Download - Capiz Chan 2013
1
INTRODUCTION TO CORPORATE GOVERNANCE AND SOCIAL RESPONSIBILITY
Director, Legal Service OfficeDepartment of Transportation & Communications (DOTC)
Mandatory Continuing Legal Education (MCLE)IBP Zambasulta Chapter
28 March 2014
Atty. Gerard L. Chan, LL.M.Atty. Gerard L. Chan, LL.M.
2
Scope of the Lecture
- Brief History of Corporate Governance
- Corporation and the Agency Problem
-Reducing/Eliminating the Agency Problem: Corporate Governance Mechanisms
- Internal Governance Mechanisms
o Ownership Structureo Executive Compensationo Board of Directors and Committeeso Shareholder Activism: Governance by Litigation
3
- External Governance Mechanisms
o Corporate Takeovers as a Governance Mechanismo Gatekeeperso Government
- Corporate Social Responsibility: Stakeholder Approach
o Shareholder vs. Stakeholder Theory of the Firmo 4-Part Model / Dimensions of CSRo CSR as a Corporate Governance Mechanismo Sustainability
4
Brief History of Corporate Governance
- Since the late 1970s corporate governance subject of much debate in the US and other countries
o Efforts to reform corporate governance driven by need and desire of shareholders to exercise
Their rights of corporate ownership and Increase value of their shares (i.e. wealth)
5
- First half of 1990s, corporate governance received considerable press attention
oWave of institutional shareholder activism due to cozy relationships between CEO and Board of Directors
oWave of CEO dismissals by their boards (e.g. IBM, Kodak, Honeywell)
- 1997 Asian Financial Crisis
oPhenomenal record of economic growth between 1987-1996 in the East Asian Region
6
oWith growth came wealth and with wealth came greed, cronyism, structural weaknesses and mismanagement
oEast Asian economies mishandled “easy money” flowing into the region
oPrivate sector borrowed recklessly, financial institutions borrowed heavily offshore with exchange rate impunity
oObscure insider lending practices diminished discipline in the financial systems poor corporate governance
oPoor corporate governance contributed to collapse of many banks and corporate firms.
o Exit of foreign capital after collapse of property assets
7
- Early 2000s massive bankruptcies (and criminal malfeasance) of Enron, WorldCom, Arthur Andersen and Tyco
o Powerful executive teams and autocratic, unaccountable, overpaid CEOs
o Fraudulent accounting practices and poor auditing by auditors
o Increase shareholder and governmental interest in corporate governance
- 2002 Sabarnes-Oxley (SOX) Act passed in the US
- 2003 Combined Code of Corporate Governance (UK)
- 2004 OECD Principles of Corporate Governance (EU)
8
- 2008 Global Financial CrisisoWithdrawal of Glass-Steigall Act (1933) in 1999 which
separated commercial banking activity from investment banking
o Commercial banks became investment banks and investment banks became hedge funds engaging in subprime lending
o End of real estate boom in the US and fall of real estate prices
o Increase in foreclosures and failure of mortgage lenderso Fall of Bear Stearns and Lehman Brothers due to losses
on derivative contracts related to US mortgage industry (“subprime” loans)
o Collapse of financial markets spread internationally
9
Corporation and the Agency ProblemStage 1:
3
Introduction
Company founded (owned and managed) by individual, family, partnership, government or company.
Stage 1:
Stage 2:
Company expands by issuing more equity and debt. New equity holders also get voting rights as to who manages the company.
Equity New Equity Debt
EquityVoting Rights
Voting Rights Voting Rights
10
Stage 2:
4
Introduction
Company founder must now choose between keeping control of the company or allowing the company to be managed by professional managers.
If they keep control there is a potential conflict between the founders and other shareholders.
If they pass management to professional managers there is a potential conflict between owners and managers.
