Module 4 Flashcards
It is the framework of rules,systems and processes in the corporation that governs the performance by the Board of Directors and Management of their respective duties and responsibilities to stockholders and other stakeholders which include, among others, customers, employees, suppliers, financiers, government and community in which it operates. (As amended by SEC Memorandum Circular No. 9, Series of 2014)
Corporate Governance
The governing body elected by the stockholders that exercises the corporate powers of a corporation, conducts all its business and controls its properties
Board of Directors
The body 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
Management
a person who is independent of management and free from any business or other relationship which could, or could reasonable be
perceived to, materially interfere with his exercise of independent
judgment in carrying out his responsibilities as a director
Independent Director
a director who is also the head of a department or unit of the corporation or performs any work
related to its operation.
Executive Director
A director who is not the head of a department or unit of the corporation nor performs any work related to its operation
Non-executive Director
The other services offered by an external auditor to a corporation that are not directly related and relevant to its statutory audit functions, such as, accounting, payroll, bookkeeping, reconciliation, computer project management, data processing or information technology outsourcing services, internal audit and other services that may compromise the independence and objectivity of an external auditor
Non-audit work
these are rules of a corporation established by the Board of Directors.
By-laws
a system established by the Board and Management for the
accomplishment of the corporation’s objectives, the efficient operations of its business, the reliability of its financial
reporting, and faithful compliance with applicable laws, regulations
and internal rules.
Internal Control
the framework under which internal controls are developed and implemented (alone or in concert with other policies or procedures) to manage and control a particular risk or business activity, or combination of risks or business activities, to which the corporation is exposed.
Internal Control System
An independent and objective assurance activity designed to add value to and improve the corporation’s operations, and help it accomplish its objectives by providing a systematic and disciplined approach in the evaluation and improvement of the effectiveness of risk management, control and governance processes.
Internal Audit
A department or unit of the corporation and its consultants, if any, that provide independent and objective assurance services, in order to add value to and improve the corporation’s operations.
Internal Audit Department
The highest position in the corporation responsible for internal audit activities. If internal audit activities are performed by outside service providers, he is the person responsible for overseeing the service contract, the overall quality of these activities, and follow up of engagement results.
Internal Auditor
Board of Directors Responsibilities
- Primarily responsible for the governance of the corporation
- Sets the policies for the accomplishment of corporate objectives
- Provides an independent check on management
Composition of the Board
- The Board shall be composed of at least five (5) but not more than fifteen (15).
- It must have at least **two (2) independent directors **or equivalent to 20% but in no case less than two (2).
– For Independent Directors, the requirements of Section 38 of the SRC should be complied with. - Could be a combination of both executive and nonexecutive directors
– Purpose: So that no director or small group of directors can dominate the decision-making process - Good practice to have diversity in board
– Diversity can be gender, age, experience, qualifications, skills and competence - Internationally recognized best practice
– Majority of the directors is non executive, including independent directors
– Directors should be properly oriented and trained in matters relevant to their role
** Board of Directors: Board Seat Limit**
- In determining the board seat limit or the maximum directorships of a director, the following should be considered:
– the capacity of a director to _______________________; and
– any potential ____________ that may arise from the concurrent directorships - For other covered corporations, a director can be elected as an independent director to a maximum of ______________________ (SEC Memorandum Circular No. 9, Series of 2011)
- Internationally recognized __________
– Non-executive directors should hold _________ in a maximum of _____________________ to ensure that they have sufficient time to effectively perform their duties and responsibilities
– diligently and efficiently perform his duties and responsibilities
– conflict of interest
* five (5) companies within a conglomerate
* best practice
– directorships; five (5) publicly-listed companies
President, Secretary and Treasurer (Section 25)
Immediately after their election, the directors of a corporation must
formally organize by the election of the following:
___________ – who shall be a Director
___________ – may or may not be a Director
____________ – resident and citizen of the Philippines other officers as may be provided for in the by-laws
IMPORTANT: Any ____________ may be held concurrently by the same person, except that no one shall act as PRESIDENT and SECRETARY or as PRESIDENT and TREASURER at the same time.
