MNGT 2

Good Governance and Social Responsibility

Credit Hours: 3

Instructor Information
Instructor: Angelo Paolo C. Acosta
Email: angelopaolo.acosta@gmail.com
Phone: 09750192882
Institution: Core Gateway College Inc.
© 2020 A.C. ACOSTA
Copyright Notice: This course pack may be used only for the CGCI educational purposes. It
includes extracts of works from outside sources which are duly cited and acknowledged on this
material. You may not copy or distribute any part of this course pack to any other person. Where
this course pack is provided to you in an electronic format you may only print from it for your
own use. You may not make a further copy for any other purpose. All rights reserved.

Course Description

Corporate Governance and Social Responsibility examines how corporations respond to ethical
dilemmas whilst taking stock of the needs of their various stakeholders and the expectations of
national governments. This requires an understanding of the social responsibilities of business
in a global environment. The roles of government regulation and community collaboration, as
they impact on businesses operating across cultures, are also explored and current reforms of
corporate governance are analyzed.

Course Scope

The content of this course includes, but is not limited, to the following topics:
1. ETHICS AND BUSINESS
2. NORMATIVE ETHICAL THEORIES IN BUSINESS DECISION-MAKING
3. GOOD GOVERNANCE AND CODE OF ETHICS
4. CORPORATE GOVERNANCE AND ETHICS
5. CORPORATE SOCIAL RESPONSIBILITY AND ETHICS
6. ETHICAL ISSUES AND PROBLEMS IN THE BUSINESS WORLD
7. DEVELOPING GOOD WORK ETHICS
 Virtual Class Schedule

Every Wednesdays 8:00a.m.-12:00p.m., 1:00-5:00 p.m. (August-December 2020)

Course Materials

Required textbooks for the course:

C. Biore, R. Gonzales, J. Caparas, N. Burgos, W. Ballada (2019). Good Governance & Social
Responsibility.

Evaluation Procedures

Forum
Please join the forums each week. Students must post a reply and comment on uploaded topics
on Edmodo class. The Forums are for student interactions in order to fully participate in the
discussions. Students should demonstrate their own knowledge in the forums and avoid copying
and pasting from websites.
Assignments
Throughout the semester you will write responses to questions. These responses will involve
analyses of readings, comparing and contrasting the views of authors, and critique of arguments
presented by the readings or the class. Questions will be posted on Edmodo class. Papers will
be graded for accuracy of interpretation, rigor of argument, and clarity of expression.
All writing assignments, unless otherwise noted, should be: 1) composed as Microsoft word
documents, 2) written using 12pt Times New Roman font, 3) double-spaced, 4) submitted
electronically. 10 points will be deducted for every day an assignment is late. Be sure to edit,
proofread, use spell check, double check your grammar and correct all errors before submitting
your weekly writing assignments. Title your work with your full last name, given, middle initial,
class, then assignment/activity number or name.
The success of this course depends on your ability to read the assigned readings closely, think
carefully about the points raised or ignored by authors, and bring to the group your questions
and concerns. Prior to each new week in the class, please review announcements and lessons.
Having prepared and read the required readings prior to class ensures your productive
participation. We should work to achieve conversational exchanges with each other through
Forums and emails, constructively challenging each other to think broadly and critically about
ideas or assertions posed by the readings.
In all participation and assignments, I am looking for evidence of:
• demonstration of substantial knowledge and higher order thinking and analytic skills and
application of facts, concepts, terms, and processes learned/read/discussed;
• critical contemplation, e.g., "grapple" with issues and topics;
• appropriate use of knowledge learned;
• imaginative thinking and responses to challenges/problems/issues;
• exploring underlying assumptions about education and schooling;
• clarity of expression and logical connection among ideas expressed; writing that reflects
precise and concise thinking; excellent grammar, and spelling.
GRADING SYSTEM

Examination = 40%
Quizzes = 30%
Projects = 20%
Attendance on virtual lectures = 10 %
TOTAL =100%

Policies

Please see the Student Handbook for full reference on all College policies.

