opinions, statistics, reasons and/or
opinions
3. Organization – The order developed and sustained within and across
paragraphs using transitional devices and including introduction and
conclusion.
4. Style – The choice, use and arrangement of words and sentence
structures that create tone and voice.
5. Conventions – Grammar, mechanics, spelling, usage and sentence
formation.
TEACHER’S REMARKS: QUIZ RECITATION PROJECT
GRADE:
1 - Excellently Performed
1 - Very Satisfactorily Performed
1 - Satisfactorily Performed
1 - Fairly Performed
1 - Poorly Performed
Objectives:
Introduction
Many of the characteristics of good governance described in Chapter 1 are relevant to both
SME's and large listed public companies. As an organization grows in size and influence, these issues
become increasingly important.
However, it is also important to recognize that good corporate governance is based on principles
underpinned by consensus and continually developing notions of good practice. There are no absolute
rules which must be adopted by all organizations. "There is no simple universal formula for good
governance. Instead emphasis is many localities, has been to encourage organizations to give
appropriate attention to the principles and adopt approaches which are tailored the specific needs of an
organization at a given point in time.
Many of the matters listed may not be directly relevant in all situations and some may not, in
particular circumstances, be within the board's control, but it provides a useful context in which any
organization can consider its governance needs so that they might be most appropriately addressed.
The essence of any system of good corporate governance is to allow the board and
management the freedom to drive their organization forward and to exercise that freedom within a
framework of effective accountability.
Relationship between Shareholders/Owners(s) and other
The relationship between the shareholders / owners, management and other stakeholders in a
corporation is shown below.
In return for the responsibilities (and power) given to management and the board, governance
demands accountability back through the system to the shareholders. However, the accountabilities do
not extend only to the shareholders. Companies also have responsibilities to other stakeholders.
Stakeholders can be anyone who is influenced whether directly or indirectly, by the actions of a
company Management and the board have responsibilities to act within the laws of society and to meet
various requirements of creditors, employees and the stakeholders.
A broad group of stakeholders has an interest in the quality of corporate governance because it
has a relationship to economic performance and the quality of financial reporting. For example, it is
likely that many employees have significant funds invested in pension plans. Those pension plans are
designed to protect the financial interests of those employees in their retirement We the word society
in the diagram to indicate those broad interests. In similar fashion employees and creditors have a
vested interest in the organization and how it governed Regulators are a response to society's wishes to
ensure that organizations, in their pursuit of returns for their owners, act responsibly and operate in
compliance with relevant laws While shareholders / owners delegate responsibilities to various parties
within the corporation, they also require accountability as to how well the resources have been
entrusted to management and the board have been used.
1. Financial performance
2. Financial transparency - financial statements that are clear with full disclosure and that reflect
the underlying economics of the company.
3. Stewardship, including how well the company protects and manages the resources entrusted to
it.
4. Quality of internal control
5. Composition of the board of directors and the nature of its including information on how well
management incentive systems are aligned with the shareholders ' best interests.
The owners want disclosures from management that are accurate and objectively verifiable. For
instance, management has responsibility to provide financial reports, and in some cases, reports on
internal control effectiveness. Management has always had the primary responsibility for the accuracy
and completeness of an organization's financial statements.
1. Choose which accounting principles best portray the economic substance of company
transactions.
2. Implement a system of internal control that assures completeness and accuracy in financial
reporting.
3. Ensure that the financial statements contain accurate and complete disclosure.
Parties involved in Corporate Governance: Their Respective Broad Role and Specific Responsibilities
Corporate governance and financial reporting reliability are receiving considerable attention
from a number of parties including regulators standard setting bodies, the accounting profession,
lawmakers and financial statement users.
Board of The major representative of stockholders ensure that the organization is run
Directors according to the organization's charter and that there is proper accountability.
2. 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 (KPLs) indicators.
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 and organization, including its control and accountability
systems.
Approving and monitoring the progress of major capital expenditure, capital
management and acquisitions and divestitures.
Committees preparing the annual financial statements as well public reports on internal control.
of the Board
of Directors Specific activities include among others:
b. Securities Ensure the accuracy, timeliness and fairness of public reporting of financial and other
and information for public companies.
