Course Code – Title : GBRMIC-Governance, Business Ethics, Risk Management and Internal Control

Course Description : Governance, Business Ethics, Risk Management and Internal Control
Accounting aims to equip accountancy students the basic knowledge, skills and perspective that are
necessary in facing the challenge in the continuously changing business environment whether it be in the
public practice sector, accounting practice, internal audit or accounting information system management.

Module No – Title : MO3 – Securities & Exchange Commission (SEC) Code of Corporate Governance
Time Frame : 1 week – 3 hrs

Desired Learning Outcomes

At the end of the learning session, you should be able to:
a) Understand the need for the Code of Governance for publicly -listed companies.
b) Know the sixteen (16) governance responsibilities of the Board of Directors of publicly-
listed companies.
c) Explain the meaning of “comply and explain” approach.
d) Describe the three aspects of the Code, namely
 Principles
 Recommendations
 Explanations
e) Know what constitutes a competent board and how can it be established.
f) Understand the composition, functions and responsibilities of the board committees that
can be established such as the
 Audit Committee
 Corporate Governance Committee
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  Board Risk Oversight Committee
 Related Party Transaction Committee
g) Know how the directors can show full commitment to the company.
h) Understand how independence and objectivity of the board can be reinforced and
enhanced
i) Describe how the performance and effectiveness of the board can be assessed.

Content/Discussion

CHAPTER 3 SEC CODE OF CORPORATE GOVERNANCE FOR PUBLICLY-LISTED COMPANIES

(CG Code for PLCs)
Securities and Exchange Commission SEC MC No. 19, Series of 2016

On November 10, 2016, the Securities and Exchange Commission approved the Code of Corporate
Governance for publicly-listed companies. Its goal is to help companies develop and sustain an ethical
corporate culture and keep abreast with recent developments in corporate governance.

One of its salient provisions is for publicly-listed companies to establish a code of business conduct and submit
a new manual on Corporate Governance that would “provide standards for professional and ethical behavior as
well as articulate acceptable and unacceptable conduct & practices”. The Board of Directors is required to
implement the code and make sure that management and employees comply with the internal policies set.

THE BOARD’S GOVERNANCE RESPONSIBILITIES

Principles 1: 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.

Principle 2: 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 stockholders and other stakeholders.

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Principle 3: 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, risk management, related part transactions, and other
key corporate governance concerns, such as nomination and remuneration.

Principle 4: 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.

Principle 5: The Board should endeavor to exercise objective and independent judgment on all corporate affairs.

Principle 6: The best measure of the Board’s effectiveness is through an assessment process. The Board
should regularly carry out evaluations to appraise its performance as a body, and assess whether it possesses
the right mix of backgrounds and competencies.

Principle 7: Members of the Board are duty-bound to apply high ethical standards, taking into account the
interests of all stakeholders.

DISCLOSURE AND TRANSPARENCY

Principle 8: The company should establish corporate disclosure policies and procedures that are practical and
in accordance with best practices and regulatory expectations.

Principle 9: 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.

Principle 10: The company should ensure that material and reportable non-financial and sustainability issues
are disclosed.

Principle 11: 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.

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INTERNAL CONTROL SYSTEM AND RISK MANAGEMENT FRAMEWORK
Principle 12: 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.

CULTIVATING A SYNERGY RELATIONSHIP WITH SHAREHOLDERS

Principle 13: The company should treat all shareholders fairly and equitably, and also recognize, protect and
facilitate the exercise of their rights.

DUTIES TO STAKEHOLDERS
Principle 14: 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.

Principle 15: A mechanism for employee participation should be developed to create a symbiotic environment,
realize the company’s goals and participate in its corporate governance processes.

Principle 16: The company should be socially responsible in all its dealings with the communities where 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 balances development.

DEFINITION OF TERMS:
Corporate Governance – the system of stewardship and control to guide organizations in fulfilling their long-
term economic, moral, legal and social obligations towards their stakeholders.

Board of Directors – the governing body elected by the stockholders that exercises the corporate powers of
corporation conducts all its business and controls its properties.

Management – a group of executives given the authority by the Board of Directors to implement the policies it
has laid down in the conduct of business of the corporation.

