CHAPTER 3

CORPORATE
GOVERNANCE
Presenting by: Group 4
Corporate
Governance
The concept of corporate governance emerged in the
1970s to protect stakeholders and prevent corporate
scandals. However, despite stricter regulations,
corporate failures continue to occur. This raises
questions about the eff ectiveness of existing corporate
governance structures and the role of individual
behavior in corporate misconduct. Even companies
recognized for their exemplary governance practices,
like Enron, have fallen victim to questionable
governance. This suggests that while rules are
important, they are only as eff ective as the people who
must abide by them.

A well-known example of a company that experienced a

major corporate governance failure despite having
received awards for its governance practices is Enron.
Enron was an American energy company that was once
considered a model of innovation and fi nancial success.
In the late 1990s and early 2000s, the company received
numerous awards for its corporate governance practices,
including being named "America's Most Innovative
Company" by Fortune magazine for six consecutive
years.

However, Enron's success was built on a foundation of

accounting fraud and deception. The company used
complex fi nancial instruments and off-balance-sheet
entities to hide billions of dollars in debt and infl ate its
earnings. This ultimately led to the company's collapse
in 2001, resulting in the loss of thousands of jobs and
billions of dollars in investor money.

Enron's downfall serves as a stark reminder that even

companies that have achieved high levels of corporate
governance excellence can fall prey to unethical
behavior and misconduct.
The concept of corporate governance has evolved
beyond simply adhering to internal policies and serving
stakeholders with honesty and transparency. It now
encompasses a company's social responsibility and its
role in contributing to societal betterment as a key
factor for long-term success. This shift refl ects the
growing demand from stakeholders for companies to
prioritize social good, making it a critical driver for
board decisions.

Following Tricker's defi nition, corporate governance is

about controlling and governing a corporation through
internal and external mechanisms. It aims to optimize
resources for the benefi t of stakeholders, increase
accountability, and prevent disasters by incorporating
risk management practices. Good governance is
essential for all organizations, regardless of their
structure or ownership, as it ensures the long-term
sustainability of their activities.
Philippine Corporate
Governance
Corporate governance in the Philippines shares similar qualities
with its East Asian counterparts, most observed of the family-
ownership structure (Echanis, 2006; Kabigting, 2011; Saldaña,
1999). This quality has been referred to as among the weakest
attributes of corporate governance in the country if gauged
against the codes on control (monitoring function) and
transparency (reporting) is concerned.

Disclosure is not crucial in a relationship-based transaction

environment where insiders exercise control over the degree of
information disclosure or what the authors would call
“information asymmetry” (p. 57). The OECD Principle (2015)
stated that disclosure infl uences the behavior of companies and
protects investors. Thus, information symmetry lends to
withholding information on impropriety and management
practices making it diffi cult to monitor misdeeds, let alone
making the culprits accountable for their misbehavior With the
chronicling of OECD Principles (2015) and other codes as stated
in the philippines’ regulatory structures such as those of the
Securities and Exchange Commission (SEC) Bangko Sentral ng
Compounding the problem of transparency is legislature.
Disclosure clauses of both the SEC and the auditing fi rms
were found to be weak and too generic. The purpose of
disclosure is to provide stockholders with accurate and
timely information to protect their interests. Shareholder
protection is among the cornerstones of the Principles of
Corporate Governance (OECD, 2015). Ownership structure
lends itself to digressions of transparency, so regular
monitoring should be conducted more often (Echanis, 2006),
and perhaps demanded from these regulators to be more
stringent.

In the World Bank Report on the Observance of Standards

and Codes of corporate governance based on the OECD
categories, the Philippines scored 74/115 maximum points.
Five categories, namely: rights of shareholders, the
equitable treatment of shareholders, the role of stakeholders
in corporate governance, disclosure and transparency, and
responsibilities of the board, were rated on a fi ve-point
Likert scale from 1 – Not Observed (1 point) to 5 Observed
The Philippines' own Code of Corporate Governance is
stated in SEC Memorandum Circular No. 2. Series of
2002, complementing the Corporation Code of the
Philippines (Paras & Ramos-Anonuevo, 2002). The said
code was revised as stated in SEC Memorandum Circular
No. 19, Series of 2016). Among other things, the
Revised Code of Corporate Governance (2016) specifi ed
that the board of directors is mainly responsible for
governance. It does not specify the recommended
number of independent directors for a publicly-listed
company. The revised Corporation Code of the
Philippines (2019), however, stated that the board
should be comprised of at least 20 percent independent
directors from the total number of directors; board
committees are formed to aid in complying with good
corporate governance, and that management is
accountable to the board, and the board is accountable
to the stockholders.
Governance and Management
Management focuses on the day-to-day operations of an
organization. Executives and managers in management
ensure that the company is run well and, ideally, brings
profi t for its shareholders. On the other hand, the
governance function is carried out by a body or group of
persons (board of directors/trustees) who governs the
organization, making sure that the company or entity is
effi ciently and eff ectively run by management.
Management - is operated by its human and material
resources to achieve organizational success. Such
success may be measured by profi ts generated through
its operations and the continued growth of its resources
to produce more revenues.

