Mindanao State University

College of Business Administration and Accountancy

DEPARTMENT OF ACCOUNTANCY
Marawi City

Governance, Business Ethics, Risk Management and Internal Control

ACT140

CHAPTER 3 the supervision of the Securities and Exchange

Securities and Exchange Commission (SEC) Commission (SEC).
Code of Corporate Governance for Publicly-listed
Companies (CG Code for PLCs) DEFINITION OF TERMS:
SEC MC No. 19, Series of 2016  Corporate governance – the system of
stewardship and control to guide organizations
Code of Corporate Governance for Publicly-listed in fulfilling their long-term economic, moral,
Companies – approved by the Securities and legal, and social obligations towards their
Exchange Commission on November 10, 2016 to help stakeholders.
companies develop and sustain an ethical corporate Purpose: To maximize the organization’s
culture and keep abreast with recent developments in long-term success, creating
corporate governance. sustainable value for its
shareholders, stakeholders, and
Code of Business Conduct and Ethics – shall be the nation.
established by publicly-listed companies according to  Board of directors – the governing body
a salient provision of the CG Code for PLCs. elected by the stockholders that exercises the
corporate powers of a corporation, conducts
Board of Directors (BOD) – the one required to all its business, and controls its properties.
implement the code and make sure that  Management – a group of executives given
management and employees comply with the the authority by the BOD to implement the
internal policies set. policies it has laid down in the conduct of the
business of the corporation.
KEY POINTS:  Independent director – a person who is
 The CG Code is intended to raise the independent of management and the
corporate governance standards of Philippine controlling shareholder, and is free from any
corporations to a level at par with its regional business or other relationship which could, or
and global counterparts. could reasonably be perceived to, materially
 “Comply or explain” approach – combines interfere with his exercise of independent
voluntary compliance with mandatory judgment in carrying out his responsibilities as a
disclosure. director.
 The Code is arranged as follows:  Executive director – a director who has
1. Principles – high-level statements of executive responsibility of day-to-day
corporate governance good practice operations of a part or the whole of the
which are applicable to all companies. organization.
2. Recommendations – objective criteria  Non-executive director – a director who has no
that are intended to identify the executive responsibility and does not perform
specific features of corporate any work related to the operations of the
governance good practice that are corporation.
recommended for companies  Conglomerate – a group of corporations that
operating according to the Code. has diversified business activities in varied
3. Explanations – additional information industries, whereby the operations of such
on the recommended best practice. businesses are controlled and managed by a
 This Code does not, in any way, prescribe a parent corporate entity.
“one size fits all” framework. indicates that each company/org.
varies from one another
 Internal control – a process designed and
 The CG Code for publicly-listed companies is effected by the BOD, senior management,
the first of a series of Codes intended to cover and all levels of personnel to provide
all types of corporations in the Philippines under

