3

SEC Code of Corporate Governance

Intended Learning Outcome

● Distinguish the importance of SEC Code of Corporate Governance to Philippine
Businesses
● Identify the different terms that with regards to SEC Code
● Understand the board’s governance responsibilities
● Explain the board’s roles in business governance based on the code
● Recognize the different functions of the major committees of the board with
regards to the code
Introduction
The Securities and Exchange Commission (SEC) has issued a new code of corporate
governance for public companies and registered issuers, in line with its plan of adopting
principles observed by the Organization for Economic Co-operation and Development (OECD).
The Philippines’ corporate regulator published over the weekend Memorandum Circular
No. 24 Series of 2019, which outlines 16 recommendations for corporate governance. The
recommendations are grouped into five primary classifications, namely: the board’s governance
responsibilities, disclosure and transparency provisions, internal control and risk management
frameworks, rules on cultivating a synergic relationship with shareholders/members and
recommendations on corporations’ duties to stakeholders.
Disclosures required under the new code include any dealings in the company’s shares by
directors and officers, as well as the annual corporate governance report (ACGR). The ACGR
should be a comprehensive report containing all pertinent corporate governance information on a
company.
It should include all relevant and material information on board directors and key
executives, every material fact or event in a company such as acquisitions or disposal of assets,
non-audit work and fees of and to the external auditor and other similar information. Other
requirements in the new code include nonfinancial and sustainability reporting. Companies must
disclose strategic and operational objectives alongside sustainability initiatives that will support
them.2
Overview
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.
The latest G20/OECD Principles of Corporate Governance and the Association of Southeast
Asian Nations Corporate Governance Scorecard were used as key reference materials in the
drafting of this Code.
Approach
The Code will adopt the “comply or explain” approach. This approach combines
voluntary compliance with mandatory disclosure. Companies do not have to comply with the
Code, but they must state in their annual corporate governance reports whether they comply with
the Code provisions, identify any areas of noncompliance, and explain the reasons for
non-compliance.
The Code is arranged as follows: Principles, Recommendations and Explanations. The
Principles can be considered as high-level statements of corporate governance good practice and
are applicable to all companies.
Recommendations
The Recommendations are objective criteria that are intended to identify the specific
features of corporate governance good practice that are recommended for companies operating
according to the Code. Alternatives to a Recommendation may be justified circumstances if good
governance can be achieved by other means. When a Recommendation is not complied with, the
company must disclose and describe this non-compliance, and explain how the overall Principle
is being achieved. The alternative should be consistent with the overall Principle. Descriptions
and explanations should be written in plain language and in a clear, complete, objective, and
precise manner, so that shareholders and other stakeholders can assess the company's governance
framework.
Explanation
The Explanations strive to provide companies with additional information on the
recommended best practice.
 This Code does not, in any way, prescribe a “one size fits all” framework. It is designed
to allow boards some flexibility in establishing their corporate governance arrangements. Larger
companies and financial institutions would generally be expected to follow most of the Code’s
provisions. Smaller companies may decide that the costs of some of the provisions outweigh the
benefits or are less relevant in their case. Hence, the Principle of Proportionality is considered in
the application of its provisions.
The Code of Corporate Governance for publicly listed companies is the first of a series of
Codes that is intended to cover all types of corporations in the Philippines under supervision of
the Securities and Exchange Commission (SEC).
Definition of Terms under The Code
⮚ Corporate Governance – the system of stewardship and control to guide organizations in
fulfilling their long-term economic, moral, legal, and social obligations towards their
stakeholders. Corporate governance is a system of direction, feedback and control using
regulations, performance standards and ethical guidelines to hold the Board and senior
management accountable for ensuring ethical behavior – reconciling long term customer
satisfaction with shareholder value – to the benefit of all stakeholders and society. Its
purpose is to maximize the organization’s long-term success, creating sustainable value
for its shareholders, stakeholders, and the nation.
⮚ Board of Directors – the governing body elected by the stockholders that exercises the
corporate powers of a corporation, conducts all its business, and controls its properties.
⮚ Management – a group of executives given the authority by the Board of Directors to
implement the policies it has laid down in the conduct of the business of the corporation.
⮚ Independent director – a person who is independent of management and the controlling
shareholder, and is free from any business or other relationship which could, or could
reasonably be perceived to, materially interfere with his exercise of independent
judgment in carrying out his responsibilities as a director.
⮚ Executive director – a director who has executive responsibility of day-to-day operations
of a part or the whole of the organization.
⮚ Non-executive director – a director who has no executive responsibility and does not
perform any work related to the operations of the corporation.
⮚ Conglomerate – a group of corporations that has diversified business activities in varied
industries, whereby the operations of such businesses are controlled and managed by a
parent corporate entity.
⮚ Internal control – a process designed and effected by the board of directors, senior
management, and all levels of personnel to provide reasonable assurance on the
achievement of objectives through efficient and effective operations; reliable, complete
and timely financial and management information; and compliance with applicable laws,
regulations, and the organization’s policies and procedures.
⮚ Enterprise Risk Management – a process, effected by an entity’s Board of Directors,
management and other personnel, applied in strategy setting and across the enterprise that
is designed to identify potential events that may affect the entity, manage risks to be
within its risk appetite, and provide reasonable assurance regarding the achievement of
entity objectives.
⮚ Related Party – shall cover the company’s subsidiaries, as well as affiliates and any party
(including their subsidiaries, affiliates and special purpose entities), that the company
exerts direct or indirect control over or that exerts direct or indirect control over the
company; the company’s directors; officers; shareholders and related interests (DOSRI),
and their close family members, as well as corresponding persons in affiliated companies.
This shall also include such other person or juridical entity whose interest may pose a
potential conflict with the interest of the company.
⮚ Related Party Transactions – a transfer of resources, services or obligations between a
reporting entity and a related party, regardless of whether a price is charged. It should be
interpreted broadly to include not only transactions that are entered into with related
parties, but also outstanding transactions that are entered into with an unrelated party that
subsequently becomes a related party.
 ⮚ Stakeholders – any individual, organization, or society at large who can either affect
and/or be affected by the company’s strategies, policies, business decisions and
operations, in general. This includes, among others, customers, creditors, employees,
suppliers, investors, as well as the government and community in which it operates.

