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MODULE 1
Governance, Business Ethics, Risk Management and Internal Controls

SESSION TOPIC 1 : Introduction to Corporate Governance

LEARNING OUTCOMES:
At the end of this module, learners must be able to:
1. explain the concepts of corporate governance
2. discuss the different theories in corporate governance
3. determine the environment of Philippine corporate governance

KEY POINTS

Corporation Governance Shareholder Stakeholder

CORE CONTENT
Introduction:

Individual freedom and institutional power rivalry is a continuing theme of history. Today,
the debate is about making corporate power compatible with the needs of a democratic society.
The modern corporation has not only created untold wealth and given individuals the opportunity
to express their genius and develop their talents but also has imposed costs on individuals and
society. How to encourage the liberation of individual energy without inflicting unacceptable costs
on individuals and society, therefore, has emerged as a key challenge.

Corporate governance lies at the heart of this challenge. It deals with the systems, rules,
and processes by which corporate activity is directed. This module focuses on the concept on
corporate governance by starting with a brief review of basic information about corporation which
were already discussed in your other business courses. This module also covers the theories and
elements of corporate governance. Furthermore, the environment of Philippine corporate
governance will be briefly discussed.

IN-TEXT ACTIVITY

Governance refers to structures and processes that are designed to ensure accountability,
transparency, responsiveness, rule of law, stability, equity and inclusiveness, empowerment, and
broad-based participation. Governance also represents the norms, values and rules of the game
through which public affairs are managed in a manner that is transparent, participatory, inclusive
and responsive. Governance therefore can be subtle and may not be easily observable. In a
broad sense, governance is about the culture and institutional environment in which citizens and
stakeholders interact among themselves and participate in public affairs. It is more than the
organs of the government (source: International Bureau of Education)

International agencies such as UNDP, the World Bank, the OECD Development Assistance
Committee (DAC) and others define governance as the exercise of authority or power in order to
manage a country’s economic, political and administrative affairs. The 2009 Global Monitoring
Report sees governance as ‘power relationships,’ ‘formal and informal processes of formulating

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policies and allocating resources,’ ‘processes of decision-making’ and ‘mechanisms for holding
governments accountable.’

Often there is a tendency to equate governance with management, the latter primarily referring to
the planning, implementation and monitoring functions in order to achieve pre-defined results.
Management encompasses processes, structures and arrangements that are designed to
mobilize and transform the available physical, human and financial resources to achieve concrete
outcomes. Management refers to individuals or groups of people who are given the authority to
achieve the desired results. Governance systems set the parameters under which management
and administrative systems will operate. Governance is about how power is distributed and
shared, how policies are formulated, priorities set and stakeholders made accountable.

ACTIVITY: Corporate Governance problem https://rb.gy/jxgwiy

Lesson learned from Corporate Scandals according to Prof. Aliza Racelis:

1. Some corporate executives will do almost anything to meet earnings, expectations and
keep the firm’s stock price stable or rising. Often, the goal is one on personal enrichment
through the executives’ exercise of options and sale of company’s stock.
2. The ethical climate in a firm is set by top management. Chief executive officers and chief
financial officers must establish and demand the integrity of the firm’s disclosure-both
financial and non-financial.
3. Auditors and their clients can get too close. An auditor’s independence is a necessary
condition for a meaningful audit, and auditing firms need to take a close look at the
relationship/s between a firm and its external auditors.
4. Application of GAAP is subject to significant management discretion and forms must take
their earnings more transparent.
5. No matter how good or effective the accounting principles are, there is no way for
accounting standards to stop fraud. Auditors and SEC, however may be able to make
some progress in reducing fraud.
6. Financial statements are only part of the information which investors need to evaluate a
company’s past, present and future. Over-reliance on a single amount-earnings per
share-can be a disaster.

Corporate Governance

A. Definition and Background

Several definitions of Corporate Governance
 “…refers to a system whereby shareholders, creditors and other stakeholders of a
corporation ensure that management enhances the value of the corporation as it
competes in an increasingly global market place” (Philippine SEC Code of Corporate
Governance)
 “deals with the ways in which suppliers of finance to corporations assure themselves of
getting a return on their investment.” (Schleifer & Vishny, A Survey of Corporate
Governance”, Journal of Finance, Vol. 52, No.2 )
 …reflects and enforces the company’s values.

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Governance is the rules and practices by which the board of directors ensures accountability,
fairness and transparency in its decision making. Why is it important? Good governance is a
robust and reliable system for making confident and timely decisions. Good governance gives
members confidence in the decision making process and lead to better decisions. It builds trust
and respect between members and elected leaders and it ensures ethical decision making. Below
are some specific reasons why corporate governance is important:
1. It mitigates accounting scandal/fraud;
2. It helps in avoiding financial crises (referring to past experiences);
3. It serves as monitoring and control systems;
4. It helps in ensuring stability of the economy in general; and
5. It cater the need of globalization.

