Corporate Governance:
What is Well-governed
Organization
INTENDED LEARNING OUTCOME
1. Articulate the important provisions of the Sarbanes-Oxley Act;
2. Articulate the principles of OECD Framework of Corporate Governance;
3. Discuss the functions of the Board of Directors;
4. Differentiate between the roles of executive and non executive directors;
5. Differentiate between comply approach and comply or explain approach to
regulating corporate governance;
6. Articulate the essential principles of SEC Code of Corporate Governance
for Publicly Listed Companies; and
7. Describe the issue in the governance of related party transactions.
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CORPORATE GOVERNANCE: WHAT IS A WELL-GOVERNED
WHAT IS A WELL-GOVERNED ORGANIZATION?
Needs to implement a sound risk management for
Internal events that affect the company’s
the events that are beyond the scope of internal
operations, reporting and compliance
control.
To ensure governance in the conduct of its affairs, the company should have a
strong and effective internal control system and enterprise risk management
framework
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CORPORATE GOVERNANCE: WHAT IS A WELL-GOVERNED
CORPORATE REGULATIONS
SARBANES- OECD PHILIPPINE
PRINCIPLES OF SEC CODE OF
OXLEY ACT CORPORATE CORPORATE
(SOX) GOVERNANCE GOVERNANCE
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CORPORATE GOVERNANCE: WHAT IS A WELL-GOVERNED
SARBANES OXLEY ACT
• It was signed into law by Pres.
George W. Bush on July 30, 2002.
• It is the United States federal law that
aims to protect investors by requiring
more reliable and more accurate
corporate disclosures.
• It is the law that has detailed rules
compared to other corporate codes
that are more principles-based rather
Sen. Paul Sarbanes Rep. Michael Oxley
than rules-based.
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CORPORATE GOVERNANCE: WHAT IS A WELL-GOVERNED
IMPORTANT SECTIONS IN SOX ACT
SECTION SECTION SECTION SECTION SECTION
302 401 404 409 802
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CORPORATE GOVERNANCE: WHAT IS A WELL-GOVERNED
SECTION 302
Financial reports and statement must certify that:
The documents have been reviewed by signing
officers and passed internal controls within the last
90 days. The documents are free of unique statements
or misleading omissions. The documents truthfully
represent the company’s health and position.
The documents must be accompanied by a list of all
deficiencies or changes in internal controls and
information on any fraud involving company
employees.
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CORPORATE GOVERNANCE: WHAT IS A WELL-GOVERNED
SECTION 401
Financial statements are required to be accurate.
Financial statements should also reflect
disclosures of any off-balance liabilities,
transactions or obligations.
Off-balance sheet is an accounting term for asset,
liability or any transaction that is NOT RECORDED
on the balance sheet because it is not legally owned
or not a direct liability on the balance sheet.
In this case, the reporting entity shall disclose future
lease payments on the lease contract to provide
additional information to readers of the financial
statements.
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CORPORATE GOVERNANCE: WHAT IS A WELL-GOVERNED
SECTION 404
Companies must publish a detailed
statement in their annual reports
explaining the structure of internal
controls used.
The information must also be made
available regarding the procedures used for
financial reporting. The statement should
also assess the effectiveness of the internal
controls and reporting procedures.
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CORPORATE GOVERNANCE: WHAT IS A WELL-GOVERNED
SECTION 409
Companies are required to urgently disclose
drastic changes in their financial position or
operations, including acquisitions,
divestments and major personnel
departures. The changes are to be presented in
clear, unambiguous terms.
A more detailed disclosures on significant
changes in the structure of the company such
as mergers and acquisitions must be made in
financial reports. This information are
important to investors in assessing the
company’s overall financial position.
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CORPORATE GOVERNANCE: WHAT IS A WELL-GOVERNED
SECTION 802
Any company official found guilty of
concealing, destroying or altering documents
with the intent to disrupt an investigation,
could face up to 20 years in prison and
applicable fines.
Any accountant who knowingly aids company
officials in destroying, altering or falsifying
financial statements could face up to 10 years in
prison.
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CORPORATE GOVERNANCE: WHAT IS A WELL-GOVERNED
BENEFITS OF SOX ACT TO
INVESTORS
1. Financial crimes and accounting fraud became less frequent.
2. The investors benefitted by having access to more reliable information and were able to
have a sound basis for their investment decisions.
COSTS TO BUSINESSES
1. Compliance costs increased for small businesses.
REPERCUSSION
1. Companies tend to put off going public until much later.
2. It leads to a rise in debt financing and venture capital.
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CORPORATE GOVERNANCE: WHAT IS A WELL-GOVERNED
OECD PRINCIPLES OF CORPORATE
GOVERNANCE
• This framework serves as a guide in the
crafting of corporate governance systems for
companies across various industries.
MAIN AREAS OF OECD Principles
I. II. III. IV. V. VI.
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CORPORATE GOVERNANCE: WHAT IS A WELL-GOVERNED
PRINCIPLE I.