Independent director – a person who is independent of management and the controlling shareholder, and is
free from any business or other relationship which could, or could reasonably be perceived to, materially
interfere with his exercise of independent judgment in carrying out his responsibilities as a director.

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Executive director – a director who has executive responsibility of day-to-day operations of a part or the whole
of the organization.

Non-executive director – a person who has no executive responsibility and does not perform any work related
to the operations of the corporation.

Conglomerate – a group of corporations that has diversified business activities in varied industries, whereby
the operations of such businesses are controlled and managed by a parent corporate entity.

Internal Control – a process designed and effected by the board of directors, senior management, and all
levels of personnel to provide reasonable assurance on the achievement of objectives through efficient and
effective operations; reliable, complete and timely financial and management information; and compliance with
applicable laws, regulations, and the organization’s policies and procedures.

Enterprise Risk Management – a process, effected by an entity’s Board of Directors, management and other
personnel, applied in strategy setting and across the enterprise that is designed to identify potential events that
may affect the entity, manage risks to be within its risk appetite, and provide reasonable assurance regarding
the achievement of entity objectives.

Related Party – shall cover the company’s subsidiaries, as well as affiliates and any party, that the company
exerts direct or indirect control over or that exerts direct or indirect control over the company.

Related Party Transactions – a transfer of resources, services or obligations between a reporting entity and a
related party, regardless of whether a price is charged.

Stakeholders – any individual, organization or society at large who can either affect and/or be affected by the
company’s strategies, policies, business decisions and operations, in general.

THE BOARD’S GOVERNANCE RESPONSIBILITIES

I. ESTABLISHING A COMPETENT BOARD
Principle 1

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The company should be headed by 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.

Recommendation 1.1
The Board should be composed of directors with a collective working knowledge, experience or
expertise that is relevant to the company’s industry/sector. The Board should always ensure that it has
an appropriate mix of competitive and expertise and that its members remain qualified for their positions
individually and collectively, to enable it to fulfill its roles and responsibilities and respond to the needs of
the organization based on the evolving business environment and strategic direction.

Recommendation 1.2
The Board should be composed of a majority of non-executive directors who possess the necessary
qualifications to effectively participate and help secure objective, independent judgment on corporate
affairs and to substantiate proper checks and balances.

Recommendation 1.3
The Company should provide in its Board Charter and Manual on Corporate Governance a policy on the
training of directors, including an orientation program for first-time directors and relevant annual
continuing training for all directors.

Recommendation 1.4
The Board should have a policy on board diversity.

Recommendation 1.5
The Board should ensure that it is assisted in its duties by a Corporate Secretary, who should be a
separate individual from the Compliance Officer. The Corporate Secretary should not be a member of
the Board of Directors and should annually attend a training on corporate governance.

Recommendation 1.6

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 The Board should ensure that it is assisted in its duties by a Compliance Officer, who should have a
rank of Senior Vice-President or an equivalent position with adequate stature and authority in the
corporation. The Compliance Officer should not be a member of the Board of Directors and should
annually attend a training on corporate governance.

II. ESTABLISHING CLEAR ROLES AND RESPONSIBILITIES OF THE BOARD

Principle 2
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.

Recommendation 2.1
The Board members should act on a fully informed basis, in good faith, with due diligence and care, and
in the best interest of the company and all shareholders.

Recommendation 2.2
The Board should oversee the development of and approve the company’s business objectives and
strategy, and monitor their implementation, in order to sustain the company’s long-term viability and
strength.

Recommendation 2.3
The Board should be headed by a competent and qualified Chairperson.

Recommendation 2.4
The Board should be responsible for ensuring and adopting an effective succession planning program
for directors, key officers, and management to ensure growth and a continued increase in the
shareholders’ value.

Recommendation 2.5
The Board should align the remuneration of key officers and board members with the long-term interests
of the company. In doing so, it should formulate and adopt a policy specifying the relationship between
remuneration and performance. Further, no director should participate in discussions or deliberations
involving his own remuneration.

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Recommendation 2.6
The Board should have and disclose in its Manual on Corporate Governance a formal and transparent
board nomination and election policy that should include how it accepts nominations from minority
shareholders and reviews nominated candidates.

