Corporate

Governance &
Capital Markets
AUGUSTUES P. LAMBINO
Kingfisher School of Business and Finance
FETP SEMINAR JULY 6, 2021
Session 1 – 1:30- 2:30
Break – 2:30 – 2:45
Session 2- 2:45 – 3:15
End of Session - 3:30
Session 1
Good Governance & Capital Markets
LECTURE OUTLINE
• Theoretical Framework
• Definition
• Importance of Good Governance in the Capital Market
• The Purpose of Corporate Governance
• 8 Characteristics of Good Governance as defined by UN
SESSION 2 – CODE OF CG
LECTURE OUTLINE
• SIX PRINCIPLES OUTLINED BY THE OECD and ratified
in 2015
• SEC Memorandum No. 24 s2019
➢Responsibilities, Duties and Functions of BOD
➢Disclosure and Transparency
➢Internal Control and Risk Management Frameworks
➢Cultivating a Synergic Relationship with Stakeholders
➢Duties to Stakeholders
• SUMMARY
Session 1 LEARNING OUTCOMES
• Identify origins of the Doctrine of Maximation of Shareholder
Value as compared to stakeholder concept to respond to
sustainability challenges, how businesses impact economy,
environment and society.
• Discuss the importance of Good Governance in the Capital
Market
• Describe the 8 Characteristics of Good Governance By United
Nations
Theoretical Framework on Corporate
Governance
• Agency Theory –
• Adam Smith in his book, An Inquiry into the Nature and Causes of
Wealth of Nations
➢Directors of companies being managers cannot be expected to watch
fervently as if their own.
➢Negligence and excess can prevail in the management of affairs of such
company.

The agency theory implies that the board of directors is elected to

manage the potential conflict between management and
shareholders.
Saed Homayoun and Sakine Homayoun, University of Gavle
Theoretical Framework
• Doctrine of Maximation of Shareholder Value
versus Theory on Corporate Social Responsibility Milton Friedman

➢Primary obligation of directors of a corporation images may be subject copyright

To seek the maximum amounts profits for the corporation

This tenet was defended by Milton Friedman a Nobel Prize in
Economics in his 1970 article published in NY Times “The social
responsibility of Business to Increase Profits” where he
concluded that “there is one and only one social responsibility of the
business- to use resources and engage in activities to increase profits so long as
it stays within the rules of the game, which is to say, engages in open and free
competition without deception or fraud”.
Villanueva, Phlippine Corporate Governance- Philippine White Cement vs.
Appellate Court220 SCRA 103 (1993)
Images may be subject to copyright
Plotting models of the Firm
Shareholders

Ends Axis

Managerialism BOD Shareholders Primacy

Means Axis

Stakeholders
Bambridge Directors
Primacy
Directors primacy
• Neither shareholders nor
managers control
corporations- BODs do.
• Maximizing shareholder
wealth remains an important
component of director
primacy.
Environmental, Social, and (Corporate)
Governance,
Business
Growth

INTEGRATED
RISK ESG
MANAGEMENT SHAREHOLDER
VALUE

SEC issued MC No.4 s2019 for

sustainability reporting guidelines
for publicly listed companies
Stewardship Theory

Images may be subject to copyright

Based on Psychology and Sociology

https://journals.aom.org/doi/10.5465/amr.1997.9707180258
Images may be subject to copyright
Significant financial crises that led to
corporate collapse since the 90s.Selected Macroeconomic
Indicators, 1970–86
• 1981- to middle of 1986 - (In percent)
Philippine Financial Crises Note: Shaded areas indicate
crisis periods. Sources: IMF, 1988;

• 1986 – 1995 - The US Savings Credit: ©

and Loan Crises Bettmann/CORBIS

• 1990 Japanese Asset Price

Bubble

Images subject to
copyright
Significant financial crises that led to
corporate collapse since the 90s.
• 1997-98 Asian Financial Crises
• 2001 – Bursting of dot-com
bubble
• 2007 – 2011 Global Financial
Crises
• 2009 – 2012 European debt
crises
• Sea of debt for purchase of
COVID VAX
Images subject to copyright
https://www.bbc.com/news/business-57606593
SEC cancels R&L Investments license,
slaps P25-million fine over stocks scandal
Is the world sleepwalking into a financial
crisis?

Getty images
Four Horsemen of the Financial
Apocalypse
.