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 reasonable assurance on the achievement of long-term success of the
objectives through: corporation, and to sustain its
o Efficient and effective operations; competitiveness and
o Reliable, complete, and timely profitability in a manner
financial and management consistent with its corporate
information; and objectives and the long-term
o Compliance with applicable laws, best interests of its shareholders
regulations, and the organization’s and other stakeholders.
policies and procedures.
 Enterprise risk management – a process, Recommendations and Explanations:
effected by an entity’s BOD, management 1.1 Competence of the Board
and other personnel, applied in strategy-  Collective knowledge;
setting and across the enterprise designed to:  Experience; and
o Identify potential events that may  Expertise
affect the entity; 1.2 Composition of the Board
o Manage risks to be within its risk  Majority of non-executive directors:
appetite; and o Independent directors (IDs)
o Provide reasonable assurance o Executive directors (EDs)
regarding the achievement of entity 1.3 Board Charter and Manual on
objectives. Corporate Governance
 Related party – shall cover the company’s  Policy on the training of directors:
subsidiaries, as well as affiliates and any party 1. Orientation program for first-
(including their subsidiaries, affiliates, and time directors (at least 8
special-purpose entities), that the company hours)
exerts direct or indirect control over or that 2. Relevant annual continuing
exerts direct or indirect control over the training for all directors (at
company; the company’s directors; officers; least 4 hours)
shareholders and related interests (DOSRI), and 1.4 Board Diversity Policy
their close family members, as well as 1.5 Corporate Secretary
corresponding persons in affiliated companies.  A separate individual from the
 Related party transactions – a transfer of Compliance Officer;
resources, services or obligations between a  Not a member of the BOD;
reporting entity and a related party, regardless  Annually attends a training on
of whether a price is charged. ex. Subsidiaries to Parent company and vice versa corporate governance; and
 Stakeholders – any individual, organization or  Primarily responsible to the
society at large who can either affect and/or corporation and its shareholders
be affected by the company’s strategies, Duties and responsibilities:
policies, business decisions and operations, in o Assists the Board and the board
general. This includes: committees in the conduct of
o Customers; their meetings;
o Creditors; o Safekeeps and preserves the
o Employees; integrity of the official records of
o Suppliers; the corporation;
o Investors; o Keeps abreast on relevant laws,
o Government; regulations, etc. and advises
o Community; and the Board and the Chairman as
o Among others. they arise;
o Works fairly and objectively;
SEC MC NO. 19, SERIES OF 2016 o Advises on the establishment of
board committees and their
A. THE BOARD’S GOVERNANCE RESPONSIBILITIES terms of reference;
o Informs members of the Board
1. Establishing a competent board of the agenda of their meetings
Principle: The company should be at least 5 working days in
headed by a competent, advance, and ensures that the
working board to foster the

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 members have before them 2. Establishing clear roles and responsibilities of
accurate information; the board
o Attends all Board meetings, Principle: The fiduciary roles,
except when justifiable causes; responsibilities, and
o Performs required accountabilities of the Board
administrative functions; should be clearly made known
o Oversees the drafting of the by- to all directors as well as to
laws and ensures that they shareholders and stakeholders.
conform with regulatory
requirements; and Recommendations and Explanations:
o Performs such other duties and 2.1 Fiduciary Duty
responsibilities as may be 1. Duty of care – requires the BOD to
provided by the SEC. act on fully informed basis in good
1.6 Compliance Officer faith and with due diligence and
 A member of the company’s obedience.
management team in charge of 2. Duty of loyalty
the compliance function; and o BOD should act in the interest of
 Primarily responsible to the the company in all its
corporation and its shareholders stakeholders.
Duties and responsibilities: o It mandates that
o Ensures proper onboarding of directors/trustees should not
new directors; give preference to their own
o Monitors, reviews, evaluates, personal amelioration by taking
and ensures the compliance by the opportunity belonging to
the corporation, its officers and the corporation.
directors with the relevant laws, 2.2 Strategic Direction and Corporate
this Code, rules and regulations, Performance
and all governance issuances  According to the OECD, the board
of regulatory agencies; should:
o Reports the matter to the Board o Review and guide corporate
if violations are found and strategy, major plans of action,
recommends the imposition of risk management policies and
appropriate disciplinary action; procedures, annual budgets,
o Ensures the integrity and and business plans;
accuracy of all documentary o Set performance objectives;
submissions to regulators; o Monitor implementation and
o Appears before the SEC when corporate performance; and
summoned in relation to o Oversee major capital
compliance with this Code; expenditures, acquisitions, and
o Collaborates with other divestitures.
departments to properly 2.3 Competent and Qualified Chairperson
address compliance issues,  Roles and responsibilities of the
which may be subject to Chairman includes:
investigation; o Ensure that the meeting
o Identifies possible areas of agenda focuses on strategic
compliance issues and works matters, such as the
towards the resolution of the Corporation's overall risk
same; appetite, taking into account
o Ensures the attendance of developments in the business
board members and key and regulatory environments,
officers to relevant trainings; key governance concerns, and
and contentious issues that will have
o Performs such other duties and a significant impact on
responsibilities as may be operations;
provided by the SEC. o Ensure that the Board receives
accurate, timely, pertinent,