CODE OF CORPORATE GOVERNANCE FOR PUBLICLY LISTED COMPANIES

THE BOARD’S GOVERNANCE RESPONSIBILITIES
1. ESTABLISHING A COMPETENT BOARD
Principle 1: The company should be headed by a competent, working board to foster the
long-term success of the corporation, and to sustain its competitiveness and profitability in a
manner consistent with its corporate objectives and the long term best interests of its
shareholders and other stakeholders.
Recommendation 1.1
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.
Explanation
Competence can be determined from the collective knowledge, experience and
expertise of each director that is relevant to the industry/sector that the company
is in. A Board with the necessary knowledge, experience and expertise can
properly perform its task of overseeing management and governance of the
corporation, formulating the corporation’s vision, mission, strategic objectives,
policies and procedures that would guide its activities, effectively monitoring
management’s performance and supervising the proper implementation of the
same. In this regard, the Board sets qualification standards for its members to
facilitate the selection of potential nominees for board seats, and to serve as a
benchmark for the evaluation of its performance.
Recommendation 1.2
The Board should be composed of a majority of non-executive directors who possess the
necessary qualifications to effectively participate and help secure objective, independent
judgment on corporate affairs and to substantiate proper checks and balances.
Explanation
The right combination of non-executive directors (NEDs), which include
independent directors (IDs) and executive directors (EDs), ensures that no
director or small group of directors can dominate the decision-making process.
Further, a board composed of a majority of NEDs assures protection of the
company’s interest over the interest of the individual shareholders. The company
determines the qualifications of the NEDs that enable them to effectively
participate in the deliberations of the Board and carry out their roles and
responsibilities.
Recommendation 1.3
The Company should provide in its Board Charter and Manual on Corporate Governance
a policy on the training of directors, including an orientation program for first-time
directors and relevant annual continuing training for all directors.
Explanation
 The orientation program for first-time directors and relevant annual continuing
training for all directors aim to promote effective board performance and
continuing qualification of the directors in carrying-out their duties and
responsibilities. It is suggested that the orientation program for first-time
directors, in any company, be for at least eight hours, while the annual continuing
training be for at least four hours.
All directors should be properly oriented upon joining the board. This ensures that
new members are appropriately apprised of their duties and responsibilities,
before beginning their directorships. The orientation program covers
SEC-mandated topics on corporate governance and an introduction to the
company’s business, Articles of Incorporation, and Code of Conduct. It should be
able to meet the specific needs of the company and the individual directors and
aid any new director in effectively performing his or her functions.
The annual continuing training program, on the other hand, makes certain that the
directors are continuously informed of the developments in the business and
regulatory environments, including emerging risks relevant to the company. It
involves courses on corporate governance matters relevant to the company,
including audit, internal controls, risk management, sustainability and strategy. It
is encouraged that companies assess their own training and development needs in
determining the coverage of their continuing training program.
Recommendation 1.4
The Board should have a policy on board diversity.
Explanation
Having a board diversity policy is a move to avoid groupthink and ensure that
optimal decision-making is achieved. A board diversity policy is not limited to
gender diversity. It also includes diversity in age, ethnicity, culture, skills,
competence and knowledge. On gender diversity policy, a good example is to
increase the number of female directors, including female independent directors.
Recommendation 1.5
The Board should ensure that it is assisted in its duties by a Corporate Secretary, who
should be a separate individual from the Compliance Officer. The Corporate Secretary
should not be a member of the Board of Directors and should annually attend a training
on corporate governance.
Explanation
The Corporate Secretary is primarily responsible to the corporation and its
shareholders, and not to the Chairman or President of the Company and has,
among others, the following duties and responsibilities:
a. Assists the Board and the board committees in the conduct of their meetings,
including preparing an annual schedule of Board and committee meetings and the
annual board calendar, and assisting the chairs of the Board and its committees to
set agendas for those meetings;
b. Safe keeps and preserves the integrity of the minutes of the meetings of the
Board and its committees, as well as other official records of the corporation;
c. Keeps abreast on relevant laws, regulations, all governance issuances, relevant
industry developments and operations of the corporation, and advises the Board
and the Chairman on all relevant issues as they arise;
d. Works fairly and objectively with the Board, Management and stockholders and
contributes to the flow of information between the Board and management, the
 Board and its committees, and the Board and its stakeholders, including
shareholders;
e. Advises on the establishment of board committees and their terms of reference;
f. Informs members of the Board, in accordance with the by-laws, of the agenda
of their meetings at least five working days in advance, and ensures that the
members have before them accurate information that will enable them to arrive at
intelligent decisions on matters that require their approval;
g. Attends all Board meetings, except when justifiable causes, such as illness,
death in the immediate family and serious accidents, prevent him/her from doing
so;
h. Performs required administrative functions;
i. Oversees the drafting of the by-laws and ensures that they conform with
regulatory requirements; and
j. Performs such other duties and responsibilities as may be provided by the SEC.
Recommendation 1.6
The Board should ensure that it is assisted in its duties by a Compliance Officer, who
should have a rank of Senior Vice President or an equivalent position with adequate
stature and authority in the corporation. The Compliance Officer should not be a member
of the Board of Directors and should annually attend a training on corporate governance.
Explanation
The Compliance Officer is a member of the company’s management team in
charge of the compliance function. Similar to the Corporate Secretary, he/she is
primarily liable to the corporation and its shareholders, and not to the Chairman or
President of the company. He/she has, among others, the following duties and
responsibilities:
a. Ensures proper onboarding of new directors (i.e., orientation on the company’s