Equity New Equity DebtVoting Rights Voting Rights
11
Agency Theory
- Separation of Ownership & Management Control
o Shareholders purchase stock and OWN the firm and bears the risk
o Professional managers (officers and executives) CONTROL the firm
- Many investors own only a small stake of a large public corporation = No incentive to get involved in monitoring activities of managers
12
Agency Theory
Transparency 10-17
An agency relationship exists when:
Shareholders (Principals)
Firm Owners
Agency RelationshipRisk Bearing Specialist
(Principal)
Managers (Agents)
DecisionMakers
which creates
Managerial Decision-Making Specialist
(Agent)
Hire
Agency Theory
13
Agency Problem
- Why would managers care about the owners?
o Managers being freed from vigilant owners would
only pursue enough profit to keep stockholders satisfied while
pursue self-serving gratification in the form of perks, power, and/or fame
Use firm’s assets to enhance their own lifestyles
• buying a corporate jet using corporate funds and using it for personal trips
14
- Occurs when the desires or goals of the principal and agent conflict; and
- It is difficult or expensive for the principal to verify that the agent has behaved appropriately
15
Reducing/Eliminating the Agency Problem
- Who watches the managers/executives?
o Board of Directors appointed by shareholders to run the corporation on their behalf
o Board of Directors represent shareholders’ interests in running the corporation
o Board of Directors appoint/replace executives who will run the day-to-day operations of the company
oBoard of Directors as the primary monitor of the mangers/executives
16
17
- Solving the Agency Problem o Incentives
“Aligning executive incentives with shareholders desires”
Tie the wealth of the executive to the wealth of the shareholders so that executives and shareholders want the same thing
Board of Directors design compensation contracts to tie management salaries to the firm’s performance
Managers act and behave in a way that is also best for the other shareholders
18
o Monitoring
Monitoring mechanisms for monitoring behaviour of managers
Monitors
• Board of Directors
• Auditors and External Counsel
• Credit Rating Agencies and Securities Analysts
• Government
• Market Forces
• Stockholders
19
- Integrated system of corporate governance
o Incentive contracts = align executive incentives with shareholder interests
oAccountants and auditors = check firm’s financial statements
o Board of Directors= represent shareholderso Investment Banks/Analysts = evaluate and sell securities
to the public
20
oCreditors/Credit Rating Agencies = monitor the firm’s ability to handle debto ShareholdersoCorporate Takeover Markets = good firms take over bad firmsoGovernment = official regulators of the securities industryo Corporate Citizenship = instilling a sense of corporate
social responsibility to the executives
21
Corporate Governance
- A system of checks and balances between the Board, Management and Shareholders to produce an efficiently functioning corporation, ideally geared to produce long-term value
- A relationship among Board of Directors, Top Management and Shareholders in determining the direction and performance of the corporation
- Corporate governance is about minimizing the loss of value that results from the separation of ownership and control
-Deals with the ways in which suppliers of finance assure themselves of getting a return on their investment
22
- Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals
- A governance framework to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources
- Aims to align as nearly as possible the interest of individuals, corporations and society
- A framework of rules, systems and procedures of the corporation that govern the performance of the Board and Management of their respective duties and responsibilities to the stockholders (SEC MC No. 6 Series of 2009)
23
INTERNAL GOVERNANCE MECHANISMS
Ownership Structure
- US companies usually owned by widely-dispersed shareholders and controlled by professional managers (no single party is in control of the company)
- Other countries= ownership concentrated in hands of family groups or government entities (one group is in control and shareholder has no option other than sell)
24
- Identity of controlling owner may have corporate governance implications
o Family-controlled companies may use cross-holdings and pyramidal structures to gain effective control with least cash ownership
oGovernment-owned and widely-held companies more likely to follow the rules.