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 perceptive, concise, and clear than for themselves or their
information to enable it to business lines only.
make wise decisions; 2.6 Selection, Nomination and Election of
o Facilitate discussions on Board Members
important topics by creating an  The board should have a formal
atmosphere that encourages and transparent board nomination
productive debate and utilizing and election policy. The policy
the abilities and experience of should include:
individual directors; o Nomination;
o Make sure that the Board o Process assessment;
questions and challenges o Shareholder’s participation;
reports presented by o Transparency;
Management in a timely o Evaluation of qualification; and
manner; o Monitoring of qualification.
o Ensure that new directors can 2.7 Related Party Transactions
access appropriate orientation,  Suggestions for the content of the
and that all directors have RPT policy:
access to ongoing training o Definition of related party;
opportunities; and o Coverage of RPT policy;
o Make sure that performance of o Guidelines in ensuring arm’s
the Board is evaluated at least length terms;
once a year and o Identification and prevention or
discussed/followed up on. management of potential or
2.4 Succession Planning actual conflicts of interest
 Retirement age policy: which arise;
o Directors – retirement age is 80 o Adoption of materiality
years old threshold;
o Management – the retirement o Internal limits for individual and
age shall follow the compulsory aggregate exposures;
retirement age prescribed o Whistle-blowing mechanisms;
under the Labor Code of the and
Philippines o Restitution of losses and other
2.5 Remuneration and Other Incentives of remedies for abusive RPTs.
Directors and Senior Management 2.8 Selection and Assessing the
 Directors shall not receive any Performance of the Management
compensation, except for  Management – primarily
reasonable per diems, unless such accountable to the Board for the
compensation is provided in the operations of the company. It is the
bylaws or granted by a vote of the responsibility of the board to
stockholders representing at least appoint a competent
majority of the outstanding capital management team and to
stock of the company. The directors exercise management oversight.
shall not decide on their own  Management oversight – includes
compensation, other than per the power to:
diems. o Select and appoint the CEO
 Compensation must be set at an and other officers;
optimum level in order to: o Monitor and assess the
o Find and keep competent, performance of management
qualified candidates; led by the CEO based on
o Prevent conflicts of interest; performance standards by the
o Promote a sound risk culture; Board and management that
and are consistent with the
o Encourage employees to act in company’s strategic objective;
the long-term interest of the o Monitor how management
company as a whole, rather carries out its business

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 strategies, plans, policies, and o Conflict of interest situations;
budgets; o Compensation program for
o Supervise the implementation employees; and
of management's human o Management succession plan.
resources policies, including the 2.11 Enterprise Risk Management
compensation and professional  The Board of directors should
advancement plans for officers ensure that an effective enterprise
and the management risk management (ERM) framework
succession plan; and is in place to effectively identify,
o Conduct a regular review of the monitor, assess, and manage key
company’s policies with the business risks.
management team.  Risk management framework –
 Fit and proper standard – the should guide the Board in
following shall be considered: identifying units/business lines and
o Integrity; enterprise-level risk exposure, as
o Probity; well as the effectiveness of risk
o Physical and mental fitness; management strategies.
o Relevant education or training;  Risk management policy – an
and integral part of a company's overall
o Possession of competencies strategy. The Board is responsible for
relevant to the job. defining the company's risk
 Executive management team – the tolerance and overseeing its risk
Board shall appoint the following management policies and
executive officers: procedures.
o President or the chief executive 2.12 Board Charter
officer;  Board Charter – formally and clearly
o The vice president (or their states the BOD’s roles,
equivalent roles in the responsibilities, and
company structure); accountabilities as it fulfills its
o The treasurer and/or the chief fiduciary duties;
finance officer (CFO); o Guides the directors on how to
o Corporate secretary; carry out their duties;
o Chief risk officer; o Specifies the criteria for
o Chief compliance officer; and evaluating the board's
o Chief audit executive. performance;
2.9 Effective Performance Management o Also contains roles and
Framework responsibilities of the Chairman;
 The Board should establish an and
effective performance o Publicly available and posted
management framework in order on the company’s website.
to ensure that management,
including the chief executive 3. Establishing board committees
officer, and staff members perform Principle: Board committees should be
to the standards set by the board set up to the extent possible to
and senior management. support the effective
2.10 Internal Control performance of the Board’s
 In the performance of the Board’s functions, particularly with
oversight responsibility, the respect to audit, risk
minimum internal control management, related party
mechanisms may include transactions, and other key
overseeing the implementation of corporate governance
the key control functions, such as: concerns, such as nomination
o Risk management; and remuneration. The
o Compliance and internal audit; composition, functions and
o Reviewing the corporation’s responsibilities of all committees
human resource policies; established should be

