CONCEPT OF GOOD GOVERNANCE (Chapter 4) • Consequently, CG is about the way the board

behaves and how it sets the values of the business.

• It is a fact that any company is a diverse group of • Shareholders play a role too, and must actively
people with their respective interests. Therefore, a participate in the CG for it to have any bite. Their
system is required in order to create and sustain role is to appoint the right directors and approve
good relationship among these people to avoid major decisions such as mergers and buyouts.
anyone be cheated and exploited. • From a legal perspective, CG in the Philippines is
• Technically speaking, corporate governance is a regulated by Securities and Exchange
system of process, policies, and rules that direct Commission (SEC).
and control an organization conduct for the good
management of companies. Potential Challenges in CG
• It consists of the relationship between numerous
• CG is an ideal which is difficult to achieve in its
stakeholders both internal and external involved
totality. It helps you to act in the best interest of the
and the goals for which the corporation is
business. More specifically, it can improve the
directed.
performance of the business, help it become
• It also is a process that aims to apportion
more stable and productive, and unlock new
corporate resources in a way that enhances value
opportunities. It can reduce risks, and enable
for all stakeholders. It also holds those at the
faster and safer growth. It can also improve
controls to account by evaluating their decisions
reputation and foster trust.
on transparency, inclusivity equity, and
• Having poor policies can expose the company to
responsibility.
lawsuits, fines and reputational damage, and loss
• The main objective of good governance is to put
of capital investment.
an end to the abusive and somehow unlawful and
improper activities of some entrepreneurs and 8 Common Pitfalls CG policies should avoid:
business owners in order to gain trust of investors
and other stakeholders. • Conflict of interest
• Oversight issues
STRATEGIC AIMS OF CORPORATE GOVERNANCE • Accountability issues
• Transparency issues
1. Ensuring a higher degree of transparency by
• Ethics violation
encouraging full disclosure of transactions in the
• Governance standards
company accounts.
• Short-termism
2. Encourages accountability of the management
• Diversity
to the company directors and the accountability
of the directors to the stakeholders. 2 Distinct approaches to CG
3. Ensures equitable treatment of all the
shareholders of the company Corporate Governance is all about monitoring and
4. Allows firms to evaluate their behavior before they controlling management decisions and strategies all to the
are scrutinized by regulatory bodies. best interest of the company’s stakeholders.
5. Main objective is to protect the long-term interests
As a result of many companies going bankrupt in winding
of the shareholders.
up despite producing healthy financial statement, Codes
ELEMENTS OF CORPORATE GOVERNANCE for corporate governance were established, and
companies were expected to comply with them.
1. Direction
2. Oversight 1. Rules-based Approach
3. Stakeholder relations
2. Principles-based Approach
4. Corporate Citizenship
5. Independence of Directors Rules-based Approach
6. Effective Risk Management
7. Solid Structure and Organization In rules-based, all provisions are legal rules, supported by
8. Transparency law which attracts punishment from the law, if there is
9. Self-evaluation failure to comply.

Who is responsible for Corporate Governance? Characteristics of Rules-based Approach

• The board of directors is pivotal for the a) Approved set of requirements

governance of its company. Their role is to set the b) Fast approach and ensuring conformity
company’s strategic direction, provide the c) Implements a checklist method
leadership to put those strategies into effect and d) Clear difference between conformity and
supervise the management of the company. non-conformity
e) Easy to observe that entity is conforming
 f) Lessening of flexibility on the part of h) but principles may be construed in different
management and auditors ways
g) Challenging to set rules entirely for all
situations The Agency Theory
h) Likely to misunderstand rules • The relationship between the agents and
i) Similar rules apply to all, whatsoever their sizes principals in the business is being examined in an
are agency theory. The agent represents the principal
Advantages in a particular business transaction and takes
decisions on behalf of the principal in an agency
• Companies do not have the choice of ignoring relationship. Any agent is expected to disregard
the rules his self-interest in order to represent the best
• All companies are required to meet the same interest of the principal.
minimum standards of corporate governance • Due to differing risk viewpoints and business goals,
• Investor confidence in the stock market might be issues may arise around the relationship between
improved if all the stock market companies are the agent and the principal. Oftentimes, the
required to comply with recognized corporate opposing interests of principal and agent could
governance rules. turn into a cause of conflict because some agents
do not work sincerely for the principal’s best
Disadvantages interest.
• The same rules might not be suitable for every • Through concrete corporate policy, the principal-
company because the circumstances of each agent problem could be minimized. Conflicts
company are different. A system of corporate arising from the agent and the principal
governance is too rigid if the same rules are relationship usually pose opportunities for moral
applied to all companies. threat. In order to readdress the behavior of the
• There are some aspects of corporate governance agent to readjust his interest with that of the
that cannot be regulated easily, such as principal’s, incentive could be offered to the
negotiating the remuneration of directors, agent by identifying what incentive best
deciding the most suitable range of skills and motivates an agent to act.
experiences for the board of directors, and • Two (2) Situations on resolving agency conflicts:
assessing the performance of the board and its a) Different risk desire
directors. b) Super self-centered executives