25
- Presence of large block of non-management related shareholder can increase monitoring of the firm, these blockholders include:
o Governmento Financial institutionso Individualso Other companies
- Large block shareholders have strong incentive to spend time, effort and expense to monitor management closely
26
Executive Compensation
- Tying executive’s wealth to the wealth of shareholders so that everyone shares the same goal
o Stock ownershipo Stock Options
- Types of Executive Compensation
o Base Salary and Bonus
Bases salary of CEO determined through benchmarking method
Cash bonus based on the performance of the firm over the past year
27
o Stock Options
Contracts that allow executives to buy shares at a fixed price (exercise or strike price)
If stock price rises above the strike price, the executive will capture the difference as a profit
Gives executives the incentive to manage the firm in such a way that the stock price increases (increase shareholder value)
28
- Issues in Executive Compensation as Corporate Governance Devise
o Base Salary and Bonus
Accounting-Based Incentives = accounting profits may be manipulated
CEOs may place too much focus on manipulating short-term earnings instead of focusing on long-term earnings and shareholder wealth
29
o Stock Options
Stock option is only affected by price appreciation, CEO might forego increasing dividends and use cash to increase stock price
Stock price likely to increase when CEO accepts risky projects, CEO may pick a higher risk business strategy
Stock price falls below strike price= stock options lose their effectiveness to establish motivation
CEO may manipulate earnings and maximize profits in one target year to time stock price movements to match the time horizons of their stock options
30
Executives only have partial influence on stock prices which are affected by company performance and market forces
• Values of options may depend on circumstances unrelated to the performance of the executive
Stock ownership makes managers more susceptible to market changes which are partially beyond their control
31
o Incentive-based compensation tied to reported earning or stock prices creates temptation for managers to manipulate or even falsify earnings
• Incentive-based compensation not a perfect fix to the agency problem of managers not acting to increase shareholder value
o Incentive systems do not guarantee that managers make
the “right” decisions, but they do increase the likelihood that managers will do the things for which they are rewarded
32
Board of Directors and Committees
Duties of Board of Directors- Setting corporate strategy, overall direction, mission and
vision
- Hiring and firing the CEO and top management
- Controlling, monitoring or supervising top management
- Reviewing and approving the use of resources
- Caring for shareholder interests
- Shareholders’ agent in charge of running the company
33
- Fiduciary duty to conduct activities to enhance profitability and share value
oDuty of loyalty and fair dealing = put shareholders’ interest before their own individual interestsoDuty of care = being informed and making rational decisionsoDuty of supervision = establish rules of ethics and disclosure
- The firm’s most important internal monitor
34
Prentice Hall, 2002 Chapter 2Wheelen/Hunger
3
Corporate Governance
•Setting corporate strategy, overall direction, mission or vision
•Hiring and firing the CEO and top management
•Controlling, monitoring, or supervisingtop management
•Reviewing and approving the use of resources
•Caring for shareholder interests
Board of Directors
35
Prentice Hall, 2002 Chapter 2Wheelen/Hunger
6
Board of Directors Continuum
PhantomRubberStamp
MinimalReview
NominalParticipation
ActiveParticipation Catalyst
Never knowswhat to do, ifanything; nodegree ofinvolvement.
Permits officersto make alldecisions. Itvotes as theofficers recom-mend on actionissues.
Formallyreviewsselected issuesthat officersbring to its
Involved to alimited degreein the perform-ance or reviewof selected keydecisions,indicators, orprograms ofmanagement.
Takes theleading role inestablishingand modifyingthe mission,objectives,strategy, andpolicies. It hasa very activestrategycommittee.
Low(Passive)
High(Active)
Approves,questions, andmakes final de-cisions on mis-sion, strategy,policies, andobjectives. Hasactive boardcommittees.Performs fiscaland manage-ment audits.
