C. Corporate Governance Flashcards
is a concept introduced in the 1970s. It was put in place to protect the various stakeholders of corporations and prevent corporate scandals and or failures from happening.
Corporate Governance
the father of corporate governance
Tricker
defined it as a way to control or govern a corporation.
Corporate Governance
is a process that allows internal and external mechanisms to ensure that the resources of the company are optimized for the benefit of stakeholders.
It is a part of risk management.
Governance
is a strategic direction for all organizations because the long term sustainability of organizational activity is dependent on the proper governance of their resources.
Good Governance
is applied to all forms of organizations regardless of their structure: private or publicly owned, profit and nonprofit, cooperative, missionary institutions, government-owned and controlled corporations, NGOs or any organized entity.
Good Governance
True or False:
Corporate governance in the country is similar with its East Asian counterparts – family-ownership structure.
True
This is referred to as among the weakest attributes of corporate governance in the country if gauged against the codes on control (monitoring function) and transparency (reporting) is concerned.
family-ownership structure
The concentration dilemma happens in two forms:
(1) Low Concentration (high dispersion)
(2) High Concentration (low dispersion)
Two features of corporate ownership among East Asian countries:
(1) Concentration
(2) Composition
occurs when majority of the ownership is held by several majority and minority shareholder.
Low Concentration
occurs when majority of the ownership is held by a small number of major stockholders.
High Concentration
True or False:
In low concentration, conflict arises between shareholders and board of directors.
False ; shareholders and managers
True or False:
In high concentration, conflict arises between majority and minority shareholders.
True
True or False:
In an Asian Development Bank study (2000), 46% of corporations in the Philippines were under family control. Because of this, it bred a culture of shareholdings, absence of independent directors, related party-lending, and evasion of single borrower limits.
True
True or False:
Most publicly-listed Philippine companies allocate a maximum number of shares to be classified as public corporation.
False ; only a minimum
refers to the owners or shareholders which can be in the form of individuals, a family or family group, a holding company, a bank, an institutional investor or non-financial corporation.
Composition
Five Problems with Composition
(1) Ownership of banks by corporate groups
(2) Non-separation of decision management and decision control
(3) Transparency
(4) Legislature
(5) Asian cultural imprint
True or False:
forming corporate groups is the means by which large shareholders controlled their investments through allocation in various businesses.
True
True or False:
Ownership of banks by corporate groups weakens corporate governance because it diminishes the capacity of banks to be effective control agents because these are in the best position to gauge the efficiency of the corporate group’s investment and financing activities.
The inclusion of banks equates to easier financing not monitoring.
True
True or False:
Non-separation of decision management and decision control when owners and directors effectively centralized and combined these functions at the board level, is one of the problems with concentration.
False ; problems with composition
True or False:
The need for transparency and disclosure is crucial in a relationship-based transaction environment where insiders exercise control over the degree of information disclosure or information asymmetry.
False ; not crucial
stated that disclosure influences the behaviors of companies and protects investors.
OECD Principle
True or False:
information asymmetry lends to withholding information on impropriety and management practices, making it difficult to monitor misdeeds, making the culprit accountable for their misbehavior.
False ; information symmetry
True or False:
In Legislature, disclosure clauses of both the SEC and auditing firms are strong and not generic.
Disclosure provides stockholders with accurate and timely information to protect their interests.
False ; weak and too generic
is among the cornerstones of the Principle of Corporate Governance
Shareholder protection
True or False:
Ownership structure lends to digressions of transparency, so regular monitoring should be conducted more often.
True
Asia does not have a tradition of strong disclosure.
Asian cultural imprint
True or False:
Governance and management are the same.
False ; two different areas
focuses on the day-to-day operations of an organization.
Management
True or False:
Executives and directors in management ensure that the company is run well and brings profit to its shareholders.
False ; Executives and Managers
is carried out by the board of directors/trustees who governs the organization making sure that it is efficiently and effectively run by management.
Governance
is defined as how an organization is operated by its human and material resources to achieve organizational success measured by profits generated through its operations and the continued growth of its resources to produce more revenues.
Management
5 Key Players in Corporate Governance
(1) CEO
(2) Chairman of the Board
(3) Board of Directors
(4) Shareholders
(5) Stakeholders
the person responsible for leading and managing the entire organization in achieving its organizational goals.
CEO
provides leadership and play an important role in the governance practices of the company
Chairman of the Board
the best entity for steering the company’s strategic direction and evaluating its performance.
Board of Directors
considered owners of the company through their ownership/holdings of stock shares.