ENSURING THE BASIS FOR AN EFFECTIVE
CORPORATE GOVERNANCE FRAMEWORK.
The corporate governance framework should promote
transparent and efficient markets, be consistent with the
rule of law, and clearly articulate the division of
responsibilities among different supervisory, regulatory
and enforcement authorities.
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CORPORATE GOVERNANCE: WHAT IS A WELL-GOVERNED
PRINCIPLE II.
THE RIGHTS OF SHAREHOLDERS
AND KEY OWNERSHIP FUNCTIONS.
The corporate governance framework should
protect and facilitate the exercise of sharholders’
rights.
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CORPORATE GOVERNANCE: WHAT IS A WELL-GOVERNED
PRINCIPLE III.
THE EQUITABLE TREATMENT OF
SHAREHOLDERS
The corporate governance framework should ensure the
equitable treatment of all shareholders, including minority
and foreign shareholders. All shareholders should have the
opportunity to obtain effective redress for violation of their
rights.
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CORPORATE GOVERNANCE: WHAT IS A WELL-GOVERNED
PRINCIPLE IV.
THE ROLE OF STAKEHOLDERS IN
CORPORATE GOVERNANCE
The corporate governance framework should
recognize the rights of stakeholders established
by law or through mutual agreements and
encourage active cooperation between
corporations and stakeholders in creating
wealth, jobs and the sustainability of financially
sound enterprises.
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CORPORATE GOVERNANCE: WHAT IS A WELL-GOVERNED
PRINCIPLE V.
DISCLOSURE AND TRANSPARENCY
The corporate governance framework should ensure that
timely and accurate disclosure is made on all material
matters regarding the corporation, including the financial
situation, performance, ownership and governance of the
company.
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CORPORATE GOVERNANCE: WHAT IS A WELL-GOVERNED
PRINCIPLE VI.
THE RESPONSIBILITIES OF THE
BOARD
The corporate governance framework should
ensure the strategic guidance of the company,
the effective monitoring of management by the
board, and the board’s accountability to the
company and the shareholders.
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CORPORATE GOVERNANCE: WHAT IS A WELL-GOVERNED
MEMORANDUM CIRCULAR NO. 24 s. 2019
There are sixteen (16) principles for CORPORATE GOVERNANCE that are
distributed among five (5) main sections, namely:
• Board’s Governance Responsibilities –Principles 1 – 7
• Disclosure and Transparency– Principles 8 – 11
• Internal Control and Risk Management Framework- Principle 12
• Cultivating a Synergic Relationship with Shareholders – 13
• Duties of Stakeholders – Principles 14 -16
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SEC CODE OF CORPORATE GOVERNANCE
OVERVIEW
“comply or explain” Companies do not have to comply with the Code, but they
Code of Corporate
approach must state in their annual corporate governance reports whether
Governance they comply with the Code provisions, identify any areas of
noncompliance, and explain the reasons for non-compliance.
What does the SEC Code of Corporate Governance look like?
PRINCIPLES- considered as high-level statements of corporate governance good practice
and are applicable to all companies
RECOMMENDATIONS- objective criteria that are intended to identify the specific features
of corporate governance good practices that are recommended for companies operating according
to the Code
EXPLANATION- to provide companies with additional information on the recommended
best practice. CHAPTER 3
SEC CODE OF CORPORATE GOVERNANCE
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 a 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 the business of the corporation.
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SEC CODE OF CORPORATE GOVERNANCE
DEFINITION OF TERMS
• 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.
• Executive director – a director who has executive responsibility for the day-to-day
operations of a part or the whole of the organization.
• Non-executive director – a director with no executive responsibility and does not perform any
work related to the corporation's operations.
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Role of an Independent Director
•The most important role is to help set the remuneration of top company executives. It is proven that
chief executives of listed companies are highly overpaid. So, this tries to take a neutral decision
regarding the correct pay structure.
•They must provide an unbiased judgment regarding important corporate finance decisions. Also,
they should always keep shareholders’ benefits in mind before deciding. Economic, Social, and
Governance (ESG) factors must also be considered while making decisions.
•Act as a middle person between the management and the shareholders. Play an active role in
controlling conflicts between the two parties.
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SEC CODE OF CORPORATE GOVERNANCE
Duties of an Independent Director
•Independent directors are paid on a sitting basis. The pay is also huge. So actually, shareholders are
spending money to get advice from experts. They must stay updated all the time. They should
constantly upgrade their skills, knowledge, etc.
•That is to blow the whistle when he sees something unethical, fraudulent, or a company
violation. He is working for the shareholders and should always continue to do so.
•They must meet outside separately, without the presence of management, to discuss the
company’s current scenario.
•They should not miss meetings as they help understand the companies inside more deeply. So, they
must attend the meetings.
