Module 4

Question 1

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)

Answer 1

Corporate Governance

Question 2

The governing body elected by the stockholders that exercises the corporate powers of a corporation, conducts all its business and controls its properties

Answer 2

Board of Directors

Question 3

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

Answer 3

Management

Question 4

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

Answer 4

Independent Director

Question 5

a director who is also the head of a department or unit of the corporation or performs any work
related to its operation.

Answer 5

Executive Director

Question 6

A director who is not the head of a department or unit of the corporation nor performs any work related to its operation

Answer 6

Non-executive Director

Question 7

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

Answer 7

Non-audit work

Question 8

these are rules of a corporation established by the Board of Directors.

Answer 8

By-laws

Question 9

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.

Answer 9

Internal Control

Question 10

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.

Answer 10

Internal Control System

Question 11

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.

Answer 11

Internal Audit

Question 12

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.

Answer 12

Internal Audit Department

Question 13

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.

Answer 13

Internal Auditor

Question 14

Board of Directors Responsibilities

Answer 14

• Primarily responsible for the governance of the corporation
• Sets the policies for the accomplishment of corporate objectives
• Provides an independent check on management

Question 15

Composition of the Board

Answer 15

• 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

Question 16

** 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

Answer 16

– 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

Question 17

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.

Answer 17

PRESIDENT
TREASURER
SECRETARY

two (2) or more positions

Question 18

Duties and Responsibilities
of the Chairperson

• The duties and responsibilities of the Chairperson in relation to the Board may include the following:

Answer 18

– 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

Question 19

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 ________________________

Answer 19

• separate; power, increased accountability and better capacity
• Chairperson; CEO
• independent views and perspectives

Question 20

Qualifications of Directors

Answer 20

• 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.

Question 21

Additional Qualifications of Directors

In addition, the corporation may provide additional qualifications:

Answer 21

• 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

Question 22

PERMANENT Disqualification of Directors

Answer 22

• 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.

Question 23

TEMPORARY Disqualification of Directors

Answer 23

• 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

Question 24

Qualifications of Independent Directors

Answer 24

• 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).

Question 25

Disqualifications of Independent Directors

Answer 25

• 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

Question 26

Responsibilities of the Director

Answer 26

• 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

Question 27

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.

Answer 27

Board Committee:
* Audit Committee
* Nomination Committee
* Compensation/Remuneration Committee

Others:
* Governance Committee
* Related Party Transactions Committee
* Risk Oversight Committee

Question 28

Board Committees

Answer 28

• Audit Committee
• Nomination Committee
• Compensation or Remuneration Committee

Question 29

• 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.

Answer 29

Audit Committee

Question 30

Audit Committee Responsibilities

Answer 30

• 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.

Question 31

• 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

Answer 31

Nomination Committee

Question 32

• 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

Answer 32

Compensation or Remuneration Committee

Question 33

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 _______________

Answer 33

• board directors
• independent directors
• Risk Oversight Committee
• non- executive directors
• independent directors

Question 34

The Corporate Officers

Answer 34

• Corporate Secretary
• Compliance Officer

Question 35

Corporate Secretary Qualifications and Responsibilities

Answer 35

• 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

Question 36

• 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

Answer 36

Corporate Officer: Compliance Officer

Question 37

Compliance Officer Qualifications and Responsibilities

Answer 37

• 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

Question 38

An _____________ is a protection policy for shareholders, preventing corporations from paying less than what the company is worth.

Answer 38

appraisal right

Question 39

Two positions can be held by a person at the same time except a _________ and _________ and _________________________.

Answer 39

president; secretary; president and treasurer

Question 40

A fine _____________________ shall be imposed for violating the code, subject to due notice and hearing.

Answer 40

not more than Php 200,000

Question 41

OECD

Answer 41

Organization for Economic Cooperation and Development

Question 42

A unique forum where governments promote economic growth, prosperity, and sustainable development.

Answer 42

OECD: Organization for Economic Cooperation and Development

Question 43

OECD Responsibilities

Answer 43

• 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.

