COMPILED BY: GRACE P.

GIRON, LPT, MBA

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A series of events over the last two decades served to place the issues and the nature and evolution of
corporate governance and its corollary the stewardship of assets at the center of the policy agenda. In a
corporate context, the board serves as a ‘guardian of assets’. Proper corporate governance and
stewardship imposes a duty to exercise due diligence, rigor and attention, in the management and
disposal of all those assets for which the officer is given responsibility. In this module, we define
corporate structure & corporate governance and integrate the concept with other elements of social
responsibility. We also examine primary issues that should be considered in the development and
improvement of corporate governance systems.

After successful completion of this module, you should be able to:

 Understand the definition and importance of corporate governance
 Know the relationship between corporate governance and social responsibility  Identify
different issues concerning corporate governance

Corporate Structure
Before we define corporate governance, it is important that we understand first the organizational
structure of corporations. Corporations have many structures, but the most typical corporation
organizational structure consists of the (1) shareholders or owners, (2) board of directors, (3) officers,
and (4) employees.

Shareholders or Owners
The shareholders are the owners of the corporation. Corporations issue shares or stocks that might be
sold to private investors or the general public in the case of publicly listed corporations. Normally, the
ownership of a corporation is divided into many individuals ranging from hundreds to thousands,
depending on the corporation’s size. Shareholders do not usually participate in the day-to-day
management of a corporation, but they ultimately hold the power to vote on the appointment and
removal of the board of directors and other major corporate changes that can only be effected with
shareholders’ approval. Board of Directors

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The primary responsibility of the board of directors is to protect the shareholders’ investment. The board
are elected by the shareholders for this reason. The board of directors report on the business’ success
and progress to the shareholders on a regular basis. The board appoints the officers. The officers are the
President or CEO (Chief Executive Officer), one or more Vice Presidents, the Treasurer and the Secretary.

Officers
The officers report to the board of directors. They are responsible for the normal everyday business
operations. Their main responsibility is to act in the best interest of the corporation. This may or may
not always align with the board of directors’ wishes. Employees

Employees make the business run. They carry out the various tasks associated with the company’s
mission. Employees report to the officers of the company.

Corporate Governance Defined

We define corporate governance as the formal system of oversight, accountability, and control for
organizational decisions and resources.

• Oversight relates to a system of checks and balances that limit employees’ and managers’
opportunities to deviate from policies and codes of conduct.

• Accountability relates to how well the content of workplace decisions is aligned with a firm's stated
strategic direction.

• Control involves the process of auditing and improving organizational decisions and actions.
The philosophy that is embraced by a board or affirm regarding oversight accountability and control
directly affects how corporate governance works. Both directors and officers of corporations are
fiduciaries for the shareholders. Fiduciaries are persons placed in positions of trust who use due care
and loyalty in acting on behalf of the best interests of the organization.

There is a duty of due care, also called a duty of diligence, to make informed and prudent decisions.
Corporate governance establishes fundamental systems and processes for oversight, accountability, and
control. This requires investigating, disciplining, and planning for recovery and continuous improvement.
Effective corporate governance creates compliance and values so that employees feel that integrity is at
the core of competitiveness. Governance also provides mechanisms for identifying risks and planning for
recovery when mistakes or problems occur.

Corporate Governance and Social Responsibility

To understand the role of corporate governance in business today, it is also important to consider how it
relates to fundamental beliefs about the purpose of business organizations. Some people believe that as
long as a company is maximizing shareholder wealth and profitability, it is fulfilling its core
responsibility. Although this must be accomplished in accordance with legal and ethical standards, the
primary focus is on the economic dimension of social responsibility. Thus, this belief places the
philanthropic dimension beyond the scope of business. Other people, however, take the view that a
business is an important member, or citizen, of society and must assume broad responsibilities. This
view assumes that business performance both affects and is influenced by internal and external factors.

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In this case, performance is often considered from a financial, social, and ethical perspective. From these
assumptions, we can derive two major conceptualizations of corporate governance: the shareholder
model and the stakeholder model.

The shareholder model

The shareholder model of corporate governance bases management decisions toward what is in the
best interests of investors, including the maximization of wealth for investors and owners. It has long
been the view that shareholders are a company’s most important stakeholder. If a business’s goal is to
make a profit, and if the firm’s owners and investors have the most to lose when a firm closes, then
businesses must create value to survive and provide returns for owners. Managers who adopt the view
of maximizing shareholder value advocate for a shareholder model of corporate governance. From an
economic perspective, such a viewpoint makes sense. Businesses cannot survive with making a profit.
However, there is a significant downside to the shareholder model. Due to the pressures to meet
performance expectations, managers are often tempted to take a short-term perspective of the
organization. In other words, managers might focus on maximizing value in the short-term rather than in
the long-term. This can have negative repercussions on the firm.

The stakeholder model

In the stakeholder model of corporate governance, the purpose of business is conceived in a broader
fashion. Although a company has a responsibility for economic success and viability, it must also answer
to other parties including employees, suppliers, government agencies, communities, and groups with
which it interacts. However, while managers with this viewpoint acknowledge the importance of all
stakeholders, they also recognize that firms must prioritize these stakeholders. For instance, some firms
may choose to prioritize employees, while others could choose to focus on customers. This allows the
firm to tailor its goals to best meet the needs of its chosen stakeholder rather than trying to meet the
needs of every stakeholder. When satisfying the interest of the chosen stakeholder, benefits to other
stakeholders, including shareholders, followed. The stakeholder model has received widespread support
from many successful managers over the years. Adopting the stakeholder model will be able to manage
both short-term results— creating wealth for shareholders—while considering the long-term well-being
of the firm.

Issues in Corporate Governance Systems

Organizations that strive to develop effective corporate governance systems consider a number of
internal and external issues. In this section we look at four areas that need to be addressed in the design
and improvement of governance mechanisms. We begin with board of directors, which have the
ultimate responsibility for ensuring a governance focus. Then, we discuss the role of shareholders and
investors, internal control and risk management, and executive compensation within the governance
systems. These issues affect most organizations, although individual businesses may face unique factors
that create additional governance questions.

Internal Control
Board of Shareholders Executive
and Risk
Directors and Investors Management Compensation

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Board of Directors
Members of a company's board of directors assume responsibility for the firm's resources and legal and
ethical compliance. The board appoints top executive officers and is responsible for providing oversight
of their performance. Thus, board membership is not designed as a vehicle for personal financial gain;
rather, it provides the intangible benefits of ensuring the success of the organization and the
stakeholders affected and involved in the fiduciary arrangement. Several issues concerning board of
directors are as follows:

• Independence. A key attribute of an effective board is that it is comprised of a majority of

independent outsiders. An outsider is someone who has never worked at the company, is not
related to any of the key employees and has never worked for a major supplier, customer or
service provider of the firm, such as lawyers, accountants, consultants, investment bankers, etc.
The outside directors are thought to bring more independence to the monitoring function
because they are not bound by past allegiances, friendships, a current role in the company, or
some other matter that may create a conflict of interest.

• Quality. Finding board members who have similar expertise in the firm's industry or who have
served as chief executives at similar sized organizations is a good strategy for improving the
board’s overall quality. Directors with competence and experiences that reflects some of the
firm's core issues should bring valuable insights to bear on discussions and decisions.