Citation and Reference Style

Attention Please: Students will follow the American Psychological Association (APA) manual
(6th edition) as the sole citation and reference style to be used in written works as part of
coursework. See http://www.apastyle.org/ and http://www.apastyle.org/learn/tutorials/basics-
tutorial.aspx

Websites: Do not quote or paraphrase published sources, including assigned readings and Web
based sources, without explicit reference to the original work. Credit the source using APA style.
Cutting and pasting from a website without citing the electronic source is plagiarism, as is taking
phrases, sentences and/or paragraphs from textbooks without referencing the source.

Documents/Files: When uploading assignments, make sure they are in Word doc format. Make
sure to properly format papers (or PowerPoint) with a cover sheet. Use black 12, Arial.

Plagiarism

Specifically, all students in this course are to follow these guidelines:

 Do not quote or paraphrase published sources, including assigned readings and Web-
based sources, without explicit reference to the original work. Cutting and pasting from a
website without citing the electronic source is plagiarism, as is taking phrases,
sentences and/or paragraphs from textbooks without referencing the source.
  Do not insert parts of class lectures, online modules, or tutorials, including examples,
into your own work, without permission or citation. These are published by the
instructors, who properly cite the sources of any externally published sources.
 Do not insert parts of previous students’ work or current students’ work into your own
work, without permission and/or citation.

You are expected to use your own words to demonstrate your understanding of the content of
this course. While it is appropriate to reference experts and outside resources, students should
do so judiciously to avoid simply summarizing and paraphrasing what all other sources have
stated about a given topic. Remember to always cite any work that is not your own intellectual
property. Failure to do so may result in failing an assignment and/or course; and ultimately may
result in being removed from the program due to a violation of professional dispositions.

Late Assignments
Students are expected to submit classroom assignments by the posted due date and to
complete the course according to the published class schedule. As adults, students, and
working professionals, I understand you must manage competing demands on your time.
Should you need additional time to complete an assignment, please contact me before the due
date so we can discuss the situation and determine an acceptable resolution. Routine
submission of late assignments is unacceptable and may result in points deducted from your
final course grade.

Netiquette
Forums on the Internet can occasionally degenerate into needless insults and “flaming.” Such
activity and the loss of good manners are not acceptable in an educational setting – basic
academic rules of good behavior and proper “Netiquette” must persist. Remember that you are
in a place for the rewards and excitement of learning which does not include indecent or
personal attacks or student attempts to stifle the Forum of others.

 Technology Limitations: While you should feel free to explore the full-range of creative
composition in your formal papers, keep e-mail layouts simple.
 Humor Note: Despite the best of intentions, jokes and especially satire can easily get
lost or taken seriously. If you feel the need for humor, you may wish to add “emoticons”
to help alert your readers: ☺

Disclaimer Statement

Course content may vary from the outline to meet the needs of this particular group.
Assessment Rubrics (Jones, n.d.)
Criterion\Level Unacceptable Reflective novice Aware Reflective
practitioner practitioner
10-14pts 15-19pts 25pts
20-24pts
Clarity Language is There are Minor, infrequent The language is
unclear and frequent lapses in lapses in clarity clear and
confusing clarity and and accuracy. expressive. The
throughout. accuracy reader can create
Concepts are a mental picture of
either not the situation being
discussed or are described.
presented Abstract concepts
inaccurately. are explained
accurately.
Explanation of
concepts makes
sense to an
uninformed
reader.
Relevance Most of the Student makes The learning The learning
reflection is attempts to experience being experience being
irrelevant to demonstrate reflected upon is reflected upon is
student and/or relevance, but the relevant and relevant and
course learning relevance is meaningful to meaningful to
goals. unclear to the student and student and
reader. course learning course learning
goals. goals.
Analysis Reflection does Student makes The reflection The reflection
not move beyond attempts at demonstrates moves beyond
description of the applying the student attempts simple description
learning learning to analyze the of the experience
experience(s). experience to experience but to an analysis of
understanding of analysis lacks how the
self, others, depth. experience
and/or course contributed to
concepts but fails student
to demonstrate understanding of
depth of analysis. self, others,
and/or course
concepts.
Interconnections No attempt to There is little to no The reflection The reflection
demonstrate attempt to demonstrates demonstrates
connections to demonstrate connections connections
previous learning connections between the between the
or experience. between the experience and experience and
learning material from material from
experience and other courses; other courses;
previous other past experience; past experience;
personal and/or and/or personal and/or personal
 learning goals. goals.
experiences.