Recommendation 2.7
The Board should have the overall responsibility in ensuring that there is a group-wide policy and
system governing related party transactions (RPTs) and other unusual or infrequently occurring
transactions, particularly those which pass certain thresholds of materiality.

Recommendation 2.8
The Board should be primarily responsible for approving the selection and assessing the performance of
the Management led by the Chief Executive Officer (CEO), and control functions led by their respective
heads.

Recommendation 2.9
The Board should establish an effective performance management framework that will ensure that the
Management, including the CEO and personnel’s performance is at par with the standards set by the
Board and Senior Management.

Recommendation 2.10
The Board should oversee that an appropriate internal control system is in place, including setting up a
mechanism for monitoring and managing potential conflicts of interest of Management, board members,
and shareholders. The Board should also approve the Internal Audit Charter.

Recommendation 2.11
The Board should oversee that a sound enterprise risk management (ERM) framework is in place to
effectively identify, monitor, assess and manage key business risks. The risk management framework
should guide the Board in identifying units/business lines and enterprise-level risk exposures, as well as
the effectiveness of risk management strategies.

Recommendation 2.12

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 The Board should have a Board Charter that formalizes and clearly states its roles, responsibilities and
accountabilities in carrying out its fiduciary duties. The Board Charter should serve as a guide to the
directors in the performance of their functions and should be publicly available and posted on the
company’s website.

III. ESTABLISHING BOARD COMMITTEES

Principle 3
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, risk management, related party transactions and
other key corporate governance concerns, such as nomination and remuneration.

Recommendation 3.1
The Board should establish board committees that focus on specific board functions to aid in the optimal
performance of its roles and responsibilties.

Recommendation 3.2
The Board should establish an Audit Committee to enhance its oversight capability over the country’s
financial reporting, internal control system, internal and external audit processes, and compliance with
applicable laws and regulations.

Recommendation 3.3
The Board should establish a Corporate Governance Committee that should be tasked to assist the
Board in the performance of its corporate governance responsibilities, including the functions that were
formerly assigned to a Nomination and Remuneration Committee.

Recommendation 3.4
Subject to a corporation’s size, risk profile and complexity of operations, the Board shoul establish a
separate Board Risk Oversight Committee (BROC) that should be responsible for the oversight of a
company’s Enterprise Risk Management system to ensure its functionality and effectiveness.

Recommendation 3.5
Subject to a corporation’s size, risk profile and complexity of operations, the Board should establish a
Related Party Transaction (RPT) Committee, which should be tasked with reviewing all material related

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 party transactions of the company and should be composed of at least three non-executive directors,
two of whom should be independent, including the Chairman.

Recommendaiton 3.6
All established committees should be required to have Committee Charters stating in plain terms their
respective purposes, memberships, structures, operations, reporting processes, resources and other
relevant information.

IV. FOSTERING COMMITMENT

Principle 4
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.

Recommendation 4.1
The directors should attend and actively participate in all meetings of the Board, Committees, and
Shareholders in person or through the tele/videoconferencing, conducted in accordance with the rules
and regulations of the Commission, except when justifiable causes, such as illness, death in the
immediate family and serious accidents, prevent them from doing so.

Recommendation 4.2
The non-executive directors of the Board should concurrently serve as directors to a maximum of five
publicly listed companies to ensure that they have sufficient time to fully prepare for meetings, challeng
Management’s proposals/views, and oversee the long-term strategy of the company.

Recommendation 4.3
A director should notify the Board where he/she is an incumbent director before accepting a directorship
in another company.

V. REINFORCING BOARD INDEPENDENCE

Principle 5
The board should endeavor to exercise an objective and independent judgment on all corporate affairs.

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Recommendation 5.1
The Board should have at least three independent directors, or such number as to constitute at least
one-third of the members of the Board, whichever is higher.

Recommendation 5.2
The Board should ensure that its independent directors possess the necessary qualifications and none
of the disqualifications for an independent director to hold the position.

Recommendation 5.3
The Board’s independent directors should serve for a maximum cumulative term of nine years. After
which, the independent director should be perpetually barred from re-election as such in the same
company, but may continue to qualify for nomination and election as a non-independent director.