Shareholders and Investors

Because they have allocated scarce resources to the organization, shareholders and investors expect to
grow and reap rewards from their investments. This type of financial exchange represents a formal
contractual arrangement and provides the capital necessary to fund all types of organizational
initiatives. Investments include financial, human, and intellectual capital. Several issues concerning
shareholders and investors include:

• Shareholder Activism. This is a way that shareholders can influence a corporation's behavior by
exercising their rights as partial owners. Several ways exist for them to influence a company’s
board of directors and executive management actions. These methods can range from dialogue
with managers to formal proposals, which are voted on by all shareholders at a company's annual
meeting. Shareholder activists also employ a variety of offensive tactics to force changes. They
may also threaten companies with lawsuits if they are not allowed to have their say.

• Social Investing. Many investors assume the stakeholder model of corporate governance, which
carries into a strategy of social investing, “the integration of social and ethical criteria into the
investment decision making process”. There are two inherent goals of socially responsible
investing: social impact and financial gain. A social investor assesses the financial outlook of the
investment while trying to gauge its social value.

• Investor Confidence. This is the investors’ willingness to engage in the investment opportunities
and associated intermediation channels available to them based on their perception of risk and

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 return. Shareholders and other investors must have assurance that their money is being placed
in the care of capable and trustworthy organizations. These primary stakeholders are expecting a
solid return for their investment, but they also have additional concerns about social
responsibility. When these fundamental expectations are not met, the confidence that investors
and shareholders have in corporations, can be severely tested. Part of this trust relates to the
perceived efficacy of corporate governance, which is now considered an investment criterion for
most investors.

Internal Control and Risk Management

Controls and strong risk management systems are fundamental to effective operations, as they allow for
comparisons between the actual performance and the planned performance and goals of the
organization. Controls are used to safeguard corporate assets and resources, protect the reliability of
organizational information, and ensure compliance with regulations, laws, and contracts. Risk
management is the process used to anticipate and shield the organization from unnecessary or
overwhelming circumstances, while ensuring that executive leadership is taking the appropriate steps to
move the organization and its strategy forward. The following are the several issues under internal
control and risk management:

• Internal and External Audit. Auditing, both internal and external, is vital between risk and controls
and corporate governance. The purpose of internal auditing is to provide insight into an
organization’s culture, policies, procedures, and aids board and management oversight by
verifying internal controls such as operating effectiveness, risk mitigation controls, and
compliance with any relevant laws or regulations. Boards of directors must ensure that the
internal auditing function of the company is provided with adequate funding, up-to-date
technology, and restricted access, independence, and authority to carry out its audit plan.
External audits, on the other hand, provides credibility, improves shareholders’ and investors’
confidence, and improves internal systems and controls.

• Control Systems. The area of internal control covers a wide range of company decisions and
actions, not just the accuracy of financial statements and accounting records. Controls also foster
understanding when discrepancies exist between corporate expectations and shareholder
interests and issues. Internal controls effectively limit employee or management opportunism or
the use of corporate assets for individualistic or non-strategic purposes. Controls also ensure the
board of directors has access to timely and quality information that can be used to determine
strategic options and effectiveness. For these reasons, the board of directors are responsible for
ensuring that an effective internal control system exists and they should have ultimate oversight
for the integrity of the internal control system.
• Risk Management. A strong internal control system alert decision-makers to possible problems,
or risks, that may threaten business operations, including worker safety, company solvency,
vendor relationships, proprietary information, environmental impact, and other concerns. Having
a strong crisis management plan is part of the process for managing risk. The board of directors is
clearly accountable for discovering risks associated with a firm’s specific industry and assessing
the firm's ethics program to ensure that it is capable of uncovering misconduct.

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Executive Compensation
Executive compensation, also known as executive pay, refers to remuneration packages specifically
designed for business leaders, senior management and executive-level employees of a company.
Executive compensation includes benefits such as salaries, perks, incentives, insurances etc. Senior
management and executive-level employees play a crucial role in the company as they're the ones
making the strategies, taking importance decisions etc. In order to keep them motivated and satisfied
it's important to set the right benefits package. Executive compensation is such an important topic that
many boards spend more time deciding how much to compensate top executives than they do ensuring
the integrity of the company's financial reporting systems. How executives are compensated for their
leadership, organizational service, and performance has become a controversial topic.

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Although Corporate Governance is a complex issue that is still in need of a clear definition, the principles
of the concept and those who are responsible for its implementation are clear. Corporate Governance is
the idea behind effective management relationships among shareholders, the board, and the executive
of a corporation. Although many Corporate Governance guidelines vary in their implementation and
execution, for the most part, they subscribe to the same basic principles of accountability, transparency,
responsibility, and fairness. In this module, we will discuss the different theories that served as the basis
for corporate governance. Next, we will explore the basic principles that must be observed in the
development and implementation of corporate governance. Finally, we look at the elements of good
corporate governance.

After successful completion of this module, you should be able to:

 Determine the theories of corporate governance
 Understand the principles of good governance
 Identify different elements of corporate governance

Theories of Corporate Governance

There are many theories of corporate governance which addressed the challenges of governance of
firms and companies from time to time. As defined in the previous module, Corporate Governance is the
process by which decisions are implemented in large businesses. There are various theories which
describe the relationship between various stakeholders of the business while carrying out the activity of
the business.

Agency Theory
Agency theory defines the relationship between the principals (such as shareholders of company) and
agents (such as directors of company). According to this theory, the principals of the company hire the
agents to perform work. The principals delegate the work of running the business to the directors or
managers, who are agents of shareholders. The shareholders expect the agents to act and make
decisions in the best interest of principal. On the contrary, it is not necessary that agent make decisions
in the best interests of the principals. The agent may be succumbed to self-interest, opportunistic
behavior and fall short of expectations of the principal. The key feature of agency theory is separation of
ownership and control. The theory prescribes that people or employees are held accountable in their
tasks and responsibilities. Rewards and Punishments can be used to correct the priorities of agents.

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Stewardship Theory
Stewardship theories argue that the managers or executives of a company are stewards of the owners,
and both groups share common goals. Therefore, the board should not be too controlling, as agency
theories would suggest. The board should play a supportive role by empowering executives and, in turn,
increase the potential for higher performance. The stewards are satisfied and motivated when
organizational success is attained. It stresses on the position of employees or executives to act more
autonomously so that the shareholders’ returns are maximized. The employees take ownership of their
jobs and work at them diligently.

Resource Dependency Theory

Resource-dependence theories argue that a board exists as a provider of resources to executives in
order to help them achieve organizational goals. Resource-dependence theories recommend
interventions by the board while advocating for strong financial, human, and intangible supports to the
executives. For example, board members who are professionals can use their expertise to train and
mentor executives in a way that improves organizational performance. Board members can also tap into
their networks of support to attract resources to the organization. Resourcedependence theories
recommend that most of the decisions be made by executives with some approval of the board.

Principles of Good Governance

Corporate Governance is a concept that is best served by focusing on the end rather than the means.
Put another way, because the rules and guidelines of Corporate Governance are always changing and
evolving, it is important that we do not get so caught up in the procedures that we forget the goal. The
goal of good Corporate Governance is to establish an effectively organized management structure and
activity system that will facilitate the corporation’s ability to meet the needs of stakeholders and any
other pressing needs that may arise. A company that follows the hardcore core fundamentals of good
corporate governance will generally surpass other companies in terms of financial advancement. The
core principles of sound corporate governance include accountability, transparency, responsibility and
fairness.

Accountability
Corporate accountability is an act of responsibility and obligation to provide an explanation for the
company’s actions and activities. Corporate Accountability includes the following:

• Presentation of a balanced and simple analysis of the company’s orientation and prospects.
• Responsibility for determining the character and extent of the adopted risks by the company.
• Maintenance of adequate risk management and internal control structure.
• Setting up formal and unclouded arrangements for corporate reports and a suitable relationship
with the company’s auditor.
• Proper communication with shareholders regarding diversification, progress and financial reports
at frequent.