Course Outline

Week Topic(s) Learning Outcome(s) Reading(s) Assignments

Corporation and Define corporation. Identify and Chapter 1 Activity 1
Corporate elaborate on the attributes of a
Governance corporation.

Enumerate the different stakeholders of

a corporation. Distinguish between
multinational and transnational
corporation.

Define corporate governance. Explain

the fundamental principles of corporate
governance.
Organizations: Understand and explain organizational Chapter 2 Activity 2
Their Political, theory, structure, design,
Structural and centralization/decentralization and
Economic levels.
Environment
Discuss the implications of government
regulation. Enumerate the advantages
and disadvantages of government
planned economic activity.

Explain the meaning of corporate social

responsibility and ethical behavior of
enterprise.
Internal and Show the legal framework that effected Chapter 3 Activity 3
External corporate governance locally.
Institutions and
Influences of Enumerate and explain the internal
Corporate foundation of corporate governance.
Governance
Explain the functions, duties, and
responsibilities, of board of directors,
chief executive officer, chief finance
officer and shareholders.

Agency Enumerate and explain the principal- Chapter 4 Activity 4

problems and agent specific issues.
accountability of
corporate Enumerate and elaborate the identified
managers and agency problems in corporate
shareholders governance.

Show the important roles the external

bodies serve to improve corporate
 governance.

Explain the concept of corporate social

Corporate Social responsibility. Reason out on the need of
Responsibility a CSR initiative. Chapter 5 Activity 5

Enumerate and discuss the ethical

decision-making process. Describe the
issues considered in social screening of
investments.

Week Topic(s) Learning Outcome(s) Reading(s) Assignments

Corporate Social Understand global corporate social Chapter 6 Activity 6
Responsibility responsibility and relate how CSR
and Corruption affects developing countries.
in Global
Context
Enumerate and discuss the CSR
issues in international business.

Understand and explain the impact

of corruption involving large
multinational companies.
 Lessons
Chapter 1: Corporation and Corporate Governance

WHAT IS A CORPORATION

According to Corporation Code of the Philippines, “A corporation is an artificial being created by

operation of law, having the right of succession and the powers, attributes and properties
expressly authorized by law or incident to its existence.”

Attributes of a corporation:

 Artificial Being
This simply means that a corporation is a non-human entity whose personality is separate and
distinct from its owners. Corporation has some of the rights that a natural person possesses.
Corporation can sue and sued in court. It can own and sell properties.

 Created by Operation of Law

This means corporation will exist through a permit from the government. Corporation cannot be
created by a mere agreement or self-declaration of the owners. The activities of a corporation
are regulated strictly and it has to follow the rules and regulations given by the government.

 Right of Succession
A corporation can continue to operate even in the death, incapacity or insolvency of any
stockholder or member. The corporation will not be closed even if the ownership of the
corporation will be transferred.

 Powers, Attributes and Properties

A corporation has the authority to do activities within the purpose(s) of its creation, it has its own
attributes, and it operates based on what has been expressly provided in the permission
including those that are considered incident to its existence as a corporation.

