Good Governance,

Social Responsibility
and Environmental
Stewardship
What Is Governance?
 ‘Governance’ is the exercise of power or
authority – political, economic,
administrative or otherwise – to manage a
country's resources and affairs. It comprises
the mechanisms, processes and institutions
through which citizens and groups
articulate their interests, exercise their legal
rights, meet their obligations and mediate
their differences.
What is Good Governance?
 ‘Goodgovernance’ means
competent management of a
country’s resources and affairs
in a manner that is open,
transparent, accountable,
equitable and responsive to
people’s needs
What is Social Responsibility?
 Social responsibility is an ethical
framework which suggests that an
entity, be it an organization or
individual, has an obligation to act for
the benefit of society at large.
 Social responsibility is a duty every

individuals has to perform so as to

maintain a balance between the
economy and the ecosystems.
What is environmental Stewardship?
 Stewardship of the environment refers
to protecting the environment through
recycling, conservation, regeneration,
and restoration. It means taking
responsibility for our choices. The
responsibility for environmental
quality should be shared by all those
whose actions affect the environment.
 CHAPTER I
CORPORATION AND
CORPORATE GOVERNANCE
WHAT IS A CORPORATION?
 It
is an artificial being created by
operation of law, having the right
of succession and the powers,
attributes and properties
expressly authorized by law or
incident to its existence. (The
corporation code of the
Philippines, Sec. 2)
WHAT IS A CORPORATION?
 Artificial Being
◦ Which means that, by fiction of law a
corporation is a juridical person whose
personality is separate and distinct from its
owners. Corporation has some of a rights that
a natural person possesses. It can be sue and
be sued in the court, it can own and dispose
properties, and it is supposed to be given
independence by its owners in terms of
existence. Corporation can also be convicted
on criminal offense; fraud is an example.
WHAT IS A CORPORATION?
 Created by Operation of Law
◦ Which means it will come into existence
through a charter or a grant from the
state. It cannot exist by a mere
agreement or a unilateral and self-
declaration of existence. Functions of
corporations are governed strictly and it
has to do within the bounds of what is
being provided in the corporate charter.
WHAT IS A CORPORATION?
 Right of Succession
◦ A corporation can continue to exist even
in death, incapacity or insolvency of any
stockholder or member. The corporation
will not be dissolved even when there are
transfers of ownership.
WHAT IS A CORPORATION?
 Powers, Attributes and Properties
◦ Which means it is authorized to do
activities within the purpose(s) of its
creation, it has its own traits, and it
operated based on what has been
expressly provided in the charter
including those that are considered
incident to its existence as a corporation
STAKEHOLDERS OF A
CORPORATION
Any individual or group who can affect
or is affected by the actions, decisions,
policies, practices, or goals of the Stakeholder
organization.
An individual or a group that has
one or more of the various kinds of Stakeholder
stakes in the organization
What is Stakeholder?
STAKEHOLDERS OF A CORPORATION

 MANAGEMENT

◦ This refers to the party given authority to

implement the policies as determined by the
Board in directing the course/business activities
of the corporation (SEC, Code of Corporate
Governance)
◦ This is the group of people running the day-to-
day activities of the corporation.
◦ This team is composed of decision makers from
the top to the bottom of the corporate hierarchy.
STAKEHOLDERS OF A CORPORATION

 CREDITORS

◦ This refers to the party who lend to the

corporation goods, services or money.
Creditors may gain from corporation by way of
interest fro money loaned or profit for goods
sold or services rendered, thus it is important
that in running corporate affairs, the concerns
of the creditors should taken into
consideration.
STAKEHOLDERS OF A CORPORATION

 Shareholders
◦ This refers to people who invest their
capital in the corporation.
◦ The people who, in some cases considered
as the first believer of what the entity can
do.
◦ These are people who bet their money and
assume the high risk of having their money
going down the drain.
STAKEHOLDERS OF A CORPORATION

 Employees
◦ These are people who contribute their skills,
abilities and ingenuity to the corporation.
◦ They are the ones who invested their future
in the company with full trust and confidence
that the entity would make them secure.
◦ Employees and corporations have symbiotic
relationships.
STAKEHOLDERS OF A CORPORATION