In order to facilitate this principle, it is advisable that corporations establish clear codes of ethics and job
descriptions so that all corporate members have clear ideas of their expectations.

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Transparency
Transparency means a company should reveal an informative piece of data about their activities to
shareholders and other stakeholders. It also includes the open-mindedness and willingness to divulge
financial figures which are genuine and correct in reality. The unveiling of reports regarding the
organization’s accomplishments and activities should be on time and strive for accuracy. Such steps
ensure the investors’ access to transparent and factual data which finely mirrors the financial,
environmental and social position of the organization.

Responsibility
The CEO and Board of Directors are accountable to the shareholders on behalf of the company regarding
the execution of responsibilities. Thus, they should exercise their authority with full responsibility. The
Board of Directors is responsible for conducting the management of the business, appointing the
suitable CEO, overseeing the affairs of the company and keeping an eye on the performance of the
company. This means that it is their responsibility to ensure that they have all of the necessary
information required to make the right decisions or complete their tasks successfully.

Fairness
Fairness touches on the points of uniform and equal treatment of all the shareholders in reference to
receiving of considerations regarding shareholdings. The fairer the company appears to stakeholders,
the more likely it is that it can endure in the league.

Elements of Corporate Governance

There is no single model of good corporate governance. However, some common elements underlie
good corporate governance. The following are the basic elements of good corporate governance:

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Good Board Practices
• Build a strong, qualified board of directors and evaluate performance. Boards should be comprised
of directors who are knowledgeable and have expertise relevant to the business and are qualified
and competent, and have strong ethics and integrity, diverse backgrounds and skill sets, and
sufficient time to commit to their duties.

• Clearly defined roles and responsibilities. Establish clear lines of accountability among the Board,
Chair, CEO, Executive Officers and management.

Control Environment
Control Environment is the set of standards, processes, and structures that provide the basis for carrying
out internal control across the organization. The board of directors and senior management establish
the tone at the top regarding the importance of internal control including expected standards of
conduct. Management reinforces expectations at the various levels of the organization.
• Emphasize integrity and ethical dealing. Not only must directors declare conflicts of interest and
refrain from voting on matters in which they have an interest, but a general culture of integrity in
business dealing and of respect and compliance with laws and policies without fear of
recrimination is critical.
• Effective risk management. Companies should regularly identify and assess the risks they face,
including financial, operational, reputational, environmental, industry-related, and legal risks.

Transparent Disclosures
Good corporate governance should ensure that timely and accurate disclosure is made regarding all
material matters concerning the corporation, including its financial situation and results. It is in the
interest of each organization to provide clear, timely and reliable information that is adequately

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prepared, and to make relevant information equally accessible to all stakeholders. Strong disclosure
promotes transparency in addition to being an important aspect of good governance.
□ Non-financial reporting. Both financial and non-financial information must be disclosed.
Sustainability reporting is a process of gathering and disclosing data on non-financial aspects of
a company’s performance, including environmental, social, employee and ethical matters, and
defining measurements, indicators and sustainability goals based on the company’s strategy.
Integrated reporting is a process of building an integrated report by combining financial
statements and sustainability reports into a coherent whole that explains company’s ability to
create and sustain value.

Well-Defined Shareholder Rights

Shareholders are given certain rights as owners of corporations. These rights are protected by law, and
honoring them is one of the objectives in corporate governance. The following are some of the
fundamental rights of shareholders:

• Voting Power on Major Issues. Shareholders have rights to vote on company decisions. They can
vote on a variety of corporate matters including voting in officers, company acquisitions and
mergers or liquidations of company assets. Voting on these matters generally take place when
corporations have their annual meetings.

• Inspecting. Shareholders also have rights to inspect their corporation’s financial information.
Inspecting the books gives shareholders a chance to view how their corporations are performing.
This can be critical to shareholders’ decisions to buy more shares or sell off what they already
own.

• Dividend Entitlement. If corporations are distributing profits in the form of dividends, each
shareholder has the right to receive them. Dividend amounts are determined by the corporate
officers and not by the ownership interests of the shareholders. These amounts can fluctuate
yearly based on the corporations’ earnings for that year. With that in mind, corporations with low
earnings, net losses or have other plans with the profits to improve their businesses may not pay
out dividends. However, corporations must pay every shareholder a dividend if they’re
distributing them and cannot select just a few to pay profits to and neglect the rest.

• Right to Sue. Shareholders who have been wronged by their corporations also have the right to
sue. For example, if shareholders didn’t receive their entitled share of dividends or were denied
access to their corporations’ financial information, they can bring legal actions against their
corporations. Shareholders seeking to sue their corporations should check with their local
authorities first on how to proceed.

• Right to transfer ownership. The right to transfer ownership means shareholders are allowed to
trade their stock on an exchange.

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Board Commitment
This means that the board of directors discuss corporate governance issues and has created an
improvement plan or initiative where appropriate resources are committed for its implementation.
These plans or initiatives must be formalized and distributed to the staffs, as appropriate.

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To avoid mismanagement, good corporate governance is necessary to enable companies operate more
efficiently, to improve access to capital, mitigate risk and safeguard stakeholders. It also makes
companies more accountable and transparent to investors so as to minimize expropriation and
unfairness for shareholders. Corporate governance makes companies more accountable and transparent
to investors and gives them the tools to respond to legitimate stakeholder concerns such as sustainable
environmental and social development. It contributes to development and increased access to capital
encourages new investments, boosts economic growth, and provides employment opportunities. In this
module, we discuss the importance of good corporate governance and the general responsibilities that
board of directors have in its implementation.

After successful completion of this module, you should be able to:

 Understand the importance of good governance
 Identify different responsibilities of board of directors

Importance of Good Governance

Employing good corporate governance helps the company to regulate risk and reduce the opportunity
for corruption. Often, scandals and fraud within a company become more likely where directors and
senior management do not have to comply with a formal governance code. The board should meet
regularly, retain control over the business and monitor those in management, to enable it to see how
the company is functioning. Furthermore, a good corporate governance scheme will make clear to every
officer of the company, his or her duties and will encourage them to keep these duties in mind when
making decisions. The following are the fundamental reasons why organizations should adopt good
governance practices:

• To preserve and strengthen stakeholder confidence – nothing distracts an organization more than
having to deal with a disgruntled stakeholder group caused by a lack of confidence in the
governing body. And on the positive side, a supportive stakeholder base can generate benefits for
the organization though social and emotional support, intangible but very valuable attributes that
all organizations should strive to achieve and sustain;

• To provide the foundation for a high-performing organization – the achievement of goals and
sustainable success requires input and support from all levels of an organization. The

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 Board, though good governance practices, provides the framework for planning, implementation and
monitoring of performance and without a foundation to build high performance upon, the achievement
of this goal becomes problematic. Achievement of the best performance and results possible, within
existing capacity and capability, should be an organization’s on going goal. Good governance should
support management and staff to be “the best they can be”; and

• To ensure the organization is well placed to respond to a changing external environment– business
today operates in an environment of constant change. Technology has created an information
age that has transformed our world, and for business to both survive and remain profitable to
enable it to fulfil its mission and achieve its vision, a system has to be in place to assist an
organization to identify changes in both the external environment and emerging trends. This
process of understanding our changing world does not happen by chance, it requires leadership,
commitment and resources from the governing body to establish and maintain such a system
within the organization. Change generally does not happen “over-night”, it is there for all to see
if they have in place a system for looking. Governing bodies, as the ultimate leaders of an
organization, should take prime responsibility for this activity.

