reviewer

1. CORPORATE GOVERNANCE
Chapter 3
Corporate governance is a concept that was introduced in the 1970s and the succeeding years leading to
the present. It has become a topic of debate around the world by both academics and practitioners.
Corporate governance structures were put in place to protect the various stakeholders of corporations
and prevent corporate scandals and/or failures from happening.
"The focus on corporate governance in the realm of corporate board discussions a decisions has evolved.
Whereas merely viewed as a systematic structure with internal policies that are implemented to serve all
stakeholders with honesty, reliability, and society as a prerequisite to achieving long-term success; hence,
a significant measure transparency, we now see the increasing importance of a company's position in
serving within the corporate governance umbrella. The tide has shifted even more on the demand side,
particularly towards the betterment of society as a now the driver for board decisions in their thrust
towards survival and profitability. There is no choice."
Carlos Jose Gatmaitan
Faculty/Fellow
Ateneo Graduate School/Institute of Corporate
Directors
Philippine Corporate Governance
Corporate governance in the Philippines shares similar qualities with its East Asian counterparts, most
observed of the family-ownership structure (Echanis, 2006; Kabigting 2011; Saldaña, 1999). This quality
has been referred to as among the weakest attributes of corporate governance in the country if gauged
against the codes on control (monitoring function) and transparency (reporting) is concerned.
The family-ownership structure is unique to East Asia, including the Philippines, and other countries such
as Japan and Germany. This issue should be addressed in the country's corporate governance code, for it
is not which model that is superior that should be regarded, but which one works for the circumstance (Iu
& Batten, 2001).
Governance and Management
It must be stated at this point that governance and management are two different areas. Management
focuses on the day-to-day operations of an organization. Executives and managers in management ensure
that the company is run well and, ideally, brings profit for its shareholders. On the other hand, the
governance function is carried out by a body or group of persons (board of directors/trustees) who
governs the organization, making sure that the company or entity is efficiently and effectively run by
management.
Management is defined as how an organization is operated by its human and material resources to
achieve organizational success. Such success may be measured by profits generated through its
operations and the continued growth of its resources to produce more revenues. Management is widely
viewed as a hierarchical organization as depicted in the illustration below:

2. The board does not readily manifest itself in the organization structure because of its explicit definition.
A board supervises the management and provides oversight, ensuring that the company is steered in the
right direction for the satisfaction of its various stakeholders without direct interference in the day-to-day
operations of the company. The board of directors may be viewed as an overlapping entity that provides
oversight for the organization and that some executives (e.g., CEO, president, or vice president) are
members of the board.
Key Players in Corporate Governance
There are five key players in corporate governance, namely the CEO, the chairman of the board, the board
of directors, the shareholders, and the stakeholders.
CEO - the person responsible for leading and managing the entire organization in achieving its
organizational goals. It is the duty of the CEO to collaborate with the board for the overall direction of the
company.
Chairman of the Board - The chairman of the board of directors should not only provide leadership of the
board, but also play an important role in the governance practices of the company.
Board of Directors - This is the best entity for steering the company's strategic direction and evaluating
its performance. As a director, questions must be asked during board meetings to make sure decisions
made by the company will be for the best interest of the company in the long term.
Shareholders - Considered owners of the company through their ownership/ holdings of stock shares, this
group actively seeks to maximize stock price increase over a period of time.
Stakeholders - Any group of people who are affected by how a corporation operates in (i.e., employees,
suppliers, government, and society among others).
Other Forms of Organizations
The main objective of good governance is the proper governance of its valuable resources for its
stakeholders. While these may not be under the scrutiny of regulating bodies, it is just as important to
ensure good governance through its board of directors (or trustees).