Shareholders
any group of people who are affected by how a corporation operate in (employees, government, suppliers, society)
Stakeholders
4 Theoretical Perspectives on Corporate Governance
(1) Agency Theory
(2) Stewardship
(3) Resource Dependency
(4) Stakeholder theory
assumes that the two principal characters – agent (manager) and the principal (owner)are at odds with their objectives.
It posits that managers cannot be trusted and act on their interests and not for the benefit of the owners of the company.
Agency Theory
The agent acts in the principal’s best interest and therefore acts as a responsible steward of the company.
Stewardship
it looks at corporate governance from a strategic management view. It examines how the external resources of organizations affect how organizations behave for their maximum utility.
Resource Dependency
organizations are entities that are responsible for their actions that affect anyone involved or affected by their existence.
It encourages the boards to consider their stakeholders and shareholders concerns as the metric for a successful organization and satisfaction of all its stakeholders
Stakeholder Theory
2 Approaches to Corporate Governance
(1) Rules-Based
(2) Principles-Based
relies on regulation and law to ensure compliance
Rules-Based
also known as comply and explain approach -companies are required to explain why certain violations of the code have been made
Principles-Based
4 Functions of the Board
(1) Accountability
(2) Monitoring and Supervision
(3) Setting Policy
(4) Strategy Formulation
success or failure of an organization rests on the board and the board is accountable
Accountability
oversee the performance of its management using financial metrics such as sales, net income, financial ratios and non-financial metrics and budgetary control system.
Monitoring and Supervision
for strategies to work to be prepared for management to abide by this either set by the board or by approving the recommendations by management
Setting Policy
the most important function of the board as this will steer the company to achieve its vision and mission
Strategy Formulation
True or False:
Membership of the Board:
One director and up to minimum of 20 directors with each director owning atleast one share of stock as per Philippine Corporate Code.
False ; one director and up to maximum of 15 directors with each director owning atleast one share of stock.
True or False:
Term of director is one year among holders of stocks, 5 years in case of trustees.
False ; one year among holders of stocks and 3 years in case of trustees
are normatively nominated by the shareholders, controlled by the Board in the director selection process
Directors
These are processes and interactions involving power and authority that influence decisions made for the benefit of individual, group or organization. How people behave in an organization is dictated by their association of power.
Corporate Policies
are formed so that board work can be done more effectively.
Committees
True or False:
The chairman of these committees must be dependent directors so that they can truly perform their oversight roles.
False ; independent directors
3 types of committees
(1) Audit Committee
(2) Remuneration committee
(3) Nomination Committee
to oversee accounting and financial reporting processes and results.
Audit Committee
to identify compensation and benefit plans for directors and senior executives through performance appraisals.
Remuneration Committee
to nominate the right mix of board members, ensure objectivity, independence and expertise.
Nomination Committee
5 Traits of Effective Directors toward an effective working board
(1) Commitment
(2) Expertise
(3) Unity
(4) Independence
(5) Networking
in terms of time spent and in the achievement of strategic objectives
Commitment
with strong technical knowledge of the business
Expertise
ability to work and get along with fellow board members; collaborating effectively in getting the group to agree on resolutions
Unity
to be able to challenge the status quo and critically questions perspectives
Independence
provide resource connections for possible alliances in business development. Needs training and development to build skills and enhance performance.
Must have good communication skills to provide a smooth flow of information to the parties involved in corporate governance.
Networking
is needed for board members to perform their functions properly, thus the need to get documents on time for review.
Information Symmetry
The objective of good family business governance is the sustainable development of the economic value and emotional value of the enterprise.
Family Governance
is manifested through its revenues.
Higher economic value
refer to the emotions that create an attachment to the company.
Emotional values
must be managed before good corporate governance can even progress.
Emotions
True or False:
The creation of a family constitution should help [ in the process of good family remembrance as this is the document that describes their strategy and structures.
True
True or False:
There are challenges to the governance of family-owned enterprises such as nepotism, lack of professional managers, family infighting, third generation entitlement and the absence of succession planning which can lead to disruptions.
True
Beyond compliance on form and structure by which corporations are regulated and assessed,
is awareness and affirmation of ethical values in corporations – such as integrity – the very core of governance; sound leadership of the CEO and board of directors.
Ethical Stewardship
the very core of governance
integrity and sound leadership of CEO and board of directors
is important to reiterate and reinforce the values.
Training
is good for business and involves demonstrating respect for values (honesty, fairness, equality, dignity, diversity and individual rights.
Ethical Stewardship
True or False:
It takes time for individual and collective efforts to build and form lasting values in organizations.
True