When trust fails, four horsemen bring down the apocalypse,

economic crises on the white horse of conquest,
currency crises on the red horse of war, banking crises on
the black horse of famine and
sovereign crises on the pale horse of death.
Philippine Stock Market now since the
1997 Asian Financial Crises
• https://tradingeconomics.com/philippines/st
ock-market
Examples of BAD GOVERNANCE
• Unqualified officers • Withholding information for
• Board meeting absences critical decisions
• Money laundering • Connivance with auditors
• Fictitious accounts • Padding documents
• Unsafe & unsound practices • Misdeclaration of facts.
Figures in financial statements
• Promoting personal and and other official documents
family interests
Copyright © Asia Business Consultants, Inc.
Failure attributable to the BOD
Management’s
Indifference

Incompetence
Abuse of directors
Failure to meet and decide on
Behest advances matters for BOD approval

Fictitious and substitute

directors during meetings
Adapted from
rbap.org
The First Order of Business is to stop
doing harm
Definition of Corporate Governance
• the system of stewardship and control to guide organizations in
fulfilling their long-term economic, moral, legal and social
obligations towards their shareholders/members and other
stakeholders.
• Corporate governance is a system of direction, feedback and
control using regulations, performance standards and ethical
guidelines to hold the board of directors and Senior Management
accountable for ensuring ethical behavior and reconciling long-
term customer satisfaction with shareholder/member value to the
benefit of all stakeholders and society.
• SEC MC 24 s2019
4 PILLARS OF PERFORMANCE
STRATEGY
• Corporate Governance
• Business Ethics
• Risk Management
• Internal Control
Ethics

Or simply GERI

Images may be subject to copyright

 Importance of Good Governance in the
Capital Market
• Point of view of users of capital
• Improving performance
• Improving access to capital and lowering of cost of capital
• Adding value to be sustainable
• Reducing investment risk and Avoiding reputational risk
• Contributing to the development of the public and private capital
markets
• Encouraging new investments, boosting economic growth [reducing
risk of financial crises], and providing employment opportunities.
Tsoi-Importance of CG]
[Paul

• Enhancing relationships with stakeholders and community relations

[World Bank’s Global CG Forum

https://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/ifc+cg/why+corporate+governance
The Purpose of Corporate Governance
• Its purpose is to maximize the organization's long-term
success, thereby creating sustainable value for its
shareholders/members, other stakeholders and the
nation. (SEC MC No. 24 s2019)
• The Code of Corporate Governance aims to steer public
companies and registered issuers in the Philippines toward higher
standards of corporate governance,” SEC Chairperson Emilio B.
Aquino said.
• “Compliance with the higher standards of corporate governance
should translate to better value propositions for shareholders and
customers, minimized risks, growth and sustainability,” he added.
Images may be subject to copyright
8 Characteristics of Good Governance By UN
Consensus Responsive
Oriented

Participatory Transparent
Good
Marked by the Governance
rule of law Accountable

Effective and Equitable and

efficient Inclusive
SHARED VISION
Summary
END OF SESSION 1 PART 1
Corporate
Governance &
Capital Markets
FETP SEMINAR JULY 6, 2022
Session 1 – 1:30- 2:30
Break – 2:30 – 2:45
Session 2- 2:45 – 3:15
End of Session - 3:30
SESSION 2 – CODE OF CG
LECTURE OUTLINE
• SIX PRINCIPLES OUTLINED BY THE OECD and ratified
in 2015
• SEC Memorandum No. 24 s2019
➢Responsibilities, Duties and Functions of BOD
➢Disclosure and Transparency
➢Internal Control and Risk Management Frameworks
➢Cultivating a Synergic Relationship with Stakeholders
➢Duties to Stakeholders
• SUMMARY
Session 2 Learning Outcomes
• Discuss the expectations of a good corporate governance.
• Discuss the Six Principles of Good Governance by OECD
• Describe and apply the SEC requirements on the 16 Corporate
Governance Principles.

