GOVERNANCE, BUSINESS ETHICS, RISK MGT, & INTERNAL CONTROL Prelims

Corporation

"An artificial being created by operation of law, having the right to succession and the powers, attributes and properties expressly authorized by law or its incident of existence."

Advantages of MNCs to the home country

-Acquisition of raw materials from abroad. -Technology and management expertise acquired from competing in global markets. -Export of components and finished goods for assembly or distribution in foreign markets. -Inflow of income from overseas profits, royalties and management contracts.

Disadvantages of MNCs

-Trade restrictions imposed at the government level. Limited quantities (quotas) of imports. -Effective management of globally dispersed organization. -----Slow down in the growth of employment in home countries. -Destroy competition and acquire monopoly.

Advantages of MNCs to the Host country

-Transfer of technology, of technology, capital, and entrepreneurship. -Increase in the investment level and thus, the income and employment in the host country. -Greater availability of products for local consumers. -Increase in exports and decrease in imports.

Franklin Root

According to _____________________, an MNC is a parent company that: Engages in foreign production through its affiliates located in several countries, Exercises direct control over the policies of its affiliates, Implements business strategies in production, marketing, finance, and staffing that transcend national boundaries.

Cadbury report of 1992

According to _______________________ Corporate Governance is the system by which organizations controlled" are directed and

Mervyn King (Chairman: King Report)

According to him "Good corporate governance is about 'intellectual honesty' and not just sticking to rules and regulations, capital flowed towards companies that practiced this type of good governance."

rules-based approach to corporate governance

A ______________________ is based on the view that Companies must be required by law (or by some other form of compulsory regulation) to comply with established principles of good corporate governance. The rules might apply only to some types of company, such as major stock market companies. However, for the companies to which they apply, the rules must be obeyed and few (if any) exceptions to the rules are allowed.

Type of stake - ownership

A legal title to an asset or a property

multinational corporation (MNC)

Characterized as business entities that have their management headquarters in one country, known as home country, and operate in several countries, known as host countries. is a enterprise that manages production or delivers services in more than one country can also be referred to as an international corporation.

Corporate Performance

Improved governance structures and processes ensure quality decision-making, encourage effective succession planning for senior management and enhance the long-term prosperity of companies, independent of the type of company and its sources of finance. This can be linked with improved corporate performance- either in terms of share price or profitability

Enhancing Enterprise Valuation

Improved management accountability and operational transparency fulfill investors' expectations confidence on and management and corporations, and in return, increase the value of corporations.

Sarbanes-Oxley Act of 2002

is a federal law that established sweeping auditing and financial regulations for public companies. Lawmakers created the legislation to help protect shareholders, employees and the public from accounting errors and fraudulent financial practices.

corporate governance

is a set of relationships between a company's directors, its shareholders and other stakeholders. structure through which the objectives of the company are set, and the means of obtaining these objectives and monitoring performance.

The Board's Governance Responsibilities Principle 6

is on assessing board performance which states that board should regularly carry out evaluations to appraise its performance and whether it possesses the right mix of backgrounds and competencies. An annual self-assessment of the board's performance, including the performance of the Chairman, individual members and committees is recommended. It is further recommended that every three years the assessment should be supported by an external facilitator.

Duties to Stakeholders Principle Principle 15

is on encouraging employees' participation. The key recommendation under this principle is the establishment of a suitable framework for whistleblowing that allows employees to freely communicate their concerns about illegal or unethical practices, without fear of retaliation and to have direct access to an independent member of the board or unit created to handle whistleblowing concerns.

Duties to Stakeholders Principle Principle 16

is on encouraging sustainability and social responsibility, which puts emphasis on the company's social responsibility in dealing with its various stakeholders. The company should recognize the interdependence between its business and the society where it operates and promote a mutually beneficial relationship between the two.

Disclosure and Transparency Principle 8

is on enhancing company disclosure policies and procedures and states that the company should establish policies and procedures that are practical and in accordance with best practices and regulatory expectations. Included are recommendations on disclosure of policies governing Related Party Transactions and on full disclosure of all relevant and material information on individual board members.

The Board's Governance Responsibilities Principle 1

is on establishing a competent board to foster the long- term success of the corporation and to sustain its competitiveness and profitability in a manner consistent with its corporate objectives and the long-term best interests of its shareholders and other stakeholder. The recommended good corporate governance practices under this principle include having a board composed of a majority of non-executive directors and having a policy on the training of directors.

principal-agent problem

situation in which an agent performing activities on behalf of a principal pursues his or her own interests

bondholder

someone who owns bonds and receives the interest payments

"Comply or Explain"

the approach in the new Code of Corporate Governance for Publicly-Listed Companies (CG Code)

Agency Costs

the costs of the conflict of interest between stockholders and management

Managerial Opportunism

the seeking of self-interest with guile. Refers to the act by the agent of taking advantage on things that are within his control by virtue of the rights given to him by the principal.

Ownership

the state or fact of owning something

Interest

wanting or attention by the stakeholders

Type of stake - Interest

when a person will be affected by a decision

goal congruence

when a subsystem achieves its goals while contributing to the organization's overall goal

Prudence

•It is defined within the Code of Governance as "care, caution and good judgment as well as wisdom in looking ahead."

conflict of interest

Principal and agent have diverse interests, and the separation of ownership and control provides potential for different interests to surface. A situation in which a person in a position of responsibility or trust has competing professional or personal interests that make it difficult to fulfill his or her duties impartially.

Advantages of TNCs

Provide jobs/wages Income benefits local businesses-multiplier effect Training-skills New technology Money to invest Improved infrastructure and comms.

Legal Rights

Rights of individuals or groups that are established and guaranteed by law

c. Statement I and II is correct

T/F I. Corporate Governance is integral to the existence of the company. II. Corporate Governance is needed to create a corporate culture of transparency, accountability and disclosure. a. Statement I is correct b. Statement II is correct c. Statement I and II is correct d. Statement I and II is incorrect

22 November 2016

The Philippine Securities and Exchange Commission (SEC) recently released a new Code of Corporate Governance for Publicly-Listed Companies (CG Code) last _________________________

Sustainability

The ability to keep in existence or maintain. A sustainable ecosystem is one that can be maintained

Shareholders

The artificial or natural persons that are legally regarded as owners of the corporation Own stock in the firm, giving them ultimate control (the shareholder-primacy model).

board of directors

The collegial body that exercises the corporate powers of all corporations formed under the Corporate Code (SEC Code of Corporate Governance). Govern and oversee management of the business.

shareholder activism

actions by large shareholders to protect their interests when they feel that managerial actions of a corporation diverge from shareholder value maximization

expropriation

activities that enrich controlling shareholders at the expense of minority shareholders

Shareholders rights

The right to vote on matters such as elections of the board of directors. The right to propose shareholder resolutions. The right to receive dividends. Pre-emption right which is the right to purchase new shares issued by the company to maintain its percentage of ownership in the company. This is also be called right to FIRST REFUSAL. The right to liquidating dividends. That is, the right to receive the company's assets during liquidation or cessation of business.

Enron Scandal (2001)

- An American energy company based in Houston, TX - 1 of the largest business scandals in American history - Was issued nearly $5 billion in unsecured loans from Chase Manhattan Bank and Citibank - 2 years after founding, 2 traders begin betting on the oil markets and 1 begins to divert company money to offshore accounts - Engaged in " Mark - to - Market" accounting (which anticipated future profits from any deal were accounted for by estimating their present value rather than historical cost) - Enron deliberately created real and imaginary power shortages in 2000 - 2001 during the California energy crisis, in order to drive up prices and reap vase profits - Engaged in manipulations designed to boost earnings reports - Enron created off- balance sheet entities' to inflate asset values and profitability even while, in some cases, the entities' assets or profits were found to be completely nonexistent - Declared bankruptcy in 2001 because of its $38 billion in debt

Arthur Andersen, LLP

- An accounting firm - Served as Enron's auditor for 16 years - Helped Enron improperly categorize hundreds of millions of dollars as increases in shareholder equity (misrepresented the true value of Enron) - Destroyed thousands of documents and emails involving Enron - Found guilty of obstructing justice - Owed nearly $2 million by Enron for services rendered

Jeffrey Skilling

- Former CEO of Enron - Was convicted of multiple fraud charges - Currently serving a 24 year, 4 month prison sentence

Kenneth Lay

- Founder and Chairman of Enron - Indicted on 11 counts of fraud - Died of a heart attack before he served any prison time

tunneling

- form of corporate theft that occurs when managers from the controlling family divert resources from the firm for personal or family use

Inside directors

- have some tie to the firm.

related transactions

- legal means whereby controlling owners sell firm assets to another firm they own at below market prices or spin off the most profitable part of a public firm and merge it with another private firm of theirs

mark to market accounting

An accounting method in which assets are valued in the balance sheets at what they would sell for in the market

Salient advantages of corporate governance

1. Good corporate governance ensures corporate success and economic growth. 2. Strong corporate governance maintains investors' confidence, as a result of which, company can raise capital efficiently and effectively. 3. There is a positive impact on the share price. 4. It provides proper inducement to the owners as well as managers to achieve objectives that are in interests of the shareholders and the organization. 5. Good corporate governance also minimizes wastages, corruption, risks and mismanagement. 6. It helps in brand formation and development. 7. It ensures organization in managed in a manner that fits the best interests of all.

G20/OECD Principles of Corporate Governance

According to this "Corporate governance involves a set of relationships between a company's management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined."

Stockholder/ Shareholder Theory

According to this theory, it is the corporation which is considered as the property of shareholders/ stockholders. The role of managers is to maximize the wealth of the shareholders. They, therefore, should exercise due diligence, care and avoid conflict of interest and should not violate the confidence reposed in them. The agents must be faithful to shareholders.

Agency Theory

According to this theory, managers act as 'Agents' of the corporation. The owners set the central objectives of the corporation. Managers are responsible for carrying out these objectives in day-to-day work of the company. In agency theory, the owners are the principals. But principals may not have knowledge or skill for getting the objectives executed. Thus, principal authorizes the mangers to act as 'Agents' and a contract between principal and agent is made. Under the contract of agency, the agent should act in good faith. He should protect the interest of the principal and should remain faithful to the goals.

incurrence of agency cost

Agency presents conflicts of interest because agents might do things which are detrimental to the maximization of shareholders' wealth.

Stakeholder engagement

An ongoing process of relationship building between a business and its stakeholders.

Transnational Corporation

Any corporation that is registered and operate as more than one country at a time. Has its headquarters in one country and operates wholly or partially owned subsidiaries in one or more other countries. The subsidiaries report to the central headquarters. Compared to MNCs, TNCs are much complex firms.

Stakeholders

Any individual or group who can affect or is affected by the actions, decisions, policies, practices, or goals of the organization.

Enhance Investor trust

As individuals and institutions invest capital directly or through intermediary funds, they look to see if well governed corporate boards are there to protect their interests. Investors who are provided with high levels of disclosure and transparency such as relating to data on matters such as pay governance, pay components, performance goals, and the rationale for pay decisions etc. are likely to invest openly in those companies. On Apple's investor relations site, for example, the firm outlines its leadership and governance, including its executive team, its board of directors and the firm's committee charters and governance documents, such as bylaws, stock ownership guidelines etc. The consulting firm McKinsey surveyed and determined that global institutional investors are prepared to pay a premium of up to 40 percent for shares in companies with superior corporate governance practices.

Combating Corruption

Companies that are transparent and have sound system that provide full disclosure of accounting and auditing procedures, allow transparency in all business transactions, provide environment where corruption would certainly fade out. Corporate Governance enables a corporation to -compete more efficiently and prevent fraud and malpractices within the organization.

Reduce Risk of Corporate Crisis and Scancals

Effective Corporate Governance ensures efficient risk mitigation system in place. A transparent and accountable system makes the Board of a company aware of most of the mask risks involved in a* particular strategy, thereby, placing various control systems in place to facilitate the monitoring of the related issues.

Andrew Fastow

Enron CFO, securities fraud - Enron was hitting a downturn, and instead manufactured false records to maintain investors - caused large widespread losses - took down Arthur Andersen (one of big 5) with it due to their compliance in falsifying records

Better enhance to global market

Good corporate governance systems attract investment from global investors, which subsequently leads to greater efficiencies in the financial sector. The relation between corporate governance practices and the increasing international character of investment is very important. International flows of capital enable companies to access financing from a much larger pool of investors. In order to reap the full benefits of the global capital market and attract long-term capital, corporate governance arrangements must be credible, well understood across borders and should adhere to internationally accepted principles. On the other hand, even if corporations do not rely primarily on foreign sources of capital, adherence to good corporate governance practices helps improve the confidence of domestic investors, reduces the cost of capital, enables good functioning of financial markets and ultimately leads to more stable sources of finance.

Duties of Board of Directors

Governing the organization by establishing broad policies and objectives. Selecting, appointing, supporting, and receiving the performance of the chief executive. Ensuring the availability of adequate financial resources. Approving annual budgets. Accounting to the stakeholders the organization's performance.

James D. Wolfensohn (Ninth President World Bank)

He said "Corporate Governance is about promoting corporate fairness, transparency and accountability"

Employees

Hired to perform actual operational work

Transparency

It is vital with respect to corporate governance due to the critical nature of reporting financial and non-financial information.

Disadvantages of TNCs

Leakage-profits taken out of host country Low wages Key jobs to outsiders Branch plants may close Poor work conditions Safety compromised Health jeopardised Air, water pollution

Managers

The individuals hired by the Board to manage the business on a daily basis.

Created by operation of law

The mere agreement of the parties cannot give rise to a corporation

Stewardship Theory

The word 'steward' means a person who manages another's property or estate. The managers and employees are to safeguard the resources of corporation and its property and interest when the owner is absent. This theory thus makes use of the social approach to human nature. The managers should manage the corporation as if it is their own corporation.

managerial defensiveness

This is in relation to issues of takeovers whereby management will employ some tactics to discourage takeovers and buyouts. These tactics may involve asset restructuring via termination of investments, changes in financial structure of the firm such as acquisition of own shares in the open market, presenting bad takeover scenarios to shareholders for them not to approve takeover.

Securities an Exchange Commission (SEC)

U.S. government agency that oversees securities transactions, activities of financial professionals and mutual fund trading to prevent fraud and intentional deception.

Robert Ian (Bob) Tricker

Who introduced the words corporate governance for the first time in his book in 1984

Type of stake - right

a moral or legal right

Stake

an amount of money an interest or a share in an undertaking

Outside directors

are independent from the firm

principal-principal conflicts

conflicts between two classes of principals: controlling shareholders and minority shareholders

right of succession

continuity of existence

Artificial Being

corporation, created by law, own property can sue and be sued

Direct stakeholders

directly involved in the operation of the business

information asymmetries

dynamic between principals and agents; agents such as managers almost always know more about the property, they manage than principals do

top management team (TMT)

group, led by the chief executive officer (CEO), that represents another crucial leg of the corporate governance tripod.

The Board's Governance Responsibilities Principle 3

is on establishing board committees, which should be set up to the extent possible to support the effective performance of the Board's functions. Under this principle, it is recommended that all PLCs have Audit and Corporate Governance Committees. The Corporate Governance Committee can perform the functions of the Nomination and Remuneration Committee. A Board Risk Oversight Committee and Related Party Transaction Committee is recommended also subject to a corporation's size, risk profile and complexity of operations.

The Board's Governance Responsibilities Principle 2

is on establishing clear roles and responsibilities of the board, which should be clearly made known to all directors as well as to shareholders and other stakeholders. This principle provides an overview of the fiduciary duty and responsibility of the Board.

The Board's Governance Responsibilities Principle 4

is on fostering commitment. To show full commitment, the director should devote time and attention to properly and effectively perform his duties. Its Recommendations include a limit of five (5) directorships in publicly-listed company for non-executive directors and prior notice to the incumbent board before accepting a directorship in another company.

Disclosure and Transparency Principle 10

is on increasing focus on non-financial and sustainability reporting. It provides that the company should ensure that the material and reportable non-financial and sustainability issues are disclosed.

Disclosure and Transparency Principle 11

is on promoting a comprehensive and cost-efficient access to relevant information which is crucial for informed decision-making by investors, stakeholders and other interested users.

Cultivating A Synergic Relationship With Shareholders Principle 13

is on promoting shareholder rights and provides that the company should treat all shareholders fairly and equitably, and also recognize, protect and facilitate the exercise of their rights. Among the recommendations to promote shareholders rights are ensuring that the notice of Annual Shareholders' Meeting are sent out at least 28 days before the meeting and establishing an Investor Relations Office to ensure constant engagement with its shareholders.

The Board's Governance Responsibilities Principle 5

is on reinforcing board independence and states that the Board should endeavor to exercise an objective and independent judgment on all corporate affairs. Among the recommendations under this Principle are the following: (1) the Board should have at least three independent directors, or such number as to constitute at least one- third of the Board, whichever is higher; (2) the independent director should serve for a maximum cumulative term of nine years; and (3) there should be a lead independent director if the Chairman of the Board is not independent.

Duties to Stakeholders Principle Principle 14

is on respecting rights of stakeholders and effective redress for violation of stakeholders' rights. Where stakeholders' rights and/or interests are at stake, stakeholders should have the opportunity to obtain effective redress for the violation of their rights. It is recommended that the company identify its various stakeholders, promote cooperation between them and the company, establish clear policies and programs to provide a mechanism on the fair treatment and protection of shareholders and have a process that allows stakeholders to communicate with the company.

The Board's Governance Responsibilities Principle 7

is on strengthening board ethics and provides that members of the board are duty bound to apply high ethical standards, taking into account the interest of all stakeholders. Under this principle, it is recommended that Boards adopt a Code of Business Conduct and Ethics and ensure the proper and efficient implementation and monitoring of compliance with said Code.

Disclosure and Transparency Principle 9

is on strengthening the external auditor's independence and improving audit quality. The recommendation under this principle focus on having a robust process for the appropriate selection of an external auditor and disclosure of the nature of non-audit services performed by the company's external auditor to deal with any potential conflict of interest.

Internal Control System and Risk Management Framework Principle 12

is on strengthening the internal control system and enterprise risk management framework. This principle states that to ensure integrity, transparency and proper governance in the conduct of its affairs, the company should have a strong and effective internal control system and enterprise risk management framework

Governance

is the leadership and direction given to a company so that it can achieve the objectives of its existence.

Indirect stakeholders

not directly involved but affected by the outcomes of the business

agents

persons (such as managers) to whom authority is delegated

principals

persons (such as owners) delegating authority

agency relationship

relationship between shareholders (principals) and professional managers (agents)

Moral rights

rights of individuals or groups that exist separately from governmental or institutional guarantees; usually asserted based on moral principles or rules

Accountability

→ The recognition and assumption of responsibility for the decisions, actions, policies, administration, governance and implementation of programs and plans of the corporation and people involved. Investor relations are essential part of good corporate governance. Investors directly/ indirectly entrust management of the company to create enhanced value for their investment. The company is hence obliged to make timely disclosures on regular basis to all its shareholders in order to maintain good investor relation. Good Corporate Governance practices create the environment whereby Boards cannot ignore their accountability to these stakeholders.