 Clients
◦ The party considered to be the very reason for
the existence of the corporation.
◦ They are the buyers of the corporation’s product
and services for final consumption, enjoyment or
maybe for the use in the production/creation of
another goods.
◦ Clients or customers should be one of the
paramount consideration on the operation of a
corporation.
STAKEHOLDERS OF A CORPORATION
 Government
◦ The government has several interest in private
corporations the most apparent of which are the taxes that
the corporations are paying
◦ Corporate activities help the economy, in general, and the
individuals, in particular.
◦ There are services offered by the private corporations that
somehow lessens the burden of the government, for
example: health services, education, vital industries like
power, water and transportation.
◦ Government also set standards and regulate important
aspects of corporate activities.
STAKEHOLDERS OF A CORPORATION

 Public
◦ The public has a stake in corporations
considering that the latter provides the
citizens within the essentials such as
goods, services, employment and tax
money for public programs.
◦ Another aspect being considered are the
concerns on natural resources.
PURPOSES OF A CORPORATION

1. Early Stage Survival

2. To increase profit
3. To offer vital services to the
Public
4. To offer Goods and Services to
the Mass Market
PURPOSES OF A CORPORATION

 Early Stage Survival

◦ There are several theories on the
aims and objectives of a corporation.
However, for an entity which has
just started, the main objective would
be survival especially during the
early years of its existence.
PURPOSES OF A CORPORATION

 To Increase Profit
◦ According to Milton Friedman, the
social responsibility of business is “to
increase profit”. This is anchored on
the argument that stockholders are
the owners of the corporation and
therefore, corporate profits ultimately
accrue to them.
PURPOSES OF A CORPORATION

 To Increase Profit
◦ Stockholders are entitled to their
profits as a result of a contract among
the corporate stakeholders.
◦ A stakeholder in this perspective
refers to employees, managers,
customers, the local community
(public) and the stockholders.
PURPOSES OF A CORPORATION

 To Increase Profit
◦ Each cluster of stakeholder has a
contractual relationship with the firm,
since they receive the remuneration
they mutually and freely agreed to,
in a pre-established agreement or
contract.
PURPOSES OF A CORPORATION
 To Offer Vital Services to the General Public
◦ There are services that are hard for the government
to offer to the vast majority of people without the
help of private enterprises. The government cannot
even solve by itself the problem as basic as traffic.
It is in this context that partnership between the
government and private corporations be considered
to deal with some problems.
◦ Other services in which the government needs help
are in areas of power, water, education and health
services.
PURPOSES OF A CORPORATION
 To Offer Goods and Services to the Mass
Market
◦ Some corporations are run not only for the sole
purpose of generating profit but also to provide
service to the masses. This endeavor will
meet the needs of the lower income class
group by offering them something at a price
they can afford.
◦ For example: Cheap and accessible transport
service.
PURPOSES OF A CORPORATION
 To Offer Goods and Services to the Mass Market
◦ For example: Cheap and accessible transport service.
1. They differ in the area of pricing
2. They differ in the area of competition.
In a perfectly competitive market, the services and goods
are easily obtainable because there are lots of suppliers.

In a less-competitive market vital industries obtained by

government contracts, regulations and/or franchises, the
service and goods are only provided by few or worse, by
one producer.
 SHAREHOLDERS,
BONDHOLDERS AND
DIRECTORS
 SHAREHOLDERS
 Shareholders or stockholders are artificial or
natural persons that are legally regarded as
owners of the corporation. Stockholders are
bestowed with special privileges depending
on the class of their stockholdings. These
rights may include:
1. The right to vote on matters such as elections of
the board of directors.
2. The right to propose shareholder resolutions
3. The right to receive dividends.
 SHAREHOLDERS
4. Pre-emption right which is the right to purchase
new shares issued by the company to maintain its
percentage of ownership in the company. This
can also be called right to first refusal.
5. The right to liquidating dividends. That is the
right to receive the company’s assets during
liquidation or cessation of business.

However, stockholders’s rights to a company’s

assets come only second to the rights of the outside
creditors of the company.
 SHAREHOLDERS

Shareholders are considered

principals, and the directors and
officers are considered agents under
the agency theory of governance.
 BONDHOLDERS
 A bondholder is a person or entity that is the
holder of a currently outstanding bond.