Images may be subject to copyright

OECD CG Six Principles 2015
Principle 1 Ensuring the basis for an effective corporate
governance framework
• 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.
Principle 2 The rights and equitable treatment of shareholders and
key ownership functions
• 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.
OECD Six Principles on Good Governance
III. Institutional investors, stock markets and other intermediaries;
Principle 3
• 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.
IV. The role of stakeholders in corporate governance;
Principle 4
• 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.
OECD Six Principles on Good Governance
Principle 5 Disclosure and transparency
• 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.
Principle 6 The responsibilities of the board
• 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.
Responsibilities, Duties and Functions of
BODs

o Board directors of today are expected to represent

independent and diverse perspectives.
o Their main role is to perform the duties of strategic
planning and oversight.
https://insights.diligent.com/board-of-directors/the-roles-
and-responsibilities-of-a-board-of-directors/
 RCC Board of
Section POWERS OF CORPORATION Directors Stockholders
15 Amendment of Articles of Incorporation Majority 2/3
23 Election of Board of Directors Majority
24 Corporate officers Majority
27 Removal of Board of Directors 2/3

28 Vacancies in BOD Removal Majority

28 Vacancies in BOD Resignation assuming the Majority
remaining BOD still constitute a quorum

28 Vacancies in BOD Resignation assuming the Majority

remaining BOD do NOT constitute a quorum
 RCC Board of
Section POWERS OF CORPORATION Directors Stockholders
28 Vacancies in BOD Resignation assuming the Unanimous
remaining BOD do NOT constitute a quorum and vote by
EMERGENCY ACTION is required, Corporate remaining
officer will be appointed directors
28 Vacancies in BOD Expired term Majority
28 Vacancies in increase number of BOD Majority
29 Compensation may be granted not to exceed 10% of Majority
Net income before income tax during the preceding year
36 To extend or shorten corporate term Majority 2/3
37 To increase or decrease Capital stock; incur , create Majority 2/3
or increase any bonded indebtedness
38 To deny preemptive right 2/3
 RCC Board of
Section POWERS OF CORPORATION Directors Stockholders
39 To sell all or substantially all of the corporation Majority 2/3
properties
40 To acquire own shares
41 To invest corporate funds in another Majority 2/3
corporation or business or any other purpose

42 To declare cash dividends Majority of

quorum

42 To declare stock dividends Majority of 2/3

quorum
 RCC Board of
Section POWERS OF CORPORATION Directors Stockholders
43 To enter into management contract Majority of Majority of
quorum managing and
managed corp
45 Adopt bylaws Majority
76 Merger or Consolidation Majority 2/3
134 Voluntary dissolution where no creditors Majority Majority
are affected
135 Voluntary dissolution where creditors are Majority 2/3
affected
136 Voluntary dissolution by shortening Majority 2/3
Corporate term
SEC MC No. 16 Series of 2019 Majority 2/3
As an incorporator of a corporation
Doctrine of Centralized Management
Section 22 of the RCC embodies the doctrine of “Centralized Management”
which clearly and directly vests “all corporate powers, all corporate properties,
and all corporate business” of the corporation with its Board of Directors, which
has the following legal and substantive consequences:
(a) That the Board possessing all corporate powers is the direct agent of the
corporation considered by LAW (RCC) to be the “principal” and to whom the
Board owes fiduciary duties of diligence and loyalty;
(b) That the Board possessing legal title to all the assets and business enterprise
of the company does not act as an agent, but rather as a trustee, of the
stockholders and its corporate decisions, as a general proposition, cannot be
overturned by the stockholders; and
(c) Management (i.e., President and the Senior Officers) are appointed by the
Board in the exercise of its plenary corporate powers, and thereby Management
is considered to be the Board’s sub-agent vis-à-vis the corporation as the
principal in the corporate setting.
Dean Cesar L. Villanueva, Business World 2017
CODE OF CORPORATE GOVERNANCE FOR
PUBLIC COMPANIES AND REGISTERED ISSUERS
1. The CG Code for PCs and RIs per SEC Memorandum Circular
No. 24 s2019 supersedes the following SEC Memorandum
Circulars:
a) SEC Memorandum Circular No. 6, Series of 2009 (Revised Code
of Corporate Governance);
b) SEC Memorandum Circular No. 9, Series of 2014 (Amendment
to the Revised Code of Corporate Governance; and
c) SEC Memorandum Circular No. 4, Series of 2017 (Term Limits
of Independent Directors).
The aforementioned Memorandum Circulars shall remain in effect for other covered
companies, when applicable.
CODE OF CORPORATE GOVERNANCE FOR
PUBLIC COMPANIES AND REGISTERED ISSUERS
The CG Code for PCs and RIs, which the SEC issued on Dec. 19, 2019, covers
both public companies and registered issuers.
• A public company is defined as one with assets of at least P50 million and has
200 or more shareholders, holding at least 100 shares each of the equity
securities.
• On the other hand, a registered issuer is a company that:
1. Issues proprietary and/or non-proprietary shares/certificates;
2. Issues equity securities to the public that are not listed in an
exchange; or
3. Issues debt securities to the public that are required to be
registered to the SEC, whether or not listed in an exchange
• SEC Commissioner Kelvin Lester Lee February 19, 2020
The CG Code for PCs and RIs per SEC Memorandum
Circular No. 24 s2019
•The Code is arranged as follows:
Principle, Recommendations and Explanations.
Principles- can be considered to be high-level statements of
corporate governance good practices, and are applicable to all
companies.
Recommendations - objective criteria that are intended to identify
the specific features of corporate governance good practice that are
recommended for companies operating according to the Code.
Alternatives to a Recommendation may be justified in particular
circumstances if good governance can be achieved by other means.
Explanations- strive to provide companies with additional
information on the recommended best practice.
There are sixteen (16) principles that are
being promoted across five (5) CG
subjects, namely:
•Board’s Governance Responsibilities – Principles 1 – 7
•Disclosure and Transparency – Principles 8 – 11
•Internal Control and Risk Management Framework – Principle 12
•Cultivating a Synergic Relationship with Shareholders –
Principle 13
•Duties of Stakeholders – Principles 14 -16
I. Board’s Governance Responsibilities
1. Establishing a Competent Board
• Principle
The company should be headed by a
competent, working board to foster the long-
term success of the corporation, and to sustain its
competitiveness and profitability in a manner consistent
with its corporate objectives and the long-term best
interests of its shareholders and other stakeholders.
Images may be subject to copyright
2. Establishing Clear Roles and
Responsibilities of The Board
• Principle
The fiduciary roles,
responsibilities and
accountabilities of the Board as
provided under the law, the
company’s articles and by-laws,
and other legal pronouncements
and guidelines should be clearly
made known to all directors as
well as to shareholders and
other stakeholders.
Images may be subject to copyright
3. Establishing Board Committees
•Principle
Board committees should be set up to the extent possible to
support the effective performance of the Board’s functions,
particularly with respect to audit, board risk oversight (BROC),
corporate governance (CG), related party transactions, and
other key corporate governance concerns, such as nomination
and remuneration. The composition, functions and
responsibilities of all committees established should be
contained in a publicly available Committee Charter.
Images may be subject to copyright
4. Fostering Commitment
•Principle
To show full commitment to the company, the directors
should devote the time and attention necessary to
properly and effectively perform their duties and
responsibilities, including sufficient time to be familiar
with the corporation’s business.

