GGSR CHAPT 3

• Management


  Focuses on the day to day operations of an organization
• Governance


  A body or group of persons (BOD/Trustees) who governs the organization, making sure that the company or entity is efficiently and effectively run by the management
• Management


  • Executives and Managers ensure that the company is run well and, ideally, brings profit for its shareholders
• Governance


  • Provides oversight to see to it that the company is steered in the right direction for the satisfaction of the stakeholders without interference in the day to day operations
• Management is how an organization is operated by its human and material resources to achieve organizational success
• Success is measured by profits generated through its operations
• Continued growth of its resources to produce more revenues is commonly viewed like the illustration below
• Board of Directors


  • Supervises management and provides oversight to see to it that the company is steered in the right direction for the satisfaction of the stakeholders without interference in the day to day operations
  • Technically it is an overlapping entity that provides oversight for the organization. (Some members, CEO, President or Vice-President) are members of the Board
• 5 Key Players in Corporate Governance

  • CEO
  • Chairman of the Board
  • Board of Directors
  • Shareholders
  • Stakeholders
• CEO


  The one responsible for leading and managing the entire organization in realizing organizational goals, through collaboration with the Board of Directors for the overall direction of the company
• Chairman of the Board


  Provides leadership of the board and plays an important role in the governance practices of the company
• Board of Directors


  The entity that oversees where the business is supposed to go and evaluate its performance. As a director, he/she asks questions during board meetings to make sure the 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, they 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 (i.e. employees, suppliers, government, and society among others)
• Not all organizations are for profit (Village associations, charitable institutions, etc.)
• The main objective of good governance is the proper governance of its valuable resources for its stakeholders
• While it is not under the scrutiny of regulatory bodies, it is equally important to ensure good governance through its board of directors (or trustees)
• Agency Theory


  Corporations act as agents of its shareholders. Shareholders invest in corporate ownership and thereby entrust their resources to the management of the directors and officers of the corporation
• Stewardship Theory


  The agent acts in the principal's best interest and therefore acts as a responsible steward of the company. David, Schoorman, and Donaldson (1997) believed that agents are naturally inclined to provide oversight and works for the best interest of the owners
• Resource Dependency Theory


  Examines how the external resources of the organizations affect how the organizations behave for their maximum utility. The long term survival of an organization is dependent on the efficient and effective use of its resources, i.e. materials, labor, executive management, and strategic networks
• Stakeholder Theory


  With the growing social activism in the last century, Freeman (1984) developed their societal perspective 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 stakeholder concern, not only shareholders, as the measure for a successful organization is the satisfaction of all its stakeholders
• Approaches to Corporate Governance

  • Rules Based approach
  • Principles-based approach
• Rules Based approach


  Relies on regulation and the law to ensure compliance
• Principles-based approach


  Companies are required to explain why certain violations of the code have been made. Also referred to as a "comply and explain" approach
• Both approaches adopt a unitary board (against the European two-tier approach) where there two boards, one made up of executive directors and another board made up of non-executive directors (shareholders and employees)
• Functions of the Board

  • Accountability
  • Strategy formulation
  • Monitoring and supervising
  • Policy -making
• 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 non financial metrics available but many companies use financial metrics as its quantifiable like sales, net income, financial ratios and others
• Setting policy


  For strategies to work, a set of policies, procedures, and plans must be prepared for management to abide. It 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


  Hardly can a company survive without a strategy. This is the most important function of the board as it will steer the company to achieve its vision and mission. Much of the work of the board is spent on the formulation and calibration of organizational strategies
• Providing accountability and formulating strategy are outward looking perspectives, whereas Monitoring and supervising and policy making are inward looking
• Time reference for accountability and monitoring and supervision refers to both historical (what happened in the past) and current period, whereas strategy formulation and policy making are future focused activities
• Membership of the Board

  • The size of the Board is determined by the current board and should be compliant with the terms as stated by the by laws of the corporation
  • It can be composed of one director up to a maximum of 15 directors with each of them owning at least one share of stock, as per guidelines indicated in the Corporation Code of the Phil
  • Their term 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 is in control of a corporation, the nominee usually comes from these entities through a nomination committee, much more so when the organization is in the start-up stage
• 3 Main types of Directors

  • Independent
  • Non-executive
  • Executive directors
• Independent directors


  Individuals who have no connection with the company and is free from any relationship which may be considered as conflict of interest
• Non-executive directors


  Individuals who are not part of management but are related to a certain aspect of a company, such as being a supplier, family representative, friend, adviser, or shareholder
• Executive directors


  Hold a particular executive position inside the organization, such as CEO or other senior executive positions as the vice president
• 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
• Types of Committees


  • Audit committee
  • Remuneration committee
  • Nomination committee
• Audit committee


  To oversee accounting and financial reporting processes and results. They make sure that internal and external audits are carried out with integrity