ggsr prelim

8/13/2019 GGSR Prelim

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BASICS OF

CORPORATE

GOVERNANCE........!!


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ean ng o corporate

governance!!

Corporate governance is the setof processes, customs, policies, laws, and institutionsaffecting the

way a corporation(or company) is directed, administered or

controlled.

Corporate governancealso includes the relationships among the

many stakeholdersinvolved and the goals for which the corporationis governed. The principal stakeholders are the shareholders,

the board of directors, executives, employees, customers, creditors,

suppliers, and the community at large
http://en.wikipedia.org/wiki/Business_processhttp://en.wikipedia.org/wiki/Custom_(law)http://en.wikipedia.org/wiki/Policieshttp://en.wikipedia.org/wiki/Lawshttp://en.wikipedia.org/wiki/Institutionshttp://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Companyhttp://en.wikipedia.org/wiki/Governancehttp://en.wikipedia.org/wiki/Stakeholder_(corporate)http://en.wikipedia.org/wiki/Shareholderhttp://en.wikipedia.org/wiki/Board_of_directorshttp://en.wikipedia.org/wiki/Employeeshttp://en.wikipedia.org/wiki/Creditorhttp://en.wikipedia.org/wiki/Creditorhttp://en.wikipedia.org/wiki/Employeeshttp://en.wikipedia.org/wiki/Board_of_directorshttp://en.wikipedia.org/wiki/Shareholderhttp://en.wikipedia.org/wiki/Stakeholder_(corporate)http://en.wikipedia.org/wiki/Governancehttp://en.wikipedia.org/wiki/Companyhttp://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Institutionshttp://en.wikipedia.org/wiki/Lawshttp://en.wikipedia.org/wiki/Policieshttp://en.wikipedia.org/wiki/Custom_(law)http://en.wikipedia.org/wiki/Business_process


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Good orporate GovernanceIt means governing the company in a value based manner.

OBJECTIVE - Enhancement of shareholder value keeping in view theinterests of other stakeholders

Key Constitutes:ShareholdersBoard of directorsManagement

Corporate Governance involves Promoting-

Transparency- Everything happen in the company should known toall the stakeholders.

Accountability- The management is accountable for its decision.

Equanimity- (Equitable Treatment) Rights of all the shareholders areequal, regardless of major and minor shareholding.


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MEANING OF

CORPORATE!!

A corporation is an

organization created

(incorporated) by a group

of shareholders who have

ownership of thecorporation.

The elected Board of

directors appoint and

oversee management ofthe corporation.


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Governance.

..meaning.!! defines Governance as

the act, manner, fact or

function of governing,

sway, control

The word has Latin

origins that suggest the

notion of 'steering'. It

deals with the processes

and systems by which anorganization or society

operates.


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Corporate Governance

Corporate governance is

a relationship among stakeholders that is used to

determine and control the strategic direction and

performance of organizations

concerned with identifying ways to ensure that

strategic decisions are made effectively

used in corporations to establish order between the

firms owners and its top-level managers


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Corporate

governancespecifies the

distribution of

rights Andresponsibililities

among different

participants in

corporations.


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CG means a system

by which corporate

entities are undercontrol and are

directed

CG attempts to put acheck on the

working of the

organization.


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Definition of CG..!!

CG denotes

direction and

control of the

affairs of acompany and it is

the relationship

between theowners ,directors

and managers.


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Corporate Governance is a relationship among

stakeholders that is used to determine and control the

strategic direction and performance of organizations



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Corporate Governance is a relationship amongstakeholders that is used to determine and control

the strategic direction and performance of

organizations

Concerned with identifying ways to ensurethat strategic decisions are made effectively



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Used in corporations to establish order betweenthe firms owners and its top-level managers

Corporate Governance is a relationship amongstakeholders that is used to determine and control

the strategic direction and performance of

organizations

Concerned with identifying ways to ensurethat strategic decisions are made effectively



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Main features of CG..!!

1. It is a set of system and

processes which embraces

organization structure.

2. Ensures best interest of the

stakeholders

3. Denotes direction leadership

4. explains relationship

between directors , owners

and managers.

