CORPORATE GOVERNANCE, BUSINESS ETHICS,

RISK MANAGEMENT AND INTERNAL CONTROL 7. Effectiveness & Efficiency – processes

institutions produce results that meet the needs
CHAPTER 1. Introduction to Corporate of society while making the best use of
Governance resources at their disposal.
- Also covers the sustainable use of
natural resources and the protection of
the environment.
Governance - refers to a process whereby elements in
society wield power, authority and influence and enact
8. Accountability – key requirement of good
policies and decisions concerning public life and social
governance. And cannot be enforced without
upliftment.
transparency and the rule of law.
- Process of decision making and
governing.
Corporate Governance – the system of rules, practices
Characteristics of Good Governance and processes by which business corporations are
directed and controlled.
1. Participation – key cornerstone of good
governance. Purpose of Corporate Governance – is to facilitate
- Could be either direct or through effective, entrepreneurial and prudent management that
legitimate institutions or can deliver long term success of the company.
representatives.
Objectives of Corporate Governance
- Needs to be informed and organized.
This means freedom of association and 1. Fair and Equitable Treatment of
expression on one hand and an Shareholders
organized civil society on the other 2. Self- Assessment
hand. 3. Increase Shareholders’ Wealth
2. Rule of Law - requires fair legal framework 4. Transparency and Full Disclosure
that are enforced impartially.
- Also requires full protection of human Principles of Good Governance
rights, particularly those of minorities.
Note: for best practice recommendations for each
3. Transparency - means that decisions taken and
principle, read the book)
their enforcement and done in a manner that
follows rules and regulations.
- Means that information is freely 1. A company should lay solid foundation for
available and directly accessible to management and oversight
those who will be affected by such 2. Structure the board to add value.
decisions and their enforcement. 3. Promote ethical and responsible decision
4. Responsiveness – processes try to serve the making.
needs all stakeholders within a reasonable 4. Safeguard integrity in financial reporting.
timeframe. 5. Make timely and balanced disclosure
5. Consensus Oriented – requires mediation of the 6. Respect the rights of shareholders and facilitate
different interest in society to reach a broad the effective exercise of those rights.
consensus. 7. Recognize and manage the risk.
- Result from an understanding of the 8. Encourage enhanced performance
historical, culture and social contexts of 9. Remunerate fairly and responsibly.
a given society or community. 10. Recognize the legitimate interest of
shareholders.

6. Equity & Inclusiveness – All its members feel

that they have a stake in it and do not feel
excluded from the mainstream of society.
 audit to evaluate the efficiency of operations and
CHAPTER 2. Corporate Governance periodic evaluation and tests of controls.
Responsibilities and Accountabilities

CHAPTER 3. SEC Code of Corporate

Parties Involved in Corporate Governance; Their
respective broad role and specific responsibilities
Governance for Publicly- Listed
Companies

 Corporate Governance – the system of

1. Shareholders – provide effective oversight
stewardship and control to guide the
through election of board members, approval of
organization direction.
major initiatives such as buying or selling stock,
annual reports on management compensation - Is a system of direction, feedback and
from the board. control using regulations, performance
standards and ethical guidelines.
2. Board of Directors – Majors representative of
stockholders.  Board of Directors – the governing body
elected by the stockholders.

3. Non-Executive or Independent Directors –  Management – a group of executives given

The same as the broad role of the entire board of the authority by BOD to implement policies.
directors.
 Independent Director - who is independent
of management and the controlling
4. Management – Operations and accountability. shareholder, and is free from any business or
Manage the organization effectively; provide other relationship which could, exercise of
accurate and timely reports to shareholders and independent judgment in carrying out his
other stakeholders. responsibilities as a director.