• To prevent and combat corruption – companies that are transparent, and have sound system that
provide full disclosure of accounting and auditing procedures, allow transparency in all business
transactions, provide environment where corruption would certainly fade out. Corporate
Governance enables a corporation to compete more efficiently and prevent fraud and
malpractices within the organization.

• To improve access to capital – Several structural changes like increased role of financial
intermediaries and institutional investors, size of the enterprises, investment choices available to
investors, increased competition, and increased risk exposure have made monitoring the use of
capital more complex thereby increasing the need of Good Corporate Governance. Evidences
indicate that well-governed companies receive higher market valuations. The credit worthiness
of a company can be trusted on the basis of corporate governance practiced in the company.

Responsibilities of the Board of Directors

Corporate board directors face the continual challenge of aligning the interests of the board,
management, shareholders and stakeholders. They respond to their duties and responsibilities with full
regard to transparency and accountability. It’s often said that corporate boards are generally
responsible for providing hindsight, oversight, insight and foresight (4Sight). That’s a tall order in today’s
marketplace, which is complex and volatile. Good governance principles are fundamental to the work
that board directors do.

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Foresight
Foresight is about maintaining a constant surveillance for possible opportunities and potential threats,
systematically exploring possible, plausible, probable, and preferred futures. As a result, people will be
better prepared for uncertainty and change.

Foresight requires an inward focus so people anticipate and notice problems, errors, and issues that
could grow into significant incidents—so encourage people to heed the warning signs, and watch for
‘weak signals’ of impending problems. Embrace multiple viewpoints, and listen to diverse voices. The
board of directors shall actively anticipate and do its best to prepare for possible scenarios. In line with
this, they should establish long-term strategic objectives for the company.

Insight
Insight is about bringing people together to pause, step back, and see the big picture, helping them
consider the interactions between the various parts of the organization. This involves systematically
gathering information and evidence from diverse sources, to continually refine and update the status of
ongoing operations and the business environment being faced. In short, it is about building situational
awareness.

So search relentlessly for latent problems and errors, and encourage people to report anomalies,
mistakes, and concerns—however minor—without fear of retribution, and provide confidence that
people’s concerns will be addressed. If required, re-frame or disrupt conventional thinking about
solutions by challenging the commonly-accepted understanding of underlying problems. The board of

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directors should interact with employees and shareholders to ensure that the problems faced will be
resolved in the best interests of stakeholders. They should encourage active participation and
collaboration among employees by providing a work culture where employees can feel free to share
their thoughts about specific subject matters.

Oversight
Oversight refers to the actions taken to review and monitor organizations and their policies, plans,
programs, and projects, to ensure that they: (1) are achieving expected results; (2) represent good value
for money; and (3) are in compliance with applicable policies, laws, regulations, and ethical standards.
To achieve this, the organization must monitor its performance and track how things are going, as well
as understanding the risks inherent in the business model, including key assumptions underlying the
continued viability of the mission, together with the business’s risk appetite and tolerance of failure.

The board carries out oversight responsibility across the organization in areas such as business and risk
strategy, organization, financial soundness and regulatory compliance.

Hindsight
Finally, Hindsight is about investing time in learning from experience and past events, and
understanding that future performance can only be enhanced if the organization is willing and able to
change behavior as a result of experience.

Importantly, this goes beyond compiling statistics about events, because metrics rarely promote
learning by themselves. So avoid the classic ‘blame game’ and asking ‘Who’s fault was it?’, but instead
ask questions such as ‘Why did that person act the way that they did at that time?’ This will better help
uncover the situational and organizational factors that were involved. The board of directors should be
composed of people who are experienced or experts in certain areas relative to the business. This will
ensure that appropriate levels of competencies can be expected from them when the need arises.

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To promote the development of a strong corporate governance culture and keep abreast with recent
developments in corporate governance, the Securities and Exchange Commission (SEC), the regulatory
body governing corporations in the Philippines, has developed the Code of Corporate Governance for
Publicly-Listed Companies (“CG Code for PLCs”) effective January 1, 2017. While the code is mandated
for publicly listed companies only, it is highly encouraged that corporate governance practices be
implemented to all business sizes due to the importance and benefits that can be obtained from it. The
Code of Corporate Governance is intended to raise the corporate governance standards of Philippine
corporations to a level at par with its regional and global counterparts. In this module, we discuss the
principles and recommendations of the code, which shall be used in embedding good corporate
governance practices.

After successful completion of this module, you should be able to:

 Understand the code of corporate governance for publicly listed companies
 Apply the principles and recommendations of the code to embed good corporate governance
practices

Figure 9.1 Code of Corporate Governance Principles

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Code of Corporate Governance for Publicly Listed Companies
The code of corporate governance provide the principles and practical guidance on how to embed good
corporate governance practices on organizations. The latest G20/OECD1 Principles of Corporate
Governance and the Association of Southeast Asian Nations Corporate Governance

Scorecard were used to develop the code. It is divided into five key areas as follows: the board’s
governance responsibilities, disclosure and transparency, internal control system and risk management
framework, cultivating a synergic relationship with shareholders and duties to stakeholders.

The Board’s Governance Responsibilities

In the previous module, we discussed the general responsibilities of the board of directors to the
business as whole. In this section, we discuss the specific functions of the board in relation to the
governance of the organization.

1. Establishing a Competent Board. 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.
□ 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 always ensure that it has an appropriate mix of competence and expertise and
that its members remain qualified for their positions individually and collectively, to
enable it to fulfill its roles and responsibilities and respond to the needs of the
organization based on the evolving business environment and strategic direction.
2. Establishing Clear Roles and Responsibilities of the Board. 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.
□ There are two key elements of the fiduciary duty of board members: the duty of care and
the duty of loyalty. The duty of care requires board members to act on a fully informed
basis, in good faith, with due diligence and care. The duty of loyalty is also of central
importance; the board member should act in the interest of the company and all its
shareholders, and not those of the controlling company of the group or any other
stakeholder.
3. Establishing Board Committees. The Board should establish board committees that focus on
specific board functions to aid in the optimal performance of its roles and responsibilities. The
code recommends the establishment of the following board committees:

• Audit Committee. 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.

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 • Corporate Governance Committee. The Board should establish a Corporate Governance
Committee that should be tasked to assist the Board in the performance of its corporate
governance responsibilities.

• Board Risk Oversight Committee. 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.

• Related Party Transaction Committee. 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.
4. Fostering Commitment. 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.

• The directors should attend and actively participate in all meetings of the Board, except
when justifiable causes, such as, illness, death in the immediate family and serious
accidents, prevent them from doing so.
5. Reinforcing Board Independence. The board should endeavor to exercise an objective and
independent judgment on all corporate affairs.

• 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 positions of Chairman of the Board and Chief Executive Officer should be held by
separate individuals and each should have clearly defined responsibilities.

6. Assessing Board Performance. 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.

• 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
process to determine the performance of the Board, the individual directors, committees
and such system should allow for a feedback mechanism from the shareholders.
7. Strengthening Board Ethics. Members of the Board are duty-bound to apply high ethical
standards, taking into account the interests of all stakeholders.

• 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 Code should be

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 properly disseminated to the Board, senior management and employees. It should also
be disclosed and made available to the public through the company website.

• The Board should ensure the proper and efficient implementation and monitoring of
compliance with the Code of Business Conduct and Ethics and internal policies.