business, charter, articles of incorporation and by-laws, among others);
b. Monitors, reviews, evaluates and ensures the compliance by the corporation, its
officers and directors with the relevant laws, this Code, rules and regulations and
all governance issuances of regulatory agencies;
c. Reports the matter to the Board if violations are found and recommends the
imposition of appropriate disciplinary action;
d. Ensures the integrity and accuracy of all documentary submissions to
regulators;
e. Appears before the SEC when summoned in relation to compliance with this
Code;
f. Collaborates with other departments to properly address compliance issues,
which may be subject to investigation;
g. Identifies possible areas of compliance issues and works towards the resolution
of the same;
h. Ensures the attendance of board members and key officers to relevant trainings;
and
i. Performs such other duties and responsibilities as may be provided by the SEC.
2. ESTABLISHING CLEAR ROLES AND RESPONSIBILITIES OF THE BOARD
Principle 2: The fiduciary roles, responsibilities and accountabilities of the Board as provided
under the law, the company’s articles and by-laws, and other legal pronouncements and
guidelines should be clearly made known to all directors as well as to stockholders and other
stakeholders.
Recommendation 2.1
The Board members should act on a fully informed basis, in good faith, with due
diligence and care, and in the best interest of the company and all shareholders.
Explanation
The Board members should act on a fully informed basis, in good faith, with due
diligence and care, and in the best interest of the company and all shareholders.
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.
Recommendation 2.2
The Board should oversee the development of and approve the company’s business
objectives and strategy, and monitor their implementation, in order to sustain the
company’s long-term viability and strength.
Explanation
According to the OECD, the Board should review and guide corporate strategy,
major plans of action, risk management policies and procedures, annual budgets
and business plans; set performance objectives; monitor implementation and
corporate performance; and oversee major capital expenditures, acquisitions and
divestitures. Sound strategic policies and objectives translate to the company’s
proper identification and prioritization of its goals and guidance on how best to
achieve them. This creates optimal value to the corporation.
Recommendation 2.3
The Board should be headed by a competent and qualified Chairperson.
Explanation
The roles and responsibilities of the Chairman include, among others, the
following:
a. Makes certain that the meeting agenda focuses on strategic matters, including
the overall risk appetite of the corporation, considering the developments in the
business and regulatory environments, key governance concerns, and contentious
issues that will significantly affect operations;
b. Guarantees that the Board receives accurate, timely, relevant, insightful,
concise, and clear information to enable it to make sound decisions;
c. Facilitates discussions on key issues by fostering an environment conducive for
constructive debate and leveraging on the skills and expertise of individual
directors;
d. Ensures that the Board sufficiently challenges and inquires on reports submitted
and representations made by Management;
e. Assures the availability of proper orientation for first-time directors and
continuing training opportunities for all directors; and
 f. Makes sure that performance of the Board is evaluated at least once a year and
discussed/followed up on.
Recommendation 2.4
The Board should be responsible for ensuring and adopting an effective succession
planning program for directors, key officers and management to ensure growth and a
continued increase in the shareholders’ value. This should include adopting a policy on
the retirement age for directors and key officers as part of management succession and to
promote dynamism in the corporation.
Explanation
The transfer of company leadership to highly competent and qualified individuals
is the goal of succession planning. It is the Board’s responsibility to implement a
process to appoint competent, professional, honest and highly motivated
management officers who can add value to the company.
A good succession plan is linked to the documented roles and responsibilities for
each position, and should start in objectively identifying the key knowledge,
skills, and abilities required for the position. For any potential candidate
identified, a professional development plan is defined to help the individuals
prepare for the job (e.g., training to be taken and cross experience to be achieved).
The process is conducted in an impartial manner and aligned with the strategic
direction of the organization.
Recommendation 2.5
The Board should align the remuneration of key officers and board members with the
long-term interests of the company. In doing so, it should formulate and adopt a policy
specifying the relationship between remuneration and performance. Further, no director
should participate in discussions or deliberations involving his own remuneration.
Explanation
Companies are able to attract and retain the services of qualified and competent
individuals if the level of remuneration is sufficient, in line with the business and
risk strategy, objectives, values and incorporate measures to prevent conflicts of
interest. Remuneration policies promote a sound risk culture in which risk-taking
behavior is appropriate. They also encourage employees to act in the long-term
interest of the company as a whole, rather than for themselves or their business
lines only. Moreover, it is good practice for the Board to formulate and adopt a
policy specifying the relationship between remuneration and performance, which
includes specific financial and nonfinancial metrics to measure performance and
set specific provisions for employees with significant influence on the overall risk
profile of the corporation.
Key considerations in determining proper compensation include the following:
(1) the level of remuneration is commensurate to the responsibilities of the
role;
(2) no director should participate in deciding on his remuneration; and
(3) remuneration pay-out schedules should be sensitive to risk outcomes
over a multi-year horizon.
For employees in control functions (e.g., risk, compliance and internal audit),
their remuneration is determined independent of any business line being overseen,
and performance measures are based principally on the achievement of their
objectives so as not to compromise their independence.
Recommendation 2.6
The Board should have and disclose in its Manual on Corporate Governance a formal and
transparent board nomination and election policy that should include how it accepts
nominations from minority shareholders and reviews nominated candidates. The policy
should also include an assessment of the effectiveness of the Board’s processes and
procedures in the nomination, election, or replacement of a director. In addition, its
process of identifying the quality of directors should be aligned with the strategic
direction of the company.