STAKEHOLDERS OF A CORPORATION

According to Investopedia,” A stakeholder is a party that has an interest in a company and can

either affect or be affected by the business. The primary stakeholders in a typical corporation
are its investors, employees, customers and suppliers. However, the modern theory of the idea
goes beyond this original notion to include additional stakeholders such as a community,
government or trade association.

Management
 This refers to the party given the authority to implement the politics as determined by the
Board in directing the course/business activities of the corporation (Security and Exchange
Commission (SEC), Code of Corporate Governance). This is the group of people composed of
decision makers from the top to the bottom of the corporate hierarchy.

Creditors
This refers to the party who lend to the corporation goods, services or money. Creditors
may gain from corporation by way of interest for money loaned or profit for goods sold or
services rendered. Whenever there is a liquidation the first priority of payment belongs to the
outside creditors.

Shareholders
This refers to people who invest their capital in the corporation. A shareholder, also
referred to as a stockholder, is a person, company, or institution that owns at least one share of
a company’s stock, which is known as equity. Because shareholders are essentially owners in a
company, they reap the benefits of a business’ success. These rewards come in the form of
increased stock valuations, or as financial profits distributed as dividends. Conversely, when a
company loses money, the share price invariably drops, which can cause shareholders to lose
money, or suffer declines in their portfolios’ values.

Employees
These are the people who contribute their skills, abilities, and ingenuity to the
corporation. They are the ones who invested their future in the company with full trust and
confidence that the entity would make them secure.

Clients
The party considered to be the very reason for the existence of the corporation. They are
the buyers of the corporation’s product or services for final consumption, enjoyment or maybe
for the use in the production of another goods.

Government
The government is the body of persons that constitutes the governing authority of a
political unit or organization. The government has several interests in private corporations the
most apparent of which are the taxes that the corporations are paying.

Public
The public has a stake in corporations considering that the latter provides the citizens
with the essentials such as goods, services, employment and tax money for public programs.
The actions and conduct of a corporation can affect the public Economically, Environmentally,
and Culturally.

PURPOSES OF A CORPORATION

Early Stage Survival

There are several theories on the aims and objectives of a corporation. However, for an
entity which has just started, the main objective would be survival especially during the early
years of its existence. Corporation should aim first for the most basic. That is, how to gain the
momentum especially when its entry is during crisis, for it to withstand the hostile environment
of commercialism.

To increase Profit

According to Milton Friedman, the social responsibility of business is "to increase profit."
This is anchored on the argument that stockholders are the owners of the corporation and
therefore, corporate profits ultimately accrue to them. Corporate executives and hired managers
are the stockholders' agents and should operate in the interests of their principal, the
stockholders.
Stockholders are entitled to their profits as a result of a contract among the corporate
stakeholders. A stakeholder in this perspective refers to employees, managers, customers, the
local community (public) and the stockholders. Each cluster of stakeholder has a contractual
relationship with the firm, since they receive the remuneration they mutually and freely agreed
to, in pre-established agreement or contract.
Based on the above, giving the corporation the authority to operate carries with it the
idea that corporation should earn for the following purposes: first, to serve its purpose of
existence which is to make the stockholders happy. Second, to perform its contractual obligation
to stakeholders embedded in the grant or authority to operate. These includes but not limited to
the payment of taxes to the government, taking care of employees within the bounds of what is
legal, giving back to the community and many others which is part of the implied agreement for
its existence.

To Offer Vital Services to the General Public

There are services that are hard for the government to offer to the vast majority of
people without the help of private enterprises. The government cannot even solve by itself the
problem as basic as traffic. It is in this context that partnerships between the government and
the private corporations be considered to deal with some problems. Typical example of this in
Metro Manila area where traffic is almost intolerable, fortunately, the government got a big help
from private investors in NLEX, SLEX, Northrail, Southrail, and other semi-private
infrastructures and other mass transport system investors. Other services in which the
government needs help are in areas of power, water, education and health services.