DEGREE OF INVOLVEMENT IN STRATEGIC MANAGEMENT
36
Board Size
- Should be an appropriate size = not too big and not too small
- Depending on company size = within range of 5-15 is ideal
- Too small = lack of monitoring
- Too big = problems reaching a consensus for decision making
37
Board Independence
- Inside Directors
o “Management directors”o Officers or executives employed by the corporation
- Outside Directors
o “Non-management directors”oExecutives of other firms but not employed by the corporation
38
- Should have a high proportion of outside/independent directors
- Outside/independent directors should have no personal interest in the company
- Firms with a higher fraction of outside/independent directors presumed to be more effective at monitoring management
- Firms with higher fraction of independent directors more likely to fire the CEO for poor performance
39
- “Outsider” overly simplistic = some outsiders are not truly objective and could be considered insiders = “Related Outsiders”
o Affiliated Directorso Retired Directorso Family Directors
40
- Direct Interlocking Directors
o Two firms share a directoroAn executive of one firm sits on the board of a second firm
- Indirect Interlocking Directors
oTwo firms have directors who also serve on the board of a third firm
41
Chairman of the Board / CEO Position- Chairman of the Board = responsible for overseeing the
Board of Directors
- CEO = responsible for day-to-day operations of the company
- Common in family-controlled corporations for Chairman and CEO to be the same person = concentrate power and reduce monitoring
- Outside director as “lead director” or Chairman to oversee and evaluate management
- Firms that separate the two positions perform better than those that combine the two positions
42
Two-Tier Board Structure
- Some European countries have two-tier board structure
o Management Board = runs the corporationoSupervisory Board = appoints and supervises the management board
controls the firm’s compliance with the law and articles of incorporation and business strategies
- A person cannot belong to both boards
43
Board Committees
- Board of Directors can delegate certain duties to Board Committees to provide increased monitoring on specific issues
- Many actions of committees require Board approval while other committees are given authority to act directly
- Audit Committee
o Responsible for internal audit function and appointment of external auditor
44
- Remuneration Committee
o Responsible for setting appropriate compensation for directors and executives
- Nomination Committee
oResponsible for finding appropriate directors and executives
45
Issues of Board of Directors as a CorporateGovernance Device
- One of the main functions of the Board is to evaluate top management, specially the CEO
o In most firms the Board’s Chairman is also the firm’s CEOoSame person who manages the firm also calls the board meetings and sets the meeting agenda
46
oDirectors receive information about the firm from management, which information is controlled by the Chairman/CEO as well
- Directors do not have a significant vested interest in the firm
o Directors own nominal shares
47
- Directors serve on multiple boards
oNo time to fully understand the major operating and financial decisions of the firm
oMost directors have their own highly demanding full-time jobs
- Directors do not have the expertise to be a board member
o Independence, in and of itself, is not a sufficient quality for being an effective director
48
- Independent directors not truly independent
- Correlation between board quality and firm performance
oIndependent and small boards may be better at monitoring but no clear correlation with better firm performance
49
Shareholder Activism
- Effect of poorly managed firm felt by shareholders through loss of share value
- Shareholders express opinions to affect or influence a firm or they could sell their shares and walk away
- Actions available to shareholders = modes of shareholder activism
o Shareholder Proposals = make proposals to change firm government
50
oDirector Election Contests = vote to replace ineffective director
o Shareholder Lawsuits
- Types of activist shareholders
o Individual shareholderso Large shareholders = owner of a large portion of shares
Have incentive AND power to be effective monitors
o Institutional shareholders
51
Shareholder Proposals
- Shareholders submit proposals which may be voted on during annual meeting
- Difficult and expensive for one shareholder to communicate with other shareholders
o Expense is not a concern for management and the Board who can freely spend corporate funds to lobby against shareholder proposals
52
- Difficult and expensive to garner the votes required
oManagement controls the votes of uncommitted shareholders who return their voting proxy but take no position on shareholder proposals
53
Director Election Contest (Proxy Fights)
- Proxy Fight = Each side (management v. shareholders) lobbies the list of shareholders seeking proxy votes in their favour to replace directors serving on the Board
o Individual shareholders do not have an incentive to become involved in monitoring the corporation.
o Difficult for shareholders to “fire” their Board
54
- Proxy solicitation
oVoting rules favour management = shareholders returning unfilled proxy forms
- Nomination of board members typically handled by a committee of the current board
o Current board picks candidates who will be voted on by shareholders
- Usually only one nominee for each seat
oOnly power of shareholder = not to vote for said candidate
55
Shareholder Lawsuits
- Derivative lawsuit
o Special type of lawsuit brought in the company’s name against the executives and/or directors
o Theory = while the Board is shareholders’ agents, shareholders retain the right to step in and enforce company rules if directors ignore them
o Shareholders bring an action on behalf of the company to force directors and officers to comply with the rules or repay money to the corporation
56
- “Derivative” = shareholders are not the parties suing, money paid goes to the company, not to the shareholders
- Direct suit by shareholders against officers and directors
oTheory = officers and directors are agents who owe a duty to act in shareholders’ best interest and that officers and directors intentionally took action that harmed shareholders
57
Issues in Shareholder Activism as a CorporateGovernance Device
- Investors (including institutional investors) have a speculative or short-run view of the stock markets and make trading and investment decisions based on short term trends
o Limit desire to be activistsoIndividual shareholders do not have an incentive to become involved in monitoring the corporation.
o Difficult for shareholders to “fire” their Board
58
EXTERNAL GOVERNANCE MECHANISMS
Corporate Takeovers
- The purchase of a company that is underperforming relative to industry rivals in order to improve the firm’s strategic competitiveness
- Management’s underperformance noticed by the market and other players will want to take control of the company
- Fear of potential takeover represents a powerful disciplinary mechanism to make sure managers perform and managerial discretion controlled
59
- Potentially powerful way to dismiss (or motivate) managers that might not be looking out for shareholders’ best interest
- Important source of discipline over managerial incompetency and waste
- “Court of last resort” for assets that are not being utilized to their full potential
60
- Mergers and Acquisitions
o Friendly mergers = acquirer and target firm’s management and board agree to the deal
oHostile takeover = target firm management and the board does not want to be acquired and attempt is made to take over control of the target firm
61
- Hostile Takeover (“Disciplinary Takeovers”)
o “Bad” firms acquired by other corporations/individual investors who subsequently impose dramatic changes to improve the acquired firm’s profitability
o Acquirer attempts to buy all the firms’ stock by making a temptingly high offer to shareholders
oOnce controlling block is acquired, acquiring firm uses the voting power to approve a merger and replace the board and management
62
o Acquirer’s goal = take over the firm and turn it around
by cutting fixed or variable costs by improving operational efficiency by getting rid of “bad” managers
o Rationale = acquire an unsuccessful firm by paying a relatively small sum, subsequent net gains significant if turnaround successful
63
o Stock market anticipates subsequent improvements = target firms’ share prices immediately increase when acquisition announced
Acquirers end up paying significant premium for target firms = gains go to the target shareholders
Target firms’ shareholders like their firms taken over but management team and board resist/oppose being acquired
64
Takeover Defenses
- Pre-emptive Takeover Defenses
o Poison-Pill = Any strategy that makes a target firm less attractive immediately after it is taken over
Favorable rights given to its shareholders = target firm shareholders have the right to buy the acquirer’s stock for a deep discount
• Dilute ownership percentage of a potential acquirer
making acquisition difficult and makes the firm less attractive as well
65
Blank-Check Preferred
• Allows the board the right to issue preferred stock at any time with any voting rights
• Allows the board to resist a takeover by putting super-voting preferred stock in friendly hands
Firm’s debt becomes immediately due once taken over
66
o Immediate deep-discount selling of fixed assets once taken over
oGolden Parachute = automatic payment made to managers if their firm gets taken over and acquirer ultimately bears the cost of parachutes
o Supermajority Rules = 2/3 or even 90% of the shareholders have to approve a hand-over
o Staggered Boards = only a fraction of the board can get elected each year making it difficult to gain control of the board in any one particular year