A board supervises the management and provides

oversight, ensuring that the company is steered in the
right direction for the satisfaction of its various
stakeholders without direct interference in the day-to-day
operations of the company.
 Key Players in Corporate
Governance
There are fi ve key players in corporate
governance, namely the CEO, the chairman of
the board, the board of directors, the
shareholders, and the stakeholders. 03. Board of
This is the Directors
best entity for steering the company’s
strategic direction and evaluating its performance. As a
director, questions must be asked during board
01. CEO meetings to make sure decisions made by the company
will be for the best interest of the company in the long
The CEO is the person responsible for leading and term.
managing the entire organization in achieving its
organizational goals. It is the duty of the CEO to
collaborate with the board for the overall direction of
04. Shareholders
the company. Considered owners of the company through their
ownership/ holdings of stock shares, this group actively

02. Chairman of the seeks to maximize stock price increase over a period of
time.
Board
The chairman of the board of directors should not
only provide leadership of the board, but also play
an important role in the governance practices of
05. Stakeholders
the company. Any group of people who are affected by how a
corporation operates in (i.e., employees, suppliers,
government, and society among others).
 THEORITICAL PERSPECTIVES

Agency Theory Steward Theory

According to this theory, the agent acts in the

This theory posits that managers cannot
principals best interest and therefore acts as a
be trusted and act on their interest and responsible steward of the company. Davis and
not for the benefi t of the owners of the Donaldson however, believed that agents are
company. And according to this theory, naturally inclined to provide proper oversight and
measuring performance through agent works for the best interest of the owners. This
and rewarding them help assuage the alternative view has been widely debated because
instric nature of agents. However, the of the tenets of agency theory should have
provided control mechanisms for the agent to
mechanics put in place from this
behave, but did not do so given numerous
perspective has not been guaranteed. corporate collapses that are still happening to this
day.

Resources Depends Theory Stakeholders Theory

This theory looks at corporate Freeman(1984) developed this

governance from a strategic societal perspective. This
management view. The long term
approach to corporate governance
survival of an organization is
encourages boards to consider
dependent on the effi cient and
eff ective use of its resources. This their stakeholder’s concern, not
theory also suggest that board only shareholders, as the metric
members should actively develop for a successful organization is
their resources to build a the satisfaction of all its
competitive advantage. stakeholders.
Culture and Corporate
Governance
Corporate governance is an important dimension to consider
when studying the relationship between an organization’s
culture and governance processes. Corporate Governance is
generally seen as a mechanisms that promote good
governance, but it is a culture that gives it the impetus.

Approaches to Corporate
Governance
A rules-based approach to corporate governance relies on
regulation and the law to ensure compliance . On the other
hand, it is in a principles-based approach wherein companies
are required to explain why certain violations of the code
have been made. Both approaches adopt a unitary board
(against the European two-tier board)wherein there are two
boards, one made up of executive directors and another
board made up of non-executive directors (shareholders and
employees).
Other Forms of
Organizations
The main objective of good governance is the proper
governance of its valuable resources for its stakeholders.
While these may not be under the scrutiny of regulating
bodies, it is just as important to ensure good governance
through its board of directors (or trustees).