Disclosure and Transparency

8. Enhancing Company Disclosure Policies and Procedures. The company should establish corporate
disclosure policies and procedures that are practical and in accordance with best practices and
regulatory expectations.

• The company should make a full, fair, accurate and timely disclosure to the public of every
material fact or event that occurs, particularly on the acquisition or disposal of significant
assets, which could adversely affect the viability or the interest of its shareholders and
other stakeholders.

9. Strengthening the External Auditor’s Independence and Improving Audit Quality. The company
should establish standards for the appropriate selection of an external auditor, and exercise
effective oversight of the same to strengthen the external auditor’s independence and enhance
audit quality.
10. Increasing Focus on Non-Financial and Sustainability Reporting. The company should ensure that
the material and reportable non-financial and sustainability issues are disclosed.

• The Board should have a clear and focused policy on the disclosure of non-financial
information, with emphasis on the management of economic, environmental, social and
governance (EESG) issues of its business, which underpin sustainability. Companies
should adopt a globally recognized standard/framework in reporting sustainability and
non-financial issues.

11. Promoting a Comprehensive and Cost-Efficient Access to Relevant Information. The company
should maintain a comprehensive and cost-efficient communication channel for disseminating
relevant information. This channel is crucial for informed decision-making by investors,
stakeholders and other interested users.

Internal Control System and Risk Management Framework

12. Strengthening the Internal Control System and Enterprise Risk Management Framework. To
ensure the integrity, transparency and proper governance in the conduct of its affairs, the
company should have a strong and effective internal control system and enterprise risk
management framework.
• The Company should have in place an independent internal audit function that provides an
independent and objective assurance, and consulting services designed to add value and
improve the company's operations. Cultivating a Synergic Relationships with
Shareholders

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 13. Promoting Shareholder Rights. The company should treat all shareholders fairly and equitably,
and also recognize, protect and facilitate the exercise of their rights.

• The Board should encourage active shareholder participation by sending the Notice of Annual
and Special Shareholders’ Meeting with sufficient and relevant information at least 28 days
before the meeting.

Duties to Stakeholders
14. Respecting Rights of Stakeholders and Effective Redress for Violation of Stakeholder’s Rights.
The rights of stakeholders established by law, by contractual relations and through voluntary
commitments must be respected. Where stakeholders’ rights and/or interests are at stake,
stakeholders should have the opportunity to obtain prompt effective redress for the violation of
their rights.

• The Board should identify the company’s various stakeholders and promote cooperation
between them and the company in creating wealth, growth and sustainability.

• The Board should establish clear policies and programs to provide a mechanism on the
fair treatment and protection of stakeholders.

15. Encouraging Employees’ Participation. A mechanism for employee participation should be

developed to create a symbiotic environment, realize the company’s goals and participate in its
corporate governance processes.

• The Board should establish policies and programs covering, among others, the following:
(1) health, safety and welfare; (2) training and development; and (3)
reward/compensation for employees, encourages employees to perform better and
motivates them to take a more dynamic role in the corporation.

• The Board should set the tone and make a stand against corrupt practices by adopting an
anti-corruption policy and program in its Code of Conduct.

• The Board should establish a suitable framework for whistleblowing that allows
employees to freely communicate their concerns about illegal or unethical practices,
without fear of retaliation and to have direct access to an independent member of the
Board or a unit created to handle whistleblowing concerns.
16. Encouraging Sustainability and Social Responsibility. The company should be socially responsible
in all its dealings with the communities where it operates. It should ensure that its interactions
serve its environment and stakeholders in a positive and progressive manner that is fully
supportive of its comprehensive and balanced development.
• The company should recognize and place an importance on the interdependence
between business and society, and promote a mutually beneficial relationship that allows
the company to grow its business, while contributing to the advancement of the society
where it operates.

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Read: https://www.sec.gov.ph/corporate-governance/code-of-corporate-governance-forpublicly-listed-
companies/

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News travels fast, regardless of whether it’s good news or bad news. We can count on technology to
increase the speed and scope of traveling news. That’s just one thing that makes a corporation’s
reputation such a valuable asset. Fast-spreading news affects branding and reputation for better and for
worse. Tackling corporate culture is challenging. When boards approach culture proactively rather than
reactively, it helps to protect a corporation’s future. This is how it also protects employees,
shareholders, vendors and other stakeholders. Creating awareness is central to developing a healthy
corporate culture. Awareness begins in the boardroom, which is why developing corporate culture
should be on every board’s agenda. In this module, we discuss ways on how to set a culture of good
governance in organizations.

After successful completion of this module, you should be able to:

 Understand how to set a culture of good governance in the workplace
 Understand the purpose and content of code of ethics and professional conduct 
Understand whistle-blower policies and procedures

Code of Ethics and Professional Conduct

A code of ethics and professional conduct outlines the ethical principles that govern decisions and
behavior at a company or organization. The establishment of a code of ethics is not a new concept
within companies. It is something that most corporations implemented at their inception but have not
revisited in several years. A corporation’s code of ethics and professional conduct should establish
guidelines and expectations for company members so that they can understand what issues they must
consider in their actions and decisions. An ethics code is valuable in the sense that it removes the
question of whether an action is tolerable to the corporation or not and reduces the ambiguity that can
arise from unclear and unwritten guidelines. By providing their members with clear and complete ethics
codes, corporations take away the guesswork and ensure that all directors, executives, and employees
understand their roles. A code of ethics and professional conduct consists of key sections detailed next.

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The work environment
Employees should act with integrity, comply with laws, maintain a professional work environment and
comply with company policies. They should treat customers, colleagues, and partners ethically at all
times. This section should include the following:
• Equal opportunity.
• Discrimination and harassment.
• Violence policy.
• Safety policy.
• Substance abuse.
• Gambling policy.
• Privacy policy.
• Misconduct explanation and policy.
Conflicts of Interest
A company's reputation depends on the actions and integrity of its employees. It is essential that they
avoid relationships and activities that hurt, or appears to hurt, their ability to make objective and fair
decisions. This section should include the following topics:

• Corporate asset contributions.

• Running for public office.
• Insider trading and financial interests.
• Investments in companies employees do business with.
• Employee political interests.
• Significant financial interests in other companies.
• Securities transactions.  Taking out loans.

Protecting company assets

Employees should always act to protect company assets, including physical, intellectual, and electronic
or digital properties. Company Assets Code of Conduct Topics:

• Preparing, maintaining, and disclosing accurate records.

• Information security.
• Protecting communication and information technology systems.
• Protecting external communications.
• Use of company property.
• Use of property owned by others.
• Facility security.
• Protecting intellectual property.

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Anti-bribery and corruption
A company's integrity is essential for maintaining trustworthiness and reputation. Employees should
always do their work fairly, honestly, and legally.

• Doing business with governments.

• Choosing and maintaining service providers.
• Receiving gifts and entertainment.
• Loans, bribes, and kickbacks.
• Relationships with former employees.
• Obligations of departing and former employees.
• Interaction with competitors.
• Relationships with affiliates, international entities, and customers.
• Whistle-blowing policies and procedures
Attendance and punctuality
Employees are expected to be regular and punctual in attendance. This means being in the office, ready
to work, at starting time each day. Absenteeism and tardiness burden other employees and the
company.

Absence without notice

Employees who are unable to work due to illness or an accident should notify their supervisor. This
allows the company to arrange for coverage of their duties and helps others continue to work in their
absence. If an employee does a report for work and the company is not notified of an employee's status
for 3 days, it is typically considered a job abandonment.