5. Audit Committees of the Board of Directors –  Executive Director – who has executive
provide oversight of the internal and external responsibility of day to day operation.
audit function and the process of preparing the
annual financial statements as well as public  Non-Executive Director – who has no
reports on internal control. executive responsibility and does not
perform any work related to the operation of
the corporation.
6. Regulators
a. Board of Accountancy – set accounting and  Conglomerate – a group of corporations
auditing standards. that has diversified business activities in
varied industries. Operation of such
b. Securities and Exchange Commission – businesses are controlled and managed by a
ensure the accuracy, timeliness and fairness parent corporate entity.
of public reporting of financial and other
information for public companies.  Internal Control - a process designed and
effected by the board of directors, senior
7. External Auditors – performs audit of company management, and all levels of personnel to
financial statements to ensure that the statements provide reasonable assurance.
are free of material misstatements including
misstatements that may be due to fraud.  Enterprise Risk Management – a process,
8. Internal Auditors- perform audits of companies effected by an entity’s BOD, management
for compliance with company policies and laws, and other personnel, applied in strategy
 setting and manage risk to be within its risk
appetite.
5. Fairness and Openness -Be fair and open minded,
 Related Party – shall cover the company’s
be willing to admit error.
subsidiaries, as well as affiliates and any
party.

 Related Party Transactions – a transfer of

resources, services or obligations between a 6. Caring for Others – Be caring, kind, and
reporting entity, and a related party. compassionate; share, be giving, be of service to
others; help those in need and avoid harming others.
 Stakeholders – any individual, organization
7. Respect for Others – Demonstrate respect for
or society at large who can either affect
human dignity, privacy, and the right to self-
and/or be affected by the company’s
determination of all people.
strategies, policies, business decisions and
operations, in general.
8. Responsible Citizenship – Obey just laws.

(NOTE: READ THE BOARD’S GOVERNANCE 9. Pursuit of Excellence – meeting your personal and
RESPONSIBILITIES) professional responsibilities, be diligent, reliable,
industrious and committed.

CHAPTER 4. SEC Code of Corporate 10. Accountability – Be accountable, accept

Governance, Continued responsibility for decisions.

(REEEEEAAAAD!!)
Why is Ethical Behavior Necessary?

- For a society to function in an orderly

CHAPTER 5. Introduction to Ethics manner.

Ethics – a set of moral principles or values that govern Why do People Act Unethically? 2 primary reasons:
the action and decisions of an individual or group.
1. The person’s ethical standards are different from
Personal Ethics -vary from individual to individual at those of society as a whole.
any point in time. 2. The person chooses to act selfishly.

Characteristics and Values Associated with ethical Categories of Ethical Principles

behavior
Principles of Personal Ethics
1. Integrity – be principled, honorable, upright,
courageous and act on convictions; do not be 1. Basic justice, fairness
twofaced or unscrupulous, or adopt an end justifies- 2. Respect for the right of others
the means philosophy that ignores principle. 3. Concern for the others
4. Concern for the well-being on welfare of others
2. Honesty – Be truthful, sincere, forthright, 5. Benevolence, trustworthiness, honesty
straightforward, frank, candid; do not cheat, steal, lie 6. Compliance with the law
deceive or act deviously.
3. Trustworthiness and Promise Keeping – Be Professional Ethics
worthy of trust, keep promises and full
commitments. 1. Integrity, impartiality, objectivity
2. Professional competence
4. Loyalty (Fidelity) and Confidentiality – Be 3. Confidentiality
faithful and loyal to family; do not use or disclose 4. Professional Behavior
information learned in confidence. 5. Avoidance of potential or apparent conflict of
interest.
 Business Ethics 7. Equality of all Professions – All professionals
1. Fair competition shall treat their colleagues with respect and shall
2. Global as well as domestic justice strive to be fair in their dealings with one
3. Social responsibility another.
4. Concern for environment

The Need for Professional Ethics CHAPTER 6. Business Ethics

All the recognized professions have several common Business Ethics – refers to standards of moral
characteristics. The most important of these conduct, behavior and judgment in business.
characteristics are: - Is an area of corporate responsibility
1. A responsibility to serve the public where businesses are legally bound and
2. A complex body of knowledge socially obligated to conduct business
3. Standards of admission to the profession in an ethical manner.
4. A need for public confidence - Is based on the personal values and
standards of each person engaged in
Code of Good Governance for the Profession in the business.
Philippines (E.O. No. 220, June 23.2003)