Functions of the Board

 There are four main
functions of a
Accountabili
board:
Monitoring and Setting Strategy
ty be accountable?
Why supervision
Another function of the board is to policy formulation
For strategies to work, a set The most important function
Simply because the oversee the performance of its of policies, procedures, and of the board as this will steer
success or failure of an management. There are various plans mus be prepared for the company to achieve its
organization rests on the financial and nonfinancial metrics
management to abide by. vision and mission. A large
board and the board available but most companies
This is also used to supervise part of board work is spent
should be accountable prefer to use financial metrics as it
management activities. on the formulation and
not only to their is readily quantifiable, such as
These may either be set by calibration of organizational
shareholders but also to sales, net income, financial ratios,
the board or by approving strategies. Board members
all the other stakeholders and others. Another common tool
the recommendations by require strategic planning
used is the budgetary control
affected by their actions/ management which is often
system that compares the budget with varying backgrounds
behavior. the case.
against actual numbers from and expertise.
operations.
Membership of the
Board
Board size is determined by the current board and
should comply with the terms established in the bylaws Politics in the Board
of the corporation. A corporation is composed of one
director (for OPCs) up to a maximum of 15 directors An aspect of organizational life is the
with each director owning at least one share of Stock, existence of politics. Politics can be
as per the guidelines indicated in the Philippine destructive.
Corporate Code (2019). The term for each director is If used the wrong way but can also be used
set at one year among holders of stocks of the positively to further a worthwhile agenda
company (three years in the case of trustees, chosen or cause that will benefi t the company.
from among the members of the corporation). Corporate politics may be described as
processes and interactions, involving
Director classifi cation comes in many forms but there power and authority that infl uence
are three main director types: independent, non- decisions made for the benefi t of an
executive, and executive directors. Independent Individual, group, or organization. In the
directors are individuals who have no connection with study of corporate governance, it is
the company and is free from any relationship which important to understand a company’s
may be considered a confl ict of interest. While non- governance structure, or where the power
executive directors are individuals who are not part of lies. Tricker (2019) noted that human
management but are related to a certain aspect of the behavior is based on relationships, and by
company, such as supplier, family representative, the processes of power. How people
friend, adviser, or shareholder. On the one hand, behave in an organization is dictated by
executive directors hold a particular executive position their association of power.
 Importance of
Committees
Committees are formed because board work can be done more eff ectively. By
focusing and discussing particular issues separately from general board
meetings, the time management of directors is optimized. It is advisable and
recommended that the chairman of these committees be independent
directors so that they truly perform their oversight roles according to the
requirements of the regulating bodies. In publicly listed companies, the
following committees are required by regulating bodies:

1. Audit committee – As 2. Remuneration committee - 3. Nomination committee

a result of corporate This committee is responsible – To assure an eff ective
meltdowns, this for identifying compensation working board, the directors
committee has become a and benefi t plans for directors on board must be
nonnegotiable aspect of and senior executives through independent thinkers,
good governance. The performance appraisals. including its executive
main objective of the Excessive compensation directors. The nomination
audit committee is to packages during economic committee should nominate
oversee accounting and downturns or fi nancial crises the right mix of board
warrant a closer investigation of members to ensure
fi nancial reporting
the rationale behind said objectivity, independence,
processes and results.
compensation. and expertise. However,
They make sure that
there is usually a
internal and external
preponderance of the “old
audits are carried out with
Toward an Effective Working
Board
An eff ective working board would require the sound leadership of a board. Apart
from this fundamental quality, it would be ideal for directors to have the
following traits:
1. Commitment – commitment in terms of time As with any professional endeavor, training and
spent and in the achievement of strategic development are the key to building
objectives;
Skills that will enhance performance. This also builds
participant confi dence in tarrying out their respective
2. Expertise – possess strong technical knowledge
roles in the organization. Professional director
of the industry or business; associations such as the Institute of Corporate
Directors (ICD) and Good Governance Advocates and
3. Unity – ability to work and get along with fellow Practitioners of the Philippines (GGAPP) are two
board members; collaborating eff ectively in getting leading outfi ts that provide such training.
the group to agree on resolutions; Perspectives; and
Information symmetry is needed for board members to
4. Independence challenging the status quo and perform their functions properly. Documents for review
must be given on time with complete formation. While
critically questioning
each director may have diff erent needs depending on
his knowledge of the company’s operations, it is the
5. Networking – providing resource connections for director’s right and duty to get information.
Board Evaluation Family Governance
Evaluating boards aims to improve best practices and Family corporations are unique due to their emotional component.
ensure eff ective functioning within legal and regulatory Schmid, Rouvinez, and Poza (2014) argue that eff ective
frameworks. Boards typically conduct evaluations governance should focus on the sustainable development of both
internally or with third-party assistance, adhering to economic value (refl ected in revenues) and emotional value (the
guidelines such as the OECD Principles and the ASEAN attachment to the company). Managing emotions is essential, and
Corporate Governance Scorecard (ACGS) in Asia, creating a family constitution with legal assistance can help defi ne
including the Philippines. The evaluation process governance strategies and involve all family members.
includes reviewing governance structures, board Despite being publicly listed, family-owned enterprises face
members, and processes. Individual directors are challenges like nepotism, lack of professional management,
assessed by the chairman, while the chairman’s family confl icts, third-generation entitlement, and poor
performance is often evaluated by an independent succession planning. These issues can disrupt operations and
director. Each company may have its own evaluation threaten the continuity of businesses over generations if
methods defi ned by governance codes or bylaws. governance is weak.