Explanation
It is the Board’s responsibility to develop a policy on board nomination, which is
contained in the company’s Manual on Corporate Governance. The policy should
encourage shareholders’ participation by including procedures on how the Board
accepts nominations from minority shareholders. The policy should also promote
transparency of the Board’s nomination and election process.
The nomination and election process also includes the review and evaluation of
the qualifications of all persons nominated to the Board, including whether
candidates: (1) possess the knowledge, skills, experience, and particularly in the
case of non-executive directors, independence of mind given their responsibilities
to the Board and in light of the entity’s business and risk profile; (2) have a record
of integrity and good repute; (3) have sufficient time to carry out their
responsibilities; and (4) have the ability to promote a smooth interaction between
board members. A good practice is the use of professional search firms or external
sources when searching for candidates to the Board.
In addition, the process also includes monitoring the qualifications of the
directors. The qualifications and grounds for disqualification are contained in the
company’s Manual on Corporate Governance.
The following may be considered as grounds for the permanent disqualification of
a director:
a. Any person convicted by final judgment or order by a competent judicial or
administrative body of any crime that:
(a) involves the purchase or sale of securities, as defined in the Securities
Regulation Code;
(b) arises out of the person’s conduct as an underwriter, broker, dealer,
investment adviser, principal, distributor, mutual fund dealer, futures
commission merchant, commodity trading advisor, or floor broker; or
(c) arises out of his fiduciary relationship with a bank, quasi-bank, trust
company, investment house or as an affiliated person of any of them;
b. Any person who, by reason of misconduct, after hearing, is permanently
enjoined by a final judgment or order of the SEC, Bangko Sentral ng Pilipinas
(BSP) or any court or administrative body of competent jurisdiction from:
(a) acting as underwriter, broker, dealer, investment adviser, principal
distributor, mutual fund dealer, futures commission merchant, commodity
trading advisor, or floor broker;
(b) acting as director or officer of a bank, quasi-bank, trust company,
investment house, or investment company;
(c) engaging in or continuing any conduct or practice in any of the
capacities mentioned in sub-paragraphs (a) and (b) above, or willfully
violating the laws that govern securities and banking activities.
 The disqualification should also apply if
(a) such person is the subject of an order of the SEC, BSP or any court or
administrative body denying, revoking or suspending any registration,
license or permit issued to him under the Corporation Code, Securities
Regulation Code or any other law administered by the SEC or BSP, or
under any rule or regulation issued by the Commission or BSP;
(b) such person has otherwise been restrained to engage in any activity
involving securities and banking; or
(c) such person is the subject of an effective order of a self-regulatory
organization suspending or expelling him from membership, participation
or association with a member or participant of the organization;
c. Any person convicted by final judgment or order by a court, or competent
administrative body of an offense involving moral turpitude, fraud,
embezzlement, theft, estafa, counterfeiting, misappropriation, forgery, bribery,
false affirmation, perjury or other fraudulent acts;
d. Any person who has been adjudged by final judgment or order of the SEC,
BSP, court, or competent administrative body to have willfully violated, or
willfully aided, abetted, counseled, induced or procured the violation of any
provision of the Corporation Code, Securities Regulation Code or any other law,
rule, regulation or order administered by the SEC or BSP;
e. Any person judicially declared as insolvent;
f. Any person found guilty by final judgment or order of a foreign court or
equivalent financial regulatory authority of acts, violations or misconduct similar
to any of the acts, violations or misconduct enumerated previously;
g. Conviction by final judgment of an offense punishable by imprisonment for
more than six years, or a violation of the Corporation Code committed within five
years prior to the date of his election or appointment; and
h. Other grounds as the SEC may provide.
In addition, the following may be grounds for temporary disqualification of a
director:
a. Absence in more than fifty percent (50%) of all regular and special
meetings of the Board during his incumbency, or any 12-month period
during the said incumbency, unless the absence is due to illness, death in
the immediate family or serious accident. The disqualification should
apply for purposes of the succeeding election;
b. Dismissal or termination for cause as director of any publicly-listed
company, public company, registered issuer of securities and holder of a
secondary license from the Commission. The disqualification should be in
effect until he has cleared himself from any involvement in the cause that
gave rise to his dismissal or termination;
c. If the beneficial equity ownership of an independent director in the
corporation or its subsidiaries and affiliates exceeds two percent (2%) of
its subscribed capital stock. The disqualification from being elected as an
independent director is lifted if the limit is later complied with; and
d. If any of the judgments or orders cited in the grounds for permanent
disqualification has not yet become final.
Recommendation 2.7
The Board should have the overall responsibility in ensuring that there is a group-wide
policy and system governing related party transactions (RPTs) and other unusual or
infrequently occurring transactions, particularly those which pass certain thresholds of
materiality. The policy should include the appropriate review and approval of material or
significant RPTs, which guarantee fairness and transparency of the transactions. The
policy should encompass all entities within the group, taking into account their size,
structure, risk profile and complexity of operations.