3. Theoretical Perspectives
There are many lenses with which to study and look at corporate governance. We take a look at the most
widely used and researched perspectives.
Agency Theory - This perspective assumes that the two principal characters, agent (manager) and the
principal (owner), are at odds with their objectives. This theory posits that managers cannot be trusted
and act on their interests and not for the benefit of the owners of the company.
Stewardship Theory - According to this theory, the agent acts in the principal's best interest and therefore
acts as a responsible steward of the company. Davis, Schoorman, and Donaldson (1997), however,
believed that agents are naturally inclined to provide proper oversight and works for the best interest of
the owners.
Resource Dependency Theory - Based on organizational theories, this theory looks at corporate
governance from a strategic management view. It examines how the external resources of organizations
affect how organizations behave for their maximum utility (Pfeffer & Salancik, 1978). The long-term
survival of an organization is dependent on the efficient and effective use of its resources, such as raw
materials, labor, executive management, and strategic networks to name a few. This theory suggests that
board members should actively develop their resources to build a competitive advantage.
Stakeholder Theory - Given the growing social activism seen in the last century, Freeman (1984)
developed this societal perspective and viewed organizations as entities that are responsible for their
actions that affect anyone involved or affected by their existence. This approach to corporate governance
encourages boards to consider their stakeholders' concerns, not only shareholders, as the metric for a
successful organization is the satisfaction of all its stakeholders.
Culture and Corporate Governance
Corporate governance is generally seen as mechanisms that promote good governance, but it is a culture
that gives it the impetus. For instance, there are nuances in corporate governance practices between the
East and the West.
A prime example of this would be the oft-discussed Chinese social value of "saving face" for a particular
person/entity/organization. Most Asian cultures, including the Philippines, have this particular emotional
idiosyncrasy. In the West, where emotions are given lesser importance, this is not seen so much of an
issue as Western culture is deemed to be more open and straightforward.
Approaches to Corporate Governance
A rules-based approach to corporate governance relies on regulation and the law to ensure compliance.
This is best exemplified by the US Sarbanes and Oxley Act. On the other hand, it is in a principles-based
approach wherein companies are required to explain why certain violations of the code have been made.
This is sometimes referred to as a "comply and explain" approach. Both approaches adopt a unitary board
(against the European two- tier board) wherein there are two boards, one made up of executive directors
and another board made up of non-executive directors (shareholders and employees).

4. Functions of the Board
There are four main functions of a board: Accountability, strategy formulation, monitoring and
supervising, and policy-making (Tricker, 2019).
Accountability - the success or failure of an organization rests on the board and the board should be
accountable not only to their shareholders but also to all the other stakeholders affected by their actions/
behavior.
Monitoring and supervision - Another function of the board is to oversee the performance of its
management. There are various financial and nonfinancial metrics available but most companies prefer
to use financial metrics as it is readily quantifiable such as sales, net income, financial ratios, and others.
Setting policy - For strategies to work, a set of policies, procedures, and plans be prepared for
management to abide by. This is also used to supervise management activities. These may either be set
by the board or by approving the recommendation by management which is often the case.
Strategy formulation - This is the most important function of the board as this will steer the company to
achieve its vision and mission. The most common tool used in strategic planning is the SWOT (strength,
weakness, opportunity, and threat) framework.
Membership of the Board
Board size is determined by the current board and should comply with the terms established in the bylaws
of the corporation. A corporation is composed of one director (for OPCs) up to a maximum of 15 directors
with each director owning at least one share of stock, as per the guidelines indicated in the Philippine
Corporate Code (2019). The term for each director is set at one year among holders of stocks of the
company (three years in the case of trustees, chosen from among the members of the corporation).
Directors are normatively nominated by the shareholders, controlled by the board in the director selection
process as best practices indicate. But in cases where a founder or majority group is in control of a
corporation, the nomination usually comes from these entities through the nomination committee, much
more so when the organization is in its start-up stage.
Director classification comes in many forms but there are three main director types: independent, non-
executive, and executive directors. Independent directors are individuals who have no connection with
the company and is free from any relationship which may be considered a conflict of interest. While non-
executive directors are individuals who are not part of management but are related to a certain aspect of
the company, such as being a supplier, family representative, friend, adviser, or shareholder. On the one
hand, executive directors hold a particular executive position inside the organization, such as the CEO or
other senior executive positions such as the vice president.