PRESIDENT
TREASURER
SECRETARY
two (2) or more positions
Duties and Responsibilities
of the Chairperson
- The duties and responsibilities of the Chairperson in relation to the Board may include the following:
– Ensure that board meetings are held in accordance with the by-laws or as the Chairperson may deem
necessary
– Supervise the preparation of the agenda of the meeting in coordination with the Corporate Secretary, taking into consideration the suggestions of the CEO, Management and the directors; and
– Maintain qualitative and timely lines of communication and information between the Board and Management
Board of Directors: Chairperson and CEO
- The roles of Chairperson and CEO should, as much as practicable, be _______ to foster an appropriate balance of ____________________ for independent decision making
- A clear delineation of functions should be made between
the ____________ and _____ upon their election - If the Chairperson and CEO are one and the same person, there should be proper checks and balances in place to ensure that the Board gets the benefit of ________________________
- separate; power, increased accountability and better capacity
- Chairperson; CEO
- independent views and perspectives
Qualifications of Directors
- Owner or holder of at least one (1) share of capital stock.
- Majority of the directors must be residents of the Philippines.
- They must be elected by the owners/holders of at least the majority of the outstanding capital stock.
Additional Qualifications of Directors
In addition, the corporation may provide additional qualifications:
- College education or equivalent academic degree
- Practical understanding of the business of the corporation
- Membership in good standing in relevant industry / business
- Previous business experience
PERMANENT Disqualification of Directors
- Any person convicted by final judgment of any crime or misconduct involving purchase or sale of Securities, moral conduct.
- Any person earlier elected as independent director who becomes
an officer, employee, or consultant. - Any person judicially declared as insolvent.
- Any person found guilty by final judgment of a foreign court or equivalent financial regulatory authority.
- Conviction of final judgment punishable by imprisonment for more than six (6) years or violation of the Code committed within five (5) years prior to the date.
TEMPORARY Disqualification of Directors
- Refusal to comply with the disclosure requirements
- Absence in more than 50% of all regular and special meetings
- Dismissal or termination for cause as director of any corporation
- If any of the judgments cited in the grounds for permanent disqualification has not yet become final
Qualifications of Independent Directors
- He shall have at least one (1) share of stock of the corporation.
- He shall be at least a college graduate.
- He shall have been engaged or exposed to business of the corporation for at least five (5) years / SEC 17-C.
- He shall possess integrity/probity.
- He must be elected during the annual stockholders’ meeting (ASM).
Disqualifications of Independent Directors
- He is a director / officer / substantial stockholder of the corporation or of its related companies
- He is acting as a nominee or representative of a substantial
shareholder (10% of the outstanding capital stock) - He is a relative of any director / officer / substantial shareholder
- He has been employed in any executive capacity / professional adviser by that public company within the last five (5) years
-
Failed to attend at least 50% of the Board meetings without any
justifiable cause
Responsibilities of the Director
- Conduct fair business
transactions - Act judiciously
- Exercise independent
judgment - Devote time and attention
- Observe confidentiality
- Working knowledge of the statutory and regulatory requirements
- Internal Control Responsibilities of the Board
Committees
The Board shall constitute the proper committees to assist it in effectively performing its functions:
Other recommended committees:
It is recognized good practice for all committees to have separate
charters clearly defining the structure of the committee and its
roles and accountabilities.
Board Committee:
* Audit Committee
* Nomination Committee
* Compensation/Remuneration Committee
Others:
* Governance Committee
* Related Party Transactions Committee
* Risk Oversight Committee
Board Committees
- Audit Committee
- Nomination Committee
- Compensation or Remuneration Committee
- Composed of at least 3 directors, preferably with accounting and finance backgrounds
- One shall be an independent director and another with audit experience
- The Chairman should be an independent director.
Audit Committee
Audit Committee Responsibilities
- Assist the Board in the performance of its oversight responsibility
- Review the annual internal audit plan
- Organize an internal audit department
- Monitor, evaluate, and review the internal control system, financial statements, and reports.