General harassment and sexual harassment

This company is committed to providing a work environment free of discrimination and unlawful
harassment. Actions, words, jokes, or comments based on an individual’s sex, race, ethnicity, age,
religion, or any other legally protected characteristic are not tolerated.

Cell phone use at work

Personal cell phone usage during work hours is discouraged, except in extreme cases such as an
emergency.

Dress code
A professional appearance is important when employees work with customers or potential customers.
Employees should be well groomed and dressed appropriately for the business and for their position.

Substance abuse
The manufacture, distribution, possession, sale, or purchase of controlled substances of abuse on
company property is prohibited. Being under the influence of illegal drugs, alcohol, or substances of

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abuse on company property is prohibited. Working while under the influence of prescription drugs that
impair performance is prohibited.

Tobacco products
The use of tobacco products on company property, outside of permitted areas, is specifically prohibited.

Internet use at work

Employees may use the Internet when appropriate to access information needed to conduct a business
company business. Use of the Internet must not disrupt or injure the company computer network. Use
of the Internet must not interfere with an employee's productivity.

The establishment of an ethical environment within a corporation requires the cooperation of all
company members. However, it is particularly important that members of management set the example
for all other employees. If those who run the corporation do not respect or enforce the company’s code
of ethics, then it is very difficult to foster a high standard at lower levels. Furthermore, corruption at
high levels often carries greater risks for the company, making management’s compliance a priority.

Whistle-blower Procedures
The term ‘‘whistle-blowing’’ applies to the actions of any company member who exposes a perceived
wrongdoing that is occurring within the organization. Two types of impressions surround whistle-
blowing. On one hand, there are those who value whistle-blowers and view them as brave people trying
to combat corruption and unethical behavior. On the other hand, some still view whistle-blowers with
contempt and consider them traitors to their company or colleagues. There is no reason why this
negative view of whistle-blowers should prevail. When conducted properly and with integrity,
whistleblower activities provide a valuable service to the company as well as to the general public.

Establishing Policies
Corporations must establish their own internal policies and procedures to facilitate whistleblowing
activities and prevent unfair retribution. Key components of these policies will be the inclusion of
privacy provisions, processes for reporting, strategies for investigating reports, and, in some cases, the
establishment of a compliance officer or committee.

Duties of the Whistle-blower

Just as the company should be governed by whistle-blowing policies, so should whistle-blowers follow a
code of conduct. Generally speaking, whistle-blowers are expected to move through appropriate
channels within their company before going public with their concerns. In other words, after detecting a
problem, the company member will seek an internal solution before involving outside organizations.
Whistle-blowers are also expected to conduct themselves with a strong sense of honesty and integrity.
Their allegations should be based on evidence and stem from a reasonable belief that a problem is
occurring.

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Educating Employees
In order for a whistle-blowing policy to be effective, company members must be informed and educated
about the rights and duties of whistle-blowers. An employee education program could include the
publishing of a formal written code and ethics workshops that discuss whistle-blowing. Most important,
employees need to understand the avenues available to them should they have a concern to report.

Read: https://i-sight.com/resources/18-of-the-best-code-of-conduct-examples
https://marshallelearning.com/blog/whistleblower-policy-contain/

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Measurement can provide several benefits for companies that implement social responsibility and good
corporate governance practices. Recording and measuring activities helps companies make better
decisions about which social initiatives to support, improve the efficiency of their programs, and
convince skeptical stakeholders of the value of the efforts. Measurement is often an afterthought,
especially among time-pressed HR and CSR teams that may question the value of investing precious time
in record tracking. “It’s important to change this mentality and understand how measurement can be
applied to benefit your organization and make your life easier,” says Ben Darlington, director at
Benefacto and GivX. In this module, we look at several ways on how to measure the effectiveness of
social responsibility and good governance programs.

After successful completion of this module, you should be able to:

 Understand how to measure the impact of social responsibility and good corporate governance
practices
 Identify ways to measure the impact of social responsibility and good corporate governance
practices

Measurement of Social Responsibility Effectiveness

Historically, one of the most significant barriers to CSR implementation has been the difficulty of
establishing how to measure corporate social responsibility’s impact and return on investment
(ROI). But, calculating ROI is not only possible, but it’s also similar to how many companies already
measure the effectiveness of other corporate or marketing strategies. It is a three-part process, as
discussed in the next section.

1 Set goals. Organizations must make short- and long-term goals to generate benchmarks for
success and measurable key performance indicators (KPIs). To do this, management must identify
the target stakeholder groups of the social responsibility initiative, and assign indicators and metrics for
each of them.

Indicators Vs. Metrics

To fully understand this step, it is important that we differentiate an indicator from a metric.

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Indicators define what is to be measured. In corporate responsibility they are used to measure elements
of sustainability, such as resource consumption, output of emissions and waste. Metrics, on the other
hand, compare indicators against another parameter or denominator; they define how the indicator will
be measured. Thus an indicator might be energy consumption, and an associated metric might be energy
consumption or ton of output. Examples of indicators and metrics for some stakeholders are presented
below:

Stakeholder Indicator Metric

Shareholders Profitability Share value
Return on investment Dividends
paid
Employees Recruitment and staff retention Employee turnover %

Ethical behavior Staff motivation and morale

Customers Customer satisfaction Number of repeat customers
Product ratings

Quality of products and services Number of complaints received

% of defective products
Community Donations Amount of earnings donated

Employment No. of jobs created

Government Compliance with relevant regulations Waste segregated
Building safety
Emergency preparedness
Amount of taxes paid
For the performance to be measurable, a target value must be assigned to the metrics.

2
Calculate Value. Use a formula to measure the social return on investment. Social return on
investment (SROI) is a method for measuring values that are not traditionally reflected in

financial statements, including social, economic, and environmental factors. They can identify how
effectively a company uses its capital and other resources to create value for the community. SROI is
useful to corporations because it can improve program management through better planning and
evaluation. It can also increase the corporation’s understanding of its effect on the community and allow
better communication regarding the value of the corporation’s work. SROI is used to monetize social
impact, in financial terms. A general formula used to calculate SROI is as follows:

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 𝑺𝑰𝑽 − 𝑰𝑰𝑨
𝑺𝑹𝑶𝑰 =
𝑰𝑰𝑨 𝑿 𝟏𝟎𝟎 %
SROI Formula

Where:
SIV = social impact value
IIA = initial investment amount
Assigning a monetary value to the social impact can present problems, and various methodologies have
been developed to help quantify the results. In the actual practice, corporations hire professionals to
measure this aspect. While the approach varies depending on the program that is being evaluated, there
are four main elements that are needed to measure SROI:
 Inputs, or resources investments in your activity (such as the costs of running, say, a jobreadiness
program)
 Outputs, or the direct and tangible products from the activity (for example, the number of people
trained by the program)
 Outcomes, or the changes to people resulting from the activity (i.e., new jobs, better income,
improved quality of life for the individuals; increased taxes for, and reduced support from, the
government)
 Impact, or the outcome less an estimate of what would have happened anyway (For example, if
20 people got new jobs but five of them would have been hired in any event, the impact is based
on the 15 people who got jobs directly as a result of the job-readiness program.)

3 Track Results. Collect data so you can get insights into whether the program is meeting your

CSR objectives, as well as inform your team how to make refinements moving forward. You can also
use the benchmarking technique by comparing the performance of your social responsibility projects
with those of your key competitors in the same field.
No matter which intractable social issue your organization determines it will help tackle within your
community, it’s important to remember social impact is top-of-mind for increasing numbers of
consumers and employees, and companies should see this focus as an opportunity to serve customers
better—and gain a competitive advantage at the same time. Corporate social responsibility programs,
once a sideline activity for many businesses, is moving into the center of business plans, driving both
strategy and marketing.