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SEC CODE OF CORPORATE GOVERNANCE
San Miguel Food and Beverage, Inc. (smfb.com.ph)
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SEC CODE OF CORPORATE GOVERNANCE
DEFINITION OF TERMS
• 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,
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and the organization’s policies and procedures. SEC CODE OF CORPORATE GOVERNANCE
DEFINITION OF TERMS
• 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
(including their subsidiaries, affiliates, and special purpose entities), that exerts direct or
indirect control over the company; the company’s directors; officers; shareholders, and related
interests (DOSRI), and their close family members, as well as corresponding persons in affiliated
companies. This shall also include such other person or juridical entity whose interest may
potentially conflict with the company's interest. CHAPTER 3
SEC CODE OF CORPORATE GOVERNANCE
DEFINITION OF TERMS
• 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. It should be
interpreted broadly to include not only transactions that are entered into with related parties, but
also outstanding transactions that are entered into with an unrelated party that subsequently
becomes a related party.
• 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. This includes, among others, customers, creditors, employees, suppliers, investors, as well
as the government and community in which it operates.
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SEC CODE OF CORPORATE GOVERNANCE
Board’s Governance
Responsibilities
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SEC CODE OF CORPORATE GOVERNANCE
1. Establishing a Competent Board
PRINCIPLE 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 and other
stakeholders.
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Board’s Governance Responsibilities- SEC CODE OF CORPORATE GOVERNANCE
1. Establishing a Competent Board
RECOMMENDATIONS:
• 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 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.
• 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.
• The Board should have a policy on board diversity.
• The Board should ensure that it is assisted in its duties by a Corporate Secretary and Compliance
Officer
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2. 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.
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2. Establishing Clear Roles and Responsibilities of the Board
RECOMMENDATIONS:
• 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.
• 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.
• The Board should be headed by a competent and qualified Chairperson.
• 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. CHAPTER 3
Board’s Governance Responsibilities- SEC CODE OF CORPORATE GOVERNANCE
2. Establishing Clear Roles and Responsibilities
of the Board
RECOMMENDATIONS:
• The Board should align the remuneration of key officers and board members with the long-term
interests of the company.
• The Board should have and disclose in its Manual on Corporate Governance that should include
how it accepts nominations from minority shareholders and reviews nominated candidates.
• The Board should have the overall responsibility of 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.
• 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 (Chief Risk Officer, Chief Compliance Officer, and Chief Audit
Executive).
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2. Establishing Clear Roles and Responsibilities
of the Board
RECOMMENDATIONS:
• The Board should establish an effective performance management framework that will ensure that
the Management is at par with the standards set by the Board and Senior Management.
• 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 oversee that a sound enterprise risk management (ERM) framework is in place to
effectively identify, monitor, assess, and manage key business risks.
• The Board should have a Board Charter that formalizes and clearly states its roles, responsibilities
and accountabilities in carrying out its fiduciary duties.
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3. 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. The
composition, functions, and responsibilities of all committees established
should be contained in a publicly available Committee Charter.
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3. Establishing Board Committees
RECOMMENDATIONS:
• The Board should establish board committees that focus on specific board functions to aid in
the optimal performance of its roles and responsibilities.
• The Board should establish an Audit Committee to enhance its oversight capability over the
company’s financial reporting, internal control system, internal and external audit processes,
and compliance with applicable laws and regulations.
• 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.
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3. Establishing Board Committees
RECOMMENDATIONS:
• The Board should 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.
• The Board should establish a Related Party Transaction (RPT) Committee, which should be
tasked with reviewing all material related 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.
• 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. CHAPTER 3
Board’s Governance Responsibilities- SEC CODE OF CORPORATE GOVERNANCE
4. 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.
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4. Fostering Commitment
RECOMMENDATIONS:
• The directors should attend and actively participate in all meetings of the Board, Committees,
and Shareholders in person or through 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.
• 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
• A director should notify the Board where he/she is an incumbent director before accepting a
directorship in another company.
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5. Reinforcing Board Independence
PRINCIPLE 5:
The board should endeavor to exercise an objective and independent
judgment on all corporate affairs.
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5. Reinforcing Board Independence
RECOMMENDATIONS:
• 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.
• 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.
• The Board’s independent directors should serve for a maximum cumulative term of nine years.
• The positions of Chairman of the Board and Chief Executive Officer should be held by separate
individuals and each should have clearly defined responsibilities.
• The Board should designate a lead director among the independent directors if the Chairman of the Board
is not independent
• The non-executive directors (NEDs) should have separate periodic meetings with the external auditor and
heads of the internal audit, compliance, 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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6. 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.
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6. Assessing Board Performance
RECOMMENDATIONS:
• 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.
• The Board should have in place a system that provides, at the minimum, criteria, and
processes to determine the performance of the Board, the individual directors, and
committees, and such a system should allow for a feedback mechanism from the
shareholders.
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7. 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.
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7. Strengthening Board Ethics
RECOMMENDATIONS:
• 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.
• The Board should ensure the proper and efficient implementation and monitoring of
compliance with the Code of Business Conduct and Ethics and internal policies.
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