5. Attempts to put a check onworking ofa n organization.


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Features continued

6. Protects interests of bond

holders and society.

7. To make balance between

economic and social goals.

8. Ensures timely flow of all info. to board of directors.

9. Ensures sound system of risk

management and internal

control.

10. Leads to transparency inworking of corporate affairs.


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Scope of CG!!

IT provides the

structure for

setting

objectives andproviding means

to attain them.


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Benefits of good CG!!

1) REDUCES RISK

2) STIMULATES PERFORMANCE

3) IMPROVES ACCESS TO

CAPITALMARKETS

4) ENHANCES THE

MARKETIBILITY OF GOODS

AND SERVICES

5) IMPROVES LEADERSHIP

6) DEMONSTRATES

TRANSPARENCY AND SOCIAL

ACCOUNTABILITY7) PROMOTES

TRANSPARENCYINDECISIONM

AKING PROCESS


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STEPS FOR MAKING CORPORATE

GOVERNANCE EFFICIENT!!

i. Commitment of the

management

ii. Legal & administrative

framework

iii. Transparency in decision

making

iv. Proper implementation of codes

v. Improving the system

vi. Reviewing banking system

vii. Making laws effective

viii. Strict compliance

ix. Increasing role of independent

directors

x. Highlighting governance role.


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ACTIVITY TIME.!!

CORPORATE

GOVERNANCE IS THE

BLOOD THAT FILLS

THE VEIN OF

TRANSPARENTCORPORATE

DISCLOSURE IN THE

LIGHT OF THIS

EXPLIAN THEIMPORTANCE OF CG.

Objecti es of good corporate


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Objectives of good corporate

governance

Objectives of good

corporate governance

Strengthen management

oversight functions and

accountability

Balance skills, experience

and independence on the

board appropriate to the

nature and extent ofcompany operations

E t bli h d t


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Establish a code to

ensure integrity

Safeguard the

integrity ofcompany reporting

Risk management

and internal control

Disclosure of allrelevant and

material matters

Recognition and

preservation of

needs of

shareholders


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More efficient allocation of capital .

Encourage higher levels of efficiency,

quality, and competitiveness throughout

the national economy.

Boost private sector development.

Create more jobs.

Improve quality of living.

Poverty alleviation of a Nation.


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Attracts investors

Lowers costs of capital

Improves performance, efficiency

Reduces risks of financial crisis

Promotes sustainable growth

Engages stakeholders

Defines responsibilities in Serving communities


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A. Evo lu tion o f Corporate Governance:

Wave of High Pro fi le Scandals, Fraud, Crisis

1990s - CEO dismissals in the US (IBM, Kodak, etc.);

Financial collapse of UK corporates (Polly Peck, Bank of

Credit and Commerce Intl, Maxwell Group,etc.)

1997 - Asian Financial Crisis

2000 - Massive bankruptcies and criminal malfeasance

(Enron, Worldcom, AIG, AOL, Arthur Andersen, etc.)

2008 - US Sub-prime Crisis goes global

2011 - Greece crises and impacts Eurozone

2012 - JP Morgans sloppy deals, Barclays Libor-rigging scandal


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A. React ions /Intervent ions to address cris is

1992 - The Cadbury Report issued. Defined Boards responsibilities

and accounting systems.

2000 - OECDs principles of corporate governance issued

2002 - Sarbanes and Oxley passed into law in the US

2008 - Bailouts of too big to fail corporates by governmentse.g. Troubled Asset Relief Program in the US

2009 - Dodd-Frank Wall Street Reform and Consumer Protection Act

Current - tighter monetary and financial policies, risk management


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B. Corpo rate Governance in the Phi l ippines

2001 - World Bank & IMF Report: Corporate Governance

Assessment of the Philippines based on OECD Principles

High concentration of wealth by limited number of families

Weak enforcement of corporate law and capital market regulations

Weak corporate boards

Need to professionalize accounting and auditing sectors

Poor disclosures of financial and non-financial information

Unprotected rights of minority shareholders

Conclusion: Crisis in Leadership


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B. SEC, PSE and BSP Response

SEC issued Corporate Governance Code in 2002, amended in 2009

Required training and defined disqualifications of Directors

CG scorecard self-assessment issued and mandated

Required accreditation of external auditors, term of managing

partner limited

Required setting up of various Board Committees

Imposed minimum of 2 independent directors in Boards

Required Audit Committees to Self-Assess Performance

Conclusion: More Regulation vs. Enforced Regulation


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Separation of Ownership and Managerial Control


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Basis of the modern corporation



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Shareholders purchase stock, becoming...