Measurement of Good Governance Effectiveness

The ASEAN Corporate Governance Scorecard
A scorecard is a performance evaluation tool that provides a concrete strategy for evaluating intangible,
nonfinancial objectives. In the Philippines, public companies are evaluated on the basis of the ASEAN

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Corporate Governance Scorecard, based on publicly available information and benchmarked against
international best practices that encourage publicly listed companies to go beyond national legislative
requirements. This report can be used by capital market regulators and other stakeholders as a reference
to understand the current corporate governance standards across the region. It is also a useful diagnostic
tool to guide improvement of corporate governance standards. The ASEAN Corporate Governance
Scorecard provides a rigorous methodology benchmarked against international best practice to assess
the corporate governance performance of publicly listed companies in the six participating ASEAN
member countries.
The scorecard covers the following five areas of the OECD principles:

• rights of shareholders,
• equitable treatment of shareholders,
• role of stakeholders,
• disclosure and transparency, and  responsibilities of the board.

Figure 11.1 The Two Levels of the ASEAN Corporate Governance Scorecard
The scorecard uses two levels of scoring to better capture the implementation of the substance of good
corporate governance (Figure 11.1). Level 1 comprises descriptors or items that are in essence indicative
of (i) the laws, rules, regulations, and requirements of each ASEAN member country; and (ii) basic

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expectations of the OECD principles. Level 2 consists of (i) bonus items reflecting other emerging good
practices, and (ii) penalty items reflecting actions and events that are indicative of poor governance.
Scorecard Methodology
Level 1
Level 1 consists of 179 items and is divided into five parts corresponding to the respective OECD
principles. Each part carries a different weight in relation to the total Level 1 score of 100 points based
on the relative importance of the area. Some items may provide for a “not applicable” option. Where a
practice is mandated by laws, regulations, or listing rules in a country, the company is taken to have
adopted the practice unless there is evidence to the contrary. To score an item, the company must make
sufficiently clear and complete disclosure.

No. of Maximum
Level 1 questions Weight Attainable Score
Rights of shareholders 25 10% 10 points
Equitable treatment of shareholders 17 15% 15 points
Role of stakeholders 21 10% 10 points
Disclosure and transparency 40 25% 25 points
Responsibilities of the board 76 40% 40 points
Total 179 100% 100 points
Figure 11.2 Composition and Structure of Level 1 The
weighted score of each part is obtained by the following formula:

𝑵𝒐.𝒐
𝒇𝒊𝒕𝒆 𝑻𝒐𝒕𝒂𝒍 𝒏𝒐. 𝒐𝒇 𝑿 𝑴𝒂𝒙𝒊𝒎𝒖𝒎 𝒂𝒕𝒕𝒂𝒊𝒏𝒂𝒃𝒍𝒆 𝒔𝒄𝒐𝒓𝒆 𝒐𝒇 𝒑𝒂𝒓𝒕
𝒎𝒔𝒄𝒐 𝒒𝒖𝒆𝒔𝒕𝒊𝒐𝒏𝒔 (𝒊𝒏 𝒑𝒐𝒊𝒏𝒕𝒔)
*Total number of questions after adjusting for items that are not applicable for a PLC.

Example: If a PLC scores in 24 out of the 25 items in Part A, the PLC’s score in Part A = 24/25 x 10 points =
9.6 points.

The Level 1 score is obtained by totaling the score of each part, A to E, in Level 1. The maximum
attainable score of Level 1 is therefore 100 points.

Level 2
Level 2 consists of bonus and penalty items that are meant to enhance the robustness of the scorecard in
assessing the extent to which companies apply the spirit of good corporate governance. The purpose of
the bonus items is to recognize companies that go beyond the items in Level 1 by adopting other
emerging good practices. The penalty items are designed to downgrade companies with poor
governance practices that are not reflected in their scores for Level 1, such as being sanctioned by
regulators for breaches of listing rules.

Level 2 contains 9 bonus and 21 penalty items, each with a different number of points. The maximum
attainable bonus points is 42 while the maximum penalty points deductible is 53.

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 No. of Maximum
Level 2 questions Attainable Score
Bonus 9 42 points
Penalty 21 -53 points
Total 30 42 points
Figure 11.3 Composition and Structure of Level 2
The Level 2 score is obtained by totaling the bonus scores and penalty scores. In the best case scenario, a
PLC would obtain a perfect score in the bonus section and no penalty scores, thereby obtaining a Level 2
score of 42 points.

Total Score
The total score is obtained by the following formula:

𝑻𝒐𝒕𝒂𝒍 𝑺𝒄𝒐𝒓𝒆 = 𝑳𝒆𝒗𝒆𝒍 𝟏 𝒔𝒄𝒐𝒓𝒆 + 𝑳𝒆𝒗𝒆𝒍 𝟐 𝒔𝒄𝒐𝒓𝒆

The maximum attainable score is 142 points (100 points from Level 1 and 42 points from Level

2).

Corporate Governance in the Philippines

In 2013, the ASEAN CG scorecard was used by the Securities and Exchange Commission (SEC) and the
Institute of Corporate Directors (ICD) to evaluate the Top 94 publicly listed corporations (PLCs) in the
country. The average scores are as follows:

Maximum Score Obtained by

Level/Category Attainable Score PLCs
Level 1
Rights of shareholders 10 points 5.55
Equitable treatment of shareholders 15 points 11.06
Role of stakeholders 10 points 4.85
Disclosure and transparency 25 points 16.03
Responsibilities of the board 40 points 19.71
Total Level 1 100 points 57.20

Level 2
Bonus and Penalty 42 points 0.78
Total Score (rounded) 142 points 58.00
Part of the reason for the relatively low scores of PLCs is the lack of adequate disclosures compared to
their counterparts in other ASEAN countries, particularly on company websites. There is a perception
that potential investors have difficulty navigating mainly due to the variety of formats and content
employed from company to company. It is hoped that these issues will be addressed by 2015 as more
companies gain a greater awareness of the corporate governance scorecard and its process, and the SEC
introduces a template and common content for websites. Their scores are also expected to improve over
time in line with the ICD’s experience with a previous scorecard project.

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Read: https://www.sec.gov.ph/corporate-governance/asean-corporate-governance-scorecard/
https://www.theacmf.org/images/downloads/pdf/ACGS_Country_report_2ndEdition.pdf

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Books:
Ferell, O.C., Thorne, Debbie M., Ferell, Linda. (4th Edition). Social Responsibility & Business. Pasig City:
Cengage Learning Asia Pte Ltd

Anand, Sanjay. (2008). Essentials of Coporate Governance. New Jersey: John Wiley & Sons, Inc

Cannon, Tom. (2012).Corporate Responsibility: Governance, Compliance and Ethics in a Suitable

Environment, 2nd Ed. New Jersey: Prentice Hall

OECD (2015), G20/OECD Principles of Corporate Governance, Paris: OECD Publishing David, Fred R. (13th

Edition). Strategic Management: Concepts and Cases. New Jersey: Pearson

Electronic Sources:

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abstractbackgrounds

Module 1 https://thecsrjournal.in/understanding-the-four-levels-of-csr/ https://www.mdos.si/wp-

content/uploads/2018/04/defining-corporate-social-responsibility.pdf
https://www.slideshare.net/JoshuaBrunsdon/corporate-social-responsibility-presentation-
76021815

https://www.investopedia.com/terms/s/sustainability.asp
https://www.investopedia.com/terms/a/accountability.asp
https://www.investopedia.com/terms/t/transparency.asp https://www.youtube.com/watch?
v=l9IyDvkxADU

Module 2 https://www.pointprox.com/featured/project-stakeholder-analysis-what-is-the-salience-
model/ https://www.pointprox.com/featured/project-stakeholder-analysis-using-the-salience-model/
https://www.stakeholdermap.com/stakeholder-analysis/stakeholder-salience.html
https://www.brighthubpm.com/resource-management/83062-example-of-the-salience-model-
instakeholder-management/
https://cuttingedgepr.com/stakeholder-relations-management-key-skill

https://www.iliyanastareva.com/blog/performing-stakeholder-analysis-with-the-salience-modelfor-
project-management

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Module 3 https://www.unglobalcompact.org/library/240pdf
https://d306pr3pise04h.cloudfront.net/docs/news_events%2F8.1%2FGC_brochure_FINAL.pdf
https://www.dummies.com/business/start-a-business/how-to-develop-a-corporate-
socialresponsibility-csr-strategy-for-your-business/
https://www.investopedia.com/terms/s/satisficing.asp https://business-
ethics.com/2015/05/05/does-corporate-social-responsibility-increase-profits/
https://blog.hrps.org/blogpost/How-Corporate-Social-Responsibility-Drives-BusinessPerformance
https://www.oberlo.com.ph/blog/inspiring-mission-vision-statement-examples

https://www.linkedin.com/pulse/20140624160539-41033175-7-mission-statements-that-
inspiresustainability

https://examples.yourdictionary.com/examples-of-core-values.html

Module 4 https://www.enotes.com/homework-help/what-role-business-economy-716463
https://online.tamucc.edu/articles/what-is-the-role-of-business-in-society.aspx
https://businessmirror.com.ph/2019/08/27/the-role-of-business-in-society/
https://www.un.org/sustainabledevelopment/sustainable-development-goals/
https://youtu.be/0XTBYMfZyrM
https://www.businessmanagementideas.com/business/functions-business/business-functions-7main-
types-of-business-function/3744

https://www.kullabs.com/class-11/business-studies/introduction-to-business/importance--andfunction-
of-business

https://www.youtube.com/watch?v=4bN9yimMXro https://businessjargons.com/production-
function.html https://en.wikipedia.org/wiki/Distribution_(marketing)
https://smallbusiness.chron.com/role-accounting-business-459.html
https://www.economicsdiscussion.net/personnel-management/functions-of-personnelmanagement-
managerial-operative-and-general-functions/31456

https://www.123helpme.com/essay/The-Personnel-Function-In-Business-123000
https://www.investopedia.com/terms/r/randd.asp

https://bizfluent.com/info-7745795-roles-business-organizations-economic-development.html

Module 5 https://www.investopedia.com/ask/answers/032715/what-accounting-fraud.asp
https://www.halstedstrategygroup.com/false-advertising
https://quizlet.com/87398371/business-ethics-chapter-3-flash-cards
https://en.wikipedia.org/wiki/Discrimination
https://www.workplaceethicsadvice.com/2014/05/how-to-handle-ethical-issues-in-theworkplace.htm

https://en.wikipedia.org/wiki/Ethical_formalism

Module 6 https://business-law.freeadvice.com/business-
law/corporations/organizational_structure.htm https://danielsethics.mgt.unm.edu/pdf/shareholder-

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model-di.pdf https://www.investopedia.com/articles/analyst/03/111903.asp
https://www.investopedia.com/terms/s/shareholderactivist.asp
https://www.investopedia.com/terms/s/sri.asp
https://www.sec.gov/files/investor_confidence_noteOct2017.pdf https://kirkpatrickprice.com/blog/5-
reasons-why-internal-audit-is-important/ https://www.menzies.co.uk/helping-you/audit-
compliance/what-is-an-audit/what-is-theimportance-of-audit/
https://www.talentlyft.com/en/resources/what-is-executive-compensation
https://corporatefinanceinstitute.com/resources/knowledge/other/corporate-governance/
https://corpgov.law.harvard.edu/2018/03/05/key-governance-issues-ways-for-the-future/

Module 7 https://www.papertyari.com/general-awareness/management/theories-corporate-
governanceagency-stewardship-etc/
https://ebrary.net/8636/business_finance/governance_theories

https://tradebrains.in/corporate-governance/#Principles_of_Corporate_Governance
https://www.slideshare.net/ujjmishra1/corporate-governance-28926439

https://www.mcinnescooper.com/publications/legal-update-the-top-5-corporate-governance-
bestpractices-that-benefit-every-company/

https://www2.deloitte.com/ng/en/pages/audit/articles/financial-reporting/coso-
controlenvironment.html

https://www.pwc.is/en/assets/document/t_dd_.pdf

https://www2.deloitte.com/content/dam/Deloitte/lv/Documents/strategy/Nonfinancial_reporting_201
5.pdf

https://smallbusiness.chron.com/shareholders-rights-corporate-governance-61933.html
https://www.investopedia.com/investing/know-your-shareholder-rights/
https://slidesgo.com/theme/circle-infographics

Module 8
https://www.linkedin.com/pulse/importance-corporate-governance-paul-tsoi
https://studycafe.in/2018/12/corporate-governance.html

https://www.vistra.com/insights/importance-good-corporate-governance

https://www.governancetoday.com/GT/Material/Governance what_is_it_and_why_is_it_impor
tant_.aspx

https://insights.diligent.com/corporate-governance/the-role-of-the-board-of-directors-incorporate-
governance

https://blog.som.cranfield.ac.uk/execdev/beyond-plan-do-check-act-4sight https://www.caaf-
fcar.ca/en/oversight-concepts-and-context/what-is-oversight-and-how-does-itrelate-to-governance
https://deloitte.wsj.com/riskandcompliance/2013/06/11/governance-operating-model-a-tool-formore-
effective-board-oversight

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https://www.extension.iastate.edu/agdm/wholefarm/html/c5-71.html

Module 9 https://www.oecd.org/daf/ca/Corporate-Governance-Principles-ENG.pdf
https://www.sec.gov.ph/wp-
content/uploads/2019/11/ASEAN_CG_SCORECARD_20_april_2015.pdf

https://www.sec.gov.ph/corporate-governance/code-of-corporate-governance-for-publicly-
listedcompanies/ https://edge.pse.com.ph/companyDirectory/form.do
https://slidesgo.com/theme/hexagon-diagrams

Module 10 https://insights.diligent.com/corporate-governance/the-importance-of-corporate-
culture-forgood-governance https://www.betterteam.com/code-of-ethics-and-professional-
conduct https://i-sight.com/resources/18-of-the-best-code-of-conduct-examples
https://marshallelearning.com/blog/whistleblower-policy-contain/

Module 11 https://glean.info/why-companies-should-measure-corporate-social-responsibility/
https://everfi.com/blog/community-engagement/how-to-measure-corporate-social-responsibility/
https://www.icaew.com/-/media/corporate/archive/files/technical/sustainability/kpimeasures.ashx
https://www.investopedia.com/ask/answers/070314/what-factors-go-calculating-social-
returninvestment-sroi.asp https://www.sec.gov.ph/corporate-governance/asean-corporate-
governance-scorecard/
https://www.theacmf.org/images/downloads/pdf/ACGS_Country_report_2ndEdition.pdf

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