To Offer Goods and Services to the Mass Market

Some corporations are run not only for the sole purpose of generating profit but also to
provide service to masses. This endeavor will meet the needs of the lower income class group
by offering them something at a price they can afford. For example, cheap and accessible
transport service. Some might ask, what is the difference of this purpose from the previous one?
First, they differ in the area of pricing. Pricing in vital industries are not market-dictated. The
investors are given guaranteed returns to cover for their investment risks. And, most are
government-sanctioned and enjoys an almost monopolized if not fully monopolized
environment. Second, they differ in the area of competition. In a perfectly competitive market,
the services and goods are easily obtainable because there are lots of suppliers. In the less-
competitive vital industries obtained by government contracts, regulations and/or franchises, the
service and goods are only provided by a few or worse, by one producer.

SHAREHOLDERS, BONDHOLDERS AND DIRECTORS

After getting a significant understanding about the corporation and its stakeholders, one
needs, to know the other players of the corporation. Shareholders, bondholders and directors
complete the cast when the corporation starts to operate. These are the parties which will be
having various claims over the entity. Shareholders will be having its claim in the form
dividends. Bondholder’s claims will be in the form of interest earned via long-term agreement.
And, the directors will have their eyes on their salaries, incentives, stock options and bonuses.

To gain a better understanding, we need to discuss who they are and how they are
related to the corporation.

Shareholders or stockholders are artificial or natural persons that are legally regarded as
owners of the corporation. Stockholders are bestowed with special privileges depending on the
class of their stockholdings. These rights may include:

1.The right to vote on matters such as elections of the board of directors.

2. The right to propose shareholder resolutions.
3. The right to receive dividends.
4. 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 can also be called
right to first refusal.
5. The right to liquidating dividends. That is the right to receive the company's assets
during liquidation or cessation of business.

However, stockholders' rights to a company's assets come only second to the rights of
the outside creditors of the company. This means that stockholders typically may receive
nothing if after the company is liquidated, there is not enough money to pay its creditors.
Shareholders play an important role in raising capital for organizations, the capital that is
otherwise hard to be raised in a proprietorship or partnership form of business organization.

Shareholders are considered principals, and the directors and officers are considered
agents under the agency theory in governance. As principals, they are expecting that things that
the agents would do would be for the paramount benefit of the stockholders. Although directors
and officers of a company are bound by fiduciary duties to act in the best interest of the
shareholders, still the shareholders themselves deserves an independent third party that would
attest on what the management team is doing. This is here where the external auditors would
come into the picture to lend credibility on the reports prepared by management.

Bondholders

A bondholder is generally defined as a person or entity that is the holder of a currently

outstanding bond. A bond being a certificate of indebtedness by the issuing corporation
provides some advantages on the holder of the said instrument. The holder has the complete
authority to manage, the bond in any way that he sees, fit and advantageous to him. He can
even sell them for it is an investment on his part.

There are several advantages to being a bondholder rather than a shareholder of a

company. One of the major advantages is that when the company goes through a process that
involves the liquidation of assets, bondholders and other outside creditors are given priority over
stockholders, which means that the bondholders will receive payments for the outstanding
bonds before any of the stockholders receive theirs in relation to their outstanding shares of
stock. Another advantage is that bonds are not exposed to the fluctuation of interest rates
because whatever is the agreed interest rate when the bonds were issued it will be the one to
be used throughout the life of the bonds. Interest rate is "nailed" so the bondholder need not
worry. There is an element of predictability of income.

The bondholder will receive regular interest payments during the life of the bond
computed at face value multiplied by the interest rate. This interest payment usually takes place
every six months and will continue to go on until the maturity of the bond. Typically, the life of a
bond would take as short as 5 years to as long as 25 years. The bondholder has a guaranteed
return of the principal at some point in the future. This makes investment in bonds rewarding on
the part of the investor who can afford to have their money in the hands of the investee for
longer periods of time.