Exchange
Commission Specific activities include among others:
Auditors to evaluate the efficiency of operations, and periodic evaluation and tests of controls.
Objectives:
1. Understand the need for the Code of Governance for publicly - listed companies
2. Know the sixteen (16) governance responsibilities of the Board of Directors of publicly- listed
companies
3. Explain the meaning of "comply and explain " approach.
4. Describe the three aspects of the Code, namely”
a. Principles
b. Recommendations
c. Explanations
5. Know what constitutes a competent board and how can it be established
6. Understand the composition, functions and responsibilities of the board committees that can be
established such as:
a. the Audit Committee
b. Corporate Governance Committee
c. Board Risk Oversight Committee
d. Related Party Transaction Committee
7. Know how the directors can show full commitment to the company
8. Understand how independence and objectivity of the board can be reinforced and enhanced
9. Describe how the performance and effectiveness of the board can be assessed.
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.
Principle 1: The company should be headed by a competent, working board to foster the long -
term success of the corporation , and to sustain The company should be headed by a competent,
working board its competitiveness and profitability in a manner consistent with its corporate objectives
and the long - term 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 independent judgment on all
corporate affairs.
Principle 6: The best measure of the Board's effectiveness is through assessment process. The
Board should regularly carry 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.
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.
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.
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.
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 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
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.
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.
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.
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.
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.
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).
Definition of Terms:
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 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.
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.
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.
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.
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 company should be headed by a competent, working board to foster the long- term
success of the corporation, and to sustain competitiveness and profitability in a manner
consistent with its corporate objectives and the long -term best interests of its shareholders and
other stakeholders.
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.
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.
4. Fostering Commitment
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.
The board should endeavor to exercise an objective and independent judgment on all
corporate affairs.
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 of backgrounds and competencies.
Members of the Board are duty- bound to apply high ethical standards, taking into
account the interests of all stakeholders.
The company should establish corporate disclosure policies and procedures that are
practical and in accordance with best practices and regulatory expectations
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.
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.
1. 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, floor brokered
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;
2. 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. 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 permit issued to him under the
Corporation Code , 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;
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;
3. 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;
4. 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;
6. 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;
7. 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
8. Other grounds as the SEC may provide.
1. 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;
2. 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;
4. If any of the judgments or orders cited in the grounds for permanent disqualification has not yet
become final.
The Audit Committee has the following duties and responsibilities, among others:
1. 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 Charter;
2. 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:
3. 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;
4. 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;
5. Reviews and monitors Management's responsiveness to the Internal Auditor's findings and
recommendations;
6. 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;
7. 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;
8. Reviews and approves the Interim and Annual Financial Statements before their submission to the
Board, with particular focus on the following matters
9. Reviews the disposition of the recommendations in the External Auditor's management letter
10. 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;
11. Coordinates, monitors and facilitates compliance with laws rules and regulations;
12. Recommends to the Board the appointment, 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,
13. In case the nnecompany 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.
The BROC has the following duties and responsibilities, among others:
1. Develops a formal enterprise risk management plan which contains the following Of H:
2. 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.
3. 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;
4. Advises the Board on its risk appetite levels and risk tolerance limits;
5. 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;
6. 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;
8. 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.
The following are the functions of the RPT Committee, among others:
1. Evaluates on an ongoing basis existing relation 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
2. 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 .
3. 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
4. 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;
5. Ensures that transactions with related parties, including write-off of exposures are subject to a
periodic independent review or audit process;
6. Oversees the implementation of the system for identifying, monitoring, measuring, controlling,
and reporting RPTs, including a periodic review of RPT policies and procedures.
In evaluating RPTs, the Committee takes into account, among others, the following:
a. The related party's relationship to the company and interest in the transaction;
b. 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;
d. 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;
1. 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;
2. 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;
3. Has not been appointed in the covered company , its subsidiaries associates , affiliates or related
companies as Chairman “ Emeritus , " “ Ex - Officio Directors 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 ;
4. not an owner of more than two percent (2%) of the outstanding shares of the covered company,
its subsidiaries, associates, affiliates or related companies;
5. 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;
6. Is not acting as a nominee or representative of any director of the covered company or any of its
related companies 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 ;
7. 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 ;
8. 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 ;
9. 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
10. Is not employed as an executive officer of another company where any of the covered
company's executives serve as directors.