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 contained in a publicly independent directors,
available Committee Charter. including the Chairman.
 Functions/purpose:
Recommendations and Explanations: o Responsible for the oversight of
3.1 Board Committees with Specific Board a company’s Enterprise Risk
Functions Management system to ensure
 Compositions/qualifications: its functionality and
o Depends on size, risk profile effectiveness.
and complexity of 3.5 Related Party Transaction Committee
operations.  Compositions/qualifications:
 Functions/purpose: o At least 3 non-executive
o Support the effective directors, two of whom should
performance of the Board’s be independent, including the
functions. Chairman.
3.2 Audit Committee
 Functions/purpose:
 Compositions/qualifications: o Reviews all material related
o At least 3 appropriately party transactions of the
qualified non-executive company.
directors, majority of whom, 3.6 Committee Charters
including the Chairman should  States in plain terms their respective
be independent; purposes, memberships, structures,
o Chairman of the Audit operations, reporting processes,
Committee should not be the resources and other relevant
chairman of the Board or of any information.
other committees; and  Functions/purpose:
o All of the members shall o Clearly defines the roles and
preferably be with accounting, accountabilities of each
committee to avoid any
auditing, or related financial
overlapping functions.
management expertise.
 Functions/purpose: 4. Fostering commitment
o Responsible for overseeing the Principle: To show full commitment to the
senior management in company, the directors should
establishing and maintaining an devote the time and attention
adequate, effective, and necessary to properly and
efficient internal control effectively perform their duties
framework. and responsibilities, including
3.3 Corporate Governance Committee sufficient time to be familiar with
 Compositions/qualifications: the corporation’s business.
o At least 3 members, all of whom
should be independent Recommendations and Explanations:
directors, including the 4.1 Directors should attend and actively
Chairman. participate in all meetings of the Board,
Committees, and shareholders.
 Functions/purpose:
 Purpose/reasons:
o Assist the Board in the
o In order for the Director to
performance of its corporate
effectively perform his/her duty
governance responsibilities,
to the company and its
including the functions that shareholders.
were formerly assigned to a  Effect of refusal:
Nomination and Remuneration o Absence in more than 50% of all
Committee. regular and special meetings is
3.4 Board Risk Oversight Committee a ground for disqualification.
 Compositions/qualifications: 4.2 Non-executive directors should
o At least 3 members, the majority concurrently serve as directors to a
of whom should be