Board of Directors

BOD refers to the collegial body that exercises the corporate powers of all corporations
formed under the Corporation Code (SEC Code of Corporate Governance). It conducts all
business and controls or holds all the assets of such corporations. This body is formed by the
stockholders and they will act as the governing body of the corporation. The BOD will be
headed by the chairman of the board who is considered as the most influential person in the
corporation. The board's activities are determined by the powers, duties and responsibilities
delegated to it or conferred on it by an authority. These issues are typically detailed in the
corporation's by-laws. The by-laws normally specify the number of members of the board. It may
also contain matters such as how the board members are to be chosen including the specifics
on when and where they are going to meet to discuss things concerning the operation of a
corporation.

Duties of the Boards of Directors

 Governing the organization by establishing broad policies and objectives;

Examples of these broad policies are as follows: investment policies that will answer the
question as to where to put excess money for additional revenue purposes;
diversification policies that will answer the question as to what type businesses that the
corporation will be getting into as additional lines of business in the near future.

 Selecting, appointing, supporting and reviewing the performance of the chief executive;
 As stewards of the corporation, the board of directors is expected to be with the chief
executive in latter's direct or indirect dealings with the corporation.

 Ensuring the availability of adequate financial resources;

It is expected from the board that the survival and financially healthy functioning of the
entity will be on the top of their agenda. With the coordination of people from the finance
department, BOD has to make certain that funds are available to finance the day-to-day
activities of the entities.
 Approving annual budgets;

Another responsibility of the board of directors is to approve the annual budget, which
can be described as the reflection of organizational program and plan into financial
terms. The annual budget will more or less define the operations of the corporation at
any given year.

 Accounting to the stakeholders the organization 's performance.

One of the most critical duty of the board of directors is to account for the entity's
performance to its stakeholders; more importantly, to the shareholders who are the
owners of the corporation. They need to inform every stakeholder what went on at any
particular given period. This can be accomplished by providing the reports on financial
highlights, short and long-term plans, material investments during the period, including
the financial statements duly audited by an independent auditing firm.

MULTINATIONAL AND TRANSNATIONAL CORPORATIONS

International corporations have several categories depending on the business structure,
investment and product/service offerings. Multinational companies (MNC) and transnational
corporations (TNC) are two of these categories. Both MNC and TNC are enterprises that
manage production or delivers services in more than one country. They are characterized as
business entities that have their management headquarters in one country, known as the home
country, and operate in several other countries, known as host countries. Industries like
manufacturing, oil, mining, agriculture, consulting, accounting, construction, legal, advertising,
entertainment, hotels, banking and telecommunications are often run through TNCs and MNCs.
What is Multinational?
 This is a corporation that has assets and facilities in one or more countries, other than
the home country, and has a centralized office where global management is coordinated.
Decision making hence affects all the subsidiaries globally.

What is Transnational?
These are corporations which operate in other countries, other than the home country,
and do not have a centralized management system. Decisions are hence made to suit the
operating zone. Similar firms operating in other countries cannot be referred to as subsidiaries,
since the management system is not centralized. Transnational companies are also not loyal to
the operating country’s value system, but are focused on business expansion.

Similarities between Multinational and Transnational

 Both have foreign affiliates and operate globally.
 Both have local services as well as production hence affect employment, standards of
living and household incomes.
Differences between Multinational and Transnational
Definition
Multinational refers to a corporation that has assets and facilities in one or more
countries, other than the home country, and has a centralized office where global management
is coordinated. On the other hand, transnational refers to a corporation which operates in other
countries, other than the home country, and do not have a centralized management system.
Operations
While multinationals have subsidiaries in other countries, a transnational does not have
subsidiaries in other countries. 
Decision making
Decision making in a multinational is made in the mother country and should be effected
in all the subsidiaries globally. On the other hand, decision making in a transnational is made by
individual transnational corporations.
Local markets
Multinationals face restrictions when it comes to local markets since they have centralized
management systems. On the other hand, transnational companies are free to make decisions
independently based on local markets.