Objectives:
2. Describe how the company disclosure policies and procedures can be enhanced
3. Appreciate how the external auditor's independence can be strengthened and how audit quality
can be enhanced
4. Understand how a company could increase focus on non-financial and sustainability reporting.
5. Explain how a company can promote a comprehensive and cost-efficient access to relevant
information.
6. Understand how integrity, transparency and proper governance of a company could be ensured
through effective internal control system and enterprise risk management framework.
7. Describe briefly how a synergic relationship with shareholders could be cultivated and
promoted.
8. Explain how the rights of stakeholders could by respected and how to institute effective redness
for the violation of their rights.
The company should ensure that the material and reportable non-financial and sustainability
issues are disclosed.
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.
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 or the Sustainability Accounting Standards Board (SASB)'s Conceptual Framework.
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.
12. Strengthening the Internal Control System and Enterprise Risk Management Framework
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.
The company should treat all shareholders fairly and equitably, and also recognize, protect and
facilitate the exercise of their rights.
The Board should ensure that basic shareholder rights are disclosed in the Manual on Corporate
Governance and on the company's website.
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.
b. Dividend policies;
c. Right to propose the holding of meetings and to include agenda items ahead of the
scheduled Annual and Special Shareholders ' Meeting;
f. 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 candidate’s qualification and credibility.
Shareholders are also encouraged to participate when given sufficient information prior to
voting on fundamental corporate changes such as () 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 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.
Duties to Stakeholders
14. Respecting Rights of Stakeholders and Effective Redress for Violation of Stakeholder’s Rights
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.
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.
Objectives:
1. Define Ethics
2. Enumerate and describe the basic characteristics and values associated with ethical behavior
3. Appreciate why ethical behavior in personal, professional and business dealings is necessary.
a. Personal ethics
b. Professional ethics
c. Business ethics
7. Explain why professional ethics is important and why a code of conduct should be adopted.
Introduction to 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, a society passes laws that define what its citizens consider to be the more extreme
forms of unethical behavior.
Each of us has such a set of values, although we may or may not have considered them explicitly
Philosophers, religious organizations, and other groups have defined in various ways ideal sets of moral
principles or values. Examples of prescribed sets of moral principles or values at the implementation
level include laws and regulations, church doctrine, code of business ethics for professional groups such
as CPAs, and codes of conduct within individual organizations.
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 maintaining a civil society, and a
significant number of notable instances of unethical behavior. Much of what is considered unethical in a
particular society 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 behavior "ethical " as long as it
does not violate a law or a rule of one's profession?
It is common for people to differ in their moral principles or values. Even if two people agree on
the ethical principles that determine ethical behavior, it is unlikely that they will agree on the relative
importance of each principle. These differences result from all of our life experiences. Parents, teachers,
friends and employers are known to influence our values, but so do television, team sports, life
successes and failures, and thousands of other experiences.
The following list of ethical principles incorporates the characteristics and values that most
people associate with ethical behavior.
1. Integrity:
2. Honesty:
Be truthful, sincere, forthright, straightforward, frank, can did do not cheat, steal, lie,
deceive or act deviously.
Be worthy of trust, keep promises, full commitments, abide by the spirit as well as the
letter of an agreement; do not interpret agreements in an unreasonably technical or legalistic
manner in order to rationalize noncompliance or create excuses and justification for breaking
commitments.
Be faithful and loyal to family, friends, employers, client and country, do not use or
disclose information learned in confidence; in a professional context safeguard the influences
and conflicts of interest.
Be fair and open-minded, be willing to admit error and, where appropriate, change
positions and beliefs, demonstrate a commitment to justice, the equal treatment of individuals,
and tolerance for acceptance of diversity; do overreach or take advantage of another's mistakes
or diversities.