- At least three (3) members
- One should be an independent director
- Reviews and evaluates the qualifications of all persons nominated to the Board and other appointments requiring Board approval
- Assesses the effectiveness of the Board’s processes and procedures in the election or replacement of directors
- Determines the nomination and election process and procedures for the company’s directors
Nomination Committee
- At least three (3) members
- One should be an independent director
- Establishes a formal and transparent procedure for developing a policy on remuneration of directors and officers
- Ensures that compensation is consistent with the corporation’s culture, strategy and the business environment in which it operates
Compensation or Remuneration Committee
Board of Directors: Committees
Internationally Recognized Practices:
* Board Committees are composed entirely of ___________
* Chairperson of all Committees should be
_______________
* Companies should have a separate board level ____________
* Audit Committee shall be composed entirely of _____________
* Nomination Committee shall be composed
entirely of _______________
- board directors
- independent directors
- Risk Oversight Committee
- non- executive directors
- independent directors
The Corporate Officers
- Corporate Secretary
- Compliance Officer
Corporate Secretary Qualifications and Responsibilities
- A Filipino and resident of the Philippines
- An Officer of the corporation
- Be responsible for the safekeeping and preservation of the minutes
- Have a working knowledge of the
operations - He can also be the Compliance Officer
- Shall have the rank of at least vice-president
- In the absence of an appointed compliance officer, the corporate secretary shall act as compliance officer
- Report directly to the Chairman of the Board
Corporate Officer: Compliance Officer
Compliance Officer Qualifications and Responsibilities
- Will report directly to the Chair
- Monitor compliance by the corporation with the SRC
- Appear before the Commission when summoned
- Issue a certification every January 30th
An _____________ is a protection policy for shareholders, preventing corporations from paying less than what the company is worth.
appraisal right
Two positions can be held by a person at the same time except a _________ and _________ and _________________________.
president; secretary; president and treasurer
A fine _____________________ shall be imposed for violating the code, subject to due notice and hearing.
not more than Php 200,000
OECD
Organization for Economic Cooperation and Development
A unique forum where governments promote economic growth, prosperity, and sustainable development.
OECD: Organization for Economic Cooperation and Development
OECD Responsibilities
- Ensure the basis of an effective corporate governance framework.
- The rights of shareholders and key ownership functions.
- The equitable treatment of shareholders.
- The role of stakeholders in corporate governance.
- Disclosure and transparency.
- The responsibilities of the board.
OECD / RCCG (Revised Code of Corporate Governance)
Any question that may arise shall be resolved in favor of promoting:
- TRANSPARENCY
- ACCOUNTABILITY
- RESPONSIBILITY
- FAIRNESS
to the stockholders and investors of the corporation
G20/OECD Principles of Corporate Governance
- The Principles are intended to help policy makers evaluate and improve the legal, regulatory, and institutional framework for corporate governance, with a view _________________________________.
- The Principles are developed with an understanding that
corporate governance policies have an important role to play
in achieving broader economic objectives with respect to
investor confidence, capital formation and allocation. - The Principles are ________ and do not aim at ____________ for national legislation.
- The Principles aim to provide a robust but flexible reference for
policy makers and market participants to ______________ for corporate governance.
- to support economic efficiency, sustainable growth and financial stability.
- non-binding; detailed prescriptions
- develop their own
frameworks
G20/OECD Principles of
Corporate Governance
- Ensuring the basis for an effective corporate governance framework
- The rights and equitable treatment of shareholders and key ownership functions
- Institutional investors, stock markets, and other intermediaries
- The role of stakeholders in corporate governance
- Disclosure and transparency
- The responsibilities of the board
The corporate governance framework should promote transparent and fair markets, and the efficient allocation of resources. It should be consistent with the rule of law and support effective
supervision and enforcement.
Ensuring the basis for an effective corporate governance framework
The corporate governance framework should protect and facilitate the exercise of shareholders’ rights and ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.
The rights and equitable treatment of shareholders and key ownership functions
The corporate governance framework should provide sound incentives throughout the investment chain and provide for stock markets to function in a way that contributes to good corporate governance.
Institutional investors, stock markets, and other intermediaries
The corporate governance framework should recognize the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.
The role of stakeholders in corporate governance
The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.
Disclosure and transparency
The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.
The responsibilities of the board
Revised Code of Corporate Governance
Covered Corporations: Registered corporations and branches or subsidiaries of foreign corporations operating in the Philippines:
- That sell ___________________ to the public that are required to be registered with the Commission;
- Have assets in excess of ____________ and at least _______________ who own at least _______________ each of equity securities [Public Company, also see SRC Rule 3 (M)].