WHAT IS CORPORATE GOVERNANCE?

Corporate governance is the system of rules, practices, and processes by which a firm is
directed and controlled. Corporate governance essentially involves balancing the interests of a
company's many stakeholders, such as shareholders, senior management executives,
customers, suppliers, financiers, the government, and the community. Since corporate
governance also provides the framework for attaining a company's objectives, it encompasses
practically every sphere of management, from action plans and internal controls to performance
measurement and corporate disclosure.
FUNDAMENTAL OBJECTIVES OF CORPORATE GOVERNANCE
Improvement of Shareholder Value
Shareholders’ value can be improved by creating a pre-commitment to build better
relations with primary stakeholders like employees, customers, suppliers, and communities.
Better relations will lead to an increase in shareholders’ wealth since this would help the firms
expand and develop intangibles which the firm could capitalize on and in turn become a source
of their competitive advantage. Good reputation is just one example to these intangibles which
could largely predict the future of the business. Better relations with employees engender
employees’ commitment. Good relations with customers and suppliers complete the full circle of
strong alliance.
Conscious Consideration of the Interests of Other Stakeholders
 When a company meets the objective of increasing the shareholder value, it will have
greater internally-generated resources in improving its commitment in meeting its
environmental, community and social obligations. It can pay taxes well; reward, train, and retain
key staff; and enhance employee satisfaction. A key focus area is a company's human capital,
which is a lead indicator of success (Principle 1, Corporate Governance Principle, ADB and
Hermes Pension Management).
WHAT GOOD GOVERNANCE PROMOTES
Transparency
Transparency is vital with respect to corporate governance due to the critical nature of
reporting financial and non-financial information. The aim includes maintaining investor,
consumer and other stakeholders' confidence. The lack of dedication to corporate governance
policies particularly those related to transparency will drive home the point that the company is
unbalanced and the leadership is not incorporating it to the highest level of truthfulness. Failure
in transparency issues could lead to many things, scaring off of investors is just one of them;
being singled out by the authority is another which could mean the watchful eyes of the
agencies will be focused on the company and many other uncomfortable scenarios which no
company wants to be in.
Information is the currency of democracy according to Thomas Jefferson. Transparency
is a thing-of huge concern in government setting since it entails giving out of information. It is
crucial because nearly all the decisions of government officials are in the interest of the public.
Transparency lessens the likelihood of nepotism, corruption, favoritism and the. likes. Shortage
of information about the how the government agencies functions can make it easy for corrupt
officials to cover their tracks. It can be said that the most corrupt countries are the least
transparent. Sunshine has its cleansing properties; so, let the light in.
Accountability
Accountability is 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, 'including the obligation to report, explain and be answerable
for its resulting consequences. It is acknowledging and taking charge for and being transparent
about the impacts of the company’s policies, decisions, actions, products and its associated
performance.
It is based on the premise that an accountable organization will take action to:

 Set a policy based on a comprehensive and balanced understanding and response to

material stakeholders' issues and concerns; the emphasis this premise is the overall
broad philosophy and operating style of the entity itself.
 Set goals and standards against which strategy and associated performance can be
measured and evaluated. This highlights the deliverables by the people to the
organization.
 Disclose credible information about strategy, goals, standards, and performance to those
who base their actions and decisions on this information. In this way, there will be goal
congruence in the organization.
 Recall that the above premises are actually the fundamental objectives o corporate
governance: (1) improvement of shareholders value and (2) conscious consideration of the
interests of other stakeholders.

