Foundation of good corporate governance
intellectual honesty of directors and senior management
quantity
It is quality of governance that is important and not the
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Foundation of good corporate governance
intellectual honesty of directors and senior management
quantity
It is quality of governance that is important and not the
Good governance
acting with responsibility, accountability, fairness, and transparency ▪A company needs the right people, team, and process ▪ The board needs to adopt the inclusive approach to governance ▪ Management must communicate with the particular groupings of stakeholders
inseparable.
Governance, strategy, and sustainability are
Long-term strategy should consider
financial, human, social, environmental, and technology. Reports must integrate impacts on a community economically, socially and environmentally.
BOD
must ensure principles of good governance are applied when taking risks for reward
Before Enron and WorldCom scandals
The Philippines had its own share of corporate scandals—like the BW Resources Corporation, whose share prices hit record highs and collapsed in 1999.
▪Impact: brought down the stock market image and weakened private investor confidence
▪Roots: management’s desire to project a false picture of performance—driving the value of the corporation in a competitive global market
Corporate governance
is needed to make corporate management more accountable and auditors more rigorous
enforced impartially
Good governance requires fair legal frameworks that should be
Code of Corporate Governance
The Philippine Securities and Exchange Commission (SEC) issued Memorandum Circular No. 2, s. 2002, otherwise known as the _____, under SEC Resolution No. 135, April 4, 2002.
▪This code is now effective and must be followed under pain of penalty.
▪promote corporate governance reforms that will raise investors confidence, ▪develop the capital market, and
▪help achieve high sustained growth for the corporate sector and the economy
Code of Corporate Governance aims to:
1. corporations whose securities are registered or listed,
2. corporations who are grantees of permits/licenses and secondary franchises from the Commission,
3.public companies, and
4.branches or subsidiaries of foreign corporations operating in the Philippines whose securities are registered or listed
The Code of Corporate Governance applies to:
Salient features of the Code
The Code prescribes that the BOD shall primarily be responsible for the governance of the corporation.
The Board should establish the corporation’s vision and mission, strategic objectives, policies and procedures that guide and direct the activities of the company, and the mechanism for monitoring management’s performance
The Board shall constitute committees in aid of good governance such as:
▪ Audit Committee – internal control and BOD as overseer
▪ Nomination Committee – review and evaluate BOD nominated persons
▪ Compensation or Remuneration Committee – in charge of establishing procedure and policy on executive remuneration.
The Code emphasizes the importance of the work of the corporate secretary, who must be a Filipino and an officer of the corporation.
To fulfill their responsibilities,
the Board should be provided with complete, adequate and timely information prior to Board meetings on an on-going basis
The Board
is primarily accountable to the shareholders.
The Management
is primarily accountable to the Board.
Audit Committee
The Board, through the _____, shall recommend a duly accredited external auditor who shall undertake an independent audit. The EA should be rotated every five years
voting right
preemptive right
power of inspection
right to information
right to dividends
appraisal rights
The following stockholders rights should be respected:
▪ The management – may establish a performance evaluation system to measure performance of the Board and top-level management of the corporation
Disclosure
is a vital and dominant theme in the Code.
Corporations
shall promulgate and adopt their corporate governance rules and principles in according with the Code.
rules
shall be in manual forms, as available reference by directors and submitted to the SEC.
Penalty for failure to adopt a manual of corporate governance
P100,000 after due notice and hearing.
All affected corporations:
submission-July, 1, 2002; effectivity-Jan.1, 2003.
Authority and Responsibility and Purpose of the BOD
▪Protects the resources entrusted to them by the shareholders
▪ The BOD is the top governing authority within the management structure at any publicly listed company.
▪ To select, evaluate, and approve appropriate compensation for the company’s chief executive officer (CEO),
▪ To assess the attractiveness of dividend payment scheme and its amount,
▪ Recommends stock splits,
▪ Oversee share reacquisition programs,
▪ Approve the company’s financial statements, reports, and other financial highlights,
▪ Recommend/Discourage acquisition and mergers.