Explanation
Ensuring the integrity of related party transactions is an important fiduciary duty
of the director. It is the Board’s role to initiate policies and measures geared
towards prevention of abuse and promotion of transparency, and in compliance
with applicable laws and regulations to protect the interest of all shareholders.
One such measure is the required ratification by shareholders of material or
significant RPTs approved by the Board, in accordance with existing laws. Other
measures include ensuring that transactions occur at market prices, at
arm’s-length basis and under conditions that protect the rights of all shareholders.
The following are suggestions for the content of the RPT Policy:
• Definition of related parties;
• Coverage of RPT policy;
• Guidelines in ensuring arm’s-length terms;
• Identification and prevention or management of potential or actual
conflicts of interest which arise;
• Adoption of materiality thresholds;
• Internal limits for individual and aggregate exposures;
• Whistle-blowing mechanisms, and
• Restitution of losses and other remedies for abusive RPTs.
In addition, the company is given the discretion to set their materiality threshold
at a level where omission or misstatement of the transaction could pose a
significant risk to the company and influence its economic decision. The SEC
may direct a company to reduce its materiality threshold or amend excluded
transactions if the SEC deems that the threshold or exclusion is inappropriate
considering the company’s size, risk profile, and risk management systems.
Depending on the materiality threshold, approval of management, the RPT
Committee, the Board or the shareholders may be required. In cases where the
shareholders’ approval is required, it is good practice for interested shareholders
to abstain and let the disinterested parties or majority of the minority shareholders
decide.
Recommendation 2.8
The Board should be primarily responsible for approving the selection and assessing the
performance of the Management led by the Chief Executive Officer (CEO), and control
functions led by their respective heads (Chief Risk Officer, Chief Compliance Officer,
and Chief Audit Executive).
Explanation
 It is the responsibility of the Board to appoint a competent management team at
all times, monitor and assess the performance of the management team based on
established performance standards that are consistent with the company’s strategic
objectives, and conduct a regular review of the company’s policies with the
management team. In the selection process, fit and proper standards are to be
applied on key personnel and due consideration is given to integrity, technical
expertise and experience in the institution’s business, either current or planned.

Recommendation 2.9
The Board should establish an effective performance management framework that will
ensure that the Management, including the Chief Executive Officer, and personnel’s
performance is at par with the standards set by the Board and Senior Management.
Explanation
Results of performance evaluation should be linked to other human resource
activities such as training and development, remuneration, and succession
planning. These should likewise form part of the assessment of the continuing
fitness and propriety of management, including the Chief Executive Officer, and
personnel in carrying out their respective duties and responsibilities.
Recommendation 2.10
The Board should oversee that an appropriate internal control system is in place,
including setting up a mechanism for monitoring and managing potential conflicts of
interest of Management, board members, and shareholders. The Board should also
approve the Internal Audit Charter.
Explanation
In the performance of the Board’s oversight responsibility, the minimum internal
control mechanisms may include overseeing the implementation of the key
control functions, such as risk management, compliance and internal audit, and
reviewing the corporation’s human resource policies, conflict of interest
situations, compensation program for employees and management succession
plan.
Recommendation 2.11
The Board should oversee that a sound enterprise risk management (ERM) framework is
in place to effectively identify, monitor, assess and manage key business risks. The risk
management framework should guide the Board in identifying units/business lines and
enterprise-level risk exposures, as well as the effectiveness of risk management strategies.
Explanation
Risk management policy is part and parcel of a corporation’s corporate strategy.
The Board is responsible for defining the company’s level of risk tolerance and
providing oversight over its risk management policies and procedures.
Recommendation 2.12
The Board should have a Board Charter that formalizes and clearly states its roles,
responsibilities and accountabilities in carrying out its fiduciary duties. The Board
Charter should serve as a guide to the directors in the performance of their functions and
should be publicly available and posted on the company’s website.
 Explanation
The Board Charter guides the directors on how to discharge their functions. It
provides the standards for evaluating the performance of the Board. The Board
Charter also contains the roles and responsibilities of the Chairman.

