ch#3:INSTITUTIONS AND INFLUENCES OF CORPORATE GOVERNANCE

0.0(0)
studied byStudied by 1 person
learnLearn
examPractice Test
spaced repetitionSpaced Repetition
heart puzzleMatch
flashcardsFlashcards
Get a hint
Hint

Foundation of good corporate governance

Get a hint
Hint

intellectual honesty of directors and senior management

Get a hint
Hint

quantity

Get a hint
Hint

It is quality of governance that is important and not the

Card Sorting

1/58

Anonymous user
Anonymous user
encourage image

There's no tags or description

Looks like no tags are added yet.

Study Analytics
Name
Mastery
Learn
Test
Matching
Spaced

No study sessions yet.

59 Terms

1
New cards

Foundation of good corporate governance

intellectual honesty of directors and senior management

2
New cards

quantity

It is quality of governance that is important and not the

3
New cards

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

4
New cards

inseparable.

Governance, strategy, and sustainability are

5
New cards

Long-term strategy should consider

financial, human, social, environmental, and technology. Reports must integrate impacts on a community economically, socially and environmentally.

6
New cards

BOD

must ensure principles of good governance are applied when taking risks for reward

7
New cards

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

8
New cards

Corporate governance

is needed to make corporate management more accountable and auditors more rigorous

9
New cards

enforced impartially

Good governance requires fair legal frameworks that should be

10
New cards

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.

11
New cards

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:

12
New cards

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:

13
New cards

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

14
New cards

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.

15
New cards

To fulfill their responsibilities,

the Board should be provided with complete, adequate and timely information prior to Board meetings on an on-going basis

16
New cards

The Board

is primarily accountable to the shareholders.

17
New cards

The Management

is primarily accountable to the Board.

18
New cards

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

19
New cards
  1. voting right

  2. preemptive right

  3. power of inspection

  4. right to information

  5. right to dividends

  6. 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

20
New cards

Disclosure

is a vital and dominant theme in the Code.

21
New cards

Corporations

shall promulgate and adopt their corporate governance rules and principles in according with the Code.

22
New cards

rules

shall be in manual forms, as available reference by directors and submitted to the SEC.

23
New cards

Penalty for failure to adopt a manual of corporate governance

P100,000 after due notice and hearing.

24
New cards

All affected corporations:

submission-July, 1, 2002; effectivity-Jan.1, 2003.

25
New cards

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.

26
New cards

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.

27
New cards

Audit committee

Committees on the BOD: – making sure FS and reports are reasonably accurate and fair.

28
New cards

Compensation committee

Committees on the BOD: – decides on the base compensation, stock option awards, and incentive bonuses for the company’s executives and CEO

29
New cards

In a company with a single shareholder

it can control the corporation

30
New cards

In a company where no controlling exists

the BOD can act as if one did exist

31
New cards

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.

32
New cards

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:

33
New cards

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

34
New cards

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.

35
New cards

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.

36
New cards

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.

37
New cards

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

38
New cards

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

39
New cards

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.

40
New cards

External environment

may create major threat or open possibilities for an organization.

41
New cards

Political environment

the politics of a country or a region affects the policies and benefits that a firm derives from the system.

42
New cards

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

43
New cards

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.

44
New cards

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.

45
New cards

Merger

is combining of two or more corporations into one.

46
New cards

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.

47
New cards

“flip-in”

which allows existing shareholders to purchase more shares at a discount.

48
New cards

“flip-over”

allow shareholders to purchase the bidder’s shares at a discount

49
New cards

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

50
New cards

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

51
New cards

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.

52
New cards

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

53
New cards

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.

54
New cards

Directors’ and Officers’ Insurance

Corporations are allowed to purchase insurance to cover matters resulting from acts taken by officers and directors.

55
New cards

Through Classes of Stock

  1. 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.

56
New cards

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%.

57
New cards

Shareholder Voting Agreements

A legal voting arrangement is a legal contract among shareholders of a corporation involving voting of shares

58
New cards

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).

59
New cards

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