Structure and Make up of the BOD
▪Individual men and women elected by the shareholders
▪They have either a vested interest in the company, or work in the upper management of the company, or are independent from the company but are known for their business abilities.
Audit committee
Committees on the BOD: – making sure FS and reports are reasonably accurate and fair.
Compensation committee
Committees on the BOD: – decides on the base compensation, stock option awards, and incentive bonuses for the company’s executives and CEO
In a company with a single shareholder
it can control the corporation
In a company where no controlling exists
the BOD can act as if one did exist
Ownership Structure and its Impact
In few companies one person can invest as much as 50% to 67% or even more. The controlling shareholder can also serve as the CEO and/or Chairman of the Board, being the supermajority, and has the complete control of the company.
▪Support to the Board
▪Delivery of program, product and service (PPS)
▪Financial, risk, and tax management
▪Human capital management
▪Public relations (PR)
The typical responsibilities of a CEO:
▪Implements internal control
▪Supervises major impact project
▪Develops relations with financing sources
▪Advisor to management
▪Drives major strategic issues
▪Risk manager
▪Relationship role
▪Objective referee
Critical areas of responsibilities of a CFO
Shareholder Rights and Responsibilities:
▪Right to a share of the income of the company called dividend
▪Right to a share of net proceeds on the sale during liquidation
▪Right to sell or transfer that share without the need to inform or getting the consent of the other stockholders
▪Right to vote, the right to information about the company and the right to express an opinion on the company’s performance.
▪ The information should not cost competitiveness
▪ Their actions will not paralyze and detrimental to the company.
General Role
REVIEWING THE ROLE OF THE SHAREHOLDERS…
▪ Certain matters require the approval of the shareholders under the Corporation Code of the Philippines, these matters include:
▪ Effecting certain mergers or reorganizations.
▪ Selling all or substantially all of the corporation’s assets.
▪ Adding or removing any restrictions on the business that the corporation may carry on.
▪ Changing the corporation’s share capital.
▪ Increasing or decreasing the number of directors or the minimum or maximum number of directors.
▪ Confirming by-laws.
▪ Adding or changing restrictions on the issue, transfer or ownership of shares.
Shareholder Ability to Change the Board
REVIEWING THE ROLE OF THE SHAREHOLDERS…
▪They may remove the directors or refuse to re-elect them if they are dissatisfied with how the directors are running the corporation.
▪Shareholders can mount a proxy battle over the election of directors. ▪Occasionally, proxy battles do occur which result in the replacement of BOD.
AUDITORS
EXTERNAL ENVIRONMENT OF CORPORATE GOVERNANCE:
▪Independent auditors – are one of the most important external institutions in governance. ▪They help to ensure that firms are run efficiently by keeping public records accurate, adhering standards of reporting for public purposes, and taxes paid properly and on time
LEGAL ENVIRONMENT
EXTERNAL ENVIRONMENT OF CORPORATE GOVERNANCE:
▪The legal environment is derived partly from the general political climate in a country. ▪Three distinct dimensions:
▪ The domestic laws of home country
▪ The domestic laws of each of foreign markets
▪ International law in general
Markets
EXTERNAL ENVIRONMENT OF CORPORATE GOVERNANCE:
▪Markets are considered the most important institution of corporate governance. ▪Three central and important points of markets:
▪ The firm’s product market
▪ Capital market
▪ The managerial labor market
▪The above three are important barometers if the firm could survive, grow, expand, diversify, and retain a good stock of human capital to manage the company as it fights the battles of competition.
External environment
may create major threat or open possibilities for an organization.
Political environment
the politics of a country or a region affects the policies and benefits that a firm derives from the system.
Technological environment
any new development may render an organization’s processes and systems obsolete if it is not quick to respond to the new changes
Social environment
comprises the general behavior of the society and includes the ethical leanings of individuals responsible for the functioning and survival of the organization.