3. ESTABLISHING BOARD COMMITTEES

Principle 3: Board committees should be set up to the extent possible to support the effective
performance of the Board’s functions, particularly with respect to audit, risk management,
related party transactions, and other key corporate governance concerns, such as nomination and
remuneration. The composition, functions and responsibilities of all committees established
should be contained in a publicly available Committee Charter.
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 may 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 other committees.
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.
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 results 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;
f. Proposes and plans relevant 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
on 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 and should be
composed of at least three non-executive directors, two of whom should be independent,
including the Chairman.
Explanation
 Examples of companies that may 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 in 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 terms (e.g., price, commissions, interest rates, fees, tenor,
collateral requirement) to such related parties than similar transactions with
nonrelated 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 Directors on a regular basis, the status and aggregate
exposures to each related party, 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 or audit process; and
f. 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
All established committees should be required to have Committee Charters stating in
plain terms their respective purposes, memberships, structures, operations, reporting
processes, resources and other relevant information. 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 performance.
4. FOSTERING COMMITMENT
Principle 4: To show full commitment to the company, the directors should devote the time and
attention necessary to perform their duties and responsibilities properly and effectively, including
sufficient time to be familiar with the corporation’s business.
Recommendation 4.1
The directors should attend and actively participate in all meetings of the Board,
Committees, and Shareholders in person or through tele-/videoconferencing conducted in
accordance with the rules and regulations of the Commission, except when justifiable
causes, such as, illness, death in the immediate family and serious accidents, prevent
them from doing so. In Board and Committee meetings, the director should review
meeting materials and if called for, ask the necessary questions or seek clarifications and
explanations.
Explanation
A director’s commitment to the company is evident in the amount of time he
dedicates to performing his duties and responsibilities, which includes his
presence in all meetings of the Board, Committees and Shareholders. In this way,
the director is able to effectively perform his/her duty to the company and its
shareholders.
The absence of a director in more than fifty percent (50%) of all regular and
special meetings of the Board during his/her incumbency is a ground for
disqualification in the succeeding election, unless the absence is due to illness,
death in the immediate family, serious accident or other unforeseen or fortuitous
events.
Recommendation 4.2
The non-executive directors of the Board should concurrently serve as directors to a
maximum of five publicly listed companies to ensure that they have sufficient time to
fully prepare for meetings, challenge Management’s proposals/views, and oversee the
long-term strategy of the company.
Explanation
Being a director necessitates a commitment to the corporation. Hence, there is a
need to set a limit on board directorships. This ensures that the members of the
board are able to effectively commit themselves to perform their roles and
responsibilities, regularly
update their knowledge and enhance their skills. Since sitting on the board of too
many companies may interfere with the optimal performance of board members,
in that they may not be able to contribute enough time to keep abreast of the
corporation’s operations and to attend and actively participate during meetings, a
maximum board seat limit of five directorships is recommended.
Recommendation 4.3
A director should notify the Board where he/she is an incumbent director before
accepting a directorship in another company.
 Explanation
The Board expects commitment from a director to devote sufficient time and
attention to his/her duties and responsibilities. Hence, it is important that a
director notifies his/her incumbent Board before accepting a directorship in
another company. This is for the company to be able to assess if his/her present
responsibilities and commitment to the company will be affected and if the
director can still adequately provide what is expected of him/her.
5. REINFORCING BOARD INDEPENDENCE
Principle 5: The Board should endeavor to exercise objective and independent judgment on all
corporate affairs.
Recommendation 5.1
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.
Explanation
The presence of independent directors in the Board is to ensure the exercise of
independent judgment on corporate affairs and proper oversight of managerial
performance, including prevention of conflict of interests and balancing of
competing demands of the corporation. There is increasing global recognition that
more independent directors in the Board lead to more objective decision-making,
particularly in conflict of interest situations. In addition, experts have recognized
that there are varying opinions on the optimal number of independent directors in
the board. However, the ideal number ranges from one-third to a substantial
majority.
Recommendation 5.2
The Board should ensure that its independent directors possess the necessary
qualifications and none of the disqualifications for an independent director to hold the
position.
Explanation
Independent directors need to possess a good general understanding of the
industry they are in. Further, it is worthy to note that independence and
competence should go hand-in-hand. It is therefore important that the
non-executive directors, including independent directors, possess the
qualifications and stature that would enable them to effectively and objectively
participate in the deliberations of the Board.
An Independent Director refers to a person who, ideally:
a. Is not, or has not been a senior officer or employee of the covered company
unless there has been a change in the controlling ownership of the company;
b. Is not, and has not been in the three years immediately preceding the election, a
director of the covered company; a director, officer, employee of the covered
company’s subsidiaries, associates, affiliates or related companies; or a director,
officer, employee of the covered company’s substantial shareholders and its
related companies;
c. Has not been appointed in the covered company, its subsidiaries, associates,
affiliates or related companies as Chairman “Emeritus,” “Ex-Officio”
Directors/Officers or Members of any Advisory Board, or otherwise appointed in
a capacity to assist the Board in the performance of its duties and responsibilities
within three years immediately preceding his election;
 d. Is not an owner of more than two percent (2%) of the outstanding shares of the
covered company, its subsidiaries, associates, affiliates or related companies;
e. Is not a relative of a director, officer, or substantial shareholder of the covered
company or any of its related companies or of any of its substantial shareholders.
For this purpose, relatives include spouse, parent, child, brother, sister and the
spouse of such child, brother or sister;
f. Is not acting as a nominee or representative of any director of the covered
company or any of its related companies;
g. Is not a securities broker-dealer of listed companies and registered issuers of
securities. “Securities broker-dealer” refers to any person holding any office of
trust and responsibility in a broker-dealer firm, which includes, among others, a
director, officer, principal stockholder, nominee of the firm to the Exchange, an
associated person or salesman, and an authorized clerk of the broker or dealer;
h. Is not retained, either in his personal capacity or through a firm, as a
professional adviser, auditor, consultant, agent or counsel of the covered
company, any of its related companies or substantial shareholder, or is otherwise
independent of Management and free from any business or other relationship
within the three years immediately preceding the date of his election;
i. Does not engage or has not engaged, whether by himself or with other persons
or through a firm of which he is a partner, director or substantial shareholder, in
any transaction with the covered company or any of its related companies or
substantial shareholders, other than such transactions that are conducted at arm’s
length and could not materially interfere with or influence the exercise of his
independent judgment;
j. Is not affiliated with any non-profit organization that receives significant
funding from the covered company or any of its related companies or substantial
shareholders; and
k. Is not employed as an executive officer of another company where any of the
covered company’s executives serve as directors.
Related companies, as used in this section, refer to
(a) the covered entity’s holding/parent company;
(b) its subsidiaries; and (c) subsidiaries of its holding/parent company.
Recommendation 5.3
The Board’s independent directors should serve for a maximum cumulative term of nine
years. After which, the independent director should be perpetually barred from reelection
as such in the same company but may continue to qualify for nomination and election as
a non-independent director. In the instance that a company wants to retain an independent
director who has served for nine years, the Board should provide meritorious
justification/s and seek shareholders’ approval during the annual shareholders’ meeting.
Explanation
Service in a board for a long duration may impair a director’s ability to act
independently and objectively. Hence, the tenure of an independent director is set
to a cumulative term of nine years. Independent directors (IDs) who have served
for nine years may continue as a non-independent director of the company.
Reckoning of the cumulative nine-year term is from 2012, in connection with
SEC Memorandum Circular No. 9, Series of 2011.
Any term beyond nine years for an ID is subjected to particularly rigorous review,
taking into account the need for progressive change in the Board to ensure an
 appropriate balance of skills and experience. However, the shareholders may, in
exceptional cases, choose to re-elect an independent director who has served for
nine years. In such instances, the Board must provide a meritorious justification
for the re-election.
Recommendation 5.4
The positions of Chairman of the Board and Chief Executive Officer should be held by
separate individuals and each should have clearly defined responsibilities.
Explanation
To avoid conflict or a split board and to foster an appropriate balance of power,
increased accountability, and better capacity for independent decision-making, it
is recommended that the positions of Chairman and Chief Executive Officer
(CEO) be held by different individuals. This type of organizational structure
facilitates effective decision making and good governance. In addition, the
division of responsibilities and accountabilities between the Chairman and CEO is
clearly defined and delineated and disclosed in the Board Charter.

