Chapter 3

Corporate Governance
 Chapter Outline

Corporation and Corporate Governance Defined

History of Corporate Governance
Corporate Governance and CSR
Good Governance
Issues in Corporate Governance Systems
Good Governance in Government Agencies
 What is a Corporation?
(Source: ww.investopedia.com/terms/c/corporation.asp)

A corporation is a legal entity that is separate and distinct from its owners. Under
the law, corporations possess many of the same rights and responsibilities as
individuals. They can enter contracts, loan and borrow money, sue and be sued,
hire employees, own assets, and pay taxes.
A corporation's distinguishing characteristic is limited liability. Limited liability of a
corporation means that its shareholders are not personally responsible for the
company's debts.
A corporation may be created by an individual or a group of people.
 What is a Corporation?
(Source: ww.investopedia.com/terms/c/corporation.asp)

A corporation is created when it is incorporated by a group of shareholders with a

common goal who share ownership represented by their holding of stock shares.
Corporations may return a profit to their shareholders. However, some
corporations, such as charities or fraternal organizations, are nonprofit or
not-for-profit.
Most states require the owners to file articles of incorporation with the state and
then issue stock to the company's shareholders.
The shareholders elect the board of directors in an annual meeting.
 Corporate Governance Defined

Corporate governance is the system of rules, practices and processes by which

a firm is directed and controlled. Corporate governance essentially involves
balancing the interests of a company's many stakeholders such as shareholders,
senior management executives, customers, suppliers, financiers, the government,
and the community. (James Chen, March 2023)
Since corporate governance 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 . ((James Chen, March 2023)
 Corporate Governance Defined

Salvador, et.al quoted the following definitions:

1. The Philippine Securities and Exchange Commission (SEC) defines corporate
governance as a system whereby shareholders, creditors and other stakeholders of a
corporation are assured that management enhances the value of the corporation as it
competes in an increasingly global market place.
2. The Final Times narrowly defines corporate governance as the relationship of a
company to its shareholders, or more broadly as its relationship to society.
3. J. Wolfenshon, president of World Bank (1995–2005) sees corporate governance as
promoting corporate fairness, transparency and accountability.
Other Definitions of Good Governance

According to UNDP, “Good Governance is, among other

things, participatory, transparent, and accountable. It is also
effective and equitable. And it promotes the rule of law.
Good governance ensures that political, social, and
economic priorities are based on broad consensus in
society and that the voices of the poorest and the most
vulnerable are heard in decision making over the allocation
of development resources.”
IMF has defined the concept “as a broad concept covering
all aspects of how a country is governed, including its
economic policies, regulatory framework, and adherence to
the rule of law”.
Framework for Enhanced Engagement on
Governance
In 2018, the IMF adopted a framework for
enhanced engagement on governance. The
framework aims to promote more systematic,
effective, candid, and evenhanded
engagement with member countries on
governance matters, including corruption, that
impact macroeconomic performance.
 History of Corporate Governance
Source: (thecorporategovernanceinstitute.com)

• It is generally accepted to have begun in the United

States during the 1970s.
• Lawmakers have often increased its importance in
their drive to avoid economic crashes and
large-scale business scandals.
• Such growth has repeatedly been interrupted by
periods of pushback, particularly from fiscal
conservatives and proponents of laissez-faire
economics.
• Legislation around corporate governance has
coalesced into national “codes” that act as corporate
governance rulebooks.
History of Corporate Governance
Source: (thecorporategovernanceinstitute.com)
The concept had existed since the dawn of modern
corporations – around the 17th century, when European
powers began to exert their dominance worldwide.
In other ways, corporate governance is new, because the
modern idea only emerged in the latter part of the 20th
century.
The modern iteration of corporate governance started in 1970s
America – when authorities began to care more about the
inner workings of some of the country’s biggest
companies. Most of these companies had spent the previous
two decades enjoying enormous success in the markets, with
little legal oversight, while their boards largely went along with
management decisions.
 History of Corporate Governance
Source: (thecorporategovernanceinstitute.com)
Corporate governance was born in this environment, and
the Securities and Exchange Commission (SEC) – the
country’s market watchdog – led the efforts to develop
it.
Although the SEC had been in operation since the 1930s,
it was only forty years later that it began clamping down
on what it deemed foul play in the markets and boards
that were “asleep at the wheel” while it was
occurring.
Reform through legislation began from that point on. In
the 1980s, it endured a backlash from Reagan-aligned
opposition, who didn’t want this regulatory reboot. Legal
and economic scholars joined them as they thought more
research was needed to develop a comprehensive
package of rules to govern companies.
History of Corporate Governance in the
Philippines (Source: Prezi.com)
 Effective Corporate Governance
(Source: University of Lincoln)