- Whose equity securities are listed on an Exchange:
– Already ______ by the Code of Corporate Governance for Publicly Listed Companies - Are grantees of ___________ from the Commission (ex. CRMD, MSRD)
– Exception: For ______________, see SEC Memorandum Circular No. 5, Series of 2010
- equity and/or debt securities
- Fifty Million Pesos; two hundred stockholders; one hundred shares
- covered
- secondary licenses
– Financing Companies,
The Board shall be composed of at least _____ but not more than _____.
a) 5 and 10
b) 10 and 15
c) 5 and 15
d) 2 or equivalent of 20% maximum of 10
c) 5 and 15
Two positions can be held by a person at the same time
I. Secretary and Treasurer
II. President and Treasurer
III. President and Secretary
a) I only
b) II only
c) III only
a) I only
This is the protection policy for shareholders that prevents corporations from paying less than what the company is worth.
a) Pre-emptive right
b) Appraisal Right
c) Protective Right
d) Rights for Payments
b) Appraisal Right
The minimum directors for any Board Committees are:
a) 3
b) 4
c) 5
d) 6
a) 3
The OECD is a unique forum where governments promote economic growth and sustainable
development. OECD stands for?
A) Organization for Economic Corporation and Development
B) Organized Economic Cooperation Development
C) Organization for Economic Cooperation and Development
D) Organized Economy Cooperation Development
C) Organization for Economic Cooperation and Development
Internal Control Responsibilities
The control environment of the corporation consistsof:
a. the ________ which ensures that the corporation is properly and effectively managed and supervised;
b. a ___________ that actively manages and operates the corporation in a sound and prudent manner;
c. the _________________________ supported by effective management information and risk management reporting systems; and
d. an ____________________ to monitor the adequacy and effectiveness of the corporation’s governance, operations, and information systems, including the reliability and integrity of financial and operational information, the effectiveness and efficiency of operations, the safeguarding of assets and compliance with laws, rules, regulations and contracts
a. Board
b. Management
c. organizational and procedural controls
d. independent audit mechanism
The minimum internal control mechanisms for the performance of the Board’s oversight responsibility may include:
a. Definition of the duties and responsibilities of the CEO who is ultimately accountable for the _________________________.
b. Selection of the person who possesses the ____________________ essential for the position of CEO
c. Evaluation of proposed __________________________
d. Selection and appointment of qualified and competent
____________________
e. Review of the corporation’s ___________________________________ for employees and ____________________.
a. corporation’s organizational and operational controls
b. ability, integrity and expertise
c. senior management appointments
d. management officers
e. human resource policies, conflict of interests situations, compensation program; managerial succession plan
Internal Control Responsibilities
The scope and particulars of an Internal Control System may differ across organizations depending on:
The Board may appoint an Internal Auditor to perform the audit functions and may require him to report to a level in the organization that allows the internal audit activity to fulfill its mandate
- Nature and complexity of the business and the business culture
- Volume, size and complexity of operations
- Degree of Risks involved, degree of centralization and delegation of authority
- Extent and effectiveness of information technology
- Extent of regulatory compliance
Board Meetings and Quorum Requirement
- Members of the Board should attend its regular or special meetings in person or via tele/video conferencing
–> See SEC Memorandum Circular No. 15 Series of 2001 for guidelines on the conduct of tele/video conferencing - Independent Directors should always attend meetings.
–> __________ will not affect quorum requirement - To monitor the directors’ compliance with the attendance requirements, the corporation shall submit to the Commission, ___________________of the following year, a _____________________ on the attendance of directors to board meetings.
- tele/video conferencing
- Absence
- on or before January 30; Corporate Secretary’s certification
Board Meetings
Sec. 53. Regular and special meetings of directors or trustees.
_____________________________, unless the by-laws provide otherwise.
_______________________________________________________________ or as provided in the by laws.
____________________________________________________, unless the by-laws provide otherwise.
Regular meetings of the board of directors or trustees of every corporation shall be held monthly
Special meetings of the board of directors or trustees may be held at any time upon the call of the president
Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines
Remuneration
- Levels of remuneration of the corporation should be sufficient to be able to _______________ of qualified and competent directors and officers.
- A portion of the remuneration of executive directors may be __________ or be based on _______________________
- Corporations may establish ____________________ for the development of a policy on remuneration depending on the particular needs of the corporation
- __________ should participate in deciding on his remuneration.
- attract and retain the services
- structured; corporate and individual performance
- formal and transparent procedures
- No director
Adequate and Timely Information
- To enable the members of the Board to properly fulfill their duties and responsibilities, ___________________________________.
- Further inquiries may have to be made by the director to properly perform his duties and responsibilities. Hence, them _________________________________
- ____________________________________ at the corporation’s expense
- Management should provide them with complete adequate and timely information
- director should be given independent access to Management and the Corporate Secretary
- Directors should have access to independent professional advice
Accountability and Audit
- __________________________. It should provide them with a balanced and comprehensible assessment of the corporation’s performance, position and prospects on a _____________.