Residual Claimants



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- Shareholders reduce risk efficiently by holdingdiversified portfolios


Residual Claimants



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Residual Claimants

Professional managers contract to provide

decision-making



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Residual Claimants


decision-making

Modern public corporation form leads to efficientspecialization of tasks



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decision-making

- Risk bearing by shareholders

- Strategy development and decision-making bymanagers



Residual Claimants

Modern public corporation form leads to efficientspecialization of tasks



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Agency Theory

An agency relationship exists

when:


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An agency relationship exists when:

Shareholders

(Principals)

Firm Owners

Agency Theory


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Shareholders

(Principals)

Firm Owners

Managers(Agents)

Decision

Makers

Hire

Agency Theory


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Shareholders

(Principals)

Firm Owners

Agency RelationshipRisk Bearing Specialist

(Principal)

Managers(Agents)

Decision

Makers

which creates

Managerial Decision-Making Specialist

(Agent)

Hire

Agency Theory


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The Agencyproblem occurs when:

- The desires or goals of the principal and agent conflict

and it is difficult or expensive for the principal to verify

that the agent has behaved appropriately

Agency Theory


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- The desires or goals of the principal and agent conflictand it is difficult or expensive for the principal to verify


Example:Overdiversification because increased productdiversification leads to lower employment risk for

managers and greater compensation

Agency Theory


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- The desires or goals of the principal and agent conflictand it is difficult or expensive for the principal to verify


Solution:Principals engage in incentive-based performance

Example:Overdiversification because increased productdiversification leads to lower employment risk for

managers and greater compensation

contracts, monitoring mechanisms such as the

board of directors and enforcement mechanisms

such as the managerial labor market to mitigate the

agency problem

Agency Theory


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Principals may engage in moni to r ingbehavior to assess

the activities and decisions of managers

- However, dispersed shareholding makes it difficult and

and inefficient to monitor managements behavior

Agency Theory


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Principals may engage in moni to r ingbehavior to assess

the activities and decisions of managers

- However, dispersed shareholding makes it difficult and

and inefficient to monitor managements behavior

For example:Boards of Directors have a fiduciaryduty to shareholders to monitor management

- However, Boards of Directors are often accused ofbeing lax in performing this function

Agency Theory


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Risk bearing specialist (principal)

pays compensation to a managerial

decision-making specialist (agent)

Agency Relationship: Owners and Managers

An Agency

Relationship

Managers

(Agents)

Shareholders

(Principals)

Decision makers

Firm owners


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Issues in corporate

governance.


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CG Is a system by

which corporate entities

are being controlledand directed .

corporate governance

attempts to puts check

on working of an

organization .it checks

the balance between

directors, auditors andmanagement..


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Corporate Governance is

concerned with holding the

balance between economic

and social goals and betweenindividual and public goals.

The governance framework is

there to encourage the efficient

use of resources and equally

to require accountability for thestewardship of those

resources.

The aim is to align as nearly as

possible the interest of

individuals, corporations andsociety.


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The foundation of any

structure of corporate

governance isdisclosure.

Openness is the basis

of public confidence

in the corporate

system and funds will

flow to centers of

economic activity thatinspire trust.

Sh h ld l i i t i t th


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Shareholders role in governance is to appoint the

directors and the auditors.

Poor corporate governance has ruined companies,

sent directors to jail, and destroyed a globalaccounting firm and threatened economies and

governments.


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Objectives of CG.!!