• Balance compliance with performance

• Clarify the board’s role in determining strategic
direction
• Regularly monitor organizational performance
• Understand the importance of/work to improve the
board-CEO relationship
• Implement and exercise sound risk management and
internal control systems
• Ensure each director has the knowledge, skills,
experience and resources needed
Benefits of Good Governance
(source:
/www.coursehero.com/file/88467845/MODULE-1-SOCIAL-RESPONSIBILITY-AN
D-GOOD-GOVERNANCEpdf/)
1. Good corporate governance ensures corporate success and
economic growth.
2. Strong corporate governance maintains investors’ confidence, as a
result of which, company can raise capital efficiently and
effectively.
3. It lowers the capital cost.
4. There is a positive impact on the share price.
5. It provides proper inducement to the owners as well as managers to
achieve objectives that are in interests of the shareholders and the
organization.
Benefits of Good Governance

7.Good corporate governance also minimizes wastages,

corruption, risks and mismanagement.
8. It helps in brand formation and development.
9. It ensures organization in managed in a manner that fits
the best interests of all.
 Issues on Corporate Governance

Shareholder rights
Risk management
Executive compensation
Auditing and control
Board of directors composition
CEO selection and termination decisions
 Issues on Corporate Governance

Integrity of financial reporting

Shareholder participation and input level
Compliance with corporate governance reform
CEO’s role in board decisions
Organizational ethics programs
The Securities and Exchange Commission

The major functions of the SEC include the registration and supervision of
corporations, including financing and lending companies. It is also charged with the
registration of securities, analysis of every registered security, and the evaluation
of the financial condition and operations of applicants for security issue.
The SEC is among the few securities commissions in the world that simultaneously
acts as a corporate registrar and a securities regulator. Such a dual role allows
the Commission a comprehensive view of the business and investment landscape,
and for a more coordinated and enabling regulatory environment.
SEC Model Manual on Corporate Governance
Read SEC Memorandum No. 19, s. 2016 – Code of Corporate Governance for Publicly
Listed Companies
 Characteristics of Good Governance
(Source:
https://schoolofpoliticalscience.com/what-is-good-governance/#Definitions%20of%20
Good%20Governance)
 Characteristics of Good Governance
1. Participation
The participation of citizens in the process of
governance is the key characteristic of good
governance. Participation is an important step for
mobilizing people to participate in the
decision-making process. It can be direct or indirect
but participation needs to be informed and organized.
The aims and objectives of the political rights would
be fulfilled by the greater participation of the people
in the society. The legal framework represents the
rule of law which ensures impartiality in terms of
participation in the decision-making process of
governance.
 Characteristics of Good Governance
2. Rule of Law
It needs a fair legal framework to establish the rule of law in
society. Rule of law ensures impartiality which helps to protect
human rights, particularly who is most marginal in society. The
Independent judiciary system, its impartial nature, and the
incorruptible police force are the key element to ensure the rule of
law.
3. Transparency
Governance needs transparency for the fair delivery of services to
the citizens. It ensures a balance between policymaking and its
enforcement following proper rules and regulations. It enables the
citizen to access governmental information regarding various
policies and their implementation freely. Proper media should be
established for an easy understanding of this information.
 Characteristics of Good Governance
4. Responsiveness
Responsiveness has a basic necessity of the
administration which can motivate the interrelationships
between administration and people. It requires sufficient
services to the people within a specific time.
5. Consensus Oriented
Governance depends on the consensus of people in
society to make it good. It could fulfill the interest of the
people as well as the community. It helped to achieve the
long-term perspective of human development. And it
originated from the social culture and institutional
behaviors of the particular society.
 Characteristics of Good Governance
6. Equity and Inclusiveness
An equitable just society must be established for ensuring
good governance. Society’s well-being depends on how its
members feel about it. It requires all its members to feel that
they have a stake in it and they are not excluded from the
mainstream in the governance.
7. Effectiveness and Efficiency
Effectiveness and efficiency ensure the outcomes of the
institutions to meet the needs of society. Proper utilization of
society’s resources for the establishment of sustainable
development is the key to good governance. It also ensures
the sustainable use of natural resources for the protection of
the environment.
 Characteristics of Good Governance
8. Accountability
Accountability is one of the most important characteristics of
good governance. Good governance depends on how
accountable government, as well as private sectors and civil
society organizations, are to their people and their institutional
stakeholders. Without transparency and the rule of law,
accountability cannot be established.
PRACTICE GOOD GOVERNANCE AND
IMPROVE BUREAUCRATIC EFFICIENCY
Source: Chapter-14.pdf (neda.gov.ph)

PARTICIPATORY GOVERNANCE DEEPENED

• Ensure sufficient and functional participatory spaces
• Broaden public access to information
• Improve the quality of participation
• Increase inclusivity and accessibility of elections
PUBLIC ACCOUNTABILITY AND INTEGRITY BOLSTERED
• Enhance public feedback loops
• Intensify transparency in public spending
• Strengthen implementation and monitoring of anti-corruption laws and programs
• Improve national governance assessments
GOVERNMENT FUNCTIONS, SYSTEMS, AND MECHANISMS RATIONALIZED
AND STRENGTHENED
• Pursue rightsizing and the whole-of-government approach in re-engineering systems and
procedures
• Accelerate digital transformation in government
• Raise the productivity performance of agencies
COMPETENT, MOTIVATED, AGILE, AND RESILIENT PUBLIC SERVANTS
SUPPORTED
• Guarantee complete and capable human resources in government
• Promote conducive working environments
Government Programs and Projects
to Ensure Good Governance