- Management should provide all members of the Board with _____________________ to enable the Board to perform its functions
- Management should formulate, under the supervision of the Audit Committee the rules and procedures on _________________________________.
- The Board is primarily accountable to the stockholders.; quarterly basis
- accurate and timely information
- financial reporting and internal control
Accountability and Audit:
External Auditor
- After consulting with the Audit Committee, the Board shall recommend to the stockholders an _______________ duly accredited by the Commission, who shall undertake an _________________ of the corporation and provide an objective assurance on the manner by which the financial statements shall be prepared and presented to the stockholders.
- The External Auditor shall not, at the same time, provide internal audit services to the corporation.
- Non-audit work can be given on the following conditions:
- EXTERNAL AUDITOR; independent audit
–It does not conflict with his duties as an independent auditor
–It does not pose a threat to his independence
Material information include:
- Earnings results,
- Acquisition and disposition of assets
- Off balance sheet transactions
- Related party transactions
- Direct and indirect remuneration of members of the Board and Management
All required information should be disclosed through the appropriate Exchange mechanisms and submissions to the Commission
Accountability and Audit:
External Auditor
- The External Auditor should be ________________________, or the signing partner of the external auditing firm should be changed with the same frequency
- If the external auditor resigns, is dismissed or ceases to perform his services, the reason/s for and the date of effectivity of such action shall be reported in the corporation’s _______________.
- If the external auditor believes that statements made in any report filed to the Commission is incorrect or incomplete, he shall give his ________________ in said report
- rotated or changed every five (5) years or earlier
- annual and current reports.
- comments or views
Disclosure & Transparency
- The essence of corporate governance is ____________. The more transparent the internal workings of the corporation are, the more ___________ it will be for mismanagement to take place.
- It is therefore essential that all material information about the corporation which could adversely affect its viability or the interests of the stockholders and other stakeholders should be ____________________ (As amended by
SEC MC 9, s. 2014) - The Board shall therefore commit at all times to full disclosure of
material information dealings through the filing of ________________________ and other reportorial
requirements
- transparency; difficult
- publicly and timely disclosed.
- Current Reports, Beneficial Ownership Reports
Board Assessment
- The best measure of a board’s performance is through an
______________. - Assessment should be on the performance of the ________________________.
- Assessment can be made through _________, through an independent third party or any other available means
- assessment process
- Chairperson, individual directors, board as a whole and the board committees
- self-rating
any person who is directly or indirectly the beneficial owner of more than ten percent (10%) of any class of its equity security
Substantial shareholder
Administrative Sanctions
- Maximum Php 200,000.00 fine for every year of violation
- Any violation of the SRC punishable by a specific penalty shall be assessed separately and shall not be covered by the aforementioned fine.
another company which is: (a) its holding company; (b) its subsidiary; and (c) a subsidiary of its holding company
Related company
Role of Stakeholders
- There is now increasing recognition of the role of stakeholders in corporation and part of good governance is having in place policies that protect and address the needs of stakeholders. This includes having policies and practices that:
- Address customers’ welfare
- Ensure an environment friendly value chain
- Promote good supplier/contractor selection procedures
- Encourage proper interaction with local communities in which the company operates
- Promote Anti-corruption
It is also encouraged that companies have a separate report/section on Environment, Social and Governance (ESG) concerns
Role of Stakeholders
Companies are also encouraged to have policies on the following:
- Whistle Blowing Policy
- Insider Trading Policy
- Related Party Transactions Policy
- Conflict of Interest Policy
- Policy relating to Health, Safety and Welfare of Employees
Companies should also have a designated Investor Relations
Officer, whose contact information must be publicly disclosed
Other Corporate Governance Concepts
- Comply or Explain Approach
- Principle of Proportionality
- No One Size Fits All
This approach combines voluntary compliance with mandatory disclosure. Companies do not have to comply with the recommended CG practices but they must provide an explanation for the non- compliance and disclose how the over-all CG Principle is still being achieved.
Comply or Explain Approach
The applicability of corporate governance recommendations would depend on a corporation’s size, risk profile and complexity of operations
Principle of Proportionality
Corporations are given flexibility in determining and establishing their own corporate governance arrangements and policies.
No One Size Fits All