Parties to corporate

governance

Board of directors

Managers

Workers

Shareholders or owners

Regulators

Customers Suppliers

Community (people

affected by the actions of

the organization)


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Corporate Governance Mechanisms

Internal Governance Mechanisms

Managerial Incentive Compensation

Ownership Concentration

External Governance MechanismsMarket for Corporate Control

Multidivisional Organizational Structure

Board of Directors

G M h i


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Governance Mechanisms


Boards of Directors

Executive Compensation

Market for Corporate Control


G M h i


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G M h i


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Ownership Concentration- Large block shareholders have a strong incentive to

monitor management closely


G M h i


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Ownership Concentration- Large block shareholders have a strong incentive to


- Their large stakes make it worth their while to spend

time, effort and expense to monitor closely


Go ernance Mechanisms


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time, effort and expense to monitor closely

- Large block shareholders have a strong incentive to

- Their large stakes make it worth their while to spend

- They may also obtain Board seats which enhances

their ability to monitor effectively (although financial

institutions are legally forbidden from directly holding board

seats)




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Boards of Directors




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Boards of Directors- Insiders

- Related Outsiders

- Outsiders




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Boards of Directors

- Review and ratify important decisions

- Insiders

- Related Outsiders

- Outsiders




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Boards of Directors


- Set compensation of CEO and decide when to

replace the CEO

- Insiders

- Related Outsiders

- Outsiders




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Boards of Directors


- Set compensation of CEO and decide when to

replace the CEO

- Lack contact with day to day operations

- Insiders

- Related Outsiders

- Outsiders




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Recommendations for more effectiveBoard Governance




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Recommendations for more effective

Board Governance

- Increase diversity of board members backgrounds

- Strengthen internal management and accounting

control systems

- Establish formal processes for evaluation of the

boards performance




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Salary, Bonuses, Long term incentive compensation





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Salary, Bonuses, Long term incentive compensation- Executive decisions are complex and non-routine

- Many factors intervene making it difficult to establish

for outcomes

how managerial decisions are directly responsible


- In addition, stock ownership (long-term incentive

market changes which are partially beyond their control

compensation) makes managers more susceptible to




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Salary, Bonuses, Long term incentive compensation- Executive decisions are complex and non-routine

- Many factors intervene making it difficult to establish

for outcomes

how managerial decisions are directly responsible


- In addition, stock ownership (long-term incentive

market changes which are partially beyond their control

compensation) makes managers more susceptible to

Incentive systems do not guarantee that managers make

the right decisions, but they do increase the likelihood

that managers will do the things for which they are

rewarded




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Designed to control managerial opportunism





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Designed to control managerial opportunism- Corporate office and Board monitor business-unit

- Increased managerial interest in wealth maximization

managers strategic decisions





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Designed to control managerial opportunism- Corporate office and Board monitor managers


strategic decisions



M-form structure does not necessarily limit corporate-

level managers self-serving actions



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strategic decisions




- May lead to greater rather than less diversification

levelmanagers self-serving actions



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strategic decisions




- May lead to greater rather than less diversification

Broadly diversified product lines makes it difficult for

top-level managers to evaluate the strategic decisions

of divisional managers

level managers self-serving actions



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Operates when firms face the risk of takeover

when they are operated inefficiently




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- Changes in regulations have made hostile takeovers difficult

- Many firms began to operate more efficiently as a result of

- The 1980s saw active market for corporate control, largely

as a result of available pools of capital (junk bonds)

the threat of takeover, even though the actual incidence of hostile

takeovers was relatively small




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The market for corporate control acts as an

important source of discipline over managerial

incompetence and waste

- Changes in regulations have made hostile takeovers difficult

- Many firms began to operate more efficiently as a result of

- The 1980s saw active market for corporate control, largely

as a result of available pools of capital (junk bonds)

the threat of takeover, even though the actual incidence of hostile

takeovers was relatively small


Corporate Governance and Ethical Behavior


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It is important to serve the interests of multiple

stakeholder groups

p



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Shareholders are one important stakeholder group,

which are served by the Board of Directors


stakeholder groups

p



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Product market stakeholders (customers, suppliers and

host communities) and Organizational stakeholders

(managerial and non-managerial employees) are also

important stakeholder groups




stakeholder groups

p



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Product market stakeholders (customers, suppliers and

host communities) and Organizational stakeholders

(managerial and non-managerial employees) are also

important stakeholder groups



Although controversial, some believe that ethically

responsible firms should introduce governance

mechanisms which serve all stakeholders interests


stakeholder groups

p

code of business


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code of business

conduct???