Question 44

OECD / RCCG (Revised Code of Corporate Governance)

Any question that may arise shall be resolved in favor of promoting:

Answer 44

1. TRANSPARENCY
2. ACCOUNTABILITY
3. RESPONSIBILITY
4. FAIRNESS

to the stockholders and investors of the corporation

Question 45

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.

Answer 45

• to support economic efficiency, sustainable growth and financial stability.
• non-binding; detailed prescriptions
• develop their own
  frameworks

Question 46

G20/OECD Principles of
Corporate Governance

Answer 46

1. Ensuring the basis for an effective corporate governance framework
2. The rights and equitable treatment of shareholders and key ownership functions
3. Institutional investors, stock markets, and other intermediaries
4. The role of stakeholders in corporate governance
5. Disclosure and transparency
6. The responsibilities of the board

Question 47

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.

Answer 47

Ensuring the basis for an effective corporate governance framework

Question 48

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.

Answer 48

The rights and equitable treatment of shareholders and key ownership functions

Question 49

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.

Answer 49

Institutional investors, stock markets, and other intermediaries

Question 50

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.

Answer 50

The role of stakeholders in corporate governance

Question 51

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.

Answer 51

Disclosure and transparency

Question 52

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.

Answer 52

The responsibilities of the board

Question 53

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

Answer 53

• equity and/or debt securities
• Fifty Million Pesos; two hundred stockholders; one hundred shares
• covered
• secondary licenses
  – Financing Companies,

Question 54

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

Answer 54

c) 5 and 15

Question 55

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

Answer 55

a) I only

Question 56

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

Answer 56

b) Appraisal Right

Question 57

The minimum directors for any Board Committees are:

a) 3
b) 4
c) 5
d) 6

Answer 57

a) 3

Question 58

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

Answer 58

C) Organization for Economic Cooperation and Development

Question 59

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

Answer 59

a. Board
b. Management
c. organizational and procedural controls
d. independent audit mechanism

Question 60

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 ____________________.

Answer 60

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

Question 61

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

Answer 61

• 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

Question 62

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.

Answer 62

• tele/video conferencing
• Absence
• on or before January 30; Corporate Secretary’s certification

Question 63

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.

Answer 63

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

Question 64

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.

Answer 64

• attract and retain the services
• structured; corporate and individual performance
• formal and transparent procedures
• No director

Question 65

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

Answer 65

• 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

Question 66

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 _________________________________.

Answer 66

• The Board is primarily accountable to the stockholders.; quarterly basis
• accurate and timely information
• financial reporting and internal control

Question 67

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:

Answer 67

• EXTERNAL AUDITOR; independent audit

–It does not conflict with his duties as an independent auditor
–It does not pose a threat to his independence

Question 68

Material information include:

Answer 68

• 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

Question 68

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

Answer 68

• rotated or changed every five (5) years or earlier
• annual and current reports.
• comments or views

Question 69

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

Answer 69

• transparency; difficult
• publicly and timely disclosed.
• Current Reports, Beneficial Ownership Reports

Question 70

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

Answer 70

• assessment process
• Chairperson, individual directors, board as a whole and the board committees
• self-rating

Question 71

any person who is directly or indirectly the beneficial owner of more than ten percent (10%) of any class of its equity security

Answer 71

Substantial shareholder

Question 72

Administrative Sanctions

Answer 72

• 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.

Question 73

another company which is: (a) its holding company; (b) its subsidiary; and (c) a subsidiary of its holding company

Answer 73

Related company

Question 74

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:

Answer 74

• 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

Question 75

Role of Stakeholders

Companies are also encouraged to have policies on the following:

Answer 75

• 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

Question 76

Other Corporate Governance Concepts

Answer 76

• Comply or Explain Approach
• Principle of Proportionality
• No One Size Fits All

Question 77

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.

Answer 77

Comply or Explain Approach

Question 78

The applicability of corporate governance recommendations would depend on a corporation’s size, risk profile and complexity of operations

Answer 78

Principle of Proportionality

Question 79

Corporations are given flexibility in determining and establishing their own corporate governance arrangements and policies.

Answer 79

No One Size Fits All