B. Elements of Corporate Governance

Governance determines who has a voice in making decisions, how those decisions are
made, and who is accountable. The rules for governing are defined in the associations’ by-laws
and other governance documents. Ultimately, however, it’s the norms and actions of the
association’s leaders that determines the effectiveness of governance. Here are the most
important characteristics of good governance:
1. Accountable. Associations have an obligation to communicate, explain and answer
to members for the consequences of the decisions they made. Member should be
able to follow and understand the decision-making process including how and why a
decision was made.
2. Follow the rules of law. Board decisions should be consistent with relevant legislation
common law and the association’s letter patent.
3. Responsive. Board of directors makes decisions based on what is best for the
membership which requires that they solicit and listen to their needs.
4. Effective and efficient. Associations should implement decisions, follow processes
that make the best use of resources available while mitigating risks.

Characteristics of Good Governance (Price, 2018)

1. Participation. Best practices for good corporate governance include highlighting the
importance of multiple perspectives in the boardroom. Historically, men have held
board positions. As women have risen as leaders in the corporate world, governance
experts have seen the value of having gender and ethnic diversity on corporate
boards. Some boards have responded to pressure to add women and members of
ethnic groups to their boards by increasing the number of board seats in order to give
the appearance of diversity. Tokenism has become a common practice in business,
but it’s not an acceptable practice as part of good corporate governance. Strong,
well-composed boards include a variety of people, skills, talents, abilities,
experiences and perspectives.

2. Consensus-Oriented. The boardroom is an appropriate forum for hosting robust

discussions and debates. In fact, it’s expected. Some of the most heated debates
result in the best decisions. Representatives from many different walks of life come
together with varying perspectives. They represent various historical, cultural and
social contexts of their lives and experiences. A broad consensus typically serves the
best interests of communities and companies.

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3. Accountability is a key corporate governance best practice just as it is in many other

areas of business and societal life. Boards of directors are accountable to groups and
individuals who are affected by their decisions, including their shareholders,
stakeholders, vendors, employees and the general public.

Transparency and the rule of law go hand-in-hand with accountability.

4. Transparency. Good corporate governance requires that records and processes are
transparent and available to shareholders and stakeholders. Financial records should
not be inflated or exaggerated. They should be presented to shareholders and
stakeholders in ways such that they can understand and interpret the findings.
Transparency means that stakeholders should be informed of whom the contact is
that can answer questions and explain reports, if necessary. Corporations should
provide enough information in their reports so that readers get a complete view of the
issues.

5. Responsiveness. The corporate world can often become overtaken with crises and
controversies in record time. Corporations that practice good governance are usually
able to find time to better communicate to shareholders and stakeholders within a
reasonable timeframe and in ways that enable them to provide honest answers to the
direction of the organization.

6. Effectiveness and Efficiency. As planners and overseers, board directors have a

responsibility to conduct their duties effectively and efficiently. Effectiveness and
efficiency pertain to material resources and time. Many corporations also consider
the impact on the environment as they perform their duties and responsibilities. One
example of effectiveness and efficiency is the trend of corporations transitioning from
manual paper processes to environmentally friendly enterprise governance
management software solutions, such as the integrated suite of tools provided by
Governance Cloud.

7. Equity and Inclusiveness. Each board director has an equal seat at the board table.
Each director can and should use their voice to share their experiences, opinions and
philosophies to enhance and broaden discussions. No one should feel left out or feel
that their opinions have less meaning than others.

8. Rule of Law . The rule of law means boards should be fair and impartial in their
collaborations and in their decision-making. Certain circumstances may require
boards to seek outside counsel, guidance or expertise from outside, third-party
experts. Good corporate governance requires boards to act ethically, honestly and
with the utmost integrity.

9. Strategic Vision. One of the primary responsibilities of board directors is strategic

planning, which includes the mission, vision and values statements. The process of
strategic planning leads boards to understand where the corporation is going and
exactly how they will get there. Planning incorporates action plans, budgets,
operating plans, analysis, reporting and much more. Strategic planning is a
coordinated and systematic plan for the short- and long-term direction of the
company. The strategic plan holds board members accountable for their decisions

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and for monitoring their goals. Strategic planning also includes risk management and
protecting the company’s reputation.

SESSION SUMMARY

Corporate governance refers to a system whereby shareholders, creditors and other

stakeholders of a corporation ensure that management enhances the value of the corporation as
it competes in an increasingly global market place
Good governance has nine major characteristics such as participative consensus
oriented, accountable, transparent, responsive, effective and efficient, equitable and inclusive,
follows the rule of law and has strategic vision

SELF-ASSESSMENT

Guide Questions
1. Discuss and support your position on the debate that managers should run a corporation
primarily or solely in the interests of its legal owners—the shareholders (the shareholder
perspective)—or should they actively concern themselves with the needs of other
constituencies (the stakeholder perspective).
2. Research a particular accounting or corporate scandal in the Philippines in the past and
list down the lessons that have been generated from such failures.

REFERENCES

Price (2018),The What Constitutes Good Governance? Obtained from :

https://insights.diligent.com/

Concept of Governance | International Bureau of Education (unesco.org)

Shareholder Theory. Accouting Tools. Obtained from 2019/1/25/shareholder-theory

rb.gy/nugx2n

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GBRN01B GOVERNMENT RISK, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL