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Chapter 1

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Governance, Risk Management and Internal Control
2BSA -ACC114A
COURSE CODE: ACC114A
COURSE TITLE: Governance, Risk Management and Internal Control
COURSE DESCRIPTION:
A. Corporate Governance:
Corporate governance offers a comprehensive, interdisciplinary approach to the management and
control of companies. This unit describes corporate governance and the parties involved in it. It
discusses the structure that specifies the distribution of rights and responsibilities among different
participants in a corporation It also spells out the rules and procedures for making decisions on
corporate affairs.
PRELIM
UNIT 1 CORPORATE GOVERNANCE
Chapter 1: Introduction to Corporate Governance
Learning Objectives:
1.
2.
3.
4.
5.
6.
Topics:
1.1.
1.2.
1.3.
1.4.
1.5.
1.6.
1.7.
Describe what governance involves.
Enumerate the different contexts in which governance can be applied.
Name and explain the characteristics of good governance.
Explain the meaning, purpose and objectives of corporate governance.
Know and describe the principles of effective corporate governance.
Understand how the principles of good corporate governance can be applied.
What is Governance?
Characteristics of Good Governance
Corporate Governance: An Overview
Purpose of Corporate Governance
Objectives of Corporate Governance
Basic Principles of Effective Corporate Governance
Illustrative Application of the Basic Principles of Corporate Governance and Best Practice
Recommendation
1.1. What is Governance?
•
•
•
•
Generally, governance refers to a process whereby elements in society wield power, authority and
influence and enact policies and decisions concerning public life and social upliftment.
It comprises all the processes of governing – whether undertaken by the government of a country, by a
market or by a network – over a social system and whether through the laws, norms, power or language of
an organized society.
Governance therefore means the process of decision -making and the process by which decisions are
implemented (or not implemented) through the exercise of power or authority by leaders of the country and/
or organizations.
Governance can be used in several contexts such as corporate governance, international governance,
national governance and local governance.
1.2. Characteristics of Good Governance
• Whatever context good governance is used, the following major characteristics should be
present:
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2BSA -ACC114A
These Characteristics are briefly described as follows:
A. Participation
•
Participation by both men and women is a key cornerstone of good governance.
•
Participation could be either direct or through legitimate institutions or representatives.
•
It is important to point out that representative democracy does not necessarily mean that the
concern of the most vulnerable in society would not be taken into consideration in decision
making.
•
Participation needs to be informed and organized.
•
This means freedom of association and expression on one hand and an organized civil society on
the other hand.
B. Rule of Law
•
Good governance requires fair legal frameworks that are enforced impartially.
•
It also requires full protection of human rights, particularly those of minorities.
•
Impartial enforcement of laws requires an independent judiciary and impartial and incorruptible
police force.
C. Transparency
•
Transparency means that the decision taken and their enforcement are done in a manner that
follows rules and regulations.
•
It means that information is freely available and directly accessible to those who will be affected
by such decisions and their enforcement.
•
It also means that enough information is provided and that it is provided in easily understandable
forms and media.
D. Responsiveness
•
Good governance requires that institutions and processes try to serve the needs of all
stakeholders within a reasonable timeframe.
E. Consensus Oriented
•
Good governance requires mediation of the different interests in society to reach a broad
consensus on what is in the best interest of the whole community and how this can be achieved.
•
It also requires a broad and long-term perspective on what is needed for sustainable human
development and how to achieve the goals of such development.
•
This can only result from an understanding of the historical, cultural and social contexts of a given
society or community
F. Equity and Inclusiveness
•
Ensures that all its members feel that they have a stake in it and do not feel excluded from the
mainstream of society.
•
This requires all groups, but particularly the most vulnerable, have opportunities to improve or
maintain their well being.
G. Effectiveness & Efficiency
•
Good governance means that processes and institutions produce results that meet the need of
society while making the best use of the resources at their disposal.
•
The concept of efficiency in the context good governance also covers the sustainable use of
natural resources and the protection of the environment.
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H. Accountability
•
Accountability is a key requirement of good governance.
•
Not only governmental institution but also the private sector and civil society organizations must be
accountable to the public and to their institutional stakeholders.
•
Who is accountable to whom varies depending on whether decisions or actions taken are internal
or external to an organization or institution.
•
In general, an organization or an institution is accountable to those who will be affected by its
decisions or actions.
•
Accountability cannot be enforced without transparency and the rule of law.
1.3. Corporate Governance: An Overview
•
•
•
•
•
•
Corporate Governance is defined as the system of rules, practices and processes by which business
corporations are directed and controlled.
It basically involves balancing the interests of a company’s many stakeholders, such as shareholders,
management, customers, suppliers, financiers, government and the community.
Corporate governance is a topic that has received growing attention in the public in recent years as
policy makers and others become more aware of the contribution good corporate governance makes to
financial market stability and economic growth.
Good corporate governance is all about controlling one’s business and so is relevant, and indeed vital,
for all organizations, whatever size or structure.
The corporate governance structure specifies the distribution of rights and responsibilities among
different participants in the corporation, such as the board, managers, shareholders, and other
stakeholders, and spells out the rules and procedures for making decisions on corporate affairs.
By doing this, it also provides the structure through which the objectives are set and the means of
attaining those objectives and monitoring performance.
1.4. Purpose of Corporate Governance
•
•
•
The purpose of corporate governance is to facilitate, entrepreneurial and prudent management that
can deliver long-term success of the company.
In simple terms, the fundamental aim of corporate governance is to enhance shareholders’ value and
protect the interests of other stakeholders by improving the corporate performance and accountability.
It is also about what the board of directors of a company does, how it sets the values of the business
firm.
1.5. Objectives of Corporate Governance
The following are the basic objectives of corporate governance.
1) Fair and Equitable Treatment of Shareholders
A corporate governance structure ensures equitable and fair treatment of all shareholders of
the company. In some organizations, a group of high net-worth individual and institutions
who have a substantial proportion of their portfolio invested in the company, remain active
through occupation of top-level positions that enable them to guard their interest. However,
all shareholders deserve equitable treatment and this equity is safeguarded by a good
governance structure in any organization.
2) Self-Assessment
Corporate governance enables firm to assess their behavior and actions before they are
scrutinized by regulatory agencies. Business establishments with a strong corporate
governance system are better able to limit exposure to regulatory risk and fines. An active
and independent board can successfully point out deficiencies or loopholes in the company
operations and help solve issues internally on timely basis.
3) Increase Shareholders’ Wealth
Another corporate governance’s main objective is to protect the long-term interests of the
shareholders. Firms with strong corporate governance structure are seen to have higher
valuation attached to their shares by businessmen. This only reflects the positive perception
that good governance induces potential investors to decide to invest in a company.
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4) Transparency and Full Disclosure
Good corporate governance aims at ensuring a higher degree of transparency in an
organization by encouraging full disclosure of transactions in the company accounts.
1.6. Basic Principles of Effective Corporate Governance
Effective corporate governance is transparent, protects the rights of shareholders and includes
both strategic and operational risk management. It is concerned in both the long-term earning
potential as well as actual short-term earnings and holds directors accountable for their
stewardship of the business.
The basic principles of effective corporate governance are threefold as presented below:
Transparency and Full Disclosure
Is the board telling us what is going on?
Accountability
Is the board taking responsibility?
Good and Effective Governance
Corporate Control
Is the board doing the right thing?
Positive answers to the following questions indicate a firm’s conformance and compliance with the basic
principles of good corporate governance:
A. Transparency and Full Disclosure
•
Does the board meet the information needs of investment communities?
•
Does it safeguard integrity in financial reporting?
•
Does the board have sound disclosure policies and practices?
o Does it make timely and balanced disclosure?
o Can an outsider meaningfully analyze the organization’s actions and performance?
B. Accountability
•
Does the board clarify its role and that of management?
o Does it lay solid foundations for management oversight?
o Does the composition mix of board membership ensure an appropriate range and
mix of expertise, diversity, knowledge and added value?
o Is the organization’s senior official committed to widely accepted standards of correct
and proper behavior?
C. Corporate Control
•
Has the board bult long-term sustainable growth in shareholders’ value for the corporation?
•
Does it create an environment to take risk?
o Does it encourage enhanced performance?
o Does it recognize and manage risk?
o Does it renumerate fairly and responsibly?
o Does it recognize the legitimate interests of stakeholders?
o Are conflicts of interest avoided such that the organization’s best interests prevail at
all times?
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1.7. Illustrative Application
Recommendations
of
the
Basic Principles
Principles of Good Governance
1. A company should lay solid foundation for
management and oversight. It should
recognize and publish the respective roles
and
responsibilities
of
board
and
management .
of Corporate
Governance
and
Best
Practice
Best Practice Recommendations
1-a. Formalize and disclose the functions reserved to
the board and those delegated to management .
2.
Structure the board to add value. Have a
board of an effective composition, size and
commitment to adequately discharge its
responsibilities and duties.
2-a. A board should have independent directors.
2-b. The roles of chairperson and chief executive
officer should not be exercised by the same
individual.
2-c. The board should establish a nomination
committee.
3.
Promote ethical and responsible decisionmaking. Actively promote ethical and
responsible decision-making.
3-a. Establish a code of conduct to guide the
directors, the chief executive officer (or equivalent),
the chief financial officer (or equivalent) and any other
key executives as to:
•
The practice necessary to maintain
confidence in the company’s integrity; and
•
The responsibility and accountability of
individuals for reporting and investigating
reports of unethical practice.
3-b. Disclose the policy concerning trading in
company securities by directors, officers and
employees.
4.
Safeguard integrity in financial reporting.
Have a structure to independently verify and
safeguard the integrity of the company’s
financial reporting.
4.a. Require the chief executive of (or equivalent) and
the chief financial officer (or equivalent ) to state in
writing to the board that the company’s financial
reports present a true and fair view, in all material
respects, of the company’s financial condition and
operational results and are in accordance with
relevant accounting standards.
4-b. The board should establish an audit committee.
4-c. Structure the audit committee so that it consists
of:
•
Only non-executive or independent directors.
•
An independent chairperson, who is not
chairperson of the board: and
•
At least three (3) members.
5.
Make timely and balanced disclosure.
Promote timely and balanced disclosure of
all material concerning the company.
5-a. Establish written policies and procedures
designed to ensure compliance with IFRS.
5-b.
Listing Rule disclosure requirements and to
ensure accountability at a senior management level
for compliance.
6.
Respect the rights of shareholders and
facilitate the effective exercise of those
rights.
6-a. Design and disclose communications strategy to
promote effective communication with shareholders
and encourage effective participation at general
meetings.
6-b. Request the external auditor to attend the annual
general meeting and be available to answer
shareholder questions about the audit.
7.
Recognize and manage risk. Establish
7-a. The board or appropriation committee should
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2BSA -ACC114A
sound system of risk oversight
management and internal control.
and
establish policies on risk oversight and management .
7-b. The chief executive officer (or equivalent) and the
chief financial officer (or equivalent) should state to
the board in writing that:
•
The statement given in accordance with
best practice recommendation 4-a (the
integrity of financial statements) is founded
on a sound system of risk management and
internal compliance and control which
implements the policies adopted by the
board; and
•
The company’s risk management and
internal compliance and control system is
operating efficiently in all material respects.
8.
Encourage enhanced performance. Fairly
review and actively encourage enhanced
board and management effectiveness.
8-a. Disclose the process for performance evaluation
of the board, its committees and individual directors,
and key executives.
9.
Renumerate fairly and responsibly. Ensure
that the level and composition of
renumeration is sufficient and reasonable
and that its relationship to corporate and
individual performance is defined.
9-a. Provide disclosure in relation to the company’s
renumeration policies to enable investors understand:
•
The costs and benefits of those policies; and
•
The link between renumeration paid to
directors and key executives and corporate
performance.
9-b. The board should establish a renumeration
committee.
9-c. Clearly distinguish the structure of non-executive
director’s renumeration from that of executives.
9-d. Ensure that payment of equity-based executive
remuneration is made in accordance with thresholds
set in plans approved by shareholders.
10. Recognize the legitimate interests of
stakeholders. Recognize legal and other
obligations to all legitimate stakeholders.
10-a. Establish and disclose a code of conduct to
guide compliance with legal and other obligations to
legitimate stakeholders.
Reference : Book of Ma. Elenita Balatbat Cabrera and Gilbert Anthony B. Cabrera
Corporate Governance, Business Ethics, Risk Management and Internal Control 2019-2020 Edition.
Of correct
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