THE BOARD'S GOVERNANCE RESPONSIBILITIES

3. ESTABLISHING B O A R D COMMITTEES

Principle

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 coin position, functions and responsibilities of all
committees established should be contained in a publicly available
Committee Charter.

Recommendation 3.1

The Board should establish board committees that focus on specific

board functions to aid in the optimal performance of its roles and
responsibilities.

Explanation

Board committees such as the Audit Committee, Corporate

Governance Committee, Board Risk Oversight Committee and Related
Party Transaction Committee are necessary to support the Board in
the effective performance of its functions. The establishment of the
same, or any other committees that the company deems necessary,
allows for specialization in issues and leads to a better management of
the Board's workload. The type of board committees to be established
by a company would depend on its size, risk profile and complexity of
operations. However, if the committees are not established, the
functions of these committees way be carried out by the whole board or
by any other committee.
Recommendation 3.2

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 committee
should be composed of at least three appropriately qualified non-
executive directors, the majority of whom, including the Chairman,
should be independent. All of the members of the committee must
have relevant background, knowledge, skills, and/or experience in the
areas of accounting, auditing and finance. The Chairman of the Audit
Committee should not be the chairman of the Board or of any

Explanation

The Audit Committee is responsible for overseeing the senior management

in establishing and maintaining an adequate, effective and efficient internal
control framework. It ensures that systems and processes are designed to
provide assurance in areas including reporting, monitoring compliance with
laws, regulations and internal policies, efficiency and effectiveness of
operations, and safeguarding of assets.

The Audit Committee has the following duties and responsibilities, among
others:

a. Recommends the approval the Internal Audit Charter (IA Charter), which
formally defines the role of Internal Arid it and the audit plan as well
as oversees the implementation of the IA Charter;

b. Through the Internal Audit (IA) Department, monitors and evaluates

the adequacy and effectiveness of the corporation’s internal control
system, integrity of financial reporting, and security of physical
and information assets. Well-designed internal control procedures
and processes that will provide a system of checks and balances
should be in place in order to (a) safeguard the company's
resources and ensure their effective utilization, (b) prevent
occurrence of fraud and other irregularities, (c) protect the
accuracy and reliability of the company’s financial data, and (d)
ensure compliance with applicable laws and regulations;
c. Oversees the Internal Audit Department, and recommends the
appointment and/or grounds for approval of an internal audit head or
Chief Audit Executive (CAE). The Audit Committee should also
approve the terms and conditions for outsourcing internal audit
services;

d. Establishes and identifies the reporting line of the Internal Auditor to

enable him to proF e rly fulfi11 his duties and responsibilities. For
this purpose, he should directly report to the Audit Committee;

e. Reviews and monitors Management's responsively to the Internal

Auditor's findings and recommendations;

f. Prior to the commencement of the audit, discusses with the External

Auditor the nature, scope and expenses of the audit, and ensures the‘
proper coordination if more than one audit firm is involved in the
activity to secure proper coverage and minimize duplication of
efforts;

g. Evaluates and determines the non-audit work, if any, of the External

Auditor, and periodically reviews the non-audit fees paid to the
External Auditor in relation to the total fees paid to li its and to the
corporation's overall consultancy expenses. The committee should
disallow any non-audit work that will conflict with his duties as an
External Auditor or may pose a threat to his independence. The
non-audit work, if allowed, should be disclosed in the corporation's
Annual Report and Annual Corporate Governance Report;

h Reviews and approves the Interim and Annual Financial Statements

before their submission to the Board, with particular focus on the
following matters:
• Any change/s in accounting policies and practices
Areas where a significant amount of judgment has been
exercised
• Significant adjustments resulting from the audit
• Going concern assumptions
• Compliance with accounting standards
• Compliance with tax, legal and regulatory requirements

Reviews the disposition of the recommendations in the External

Auditor's management letter;
 j. Performs oversight functions over the corporation's Internal and
External Auditors. It ensures the independence of Internal and
External Auditors, and that both auditors are given unrestricted
access to all records, properties and personnel to enable them to
perform their respective audit functions;

k. Coordinates, monitors and facilitates compliance with laws,

rules and regulations;

l. Recommends to the ,Board the appointment, reappointment,

removal and fees of the External Auditor, duly accredited by the
Commission, who Undertakes an independent audit of the
corporation, and provides an objective assurance on the manner by
which the financial statements should be prepared and presented to
the stockholders; and

m. In case the company does not have a Board Risk Oversight

Committee and/or Related Party Transactions Committee, performs
the functions of said committees as provided under
Recommendations 3.4 and 3.5

The Audit Committee meets with the Board at least every quarter
without the presence of the CEO or other management team members,
and periodically meets with the head of the internal audit.

Recommendation 3.3

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. It should be composed of at least three members, all of
whom should be independent directors, including the Chairman.

Explanation

The Corporate Governance Committee (CG Committee) is tasked with

ensuring compliance with and proper observance of corporate
governance principles and practices. It has the following duties and
functions, among others:

a. Oversees the implementation of the corporate governance

 framework and periodically reviews the said framework to ensure
that it remains appropriate in light of material changes to the
corporation's size, complexity and business strategy, as well as its
business and regulatory environments;

b. Oversees the periodic performance evaluation of the Board and its

committees as well as executive management, and conducts an
annual self-evaluation of its performance;

c. Ensures that the i'esu1ts of the Board evaluation are shared,

discussed, and that concrete action plans are developed and
implemented to address the identified areas for improvement;

d. Recommends continuing education/training programs for

directors, assignment of tasks/projects to board committees,
succession plan for the board members and senior officers, and
remuneration packages for corporate and individual
performance;

e Adopts corporate governance policies and ensures that these are

reviewed and updated regularly, and consistently implemented
in form and substance;

Proposes and plans irrelevant trainings for the members of the

Board;

g. Determines the nomination and election process for the

company’s directors and has the special duty of defining the
general profile of board members that the company may need
and ensuring appropriate knowledge, competencies and
expertise that complement the existing skills of the Board; and

h. Establishes a formal and transparent procedure to develop a

policy for determining the remuneration of directors and officers
that is consistent with the corporation's culture and strategy as
well as the business environment in which it operates.

The establishment of a Corporate Governance Committee does not

preclude companies from establishing separate Remuneration or
Nomination Committees, if they deem necessary.
Recommendation 3.4

Subject to a corporation’s size, risk profile and complexity of

operations, 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 BROC should be composed of
at least three members, the majority of whom should be
independent directors, including the Chairman. The Chairman
should not be the Chairman of the Board or of any other committee.
At least one member of the committee must have relevant thorough
knowledge and experience on risk and risk management

Explanation

The establishment of a Board Risk Oversight Committee (BROC) is

generally for conglomerates and companies with a high risk profile.

Enterprise risk management is integral to an effective corporate

governance process and the achievement of a company's value creation
objectives. Thus, the BROC has the responsibility to assist the Board in
ensuring that there is an effective and integrated risk management
process in place. With an integrated approach, the Board and top
management will be in a confident position to make well-informed
decisions, having taken into consideration risks related to significant
business activities, plans and opportunities.

The BROC has the following duties and responsibilities, among others:

a. Develops a formal enterprise risk management plan which contains

the following elements: (a) common language or register of risks,
(b) well-defined risk management goals, objectives and oversight,
(c) uniform processes of assessing risks and developing strategies to
manage prioritized risks, (d) designing and implementing risk
management strategies, and (e) continuing assessments to improve
risk strategies, processes and measures:

b. Oversees the implementation of the enterprise risk management plan

through a Management Risk Oversight Committee. The BROC
conducts regular discussions of the company’s prioritized and
residual risk exposures based on regular risk management reports
and assesses how the concerned units or offices are addressing and
 managing these risks;