Recommendation 5.4
The positions of the Chairman of the Board and Chief Executive Officer should be held by separate
individuals and each should have clearly defined responsibilities.

Recommendation 5.5
The Board should designate a lead director among the independent directors if the Chairman of the
Board is not independent, including if the positions of the Chairman of the Board and Chief Executive
Officer are held by one person.

Recommendation 5.6
A director with a material interest in any transaction affecting the corporation should abstain from taking
part in the deliberation for the same.

Recommendation 5.7
The non-executive directors (NEDs) should have separate periodic meetings with the external auditor
and heads of the internal audit, compliancde and risk functions, without any executive directors present
to ensure that proper checks and balances are in place within the corporation. The meetings should be
chaired by the lead independent director.

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VI. ASSESSING BOARD PERFORMANCE
Principle 6
The best measure of the Board’s effectiveness is through an assessment process, The Board should
regularly carry out evaluations to appraise its performance as a body, and assess whether it possesses
the right mix of backgrounds and competencies.

Recommendation 6.1
The Board should conduct an annual self-assessment of its performance including the performance of
the Chairman, individual members and committees. Every three years, the assessment should be
supported by an external facilitator.

Recommendation 6.2
The Board should have in place a system that provides, at the minimum, criteria and process to
determine the performancde of the Board, the individual directors, committees and such system should
allow for a feedback mechanism from the shareholders.

VII. STRENGTHENING BOARD ETHICS

Principle 7
Members of the Board are duty-bound to apply high ethical standards, taking into account the interests
of all stakeholders.

Recommendation 7.1
The Board should adopt a Code of Business Conduct and Ethics, which would provide standards for
professional and ethical behavior, as well as articulate acceptable and unacceptable conduct and
practices in internal and external dealings.

Recommendation 7.2
The Board should ensure the proper and efficient implementation and monitoring of compliance with the
Code of Business Conduct and Ethics and internal policies.

VIII. DISCLOSURE AND TRANSPARENCY

Principle 8

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The company should establish corporate disclosure policies and procedures that are practical and in
accordance with best practices and regulatory expectations.

Recommendation 8.1
The Board should establish corporate disclosure policies and procedures to ensure a comprehensive,
accurate, reliable and timely report to shareholders and other stakeholders that gives a fair and
complete picture of a company’s financial condition, results and business operations.

Recommendation 8.2
The Company should have a policy requiring all directors and officers to disclose/report to the company
any dealings in the company’s shares within three business days.

Recommendation 8.3
The Board should fully disclose all relevant and material information on individual board members and
key executives to evaluate their experience and qualifications, and assess any potential conflicts of
interest that might affect their judgment.

Recommendation 8.4
The company should provide a clear disclosure of its policies and procedure for setting Board and
executive remuneration, as well as the level and mix of the same in the Annual Corporate Governance
Report.

Recommendation 8.5
The company should disclose its policies govering Related Party Transactions (RPTs) and other
unusual or infrequently occuring transactions in their Manual on Corporate Governance.

Recommendation 8.6
The company should make a full, fair, accurate and timely disclosure to the public of every material fact
or event that occurs, particularly on the acquisition or disposal of significant assets, which could
adversely affect the viability or the interest of its shareholders and other stakeholders.

Recommendation 8.7

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 The company’s corporate governance policies, programs and procedures should be contained in its
Manual on Corporate Governance, which should be submitted to the regulators and posted on the
company’s website.

IX. STRENGTHENING THE EXTERNAL AUDITOR’S INDEPENDENCE AND IMPROVING AUDIT

QUALITY
Principle 9
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.

Recommendation 9.1
The Audit Committee should have a robust process for approving and recommending the appointment,
reappointment, removal, and fees of the external auditor should be recommended by the Audit
Committee, approved by the Board and ratified by the shareholders.

Recommendation 9.2
The Audit Committee Charter includes a disclosure of its responsibility on assessing the intergrity and
independence of the external auditor.

Recommendation 9.3
The company should disclose the nature of non-audit services performed by its external auditor in the
Annual Report to deal with the potential conflict of interest.

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