The Corporation and

Corporate Governance
CHAPTER 2
WHAT IS A CORPORATION?
• It is a legal entity created by an individual or group of shareholders who have ownership of the
corporation( through shares of stocks issued by the corporation) to engage in business activities.
• Are legal entities and are sometimes defined as “legal persons”. Corporations are allowed to
perform functions that humans make such as
 Buying and selling properties
 Owning copyrights
 Patents
 Trademarks
 And engaging in any business activities
 It has indefinite life span that can survive from generation to generation
PHILIPPINE CORPORATION

• There is no minimum number of incorporators( directors)

• But shall not have more than 20 incorporators
• Each of the incorporators must have one share of stocks.
• Granted a perpetual corporate term( previously 50- year term)
• No Required subscribe/ paid-up capital and residency of incorporators to keep
with global standards.
• One Person Corporation ( OPC)
WHA IS CORPORATE GOVERANCE

• It is a concept that was introduced in the 1970s.

• Corporate Governance structures were put into place to protect the various stakeholders of
corporations and prevent corporate scandals and or failures from happening.
• Corporate governance is the system of rules, practices, and processes by which a firm is
directed and controlled.
• Corporate governance essentially involves balancing the interests of a company's many
stakeholders, such as shareholders, senior management executives, customers, suppliers,
financiers, the government, and the community.
IMPORTANCE OF CORPORATE GOVERNANCE
IMPORTANCE OF CORPORATE GOVERNANCE
Aims and Objectives of a Business

• An aim is where the business wants to go in the future and its goals. It is a statement of
purpose, e.g. we want to grow the business into Europe.
• Business objectives are the stated, measurable targets of how to achieve business aims. For
instance, we want to achieve sales of €10 million in European markets in 2004.
• A mission statement sets out the business vision and values that enables employees,
managers, customers, and even suppliers to understand the underlying basis for the actions of
the business.
BUSINESS OBJECTIVES
• Objectives give the business a clearly defined target.
• These are Plans that can then be made to achieve
targets.
• This can motivate the employees.
• It also enables the business to measure the progress
toward its stated aims.
BUSINESS OBJECTIVES
• The most effective business objectives meet the following criteria:

• Specific – objectives are aimed at what the business does, e.g. a hotel might have an objective of
filling 60% of its beds a night during October, an objective specific to that business.
• M - Measurable – the business can put a value to the objective, e.g. $10,000 in sales in the next half
year of trading.
• A - Agreed by all those concerned in trying to achieve the objective.

• R - Realistic – the objective should be challenging, but it should also be able to be achieved by the
resources available.
• T- Time specific – they have a time limit of when the objective should be achieved, e.g. by the end
of the year.
EFFECTIVE BUSINESS CRITERIA
BUSINESS OBJECTIVES
The main objectives that a business might have are:
• Survival – a short-term object short-trembly for a small business just starting out, or when a new
firm enters the market or at a time of crisis.
• Profit maximization – try to make the most profit possible – most like to be the aim of the
owners and shareholders.
• Profit satisficing – try to make enough profit to keep the owners comfortable – probably the aim
of smaller businesses whose owners do not want to work longer hours.
• Sales growth – where the business tries to make as many sales as possible. This may be because
the managers believe that the survival of the business depends on being large. Large businesses
can also benefit from economies of scale.
BUSINESS OBJECTIVES
A business may find that some of its objectives conflict with one and another:
• Growth versus profit: for example, achieving higher sales in the short term (e.g. by cutting
prices) will reduce short-term profit.
• Short-term versus long-term: for example, a business may decide to accept lower cash flows in
the short term whilst it invests heavily in new products or plant and equipment.
• Large investors in the Stock Exchange are often accused of looking too much at short-term
objectives and company performance rather than investing in a business for the long-term.
Alternative Aims and Objectives
Not all businesses seek profit or growth. Some organizations have organizational objectives.
• Ethical and socially responsible objectives – organizations like the Co-op or the Body Shop have objectives
that are based on their beliefs on how one should treat the environment and people who are less fortunate.
• Public sector corporations are run to not only generate a profit but provide a service to the public. This
service will need to meet the needs of the less well-off in society or help improve the ability of the economy
to function: e.g. cheap and accessible transport service.
• Public sector organizations that monitor or control private sector activities have objectives that are to ensure
that the business they are monitoring complies with the laws laid down.
• Health care and education establishments – their objectives are to provide a service – most private schools
for instance have charitable status. Their aim is the enhancement of their pupils through education.
• Charities and voluntary organizations – their aims and objectives are led by the beliefs they stand for.
Changing Objectives
A business may change its objectives over time due to the following reasons:
• A business may achieve an objective and will need to move onto another one
(e.g. survival in the first year may lead to an objective of increasing profit in the
second year).
• The competitive environment might change, with the launch of new products
from competitors.
• Technology might change product designs, so sales and production targets
might need to change.
 KEY PLAYERS IN CORPORATE GOVERNANCE