 Advantages to being a bondholder rather

than a shareholder of a company
1. Bondholders and other outside
creditors are given priority over
stockholders
2. Bonds are not exposed to the
fluctuation of interest rates.
 BOARD OF DIRECTORS
 BOD refers to the collegial body that exercises
the corporate powers of the corporations formed
under the Corporation Code (SEC Code of
Corporate Governance).
 It conducts all business and controls or holds all

the assets of such corporations

 This body is formed by the stockholders and they

will act as the governing body of the corporation.

 The BOD will be headed by the chairman of the

board who is considered as the most influential

person in the corporation
 BOARD OF DIRECTORS
 The boards activity are determined by the powers,
duties and responsibilities delegated to it or
conferred on it by an authority. (detailed in the
corporation’s by-laws)

 By laws:
◦ Specify the number of members of the board
◦ It also contain matters such as how the board members
are to be chosen including the specifics on when and
where they are going to meet to discuss things
concerning the operation of a corporation.
Duties of the Board of Directors
 Governing the organization by
establishing broad policies and
objectives;

◦ Examples:
1. Investment policies
2. Diversification policies
Duties of the Board of Directors
 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 the

organization’s performance.
MULTINATIONAL AND
TRANSNATIONAL
CORPORATIONS
Multinational Corporations (MNC)
 MNC have investment in other
countries but do not have coordinated
product offerings in each country

Example: Uniliver, Procter & Gamble,

McDonalds and 7-11.
Transnational Corporations (TNC)
 Transnationalcorporation (TNC) refer to
enterprises which own or control
production or service facilities outside the
country in which they are based. (United
Nations Commission on Transnational Corporations and Investment)

 TNC is any corporation that is registered

and operates in more than one country at
a time.
 CORPORATE
GOVERNANCE
Definitions
 The Malayan High Level Finance Committee
Report on Corporate Governance defined
corporate governance as the process and
structure used to direct and manage the
business and affairs of the company towards
enhancing business prosperity and corporate
accountability with the ultimate objective of
realizing long-term shareholder value, whilst
taking into account the interests of other
stakeholder.
Definitions
 The Wall Street Journal defined corporate
governance as:

“Corporate Governance, in principle,
refers to the joint responsibility
imposed on the Board of Directors
and management to protect
shareholder rights and enhance
shareholder value.
Definitions
 SEC Memo Cir. No. 2, Series of 2002, Code of
Corporate Governance defined corporate governance
as:
 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 increasingly global market place
Definitions
 Accordingto Sir Adrian Cadbury
“Corporate Governance, is
concerned with holding the
balance between economic
and social goals and between
individual and communal
goals.
Definitions

Corporate Governance is
defined as the structures and
processes by which
companies are directed and
controlled.
Definitions

 Good corporate governance helps

companies operate more efficiently,
mitigate risk and safeguard against
mismanagement, and improve access to
capital that will fuel their growth.
 It makes companies more accountable

and transparent to investors and gives

them tools to respond to stakeholder
concerns, including implementation of
good environmental and social practices.
Definitions
 Corporate governance also contributes to
development. Increased access to capital
encourages new improvements, boosts
economic growth and provides employment
opportunities.
 Businesses that operate more efficiently tend to

allocate and mange resources more sustainably.

 Better stakeholder relationships help companies

address environmental protection, social, and

labor issues.
FUNDAMENTAL OBJECTIVES
OF CORPORATE
GOVERNANCE
 Improvement of Shareholder
Value
 Shareholders’ value can be improved by making
a pre-commitment to build better relations with
primary stakeholders like employees,
customers, suppliers and communities
 Better relations will lead to an increase in

shareholders’ wealth since this would help the

firms expand and develop intangibles which the
firm could capitalize on and in turn become a
source of their competitive advantage.
 Improvement of Shareholder
Value
 Good reputation is just one example to
these intangibles which could largely
predict the future of the business.
◦ Better relations with employees engender
employees’ commitment.
◦ Good relations with customers and
suppliers complete the full circle of strong
alliances.
 Conscious Consideration of the
Interests of Other Stakeholders
 When a company meets the objective of
increasing the shareholders value, it will have
greater internally-generated resources in
improving its commitment in meeting its
environmental, community and social
obligations.
 It can pay taxes well; reward, train and retain