- This code is adopted by the Main Purpose

Professional Regulation Commission
(PRC) and the 42 professional - Is to help business and would be
regulatory boards to cover an business to determine what business
environment of good governance in practices are right and what are wrong
which all Filipino professionals shall
Special Purpose
perform their tasks.
1. To make businesses realize that they cannot
employ double standards to the actions of
Specific Principle of Professional Conduct other people and to their own actions.
2. To show businesses that common practices
1. Serve to others – committed to a life of service which they have thought to be right because
to others. they see other businessmen doing it, are
really wrong.
2. Integrity and Objectivity – shall perform their 3. To serve as a standard or ideal upon which
responsibilities with the highest sense of business conduct should be based.
integrity and imbued with nationalism and
spiritual values. Scope and Impact of Business Ethics

 Economic Impact – through the wages it

3. Professional Competence – i.e knowledge,
pays to its employees, the materials that they
technical skills, attitudes, and experience.
buys from their suppliers and the prices it
charges its customers.
4. Solidarity and Teamwork - shall nurture and
 Social Impact – contributes to the ethical
support one organization for all its members.
climate of society
5. Social and Civic Responsibility – shall always  Environmental Impact – is a key area of
carry out their professional duties with due business influence on society.
consideration of the broader interest of the  Impact on Business Managers – although
public. the manager is expected to act in the best
interest of the business, he cannot be
6. Global Competitiveness - shall remain open to expected to act in a manner that is contrary
challenges of a more dynamic interconnected to the law or to his conscience.
world. Shall rise up global standards.
 CHAPTER 7. Common Unethical he is giving away or receiving in
Practices of Business Establishments return.
 Passive Deception – businessman is
 Misrepresentation- may be classified into unable to provide the customer with
two types: the complete information that the
1. Direct Misrepresentation – actively latter needs to make a fair decision.
misrepresenting about the product or  Over-Persuasion – appealing to the
customers. emotions of a prospective customer and
urging him to buy an item of merchandise he
 Deceptive Packaging – placing the needs.
product in containers of exaggerated Corporate Ethics
sizes and misleading shapes to give
a false impression of its actual Some Unethical Practices of the Board of Directors
contents.
1. Plain Graft – done by voting for themselves and the
 Misbranding or Mislabeling –
executive officers huge per diems, large salaries, big
making of false statements on the
bonuses that do not commensurate to the value of
label of a product or making its
their services.
container similar to well-known
2. Interlocking Directorship – practice by a person
product.
who holds directorial positions on two or more
 False or Misleading Advertising –
corporation that do business with each other.
greatly exaggerates the virtues of a
3. Insider Trading – when a broker or another person
product and tells only half of the
with access to confidential information uses that
truth.
information to trade shares and securities of a
 Adulteration – debasing a pure or
corporation.
genuine commodity by imitating or
4. Negligence of Duty – fail to attend board meetings
counterfeiting.
regularly.
 Weight understatement or Short
Weighing – tampered with or
something is unobtrusively attached
to it so that the scale registers more Some Unethical Practices of Executive Officers
than the actual weight. and Lower Level Managers
 Measurement understatement or 1. Claiming a vacation trip to be a business trip
Short measurement- measuring 2. Having employees do work unrelated to the
stick or standard is shorter than the business
real length or smaller in volume 3. Loose or ineffective controls
than the standards. 4. Unfair Labor practices
 Quantity understatement or Short 5. Making false claims about losses to free
Numbering – seller gives the themselves from paying the compensation and
customer less than the number asked benefits provided by law.
for or paid for. 6. Making employees sign documents showing that
they are receiving fully what they are entitled to
2. Indirect Misrepresentation – by under the law when in fact they are only
omitting adverse or unfavorable receiving a fraction of what they are supposed to
information about the product or get.
services. 7. Sexual Harassment