Be caring, kind, and compassionate share, be giving, be of service to others help those in
need and avoid harming others.
Demonstrate respect for human dignity, privacy, and the right to self-determination of
all people; be courteous, prompt, and decent; provide others with the information they need to
make informed decisions about their own lives; do not patronize, embarrass, or demean.
8. Responsible Citizenship:
Obey just laws ; if all law unjust , openly protest it; exercise all democratic rights and
privileged responsibly by participation (voting and expressing informed views ), social
consciousness , and public service ; when in a position of leadership or authority , openly respect
and honor democratic processes of decision making , avoid unnecessary secrecy or concealment
of information , and assure that others have all the information they need to make intelligent
choices and exercise their rights.
9. Pursuit of Excellence:
10. Accountability:
Ethical behavior is necessary for a society to function in an orderly manner. can be argued that
ethics is the glue that holds a society together. What would happen if for example we could not depend
on the people we deal with to be honest? If parents, teachers, employees, siblings, co-workers and
friends 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 honesty principle, it is practical to
have laws that deal with cheating, stealing, lying, or deceiving others. It is far more difficult to establish
meaningful laws that deal 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.
Business decisions influence employees, customers, suppliers and competitors, while company
operations affect communities, governments and the environment.
Most people define unethical behavior as conduct that differs from the way they believe would
have been appropriate given the circumstances. Each of us decides for ourselves what we consider
unethical behavior, both for ourselves and other It is important to understand what causes people to act
in a manner that we decide is unethical.
1. the person's ethical standards are different from those of society as a whole
There are also many far fewer 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.
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.
Professional competence
Confidentiality
Professional behavior
Fair competition
To understand the importance of a Code of Ethics to professionals, one must understand the
nature of a profession as opposed to other vacation.
Medicine, law, engineering, architecture and theology are examples of disciplines long accorded
professional status. Public accounting is relatively new as far as the ranking of the professions is
concerned but it has achieved widespread recognition in recent decade.
All the recognized professions have several common characteristics. The most important of
these characteristics are:
Careless work or lack of integrity of a professional may lead the public to a negative view toward
the entire profession. All professionals must have public confidence of the public to be successful.
Consequently, the members of the different professions act in unison by deriving their respective code
of conduct.
Code of Good Governance for the Profession in the Philippines (June 23, 2003)
This Code is adopted by the Professional Regulation Commission (PRC) and the 42 Professional
Regulatory Boards to cover an environment of good governance in which all Filipino professionals shall
perform their tasks. While each profession may adopt and enforce its own code of good governance and
code of ethics, it is generally recognized that there is a general commonality among the various codes.
This Code which covers the common principles underlying the codes of various professions could be
used by all professionals who face critical ethical questions in their work.
Professionals are required not only to have an ethical commitment , a personal resolve to act
ethically, but also have both ethical awareness and ethical competency Ethical awareness refers to the
ability to between night and wrong while ethical competency pertains to the ability engage in sound
moral reasoning and consider carefully the implications of alterative actions.
1. Service to Others:
Professionals are committed to a life of service to others. They protect life, property,
and public welfare. serve others, they shall be prepared for heroic sacrifice and genuine
selflessness in carrying out their professional duties even at the expense of personal gain.
3. Professional Competence:
Each profession shall nurture and support one organization for all its members. Though
a deep spirit of solidarity, each member should put the broader interest of the profession above
one's personal ambition and preference. Through teamwork within a cohesive professional
organization, each member shall effectively observe ethical practices and pursue continuing
professional development as well as deepen one's social and civic responsibility.
Professionals shall always carry out their professional duties with due consideration of
the broader interest of the public They shall, therefore serve their clients/ employers and the
publics with professional concern and in a manner consistent with their responsibilities to
society. As responsible Filipino citizens, they shall actively contribute to the attainment of the
country's national objectives.
6. Global Competitiveness:
All professionals shall treat their colleagues with respect and shall strive to be fair in
their dealings with another. No one group of professionals is superior or above others. All
professionals perform an equally important yet distinct, service to society. In the of the PRC, all
professions are equal and therefore, every one shall treat one other professionals with respect
and fairness.