67
- Reactionary Takeover Defenses
oGreenmail = a bribe that prevents someone from pursuing a takeover
oWhite Knight = finding another acquirer who might not fire management after the takeover
oWhite Squire = finding an investor to buy enough shares to have sufficient power to block the acquisition
68
- Issues of Takeovers as a Corporate Governance Device
oWhether takeovers are an effective governance mechanism
Acquirer may have to pay too much for a targetTakeovers could occur for the wrong reason (e.g. empire building, corporate diversification) “Fair” price paid by acquirer for a target still significant
69
o “Corporate raiders” seen as villains = cut jobs to control costs, only cared about making profits
o Whether takeover defences are bad for corporate governance
Takeover defences contributed to the end of disciplinary takeovers
70
Gatekeepers
- Outside professionals who serve the board or investors-Independent monitor tasked to screen out errors and defects and to verify an institution’s compliance with standards and procedures-One of the earliest private enforcement tools for advancing public objectives as screeners for prospective wrongdoers at city gates-Positioned to observe clients’ use of their goods/services and to identify and/or prevent illicit/deceptive use of their goods/services in a cost-effective way-Includes external auditors, external counsel, securities analysts and credit rating agencies
71
External Auditors- Accountants keep track of quantitative financial information of the firm
-Banks, creditors and investors rely on these financial statements to get an accurate picture of the firm’s financial health and value
-External auditors review the financial information and determine whether company’s public financial statements reflect the true level of business
-External auditors must be independent of the firm being audited as their job is to check for accounting fraud which hurts the firm’s shareholders
72
External Counsel- Render legal advice and opinions to the Board and
management
- Represent the corporation in litigation
Securities Analysts- Rate stocks for potential stock investors
-Employed by brokerage and investment banks and make earnings forecasts for a firm to help investors make their own buy/sell decisions
-Review the firm’s operating and financial conditions, immediate and long-term future prospects, effectiveness of its management teams and the general outlook of the industry in which the firm belongs
73
Credit Rating Agencies
- Rate bonds for potential bond investors = opinion on the likelihood that obligations will be repaid
- Credit rating = an opinion on the creditworthiness of a debt issue or issuer
- Creditworthiness = risk that a loan instrument will decline in value as a result of debtor’s failure to satisfy the contractual terms of the borrowing arrangement
74
- Debt as a disciplinary mechanism on the firm’s management
oManagement has to generate enough revenue to cover interest expense otherwise firm goes bankrupt/defaults and loses control to a creditor
oCreditor rights superior to shareholders, debt provides better protection than equity
75
Issues of Gatekeepers as a Corporate Governance Device
- Conflict of Interest
o The corporation is at the same time the auditing/law firm’s client and subject of audit
Auditing/law firm may become less confrontational in order to keep the corporation as a client
76
oAuditing/law firm also provide consulting services to advise companies on how to improve accounting methods and business activities
May reduce the monitoring role of auditors Sarbarnes-Oxley Act prohibits accounting firms from
providing both auditing and consulting services to the same company
77
oAnalysts want to gather good information through access to the firm’s management team which requires good relationship
Difficult to give firm a bad rating even if firm’s prospects are poor
Difficult for analysts to give objective evaluation
oAnalysts make slightly conservative earnings estimates in response to what management wants/expects
CEO happy and willing to grant future access to the analyst
Company will either make or beat the estimate and still be considered a good company
78
o Companies pay to have their bonds rated
Threat that client takes the business to a competitor if they do not receive the rating that they want
oCredit rating agencies obtain private information that other monitors and analysts might not receive
They may follow the lead of company executives instead of independently validating information and making conclusions based on their own analysis
79
Government
Codes of Corporate Governance
- Securities and Exchange Commission