 Caveat Emptor – very common Some Unethical Practices of Employees

among salesmen. “Let the buyer
1. Conflict of Interest – where his decision or
beware”
actuation is influenced by what he can gain.
 Deliberate Withholding of
2. Dishonesty
Information – where one of the
parties does not exactly know what
 CHAPTER 8. ETHICAL DILEMMA entertainment may be given and accepted and
what records need to be kept.
Ethical Dilemma – a situation a person faces in which a
decision must be made about the appropriate behavior.
Resolving Ethical Dilemmas 3. Declaration of Conflict of Interest – In order to
safeguard the business interest, a declaration
1. Obtain the relevant facts.
system that is applicable to all levels of
2. Identify the ethical issues from the facts.
3. Determine who is affected by the outcome of the employees may be instituted.
dilemma and how each person or group is
affected. 4. Convenient Corruption Reporting System – Is a
4. Identity the alternative available to the person key function to control corruption and bribery
who must resolve the dilemma. risk, and can comprise a whistle-blowing policy
5. Identify the likely consequences of each or feedback channel.
alternative
Efforts to Curb Corruption through Legislation
6. Decide the appropriate action.
 Anti-Graft and Corrupt Practices – Act
CHAPTER 9. Advocacy against Corruption criminalizes active and passive bribery,
embezzlement, extortion, abuse of office
Corruption – is the abuse of private and public office for and conflict of interest in the public sector.
personal gain. It includes acts of bribery, embezzlement,  Anti- Red Tape Act – Act forbids office
nepotism, kickbacks and state capture. holders from accepting any gifts or
materials benefits in exchange for any
- Misuse of entrusted power.
government permit or license.
 Under the Revised Penal Code, gifts are
classified as indirect bribery.
Why and how does a person become Corrupt
 Anti- Money Laundering Act – criminalizes
 Career Advancement money laundering and organized crime.
 Earning of more income  Act Establishing a Code of Conduct and
 Financial problems caused by Ethical Standards for Public Officials
illness, loss of property, etc. Employees – formulates standards for the
personal integrity and accountability of civil
servants.
Characteristics of Corruption
 Government Procurement Reform Act –
a. Recipient and payers requires competitive and transparent
b. Extortion bidding.
c. Lubricant of Society  The Philippine has ratified the United
d. Poverty alleviation Nations Convention against Corruption.
e. Culture
f. Kindness among friends
CHAPTER 10. Initiative to Improve Business
Ethics and Reduce Corruption
Prevention of Corruption
( REAAAAD ONLY )
1. Clear Business Processes – can help flag
irregularities in a business or organization.

2. Policy on Gifts and Entertainment – to promote

good relations. The risk of corruption can be
reduced by setting a policy on when gifts and
 CHAPTER 11. Risk Management  Liquidity Risk - Is associated with
the uncertainty created by the
Risk Management – is the process of measuring or inability to sell the investment
assessing risk and developing strategies to manage it. quickly for cash.
- Is a systematic approach in identifying,  Management Risk – Decisions
analyzing and controlling areas or made by a firm’s management and
event. board of directors materially affect
- Act or practice of controlling risk the risk faced by investors.
 Purchasing Power Risk – Is
perhaps, more difficult to recognize
than the other types of risk.
As defined in the International Organization of
Standardization (ISO) – Risk management is the II. Risk Associated with Manufacturing, Trading, and
identification, assessment, and prioritization of risks Services Concerns
followed by coordinated and economical application or
resources to minimize unfortunate events. A. Market Risk
 Product Risk
Risk Management should:  Complexity
 Obsolescence
1. Create value
 Research and Development
2. Address uncertainty and assumptions
 Packaging
3. Be an integral part of the organizational
 Delivery of Warranties
processes and decision-making.
 Competitor Risk
4. Be dynamic
 Pricing Strategy
5. Create capability
 Market Share
6. Be systematic
 Market Strategy