Recommendation 5.5
The Board should designate a lead director among the independent directors if the
Chairman of the Board is not independent, including if the positions of the Chairman of
the Board and Chief Executive Officer are held by one person.
Explanation
In cases where the Chairman is not independent and where the roles of Chair and
CEO are combined, putting in place proper mechanisms ensures independent
views and perspectives. More importantly, it avoids the abuse of power and
authority, and potential conflict of interest. A suggested mechanism is the
appointment of a strong “lead director” among the independent directors. This
lead director has sufficient authority to lead the Board in cases where
management has clear conflicts of interest.
The functions of the lead director include, among others, the following:
a. Serves as an intermediary between the Chairman and the other directors when
necessary; b. Convenes and chairs meetings of the non-executive directors; and c.
Contributes to the performance evaluation of the Chairman, as required.
Recommendation 5.6
A director with a material interest in any transaction affecting the corporation should
abstain from taking part in the deliberations for the same.
Explanation
The abstention of a director from participating in a meeting when related party
transactions, self-dealings or any transactions or matters on which he/she has a
material interest are taken up ensures that he has no influence over the outcome of
the deliberations. The fundamental principle to be observed is that a director does
not use his position to profit or gain some benefit or advantage for his himself
and/or his/her related interests.
Recommendation 5.7
The non-executive directors (NEDs) should have separate periodic meetings with the
external auditor and heads of the internal audit, compliance and risk functions, without
 any executive directors’ present to ensure that proper checks and balances are in place
within the corporation. The meetings should be chaired by the lead independent director.
Explanation
NEDs are expected to scrutinize Management’s performance, particularly in
meeting the companies’ goals and objectives. Further, it is their role to satisfy
themselves on the integrity of the corporation’s internal control and effectiveness
of the risk management systems. This role can be better performed by the NEDs if
they are provided access to the external auditor and heads of the internal audit,
compliance and risk functions, as well as to other key officers of the company
without any executive directors’ present. The lead independent director should
lead and preside over the meeting.

6. ASSESSING BOARD PERFORMANCE

Principle 6: The best measure of the Board’s effectiveness is through an assessment process.
The Board should regularly carry out evaluations to appraise its performance as a body and
assess whether it possesses the right mix of backgrounds and competencies.

Recommendation 6.1
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.
Explanation
Board assessment helps the directors to thoroughly review their performance and
understand their roles and responsibilities. The periodic review and assessment of
the Board’s performance as a body, the board committees, the individual directors,
and the Chairman show how the aforementioned should perform their
responsibilities effectively. In addition, it provides a means to assess a director’s
attendance at board and committee meetings, participation in boardroom
discussions and manner of voting on material issues. The use of an external
facilitator in the assessment process increases the objectivity of the same. The
external facilitator can be any independent third party such as, but not limited to, a
consulting firm, academic institution, or professional organization.
Recommendation 6.2
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.
Explanation
Disclosure of the criteria, process and collective results of the assessment ensures
transparency and allows shareholders and stakeholders to determine if the
directors are performing their responsibilities to the company. Companies are
given the discretion to determine the assessment criteria and process, which
should be based on the mandates, functions, roles and responsibilities provided in
the Board and Committee Charters. In establishing the criteria, attention is given
to the values, principles and skills required for the company. The Corporate
Governance Committee oversees the evaluation process.
7. STRENGTHENING BOARD ETHICS
Principle 7: Members of the Board are duty-bound to apply high ethical standards, considering
the interests of all stakeholders.
 Recommendation 7.1
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
properly disseminated to the Board, senior management, and employees. It should also be
disclosed and made available to the public through the company website.
Explanation
A Code of Business Conduct and Ethics formalizing ethical values is an important
tool to instill an ethical corporate culture that pervades throughout the company.
The main responsibility to create and design a Code of Conduct suitable to the
needs of the company and the culture by which it operates lies with the Board. To
ensure proper compliance with the Code, appropriate orientation and training of
the Board, senior management, and employees on the same are necessary.
Recommendation 7.2
The Board should ensure the proper and efficient implementation and monitoring of
compliance with the Code of Business Conduct and Ethics and internal policies.