• CEO- The CEO is the person responsible for leading and 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 the company.
• Chairman of the 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 the company.
• Board of Directors- This is the best entity in steering the company’s strategic
direction and evaluating its performance. As a director, questions must be asked
during board meetings to make sure decisions made by the company will be for
the best interest of the company in the long term.
KEY PLAYERS IN CORPORATE GOVERNANCE
• Shareholders- Considered owners of the company through their ownership/
holdings of stock shares, this group actively seeks to maximize stock price
increase over a period of time.
• Stakeholders- Any group of people who are affected by how a corporation
operates (i.e., employees, suppliers, government and society among others).
DIRECTORS CLASSIFICATION
• Independent director
 Are individuals who have no connection with the company and are free from any
relationship which may be considered a conflict of interest
• Non-executive director
 Are individuals who are not part of the management but related to a certain aspect of
the company, such as being a supplier, family representative, friend, adviser or
shareholder
• Executive director
 Hold a particular executive position inside the organization, such as CEO or other
senior executive position such as the vice president.
 DUTIES OF DIRECTORS
A corporation is managed by directors and officers. Directors act as a group known as a board of
directors. Corporations also have officers who are appointed by and receive their powers from the board.
• Act in the best interest of those they serve
• Owe a duty of care to their corporation. Stays informed about corporate developments and makes
informed decisions
• Be loyal to the corporation.
• Manage the corporation’s business and affairs and has the authority to exercise all of the corporation’s
powers
• Responsible for making major business and policy decisions, and the officers are responsible for
carrying out the board’s policies and for making the day-to-day decisions
 CORPORATE OFFICERS & THEIR DUTIES
PRESIDENT- usually makes decisions on corporate policy and operations.
VICE PRESIDENT- assumes the president’s function in his or her absence. Also often be
responsible for running part of the corporation’s business or operations.
SECRETARY-makes and keeps the corporate books and records. This includes keeping
the records of directors’ and shareholders’ meetings and the corporation’s stock record
book. The secretary also has the authority to send out notices to corporate meetings and
keep a register of the names and addresses of the stakeholders. The secretary also keeps
the corporate seal
TREASURER- keeps the corporation’s money and is responsible for taxes, financial
reports, etc.
THE COMMITTEE
• Committees are formed because board work can be done effectively. By
focusing and discussing particular issues separately from general board
meetings, the time management of directors is optimized.
Note: 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.
DIFFERENT COMMITEES
• AUDIT COMMITTEE- as a result of corporate meltdowns, this committee has
become a nonnegotiable aspect of good governance. The main objective of this
committee is to oversee accounting and financial reporting processes and results.
They make sure that internal and external audits are carried out with integrity.
• REMUNERATION COMMITTEE- this committee is responsible for identifying
compensation and benefit plans for directors and senior executives through
performance appraisals. Excessive compensation packages during economic
downturns or financial crises warrant a closer investigation of the rationale
behind said compensation.
DIFFERENT COMMITTEES
• NOMINATION COMMITTEE- to assure an effective working board, the
directors on board must be independent thinkers, including executive directors.
The nomination committee should nominate the right mix of board members to
ensure objectivity, independence, and expertise.
Note: other committees can be formed by the board as part of good governance
but this will depend on the need and circumstances of a company.
THE HEALTHY CORPORATION CHECKLIST
 The healthy
corporation checklist
allows you to check
your corporation’s
compliance with your
rule book and the
law.

 The checklist contains

a list of questions to
ask about your
corporation.
 Each question has a
tick box to record
your corporation’s
compliance, helping
you to identify the
areas that need
HEALTHY CORPORATION CHECKLIST FOR
DIRECTORS & OFFICERS
HEALTHY CORPORATION CHECKLIST FOR
DIRECTORS & OFFICERS
HEALTHY CORPORATION CHECKLIST FOR
DIRECTORS, MEMBERS, & STAFF