Process of Risk Management B. Operation Risk

 Process Stoppage
1. Establishing the Context
 Health and Safety
2. Identification of potential risks
3. Risk assessment  After Sales Services Failure
 Environmental
Relevant Risk Terminologies  Technological Obsolescence
i. Risk Associated with Investments  Integrity
 Business Risk – refers to the  Management Fraud
uncertainty about the rate of return  Employee
caused by nature of the business.  Illegal Acts
 Default Risk – related to the C. Financial Risk
probability that some or all of the  Interest Rates Volatility
initial investment will not be  Foreign Currency
returned.  Liquidity
 Financial Risk – The firm’s capital
 Derivative
structure or source of financing
 Viability
determine financial risk..
D. Business Risk
 Interest Rate Risk – fluctuation in
 Regulatory Change
interest rate will cause the value of
an investment to fluctuate also. The  Reputation
most commonly associated with  Political
bond price movements, rising  Regulatory and Legal
interest rates cause bond prices to  Shareholder Relations
decline and declining interest rate  Credit Rating
cause bond price to rise.  Capital Availability
 Business Interruptions
 the achievement of any of these
objectives.
Potential Risk Treatments
Those objectives fall into three
These techniques can fall into one or more of these categories:
four categories:  Reliability of the entity’s financial reporting
 Effectiveness and efficiency of operations
 Risk Avoidance – performing an activity  Compliance with applicable laws and
that could carry risk. regulations
- Losing out the potential gain.
- Not entering a business to avoid risk of
loss also avoids the possibility of Internal control system – all policies and procedures
earning profits. (internal controls) adopted by the management of an
 Risk Reduction – involves reducing the entity to assist in achieving management’s objective,
severity of the loss or the likelihood of the and safeguarding of assets.
loss from occurring.
- Finding a balance between the negative Elements of Internal Control
risk reduction and the benefit of the The internal control system extends beyond these
operation or activity. matters which relate directly to the functions of the
 Risk Sharing – means sharing with another accounting system and consists of the following
party the burden of loss or the benefit of components:
gain from a risk.
 Risk Retention – involves accepting the a. The Control Environment – means the
loss or benefit of gain from a risk when it overall attitude, awareness and actions of
occurs. directors and management regarding the
internal control system and its importance
in the entity.
Areas of Risk Management
Several factors comprise the control
The most commonly encountered areas of risk
environment:
management include:
1. Communication and
1. Enterprise risk management Enforcement of Integrity and
2. Risk management activities as applied to project Ethical Values - essential
management elements of the internal
3. Risk management for megaprojects control environment
4. Risk Management of information technology 2. Commitment to competence –
5. Risk management techniques in petroleum and is the knowledge and skills
natural gas. necessary to accomplish task.
3. Participation by those
charged with Governance –
CHAPTER 12. Practical Guidelines in Reducing include independence from
and Managing Business Risks management, their experience
and stature, the extent of their
( REEEEEEEEAAAAAD !! ) involvement and scrutiny of
activities.
4. Management’s Philosophy
CHAPTER 13. OVERVIEW OF INTERNAL and Operating Style - refers
CONTROL to management’s attitude
towards; business risk,
Internal control – the process designed and effected by financial reporting, meeting
those charged with governance. budget, profit and other
- Designed and implemented to address established goals which all
identified business risks that threaten
 have impact on the reliability distribute an entity’s products and services
of the financial statements. ; Ensure compliance with laws and
5. Organizational Structure – regulations ; Record information, including
responsibilities and authorities accounting and financial reporting
of the various personal within information.
the organization should be Application to Small Entities - small
established in such a manner. entities with active management
6. Assignment of Authority and
involvement may not need extensive
Responsibility – personnel
descriptions of accounting procedures,
within an organization need to
sophisticated accounting records, or
have a clear understanding of
their responsibilities and the written policies.
rules and regulations that
govern their actions. d. Control Activities – are the policies and
7. Human Resources Policies procedures that help ensure that
and Procedures – the most management directives are carried out.
important element of an
internal accounting control Major Categories of control procedures
system is the people who are:
perform and execute the A. Performance Review –
established policies and management uses accounting
procedures. and operating data to assess
b. Entity’s Risk Assessment Process performance, and it then
Risk assessment – is the identification, takes corrective action.
analysis, and management of risks B. Information Processing
pertaining to the preparation of financial Control – are policies and
statements. procedures designed to
Risks can arise or change due to require authorization of
circumstances such as the following: transactions and to ensure
 Changes in operating environment the accuracy and
 New personnel completeness of transaction
 New or revamped information
processing.
systems
C. Physical control – intended to
 Rapid growth
prevent theft of assets.
 New technology
 New business models, products, or e. Monitoring Control – the final component
activities of internal control.
 Corporate restructurings - The process that an entity uses to
 Expanded foreign operations assess the quality of internal control
 New accounting pronouncements overtime.
c. Information System, including the - May include communications from
Business Processes, Relevant to Financial external parties.
Reporting and Communication - an
information system consists of
infrastructure (physical and hardware
components), software, people,
procedures and data.
Journal Entries – required on a recurring
basis to record transactions.
Related Business Processes – designed to:
develop, purchase, produce, sell and “ STUDY S M A R T . PASAR LGE KA  “