This Code of

Business Conduct

and Ethics helps

ensure compliancewith legal

requirements and

our standards of

business conduct

C d f d t ti d !!


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Code of conduct continued..!!

All Company employees areexpected to read and understand

this Code of Business Conduct and

Ethics, uphold these standards in

day-to-day activities, obey with all

applicable policies and procedures,

and ensure that all agents and

Contractors are aware of,

understand and adhere to these

standards.

Because the principles described in

this Code of Business Conduct and

Ethics are general in nature

COMPLIANCE IS EVERYONE'S

BUSINESS


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Ethical business conduct is critical to our business. As anemployee, your responsibility is to respect and adhere to these

practices.

Many of these practices reflect legal or regulatory

requirements. Violations of these laws and regulations can

create significant legal responsibility for you, the Company, itsdirectors, officers, and other employees. Part of your job and

ethical responsibility is to help enforce this Code of Business

Conduct and Ethics.

C d f t ti !!


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Code of corporate practice..!!

Written guidelinesissued by

an officialbody or

professionalassociationto

its membersto

helpthemcomplywith

its ethical

standards.

Example of code of corporate
http://www.businessdictionary.com/definition/guideline.htmlhttp://www.investorwords.com/3398/official.htmlhttp://www.businessdictionary.com/definition/professional.htmlhttp://www.businessdictionary.com/definition/association.htmlhttp://www.businessdictionary.com/definition/association.htmlhttp://www.businessdictionary.com/definition/member.htmlhttp://www.investorwords.com/1004/comply.htmlhttp://www.businessdictionary.com/definition/ethical-standards.htmlhttp://www.businessdictionary.com/definition/ethical-standards.htmlhttp://www.businessdictionary.com/definition/ethical-standards.htmlhttp://www.businessdictionary.com/definition/ethical-standards.htmlhttp://www.investorwords.com/1004/comply.htmlhttp://www.businessdictionary.com/definition/member.htmlhttp://www.businessdictionary.com/definition/association.htmlhttp://www.businessdictionary.com/definition/association.htmlhttp://www.businessdictionary.com/definition/professional.htmlhttp://www.investorwords.com/3398/official.htmlhttp://www.businessdictionary.com/definition/guideline.html


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Example of code of corporate

practice!! The International Council of Toy Industries (ICTI), an association

of associations, is committed on behalf of its member companies

to the operation of toy factories in a lawful, safe, and healthful

manner.

It upholds the principles that no underage, forced, or prison labor

should be employed; that no one is denied a job because ofgender, ethnic origin, religion, affiliation or association, and that

factories comply with laws protecting the environment.


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Supply agreements with firms manufacturing on behalfof ICTI members must also provide for adherence to

these principles.

The role of ICTI is to inform, educate, and survey its

members so that individual member companies canadhere to its Code of Business Practices.

As an association, it also acts tao encourage local and

national governments to enforce wage and hour laws

and factory health and safety laws


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Specific operating conditionsthat member companies areexpected to meet and obtaincontractor agreement in advanceare as follows

L b !!


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Labor..!! That working hours per week, wages and overtime pay practices

comply with the standards set by law or, in the absence of a law,address humane, safe and productive working conditions;

that no one under the legal minimum age is employed in any

stage of toy manufacturing; that a minimum age of 14 applies in

all circumstances, but notwithstanding the foregoing, that C138

Minimum Age Convention (1973) and C182 Worst Forms of

Child Labor Convention (1999) of the International Labor

Organization apply;

that no forced or prison labor is employed, that workers are free

to leave once their shift ends, and that guards are posted only for

normal security reasons;

that all workers are entitled to sick and maternity benefits as

provided by law;

that all workers are entitled to freely exercise their rights ofemployee representation as provided by local law.

THE WORKPLACE !!


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THE WORKPLACE.!!