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 maximum of 5 publicly listed o Have not been in the 3 years
companies. preceding the election, a
 Purpose/reasons: director, officer, or employee;
o Ensure that they have sufficient o Have not been appointed;
time to fully prepare for o Not an owner of more than 20%
meetings, challenge of the outstanding shares;
Management’s proposal, and o Not a relative of director,
oversee the long-term strategy officer, or shareholder;
of the company. o Not acting as nominee or
 Effect of refusal: representative of any director;
o Sitting on board of too many o Not a security broker-dealer of
companies may interfere with listed company and registered
the optimal performance of issues of securities;
board members. o Not retained as professional
4.3 Director should notify the Board where adviser, auditor, consultant,
he/she is an incumbent director before agent, or counsel;
accepting directorship in another o Does not engaged in any
company. transaction;
 Purpose/reasons: o Not affiliated with any non-
o In order for the company to profit organization that receives
assess if his/her present funding from related company;
responsibilities and and
commitment in the company o Not employed as executive
will be affected. officer of another company
 Effect of refusal: where any related company’s
o The director’s duties and executive serves as director.
responsibilities might be in 5.3 Term
conflict.  Independent directors should serve
for a maximum cumulative term of
5. Reinforcing board independence 9 years. After which, IDs should be
Principle: The Board should endeavor to perpetually barred from re-election
exercise an objective and but may qualified for nomination
independent judgment on all and election as non-independent
corporate affairs. director.
5.4 Separate Individuals
Recommendations and Explanations:  The position of Chairman of the
5.1 Independent Directors Board and CEO are held by
 The Board should have at least 3 separate individuals, and each
independent directors or such should have clearly defined
number as to constitute at least responsibilities and disclosed in the
one-third of the Board, whichever is Board Charter.
higher. It ensures the exercise of  CEO’s roles and responsibility:
objective judgment on corporate o Determines, formulates, and
affairs and proper oversight of implements strategic plan on
managerial performance. the direction of business;
5.2 Qualifications o Implements the corporation’s
 Related company – (1) covered vision, mission, values, and
entity/parent company; (2) its overall strategy;
subsidiaries; and (3) subsidiaries of o Oversee the operation of the
its parent company. corporation;
 Independent directors (IDs) refers to o Keeps up-to-date and good
person who, ideally in the related working knowledge of the
company: corporation industry and
o Not a senior officer or employee market;
unless change of ownership of
the company;

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 o Directs, evaluates, and guides  The Board should conduct annual
the work of the key officers of self-assessment of its performance
the corporation; to help the directors to thoroughly
o Manages the corporation’s review their performance and
resources; understand their roles and
o Provides the board with timely responsibilities.
information; and  Every 3 years, the assessment
o Serves as the link between should be supported by an external
internal operations and external facilitator (independent 3rd party
stakeholders. such as consulting firm, academic
5.5 Lead Director institution or professional
 There should be a lead organization) to increases its
independent director if the objectivity.
Chairman of the Board is not 6.2 Disclosure of Criteria, Process & Result
independent and if the position of of Assessment
Chairman of the Board and CEO  It ensures transparency and allows
are held by same person. shareholders and stakeholders to
 Function of lead director: determine if the directors are
o Serves as Intermediary between performing their roles and
the Chairman and other responsibilities to the company.
directors when necessary;
o Convenes and chairs meeting 7. Strengthening board ethics
of the non-executive directors; Principle: Members of the board are duty
and bound to apply high ethical
o Contributes to the performance standards, considering the
evaluation of the chairman. interest of all stakeholders.
5.6 Interest
 A director, with material interest in Recommendations and Explanations:
any transition affecting the 7.1 Adaptation of Code of Business
corporation, must be abstain from Conduct and Ethics
taking part in deliberation to ensure  The Code of Business Conduct and
that he has no influence over the Ethics formalizing ethical values is
outcome of the deliberation. an important tool to instill an ethical
5.7 Non-executive Directors corporate culture that pervades
 Non-executive directors (NEDs) throughout the company.
should have separate periodic  To ensure proper compliance with
meetings with the external auditor the code, appropriate orientation
and heads of the internal audit and training of board, senior
without any executive directors management and employees are
present to ensure that proper necessary.
checks and balances are in place 7.2 Implementation and Monitoring
within the corporation.  The Board has primary duty to make
 The meetings should be chaired by sure that the internal controls are in
the lead independent director. place to ensure the company’s
compliance.
6. Assessing board performance
Principle: The Board should regularly carry B. DISCLOSURE AND TRANSPARENCY
out evaluations to appraise its
performance and whether it 8. Enhancing company disclosure policies and
possesses the right mix of procedures
backgrounds and Principle: The company should establish
competencies. corporate policies and
procedures that are practical
Recommendations and Explanations: and in accordance with best
6.1 Self- Assessment practices and regulatory
expectations.

