CHAPTER 3: Corporate Governance

• 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. But corporate failures continue to occur despite existing regulations.
• Two key features of corporate ownership among East-Asian Countries:

  • Concentration
  • Compostion
• Forms of Concentration: low concentration and high concentration.
• Low Concentration occurs when the majority of the ownership is held by several majority and minority shareholders. The conflict arises between shareholders and managers.
• High Concentration when the majority of the ownership is held by a small number of major stockholders. Conflict arises between majority and minority shareholders.
• Composition refers to the owners or shareholders.
• 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 - 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.
• Management is defined as how an organization is operated by its human and material resources to achieve organizational success.
• 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.
• CEO - The CEO is 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).
• 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).
• Agency Theory - This perspective assumes that the two principal characters, the agent (manager) and the principal (owner), are at odds with their objectives.
• 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.
• Resource Dependency Theory - Based on organizational theories, this theory looks at corporate governance from a strategic management view.
• 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.
• Accountability - Why be accountable? Simply because 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. Another common tool used is the budgetary control system that compares the budget against actual numbers from operations.
• Setting policy - For strategies to work, a set of policies, procedures, and plans must 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 recommendations by management which is often the case.
• Strategy formulation - Can a company survive without a strategy? Hardly. This is the most important function of the board as this will steer the company to achieve its vision and mission. A large part of board work is spent on the formulation and calibration of organizational strategies. Board members require strategic planning with varying backgrounds and expertise. The most common tool used in strategic planning is the SWOT (strength, weakness, opportunity, and threat) framework.
• 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).
• MAIN DIRECTOR TYPES:

  1. INDEPENDENT - no connection with the company.
  2. NON-EXECUTIVE - not part of the management but related to a certain aspect of a company.
  3. EXECUTIVE - hold a particular executive position inside the organization.
• DIRECTOR MUST HAVE THE FF COMPETENCIES:

  • good communication skills
  • ability to read and understand financial statements
  • strategic planning
  • critical thinking
  • networking
• 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.
• Audit committee - As a result of corporate meltdowns, this committee has become a nonnegotiable aspect of good governance. The main objective of the audit committee is to oversee accounting and financial reporting processes and results. They make sure that internal and external audits are carried out with integrity.
• Remuneration committee - This committee is responsible for identifying compensation and benefit plans for directors and senior executives through performance appraisals. Excessive compensation packages during economic downturns or financial crises warrant a closer investigation of the rationale behind said compensation.
• 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