oRevised Code of Corporate Governance (SEC MC No. 6, Series of 2009)
- Bangko Sentral ng Pilipinas
oBSP Circulars on Corporate Governance (Circular No. 283, Series of 2001)
80
- Insurance Commission
oCorporate Governance Principles and Leading Practices (Circular No. 31-2005)
- Governance Commission for GOCCs
o Draft Code of Corporate Governance for GOCCs
81
Revised Code of Corporate Governance (SEC MC No. 6, Series of 2009)
- Board of Directors
o Regular Directors = 5-15oIndependent Directors = at least 2 for listed/registered corporationso A combination of executive and non-executive directors
82
- Chairman and CEO
o Roles of Chair and CEO should, as much as practicable, be separate to foster an appropriate balance of power, increased accountability and better capacity for independent decision-making by the Board
o Clear delineation of functions should be made between the Chair and CEO upon their election
oIf positions are unified, proper checks and balances should be laid down to ensure that the Board gets the benefit of independent views and perspectives
83
- Term limits for Independent Directors
o Only 5 companies of a conglomerate (parent, subsidiary or associate)
o Serve only for 5 consecutive years (6 months = 1 year)o Cooling off period of 2 yearso Serve for another 5 consecutive years in the
conglomerate
- Disqualifications
o Temporary = may be remedied within 60 business days from such disqualification, otherwise becomes permanent disqualification
Refusal to comply with disclosure requirements of the SRC and its IRR
84
Absence in more than 50% of all meetingsDismissal or termination for cause in a covered corporation until clearedIndependent directors holds more than 2% of the subscribed capital stock of the corporation, subsidiary or affiliateAny judgment/order cited under permanent disqualification has not yet become final
o Permanent
- Migration from Regular to Independent Director
o 2-year cooling off periodo1 year cooling off = for emeritus/ex-officio officers and directors
85
- Board Committees
o Audit Committee
At least 3 directors preferably with accounting and finance background
One of whom shall be an Independent Director and another with audit background
o Nominations Committee
At least 3 members, one of whom an Independent Director
86
Review and evaluates qualifications of director-nominees and appointments
Assess effectiveness of Board’s processes and procedures in the election and replacement of directors
o Compensation and Remuneration Committee
At least 3 members one of whom an Independent Director
Establish formal and transparent procedure for developing remuneration policy to ensure consistency with corporation’s culture, strategy and business environment
87
- Corporate Secretary
o Filipino and resident of the Philippineso An officer of the corporation
- Compliance Officer
o Reports directly to the ChairmanoMonitors compliance with the Code, rules and regulations of regulatory agencies
88
o Reports violations to the Board and recommend appropriate disciplinary actions
o Recommends measures to prevent repetition of violation
o Appears before the SEC if summoned regarding compliance with the Code
o Issues Certificate of Compliance with the Codeo Explains reasons for deviations with the Code
89
- Stockholders’ Rights and Protection of Minority Stockholders’ Interests
o Board of Director shall respect the rights of stockholders under the Corporation Code
Right to vote Pre-emptive right Inspect corporate books and accounts Right to information Right to dividends Appraisal right
90
- Disclosure and Transparency
o Disclose material information regarding
Earnings results Acquisition and disposition of assets Off balance sheet transactions Related party transactions
Direct and indirect remuneration of directors and management
91
- Commitment to Good Corporate Governance
o Corporate Governance Manual = 180 days from effectivity of the Code
oAvailable for inspection by shareholders at reasonable hours on business days
- Administrative Sanctions
o Fine of not more than Php200K for every year that a covered corporation violates the provisions of the Code
92
oWithout prejudice to other sanctions that the SEC may be authorized to impose under the law
o Any violation of the SRC punishable by a specific penalty shall be separately assessed
93
Issues on Codes as a Corporate Governance Device
Soft-Law Approach
- Comply or explain
Corporate governance by box ticking
- Corporate governance reporting as a ‘box-ticking’ exercise
- Compliance vs. Commitment
- Increased compliance cost
94
Corporate Social Responsibility
- Should strategic decision makers be responsible only to shareholders or do they have broader responsibilities?
- “Who” are the firms responsible to?