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  Transparency is one of the core
Recommendations and Explanations: principles of corporate
8.1 Establishment governance. Hence, full disclosure
 Setting up a clear policies and of the company’s corporate
procedures on corporate disclosure governance policies, programs
policies and procedure to ensure a and procedures is imperative.
comprehensive, accurate, reliable,
and timely report to shareholders 9. Strengthening the external auditor’s
and other stakeholders. independence and improving audit quality
8.2 Requirement Principle: The company should establish
 The company should have policy standards for the appropriate
requiring all directors and officers to selection of an external auditor,
disclose/report to the company and exercise effective oversight of
any dealing in the company’s the same to strengthen the external
shares within 3 business days to auditor’s independence and
reduce the risk of taking enhance audit quality.
advantage of information.
8.3 Disclosure Recommendations and Explanations:
 The Board should fully disclose all 9.1 Audit Committee
relevant ad material information on  Fees; and
individual board members and key  Appointment, reappointment, and
executives. removal of the external auditor:
8.4 Disclosure of Remuneration Policies o By the Board’s approval;
and Procedures o Through the Audit
 Clear disclosure of remuneration Committee’s
policies and procedure enables recommendation; and
investor to understand the link o Shareholders’ ratification at
between the remuneration paid to shareholders’ meetings
directors and key management 9.2 Audit Committee Charter
personnel and the company’s  Detailed guidelines, policies, and
performance. procedures on the Audit
8.5 Related Party Transaction Committee’s responsibility on
 The company should disclose its assessing the integrity and
policies governing Related Party independence of external auditors
Transaction (RPTs) and other and exercising effective oversight
unusual or infrequently occurring 9.3 Non-audit Services Performed by the
transactions in their Manual on External Auditor
Corporate Governance.  Disclosure of its nature in the Annual
8.6 Acquisition and Disposal of Assets Report
 The company should make a full,
fair, accurate, and timely disclosure 10. Increasing focus on non-financial and
to the public of every material fact sustainability reporting
or event that occurs, particularly on Principle: The company should ensure that
the acquisition or disposal of the material and reportable non-
significant assets, which could financial and sustainability issues
adversely affect the viability or the are disclosed.
interest of its shareholders and other
stakeholders. 11. Promoting a comprehensive and cost-efficient
8.7 Transparency access to relevant information
 The company’s corporate Principle: The company should maintain a
governance policies and comprehensive and cost-efficient
procedure should be contained in communication channel for
its Manual on Corporate disseminating relevant information.
Governance (submitted to the This channel is crucial for informed
regulators and posted on the decision-making by investors,
company’s website).

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 stakeholders, and other interested Principle: The rights of stakeholders
users. established by law, by contractual
relations and through voluntary
C. INTERNAL CONTROL SYSTEM AND RISK commitments must be respected.
MANAGEMENT FRAMEWORK Where stakeholders’ rights and/or
interests are at stake, stakeholders
12. Strengthening the internal control system and should have the opportunity to
enterprise risk management framework obtain prompt effective redress for
Principle: To ensure the integrity, the violation of their rights.
transparency, and proper
governance in the conduct of 15. Encouraging employees’ participation
its affairs, the company should Principle: A mechanism for employee
have a strong and effective participation should be developed
internal control system and to create a symbiotic environment,
enterprise risk management realize the company’s goals and
framework. participate in its corporate
governance processes.
D. CULTIVATING A SYNERGIC RELATIONSHIP WITH
SHAREHOLDERS 16. Encouraging sustainability and social
responsibility
13. Promoting shareholder rights Principle: The company should be socially
Principle: The company should treat all responsible in all its dealings
shareholders fairly and equitably, with the communities where it
and also recognize, protect, and operates. It should ensure that
facilitate the exercise of their rights. its interactions serve its
environment and stakeholders
E. DUTIES TO STAKEHOLDERS in a positive and progressive
manner that is fully supportive of
14. Respecting rights of stakeholders and effective its comprehensive and
redress for violation of stakeholder’s rights balanced development.

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