Anti-takeover Defenses
▪ Technical terms such as “shark repellent” and “poison pill” are used to describe the defensive means or tactics that companies use to challenge an impending merger or two more businesses into one.
Merger
is combining of two or more corporations into one.
Anti-takeover defenses
can also be employed in a hostile takeover, a setting where a business is acquired against the management’s or some shareholders’ wishes.
▪ Anti-takeover tactics are designed to make a company unattractive to predators.
“flip-in”
which allows existing shareholders to purchase more shares at a discount.
“flip-over”
allow shareholders to purchase the bidder’s shares at a discount
done to prevent the unwelcome takeover
Acquisition of previous issued stock
▪ Provision such as “One can never be a board member if you are already a board member of a competitor company”
▪ Supermajority vote as prerequisite of companies major move like merger, etc.
▪ A provision in the company’s charter or articles of incorporation which allows shareholder to sell their shares to the bidder for more than the market price.
▪ The “debt façade,” a ploy wherein a company takes on plenty of debts to make it unappealing ▪ The “debenture sheltering,” business issues bonds that will have to be redeemed at a higher price in the future.
▪ The company offers its employees stock options, etc.
▪ Staggered elections to the board
Advantages of Anti-Takeover Defenses
1. Anti-takeover tactics are positive when a company has the sense to believe that its stock has a higher market price than reflected and thus may become the target of a takeover.
2. They are good when the predator company's purpose is to acquire the company and then use it for not good purposes which would not benefit the constituent companies.
3. Short-term poison pills may help businesses go through difficult financial periods when they could be defenseless targets
Disadvantages of Anti-Takeover Defenses
1. It will prevent a genuinely good takeover purpose or aim.
2. AT tactics are sometimes used to embed management and prevent shareholders from selling their stocks and maximizing its price.
3. Board members, who are already in their comfort zone, sometimes hide behind poison pills to retain their positions.
Personal liability of officers and directors
▪Issues involving misappropriations
▪Issues involving nondisclosure of conflict of interest
▪Issues on loyalty
▪Issues on non-separation of personal and business concerns
▪Issues on prudence
Indemnification of Officers and Directors
▪It refers to the act of the reimbursing officers and directors for expenses incurred, liabilities accrued, and amounts paid to defending claims brought to them for actions taken on behalf of the corporation. ▪Some corporate bylaws are now containing provisions regarding this.
Directors’ and Officers’ Insurance
Corporations are allowed to purchase insurance to cover matters resulting from acts taken by officers and directors.
Through Classes of Stock
Ordinary shares – no special rights or restrictions
2. Preference shares – gives the holder preferential treatment
3. Cumulative preference shares – gives holders the right that, if a dividend cannot be paid one year, it will be carried forward to the succeeding years
4. Redeemable shares – comes with an agreement that the company can buy them back at a future date.
Supermajority
▪It refers to percentage of ownership that is way above the simple majority which is , one half plus one share of the total shares outstanding.
▪Usually supermajority could mean 67% to 90%.
Shareholder Voting Agreements
A legal voting arrangement is a legal contract among shareholders of a corporation involving voting of shares
Shareholders-Management Agreements
Aside from the articles of incorporation, “what gives investors their most important contractual protections is the shareholders’ agreement… Agreements of this kind are by far the most recommendable system or method for the protection of shareholders.” (Chris Southorn, www.cmck.com et al., 2017).
▪ Board appointment rights – agreement to establish right of representation to the BOD.
▪ Veto rights – right to overturn decisions reach by the board.
▪ Adoption and amendment of business plans and budgets
▪ Scope of business
▪ Intellectual property rights
▪Right to information
▪Warranties from the management team
▪Strategic investor rights
▪Restrictions on transfers of shares
▪Restrictive covenants
▪Exit provisions
The main features of this shareholders’ agreement are