Explanation
The Board has the primary duty to make sure that the internal controls are in place
to ensure the company’s compliance with the Code of Business Conduct and
Ethics and its internal policies and procedures. Hence, it needs to ensure the
implementation of said internal controls to support, promote and guarantee
compliance. This includes efficient communication channels, which aid and
encourage employees, customers, suppliers, and creditors to raise concerns on
potential unethical/unlawful behavior without fear of retribution. A company’s
ethics policy can be made effective and inculcated in the company culture through
a communication and awareness campaign, continuous training to reinforce the
code, strict monitoring and implementation and setting in place proper avenues
where issues may be raised and addressed without fear of retribution.

Chapter Discussion Questions

1. What is the role of SEC Code of Good Governance to business establishments in the
Philippines?
2. Do publicly listed companies need to comply with the SEC Code? Why or Why not?
3. Differentiate the role of the board secretary to the role of the compliance officer.
4. What are the grounds for disqualification of a director of the board?
5. Based on the SEC Code, which among the committees of the board do you think has the
most important role?

Module Test 1
Identify as to which principle does the following recommendation belongs.
1. ______________________________ The non-executive directors (NEDs) should have
separate periodic meetings with the external auditor and heads of the internal audit,
compliance and risk functions, without any executive directors’ present to ensure that
proper checks and balances are in place within the corporation. The meetings should be
chaired by the lead independent director.
2. ______________________________All established committees should be required to
have Committee Charters stating in plain terms their respective purposes, memberships,
 structures, operations, reporting processes, resources and other relevant information. The
Charters should provide the standards for evaluating the performance of the Committees.
It should also be fully disclosed on the company’s website.
3. ______________________________The Board should have a Board Charter that
formalizes and clearly states its roles, responsibilities and accountabilities in carrying out
its fiduciary duties. The Board Charter should serve as a guide to the directors in the
performance of their functions and should be publicly available and posted on the
company’s website.
4. ______________________________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.
5. ______________________________The Board should ensure the proper and efficient
implementation and monitoring of compliance with the Code of Business Conduct and
Ethics and internal policies.
6. ______________________________The Board should be primarily responsible for
approving the selection and assessing the performance of the Management led by the
Chief Executive Officer (CEO), and control functions led by their respective heads (Chief
Risk Officer, Chief Compliance Officer, and Chief Audit Executive).
7. ______________________________The Company should provide in its Board Charter
and Manual on Corporate Governance a policy on the training of directors, including an
orientation program for first-time directors and relevant annual continuing training for all
directors.
8. ______________________________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 and should be composed of at least three non-executive directors, two of
whom should be independent, including the Chairman.
9. ______________________________The positions of Chairman of the Board and Chief
Executive Officer should be held by separate individuals and each should have clearly
defined responsibilities.
10. ______________________________The non-executive directors of the Board should
concurrently serve as directors to a maximum of five publicly listed companies to ensure
that they have sufficient time to fully prepare for meetings, challenge Management’s
proposals/views, and oversee the long-term strategy of the company.

Module Test 2
Match the lettered item to the numbered item. Write the letter of the item on the space provided
after each number.
A. Stakeholders G. Independent director
B. Corporate Governance H. Executive director
C. Related Party Transactions I. Non-executive director
D. Board of Directors J. Conglomerate
E. Management K. Internal control
F. Related Party L. Enterprise Risk Management

1. ____________ the governing body elected by the stockholders that exercises the
corporate powers of a corporation, conducts all its business, and controls its properties.
2. ____________ a process designed and effected by the board of directors, senior
management, and all levels of personnel to provide reasonable assurance on the
achievement of objectives through efficient and effective operations; reliable, complete
 and timely financial and management information; and compliance with applicable laws,
regulations, and the organization’s policies and procedures.
3. ____________ a process, effected by an entity’s Board of Directors, management and
other personnel, applied in strategy setting and across the enterprise that is designed to
identify potential events that may affect the entity, manage risks to be within its risk
appetite, and provide reasonable assurance regarding the achievement of entity
objectives.
4. ____________ a person who is independent of management and the controlling
shareholder, and is free from any business or other relationship which could, or could
reasonably be perceived to, materially interfere with his exercise of independent
judgment in carrying out his responsibilities as a director.
5. ____________ a group of corporations that has diversified business activities in varied
industries, whereby the operations of such businesses are controlled and managed by a
parent corporate entity.
6. ____________ any individual, organization, or society at large who can either affect
and/or be affected by the company’s strategies, policies, business decisions and
operations, in general. This includes, among others, customers, creditors, employees,
suppliers, investors, as well as the government and community in which it operates.
7. ____________ a transfer of resources, services or obligations between a reporting entity
and a related party, regardless of whether a price is charged. It should be interpreted
broadly to include not only transactions that are entered into with related parties, but also
outstanding transactions that are entered into with an unrelated party that subsequently
becomes a related party.
8. ____________ a group of executives given the authority by the Board of Directors to
implement the policies it has laid down in the conduct of the business of the corporation.
9. ____________ shall cover the company’s subsidiaries, as well as affiliates and any party
(including their subsidiaries, affiliates and special purpose entities), that the company
exerts direct or indirect control over or that exerts direct or indirect control over the
company; the company’s directors; officers; shareholders and related interests (DOSRI),
and their close family members, as well as corresponding persons in affiliated companies.
This shall also include such other person or juridical entity whose interest may pose a
potential conflict with the interest of the company.
10. ____________ a director who has no executive responsibility and does not perform any
work related to the operations of the corporation.