Images may be subject to copyright

5. Reinforcing Board Independence
•Principle
❑The board should endeavor to
exercise an objective and
independent judgment on all
corporate affairs.
✓To reinforce its independence, the board
should also be composed of a majority of
non-executive directors and have at least two
(2) independent directors, or such number as
to constitute at least one-third of the
members of the board, whichever is higher.

RCC Sec 22 requires independent directors for corporations

vested with public interest of at least 20% of the Board while
PSE listed companies requires at least 3 or 30%, whichever is
higher, of its directors as independent directors. Images may be subject to copyright
6. Assessing Board Performance
•Principle
The best measure of the Board’s effectiveness is through an assessment
process. The Board should regularly carryout evaluations to appraise its
performance as a body, and assess whether it possesses the right mix of
backgrounds and competencies.
7. Strengthening Board Ethics
•Principle
Board directors are duty-bound to apply high ethical standards,
taking into account the interests of all stakeholders.

Images may be subject to copyright

I. Board’s Governance Responsibilities
Competent Clear Board
Board Responsibilities Committees

Board Board
Commitment
Independence Performance

Board Ethics
II. Disclosure and Transparency
8. Enhancing Company Disclosure
Policies and Procedures
•Principle
The company should establish corporate disclosure policies
and procedures that are practical and in accordance with
best practices and regulatory expectations.

Images may be subject to copyright

9. Strengthening The External Auditor’s
Independence and Improving Audit Quality
• Principle
The company should establish
standards for the appropriate
selection of an external auditor,
and exercise effective oversight
of the same to strengthen the
external auditor’s independence
and enhance audit quality.

Images may be subject to copyright

10. Increasing Focus on Non-financial
and Sustainability Reporting
•Principle
The company should ensure that
the material and reportable
non-financial and sustainability
issues are disclosed.

Images may be subject to copyright

11. Promoting a Comprehensive and Cost-
efficient Access to Relevant Information
•Principle
The company should maintain a
comprehensive and cost-
efficient communication
channel for disseminating
relevant information. This
channel is crucial for informed
decision-making by investors,
stakeholders and other
interested users.