o Traditional View / Shareholder Model (Milton Friedman)
Founded on classic economic preceptsMaximization of wealth for shareholders, investors and owners Increase shareholder valueThe Social Responsibility of Business is to Increase its Profits
95
• “There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud”
By taking on the burden of social cost, businesses become less efficient
Firms are responsible only to their shareholders
96
7
97
o Modern View / Stakeholder Model (Archie Carroll)
Companies have responsibilities to groups other than to shareholders
Broader view of the corporation’s purpose Satisfying concerns of a broader variety of
stakeholders Optimization of the sustainable economic wealth of all
stakeholders Corporate Social Responsibility
98
Stakeholders of the Corporation- Individuals or groups who depend on the corporation to
fulfil their own goals and upon whom the corporation in turn depends
- Those who have a stake or claim in some aspect of a company’s products, operations, markets, industry and outcomes
- Provide tangible and intangible resources critical to a firm’s success
o Employeeso Customers
99
o Supplierso Investorso Communitieso Governmento Environment
- Primary Stakeholders = continued association is absolutely necessary for a firm’s survival
- Secondary Stakeholders = do not typically engage in transactions with the company and are not essential for the firm’s survivalo Mediao Trade Associations
o Special Interest Groups
100
The Stakeholder Interaction Model
101
FIRM
MANAGERSOWNERS
BOARD OF DIRECTORS
EMPLOYEES
LAWCAPITAL MARKETS
PRODUCTMARKETS
LABORMARKETS
SUPPLIERS
CONSUMERS
102
Exploring Corporate Strategy 8e, © Pearson Education 2008 4-17
Exhibit 4.7 Stakeholders of a Large Organisation
103
Corporate Social Responsibility (CSR)
- Duty of a corporation to create wealth in ways that avoid harm to, protect and enhance societal assets
- Corporation’s obligation to maximize its positive impact on stakeholders and minimize its negative impact
- Companies have a social obligation to operate ethically, socially and environmentally responsible ways
- The extent to which businesses strategically meet their four responsibilities = economic, legal ethical and philanthropic
104
Four-Part Model of CSR / Four Dimensions of Corporate Citizenship
Economic
- First and foremost social responsibility of a firm
-Produce goods & services at a profit so that the firm may repay creditors and shareholders
- Strong sustained economic performance
- Maximizing shareholder wealth / value
- “Must Do”
105
Legal
- Society expects firms to operate their business within the legal framework
- Corporation obeys laws and regulations
- Rigorous (strict) compliance (conformity)
- Abiding by all laws and government regulations
- “Have to Do”
106
Ethical
- Responsibilities over and above ones codified in laws and are in line with societal norms and customs
- Expected, though not required, by society
- Follow generally held beliefs about how one should act in society
- Following standard of acceptable behaviour as judged by stakeholders
- “Should Do”
107
Philanthropic
- Purely voluntary obligations assumed by the firm
-Voluntary contributions that advance reputation and stakeholder commitment
- “Giving back” to society
- “Might Do”
108
The Steps of Social Responsibility
109
Prentice Hall, 2002 Chapter 2Wheelen/Hunger
29
Social Responsibility
110
CSR as a Corporate Governance Device
- Higher-priority responsibilities (legal/ethical) cannot be offset through greater participation in lower-priority responsibilities (corporate giving)
- Corporate citizenship may include charity or philanthropy but focuses more on engagement with stakeholders to achieve mutual goals (legal and ethical goals)
- CSR associated with:
o Insulation from activist actionso Establish stakeholder confidence in management
111
o Increased employee commitmento Enhance firm reputationo Greater customer loyaltyo Increased profits
- Corporate Governance and Social Responsibility are two sides of the same coin
112
Issues on CSR as a Corporate Governance Device
- Measuring firm’s CSR performance
oNo accounting measure such as earnings and stock prices regarding effect on stakeholder welfare
- Greenwashing
o CSR = superficial window-dressingo Regarded as charity and image-building exercise
113
- Integration of CSR into company strategy
o Delinked from mainstream activities of the firmo In good times = CSR activities abound
o In bad times = no CSR activities
114
Sustainability
- Integration of economic, social and environmental aspects to meet the needs of the present without compromising the ability of future generations to meet their own needs
- Credible business practices as integral part of sustainable business
o Avoiding exploitation of labouro Accounting manipulation
115
- Triple Bottom Line Framework of Sustainability
o Economic
Maintain shareholder value
o Social
Community well-being
o Environmental
Environmental protection
116
Triple Bottom Line Framework
Social Environment
Economic SphereMaximise
shareholder valueMarket shareCurrent profits
Environment sphereEco-friendly productsRecycling wasteClimate protectionEmissions control
Social sphere Community well-
being Regional
development Local issues
Economic
All organisations have three dimensionsto their strategies and operations
How to move the three spheres closer? How to align Social andEnvironmental spheres with the Economic sphere?
117
Thank YouThank You