Ethical Stewardship RCBC

Ethical stewardship is the responsibility of the board of The bank was established in 1960, and is currently one of the
directors to ensure proper governance, addressing both largest universal banks in the Philippines with a total
resources and stakeholder needs. Compliance is not consolidated resource of 517 billion as of 2015. RCBC is majority-
enough—ethical values, especially integrity (Estanislao, owned by the Yuchengco Group of Companies (YGC), which owns
2017), must guide corporate governance alongside strong a wide range of business interests, such as Malayan Insurance,
leadership. Training at all levels fosters moral behavior. EEI Corporation, educational institutions, and vehicle dealerships.
Ethical stewardship (Caldwell et al., 2008) promotes The Yuchengco group was embroiled previously in a highly
success through values like honesty and fairness. publicized collapse of its affi liate company Pacifi c Plans Inc. (PPI).
Corporations should aim for nation-building and economic This educational pre-need fi rm was established in 1986 and
growth, recognizing accountability to all shareholders and eventually collapsed in 2005. A pending class-action suit fi led by
the public, without sacrifi cing profi tability. the plan holders remains unresolved as of 2016.
CEO Lorenzo Villanueva Tan
Tan has been the CEO and president of RCBC since 2007. He
was responsible for the growth of the RCBC universal bank.
Through Tan’s leadership, RCBC garnered many awards from
international institutions as one of the best banks in the
country. Tan has extensive experience both here and abroad.
He was the former president of PNB (2002-2005), UCPB (1998-
2002), and had various executive positions in Citibank N.A. and
Citibank Singapore. He was the chairman of the Asian Bankers
Association (2012-2014), and is the incumbent president of the
Bankers Association of the Philippines, a position he took over
in 2013. Tan is a graduate of the De La Salle University and
holds a master’s degree from Kellogg Graduate School of
Management in the USA. His brother Nestor Tan is the current
president of BDO Universal Bank.

At the onset of the controversy in late February, RCBC’s Board

of Directors (BOD) have reassured Tan that he still had their
trust and confi dence. However, on March 24, 2016. It was
reported that Tan went to go on leave so that he could focus on
clearing his name and help with the investigation. On April 20,
 Anti-money Laundering Council
(AMLC)
On March 11, 2016, the AMLC fi led a complaint against Maia
Santos-Deguito branch manager of RCBC in Jupiter St., Makati
City, for allowing withdrawal of the funds on February 5 and 9,
2016, despite requests from Bangladesh to stop the transfers.
The Bangladesh Central bank requested a stop payment, but
Deguito purportedly proceded with the transaction.

The money (US$81 million) was electronically transferred out of

Bangladesh’s account at the Federal Reserve Bank of New York
and eventually transferred to RCBC. Four bogus accounts were
opened in RCBC to enable the necessary transfers to a single
account and sent to a foreign exchange broker called Philrem
Service Corporation. From Philrem, US$30 million was delivered in
cash to Kim Wong, a Filipino Chinese man who is allegedly a
casino junket operator. The money trail ended at several casinos
(one of which is Solaire), which are lightly regulated (Case in
point. Casinos are exempt from many AMLA requirements).

The scandal over the laundering of US$81 million stolen by

hackers through the local
Banking system has opened the door for more speculations that
the Philippines is a dirty money haven. Share prices of RCBC
Senate Hearing: Let the Chips
Fall Where They May…
The Senate hearing on the money laundering scandal started on March 16,
2016, a few days after the complaint fi led against Deguito by AMLC.

Deguito accused Lorenzo Tan, the bank’s president, of knowing about the
illicit transaction involving his purported acquaintance Kim Wong, the owner
of one of the bank accounts used to transfer millions of dollars that were
purportedly stolen from the Bank of Bangladesh by unidentifi ed hackers and
laundered in casinos. Tan angrily refuted the charges. At the Senate hearing,
Tan maintained that he was unaware of the transfer, for which the bank
placed all the blame on Deguito, the manager of the Jupiter branch, and a few
members of her staff.

Deguito added that she had inquired with the RCBC head offi ce on the
unexpected transfer of the substantial sum from the head offi ce. It was
alleged that the RCBC settlements division disregarded the warning signs
regarding the transfer, and that the Treasury even changed the dollar transfer
into pesos prior to its removal from William Go’s account. Deguito claimed
that Go had received instructions from Kim Wong to open an account on Go’s
The Bank Secrecy Law
At the Senate hearing, several Senators lost their
temper during the proceedings over the refusal of
the bank offi cers to reveal detailed information.
RCBC executives headed by Tan used the country’s
bank secrecy law to preclude them from revealing
any information relevant to the case. Senator
Guingona stated that the bank secrecy law does not
apply in this instance since the owner of the stolen
money was the Bangladesh government. Guingona
was quoted saying “If you push the consequences,
the Philippines could become blacklisted as a
money-laundering haven, our credit ratings could
go down and the cost of doing business could go
up.”
Thank you
very
much!GROUP 4
Correa, Phillip
Dacutanan, April Jane L.
Fallado, Maria Angel
Maturan, Jasmen
Patosa, Rolyn
Resola, Lovely Claire
Sim, Jaziel
Taer, Mary Grace