That toy factories provide a safe working environment for their employees and comply with or exceedall applicable local laws concerning sanitation and risk protection;

that the factory is properly lighted and ventilated and that aisles and exits are accessible at all times;

that there is adequate medical assistance available in emergencies, and that designated employees

are trained in first aid procedures;

that there are adequate and well-identified emergency exits, and that all employees are trained in

emergency evacuation;

WORKPLACE


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CONTINUED!! that protective safety equipment is available and

employees are trained in its use;

that safeguards on machinery meet or exceed

local laws;

that there are adequate toilet facilities which meet

local hygiene requirements, and that they areproperly maintained;

that there are facilities or appropriate provisions

for meals and other breaks;

if a factory provides housing for its employees, it

will ensure that dormitory rooms and sanitary

facilities meet basic needs, are adequatelyventilated and meet fire safety and other local

laws;

that

Compliance !!


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Compliance..!!

The purpose of this Code is to establish a standard of performance, toeducate, and to encourage commitment to responsible manufacturing, not to

punish.

To determine adherence, ICTI member companies will evaluate their own

facilities as well as those of their contractors. They will examine all books and

records and conduct on-site inspections of the facilities, and request that their

contractors follow the same practices with subcontractors.

An annual statement of compliance with this Code must be signed by an officer

of each manufacturing company or contractor.


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Contracts for the manufacture of toys shouldprovide that a material failure to comply with

the Code or to implement a corrective action

plan on a timely basis is a breach of contract

for which the contract may be canceled.

Because of the great diversity in the kinds of

toys manufactured and the manufacturing

methods used, as well as the wide range in

factory sizes and numbers of employees,

three annexes are attached to this Code to

provide guidelines for determining

compliance. A rule of reason must be used

to determine applicability of the annex

provisions.

This Code should be posted or available for

all employees in the local language.

Board of Directors


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Board of Directors

A board of directorsis a bodyof elected or appointed

members who jointly oversee

the activities of a company or

organization. The body

sometimes has a differentname, such as board of

trustees, board of governors,

board of managers, or

executive board. It is often

simply referred to as "the

board."

Rights of Directors !!


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Rights of Directors ..!!

Directors have the right to: Participate in corporate

decisions and inspect

corporate books and records.

Compensation (usually a

nominal sum) andindemnification.

If a director is sued for acts as

director, the corporation should

guarantee reimbursement

(indemnification) or purchaseliability insurance to protect the

board from personal liability

A board's activities are

determined by the powers


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determined by the powers,

duties, and responsibilities

delegated to it or conferred on

it by an authority outside itself. These matters are typically

detailed in the organization's

bylaws.

The bylaws commonly also

specify the number ofmembers of the board, how

they are to be chosen, and

when they are to meet.

Typical duties of boards of directors include


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governing the organization byestablishing broad policies and

objectives;

Selecting, appointing, supporting

and reviewing the performance of

the chief executive;

ensuring the availability of

adequate financial resources;

Approving annual budgets;

Accounting to the stakeholders for

the organization's performance.


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The legal responsibilities ofboards and board

members vary with the

nature of the organization,

and with the jurisdictionwithin which it operates.

For public corporations,

these responsibilities are

typically much more

rigorous and complex than

for those of other types.

CG SYSTEM


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WORLDWIDE..!!

World wide corporate


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governance systems

(outsider) are those in

which the owners offirms tend to have a

transitory interest in the

firm and do not have

close relationships with

those in senior

managerial positions

within the company.


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Rather, these systems are characterized by relationshipsbetween management and shareholders being fluid and arms-

length.

Outsider systems are also characterized by the existence of an

active 'market for corporate control'- takeovers, particularly

hostile ones, are seen as both a remedy for managerial failureand a disciplinary mechanism on managers, ensuring that they

act in the best interests of shareholders.

Indeed, a further feature of this system in the protection of

shareholder rights over those of other organizational groups

(particularly employees).

by contrast, in 'insider' systems the owners of firms tend to havean enduring interest in the company and often hold positions on

the board of directors or other senior managerial positions


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the board of directors or other senior managerial positions.

These systems are characterized by stable and close relationships

between management and shareholders.

This stability of ownership, often coupled with legal or institutionalbarriers to takeovers, means that there is little by way of a market

for corporate control.

Moreover, insider systems are characterized by the existence of

formal rights for employees to influence key managerial decisions,

often through supervisory boards or works council-type bodies.

ggsr prelim

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