c. Evaluates the risk management plan to ensure its continued

relevance, comprehensiveness and effectiveness. The BROC revisits
defined risk management strategies, looks for emerging or changing
material exposures, and stays abreast of significant developments
that seriously impact the likelihood of harm or loss;

d. Advises the Board on its risk appetite levels and risk tolerance
limits;

e. Reviews at least annually the company’s risk appetite levels and

risk tolerance limits based on changes and developments in the
business, the regulatory framework, the external economic and
business environment, and when major events occur that are
considered to have major impacts on the company;

f. Assesses the probability of each identified risk becoming a reality

and estimates its possible significant financial impact and likelihood
of occurrence. Priority areas of concern are those risks that are the
most likely to occur and to impact the performance and stability of
the corporation and its stakeholders;

g. Provides oversight over Management’s activities in managing

credit, market, liquidity, operational, legal and other risk exposures
of the corporation. This function includes regularly receiving
information on risk exposures and risk management activities from
Management; and

h. Reports to the Board on a regular basis, or as deemed necessary, the

company’s material risk exposures, the actions taken to reduce the
risks, and recommends further action or plans, as necessary.

Recommendation 3.5

Subject to a corporation’s size, risk profile and complexity of

operations, the Board should establish a Related Party Transaction
(RPT) Committee, which should be tasked with reviewing all material
related party transactions of the company alid should be composed of at
least three non-executive directors, two of whom should be independent,
including the Chairman.
Explanation

Examples of companies that way have a separate RPT Committee are

conglomerates and universal/commercial banks in recognition of the potential
magnitude of RPTs in these kinds of corporations.

The following are the functions of the RPT Committee, among

others:

a. Evaluates on an ongoing basis existing relations between and among

businesses and counterparties to ensure that all related parties are
continuously identified, RPTs are monitored, and subsequent changes
in relationships with counterparties (from non-related to related and
vice versa) are captured. Related parties, RPTs and changes i1i
relationships should be reflected in the relevant reports to the Board and
regulators/supervisors;

b. Evaluates all material RPTs to ensure that these are not undertaken on
more favorable economic terns (e.g., price, commissions, interest
rates, fees, tenor, collateral requirement) to such related parties than
similar transactions with non-related parties under similar
circumstances and that no corporate or business resources of the
company are misappropriated or misapplied, and to determine any
potential reputational risk issues that may arise as a result of or in
connection with the transactions. In evaluating RPTs, the Committee
takes into account, among others, the following:

1 . The related party's relationship to the company and interest in

the transaction;
2. The material facts of the proposed RPT, including the proposed
aggregate value of such transaction;
3. The benefits to the corporation of the proposed RPT;
4. The availability of other sources of comparable products or
services; and
5. An assessment of whether the proposed RPT is on terms and
conditions that are comparable to the terms generally available to an
unrelated party under similar circumstances. The company should
have an effective price discovery system in place and exercise due
diligence in determining a fair price for RPTs;
 c. Ensures that appropriate disclosure is made, and/or information is
provided to regulating and supervising authorities relating to the
company's RPT exposures, and policies on conflicts of interest or
potential conflicts of interest. The disclosure should include information
on the approach to managing material conflicts of interest that are
inconsistent with such policies, and conflicts that could arise as a result
of the company’s affiliation or transactions with other related parties;
d. Reports to the Board of Director's on a regular basis, the status and
aggregate exposures to each related pai4y, as well as the total amount
of exposures to all related parties;

e. Ensures that transactions with related parties, including write-off

of exposures are subject to a periodic independent review oi
audit process; and

Oversees the implementation of the system for identifying,

monitoring, measuring, controlling, and reporting RPTs,
including a periodic review of RPT policies and procedures.

Recommendation 3.6

A11 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. The Charters should provide the
standards for evaluating the performance of the Committees. It
should also be fully disclosed on the company's website.

Explanation

The Committee Charter clearly defines the roles and

accountabilities of each committee to avoid any overlapping
functions, which aims at having a more effective board for the
company. This can also be used as basis for the assessment of
committee p e r f o r m a n c e