5. Aside from the fundamental requirements of a director having integrity, intellect, and independence, a
director must have the following core competencies: good communication skills, ability to read and
understand financial statements, strategic planning, critical thinking, and networking.
Politics in the Board
An aspect of organizational life is the existence of politics. Politics can be destructive if used the wrong
way but can also be used positively to further a worthwhile agenda or cause that will benefit the company.
Corporate politics may be described as processes and interactions, involving power and authority that
influence decisions made for the benefit of an individual, group, or organization. In the study of corporate
governance, it is important to understand a company's governance structure, or where the power lies.
Tricker (2019) noted that human behavior is based on relationships, and by the processes people behave
in an organization is dictated by their association of power.
Importance of Committees
Committees are formed because board work can be done more effectively. By focusing and
discussing particular issues separately from general board meetings, the time management of
directors is optimized.
Audit committee - this committee has become a non-negotiable aspect of good governance. The
main objective is to oversee accounting and financial reporting processes and results.
Remuneration committee - This committee is responsible for identifying Remuneration committee
compensation and benefit plans for directors and senior executives through performance appraisals.
Nomination committee - To assure an effective working board, the directors on board must be
independent thinkers, including its executive directors. The nomination committee should nominate
the right mix of board members to ensure objectivity, independence, and expertise.
Toward an Effective Working Board
An effective working board would require the sound leadership of a board from this fundamental quality,
it would be ideal for directors to have the following traits.
Commitment – commitment in terms of time spent and in the achievement of
Expertise - possess strong technical knowledge of the industry or business;
Unity - ability to work and get along with fellow board members; collaborating effectively in getting
the group to agree on resolutions;
Independence - challenging the status quo and critically questioning perspectives; and
Networking - providing resource connections for possible alliances in business development.
Information symmetry is needed for board members to perform their functions properly. Documents for
review must be given on time with complete formation. While each director may have different needs
depending on his knowledge of the company's operations, it is the director's right and duty to get
information.

6. Board Evaluation
One of the purposes of evaluating boards is to continuously improve best practices and see if they are
functioning effectively. The board is tasked to do evaluations internally and/or through a third party to
ensure compliance within the legal and regulatory framework of course, best practice would dictate such
processes to go beyond conformance and compliance. Every country would have different evaluation
parameters but most rating systems follow the OECD Principles. In Asia including the Philippines, the
ASEAN corporate governance scorecard (ACGS) is used. Evaluating the board would include a review of
the company's governance and board structure, board members, and processes.
Concerning board evaluation, individual directors are also assessed. The chairman of the board normally
assesses directors. Who now assesses the chairman? In some companies, it is the independent director
who does this assessment. Again, each company may have its method of evaluation, as indicated in its
governance codes or the company bylaws.
Family Governance
Family corporations are unique in the sense that there is an emotional component to it. Schmid, Rouvinez,
and Poza (2014) argued that the objective of good family business governance is the sustainable
development of the economic value and emotional value (well- being) of the enterprise. Higher economic
value is manifested through its revenues, while emotional value refers to the emotions that create an
attachment to the company. In other words, emotions must be managed before good corporate
governance can even progress. The creation of a family constitution (with the assistance of a lawyer
and/or consultant) should help in the process of good family governance as this is a document that
describes their strategy and structures. All family members must be included in the construction of this
constitution.
Ethical Stewardship
One of the board of directors' responsibilities is to ensure the proper governance of their organization's
resources, and address the needs of its various stakeholders. Apart from formulating business strategies
and policies, a director is also held accountable for a carries a lot of weight in the downstream activities
of an organization's various functions.