Principles-based Approach The Agency Theory in Corporate Governance

• It is grounded on the outlook that a distinct set of • It is an extension of the agency theory. It tells
rules is unfitting for every company. about the definite type of agency relationship
Circumstances and situations vary from that happens between the shareholders and top
companies to companies. The circumstances of a management of a company. The true owners of
company can change every now and then. the corporation or the shareholders as principals
• In Principles-based jurisdiction, legal force applies select the members of the board who would act
to the provisions of company laws but additional and make decisions on their behalf.
listing rules are enforced on a “comply or explain” • The shareholders must place their trust to the top
basis. If there is a reason why there is non- management and strive harder to understand
compliance, there should be an explanation for their daily business decisions. Likewise, the top
the shareholders. management must always preserve the interest of
the shareholders as true owners of the company
Characteristics of Principles-based Approach in their decision-making.
• In order to help shareholders, comprehend and
a) Activities of entities must address major recognize changes if any behind major business
principles set out in codes of best practices decisions, a clear communication should be
b) Not merely a box-ticking application disseminated to them.
c) More demanding to avoid than rules-based
approach The Stewardship Theory
d) Easy to observe that entity is complying
e) Directors are necessary to work in the entity’s • Under this theory, company top executives
best interest protect the interest of the owners or shareholders
f) More-stretchy, and therefore better able to and make decisions on their behalf. Their sole
cope up with different situations objective is to create and maintain a successful
g) Easier defense for obvious breach of organization so the shareholders prosper. In a
principles company, stewardship is done by placing CEO
and Chairman responsibilities under one top
 executive. This allows for intimate knowledge of Six (6) Principles that direct the connection between
organizational operation and a deep stakeholders and the corporation:
commitment to success.
• Stewardship theory holds that ownership does not 1. Entry and Exit
actually own a company but simply hold it in trust. 2. Governance
3. Externalities
Models using Stewardship Theory 4. Contract costs
5. Agency
1. Operating with little negative impacts as possible 6. Limited immortality
against the environment or the earth
2. Supporting human and animal rights 3 Categories of Stakeholders inside the company
3. Abstaining from using products made in
sweatshops (business employing workers at low 1. Organizational Stakeholders – those people that
wages, for long hours, and under poor conditions). are present inside the company with direct
4. Renouncing product testing in living subjects interest on how the company is doing. The staff
5. Honoring the belief of servant leadership and employees as well as the stockholders and
the managers are the main stakeholders here.
Stewardship Theory in Corporate Governance 2. Economic Stakeholders – these people function
as the essential boundary between the company
• Clearly, the main purpose of the stewardship and the bigger societal environment such as the
theory of governance is to satisfy shareholders. bankers, creditors and suppliers and most
With a single leader, a strong channel is formed to importantly the customers.
convey business requirements to the shareholders 3. Societal Stakeholders – these are the players who
and vice versa. It is the requisite that stewardship the company makes business dealings and must
governance takes a CEO who is dependable and have a good relationship such as government
prepared to set his personal interest only agencies, regulators, communities and the
secondary for the interest of the company. environment itself.
• Stewardship governance entails choosing the
right personality that would lead the boardroom Stakeholder Theory in Corporate Governance
of the company.
• This theory centers on the effects of corporate
Applications of Stewardship Theory in Corporate activities on all recognizable stakeholders of the
Governance company. This suggests that corporate officers
and directors must consider the interests of every
1. On-Business – Company dedicated with a higher stakeholder in its governance practice. This
purpose will attract customers who believe in consists of taking extra efforts to reduce or lessen
similar purpose. any conflicts that may confront stakeholder’s
2. On Employees – the way employees are treated. interest.
Employees sense that they are part of something • Besides the usual members, corporate officers,
greater directors and shareholders, it also promotes the
3. On Customers – same as with employees, if interest of any third party that may have some
company takes care of its customers, they may degree of reliance on the company known as
likely to stay connected with businesses that are independent directors.
stewardship-driven.
5 Principles which businesses are expected to operate:
The Stakeholder Theory
1. Rights and equitable treatment of
• This theory states that the purpose of a business is shareholders
to create value for wider group stakeholder other 2. Interests of other stakeholders
than just shareholders. This theory considers the 3. Role and responsibilities of the board
corporate environment as a network of 4. Integrity and ethical behavior
interconnected groups, all of which are required 5. Disclosure and transparency
to be pleased to sustain the healthy and success
of the company in the long term.
• Stakeholders consist of those who work in the
stores, who work and live close to its factories,
those who do business with it and even of
competitors.
• This theory was coined originally by Edward
Freeman, as he recognized such as an important
element of Corporate Social Responsibility (CSR).