key staff; and enhance employee

satisfaction. A key focus area is a company’s
human capital, which is a lead indicator of
success.
 WHAT GOOD
GOVERNANCE PROMOTES?
TRANSPARENCY
 Transparency is built on the free flow of
information. It promotes openness of
government actions, decision making
processes and consultative processes among
public sectors and all stakeholders.
ACCOUNTABILITY
 Itis the recognition and assumption
of responsibility for the decisions,
actions, policies, administration,
governance and implementation of
programs and plans of the
corporation and people involved,
including the obligation to report,
explain and be answerable for its
resulting consequences.
ACCOUNTABILITY
 It is acknowledging and taking charge
for and being transparent about the
impacts of the
 It is based on the premise that an

accountable organization will take

action to:
ACCOUNTABILITY
◦ Set a policy based on comprehensive
and balance understanding and
response to material stakeholders’
issues and concerns; emphasis on this
premise is the overall broad philosophy
and operating style of the entity itself.
◦ Set goals and standards against which
strategy and associated performance
can be measured and evaluated.
ACCOUNTABILITY
◦ Disclose credible information about
strategy, goals standards and
performance to those who base their
actions and decisions on this information.
 Decision makers in government, the

private sector and civil society

organizations are accountable to the
public, as well as to institutional
stakeholders.
Prudence
 It
is defined as “care, caution and
good judgment as well as wisdom in
looking ahead.” It is the management
committee which is in corporate
setting, the board of director, who will
be the body responsible in
safeguarding the interest of the
organization through good planning
and management of finances and
other resources of the organization.
BENEFITS OF GOOD
GOVERNANCE
Reduced Vulnerability
 Adopting good corporate governance practices
leads to an
◦ Improved system of internal control
◦ Greater accountability, protection of corporate
resources and eventually, better profit margins.
◦ It will also pave the way for probable future
development, diversification, including the capability to
attract investors, both sourced nationally and abroad.
◦ It will also reduce the cost of loans or credits for
corporations since companies with good corporate
governance can be considered low-risk companies in
the eyes of debt investors.
Marketability
Embracing principles of good corporate
governance can also play a role in enhancing
the corporate value of companies. This leads to
◦ Easy access to capital in financial markets which
helps company survive in an even more competitive
environment.
◦ It will also make the company more attractive in the
open market.
◦ This attribute will be beneficial and will place the
company at the finer end of bargaining in times
when strategic alliances are needed.
Credibility
 Benefits when a company embraces good
governance:
1. The company need not spend more resources in
compliance with the regulatory and other
financial institution’s requirements necessary
since all things are already integrated in
company’s operating approach.
2. Companies that are known for good governance
practices do not need to sell themselves that
hard for the investors to fuse-in their
investment either as equity or as debt investors.
Credibility
 When a company is credible, investor’s
trust comes next;
 where investors trust is in, money

follows;
 when there is money, there is

flexibility.
AGENCY PROBLEM IN CORPORATIONS
 In traditional approach, corporation is treated
as a single entity.
 It is one of the features of a sole

proprietorship. Owner-managers have no

conflict of interest.
 In big companies – there is a separation of

owners and managers.

 Financial managers should work in the best

interests of the owners by taking actions that

increase the value of the company.
AGENCY PROBLEM IN CORPORATIONS
 Advantagesof the separation of
stockholders and management:
1. It allows share ownership to
change without interfering so
much with the operations of the
business
2. It allows the company to hire
professional managers
AGENCY RELATIONSHIPS AND COSTS
 The connection between owners
and managers is called a
principal-agent problem and the
conflict is called agency
relationship.
 Shareholders are the principal; the

managers are their agents.

AGENCY RELATIONSHIPS AND COSTS
 Agency costs are incurred when:
1. Managers do not attempt to
maximize the firm value
2. Shareholders incur costs to monitor
the managers and influence their
actions.
 Agency costs refers to the cost of
the conflict of interest between
stockholders and management
 Types of Agency Costs
 IndirectCost – is a lost opportunity….
 Direct agency cost come in two forms:

a. It is a corporate expenditure that

benefits management but costs the
stockholders.
b. It is an expense that arises from the
need to monitor management actions.
Example, paying outside auditors to
assess the accuracy of financial
statement information.
Goals of Financial Management
1. To survive
2. To avoid financial distress and
bankruptcy
3. To beat the competition
4. To maximize sales or market share
5. To minimize costs
6. To maximize profits
7. To maintain the steady earning
growth