Images may be subject to copyright

II. Disclosure and Transparency

Disclosure External Comprehensive

Sustainability
Policies and Auditor’s Access to
Reporting
Procedures Independence Information
III. Internal Control System and
Risk Management Frameworks
12. Strengthening Internal Control
and Risk Management Systems
•Principle
To ensure the integrity, transparency and proper
governance in the conduct of its affairs, the company should
have a strong and effective internal control system and
enterprise risk management framework.

Images may be subject to copyright

IV Cultivating a Synergic Relationship
with Shareholders
13. Promoting Shareholder Rights
• Principle
• The company should treat all shareholders fairly and
equitably, and also recognize, protect and
facilitate the exercise of their rights.

Images may be subject to copyright

V. Duties To Stakeholders
14. Reporting Rights of Shareholders and
Effective Redress for Violation of
Stakeholder’s Rights
•Principle
The rights of stakeholders established by law, by contractual
relations and through voluntary commitments must be
respected. Where stakeholders' rights and/or interests are at
stake, stakeholders should have the opportunity to obtain
prompt effective redress for the violation of their rights.

Images may be subject to copyright

15. Encouraging Employees’ Participation
• Principle
A mechanism for employee
participation should be
developed to create a symbiotic
working environment consistent
with the realization of the
company's objectives and good
corporate governance goals.

Images may be subject to copyright

16. Encouraging Sustainability and Social
Responsibility
• Principle
The company should be socially
responsible in all its dealings with
the communities in which it
operates. It should ensure that its
interactions serve its environment
and stakeholders in a positive and
progressive manner that is fully
supportive of its comprehensive
and balanced development.

Images may be subject to copyright

V. Duties To Stakeholders
Stakeholders Employees Sustainability
14

15

17
Right Participation and Social
Responsibility
In general, the updated CG Code per
MC no. 24 s2019 aims to:
• Increase the responsibilities of the board
• Ensure the competence and commitment of the directors
• Strengthen the protections of shareholders and other
stakeholders; and
• Promote full disclosure and transparency in both financial and
non-financial reporting
Measures to improve non-controlling
shareholders
• SEC MEMORANDUM CIRCULAR NO. 14 Series of 2020
• Shareholders who, alone or together with other shareholders,
hold at least five percent (5%) of the outstanding capital stock of a
publicly-listed company (PLC) shall have the right to include items
on the agenda prior to the regular/special stockholders’ meeting.
• SEC Memorandum Circular 4, Series of 2019, the SEC has
issued the Sustainability Reporting Guidelines for Publicly Listed
Companies, which aimed to raise awareness on sustainability
reporting among Philippine-listed companies.
Breaking the ethical
blind spot cycle
• Hiring honest people, training them in ethical behavior and
penalizing transgressions – is not working
• The fact is that ‘honest people’ don’t always live up to their
values.
• Ethics training incorrectly assumes that people always make
conscious decisions, while punishments are not effective
deterrents for those focused on short-term rewards as they
tend to ignore the risk of getting caught.
• According to Dr Michael Collins, a management expert with The University of
Queensland (UQ) Business School

Images may be subject to copyright

Recommendations
by Dr. Michael Collins
✓Identify employees with high reward sensitivity and low cognitive flexibility, as
there are now evidence-based tools to help them do so. “Forewarned is
forearmed”
✓Understand the type of people they are hiring or promoting and their appetite for
risk.
✓Then, rather than teaching moral values, they can help people improve their
‘ethical intelligence’ by developing self-awareness and learning how to navigate
their own ethical dilemmas.”
✓Other ways to encourage ethical behavior at the organization level include
▪ establishing open and transparent decision-making processes,
▪ having a system of checks and reviews,
▪ understanding the pros and cons of incentive schemes and
▪ being mindful of how high workload influences unethical behavior.
• According to Dr Michael Collins, a management expert with The University of Queensland (UQ) Business School

Images may be subject to copyright

Summary
END OF SESSION 1 PART 2
4 PILLARS OF PERFORMANCE
STRATEGY
• Corporate Governance
• Business Ethics
• Risk Management
• Internal Control
Ethics

Or simply GERI

Images may be subject to copyright

8 Characteristics of Good Governance By UN
Consensus Responsive
Oriented

Participatory Transparent
Good
Marked by the Governance
rule of law Accountable

Effective and Equitable and

efficient Inclusive
SHARED VISION