Prudence
Prudence is defined within the Code of Governance as "care, caution and good
judgment as well as wisdom in looking ahead." It is the management committee which is in
corporate setting, the board of director, who will be the body responsible in safeguarding the
interests of the organization through good planning and management of finances and other
resources of the organization.
BENEFITS OF GOOD GOVERNANCE
To put it into perspective, Arthur Levitt (former chairman of the US Securities &
Exchange Commission) once said: "If a country does not have a reputation for strong corporate
governance practices, capital will flow elsewhere. If investors are not confident with the level of
disclosure, capital will flow elsewhere. If a country opts for lax accounting and reporting
standards, capital will flow elsewhere. All enterprises in that country suffer the consequences."
From the investors' perspective a simple question can be raised, "will you invest in a region or a
country the track record of which in governance is questionable? If yes, how long?"
It is a well-established reality that investors would behave differently in settings in which
good governance, both in political and corporate setting, is not seriously practiced. Investors'
concern will be more on short-term prosperity instead of long-term stability. There are many
countries in the world where investors are so speculative. One of evidences of these speculative
behaviors are the fact that they are now more flexible in term of locations. For instance, HSBC,
in Hong Kong, has a collapsible building; that is, it can be dismantled, shipped out, and
assembled at a place of choice. A better example is in utility services, there was a time in
Nigeria when utility companies providing power are having their main supply of power on barges
for them to easily get out of the country if something goes wrong.
It can be deduced that good governance immeasurably benefits not only a specific
company or industry but also the country. The following are the specific benefits of good
governance:
Reduced Vulnerability
Adopting good corporate governance practices leads to an improved system of internal
control. This leads to greater accountability, protection of corporate resources and eventually,
better profit margins. Good corporate governance practices will also pave the way for probable
future development, diversification, including the capability to attract investors, both sourced
nationally and abroad. Good corporate governance will also reduce the cost of loans or credits
for corporations since companies with good corporate governance can be considered low-risk
companies in the eyes of debt investors.
Marketability
Embracing principles of good corporate governance can also play a role in enhancing
the corporate value of companies. This leads to easy access to capital in financial markets
which helps the company survive in an even more competitive environment. Good corporate
governance will also make the company more attractive in open market. This attribute will be
beneficial and will place the company at the finer end of the bargaining in times when strategic
alliances are needed. Examples of these strategic alliances are mergers, acquisitions, corporate
absorptions and buy outs, partnerships, joint ventures and other risk mitigating initiatives.
Credibility
There are a good number of benefits when an entity embraces good corporate
governance, one of which is the company need not spend more resources in compliance with
the regulatory and other financial institutions' requirements necessary since all these things are
already integrated in company's operating approach.
Companies that are known for good governance practices do not need to sell
themselves that hard for the investors to fuse-in their investment either as equity or as debt
investors. In the context of investment, everything could raise and fall in credibility and
reputation. When a company is credible, investors' trust comes next; where investors' trust is in,
money follows; when there is money, there is flexibility. It is in having that flexibility in a
competitive world that could spell out the difference between failure and success.
Valuation
Observed evidence and studies conducted in recent years back the idea that it pays to
have good corporate governance. It was found out that more than 84% of the global investors
are willing to pay a higher price or a premium for the shares of a well governed company over
one considered poorly governed given all financial figures comparably equal. The issue is
reliability of company-provided information. This is one convincing fact that embracing corporate
governance principles and practices affects corporate financial and non-financial value of the
enterprise.
AGENCY PROBLEM IN CORPORATIONS
In traditional (neo-classical) approach, corporation is treated as a single entity, it is often
called holistic approach. It is one of the features of a sole proprietorship. Owner—managers
have no conflicts of interest. In big companies, we almost always have the separation of owners
and managers. Financial manager should work in the best interests of the owners by taking
actions that increase the value of the company. However, we've also seen that in large
corporations’ ownership can be spread over a huge number of stockholders.
If we assume that stockholders buy stock because they seek to gain financially, then the
answer is obvious; good decisions increase the value of the stock, and poor decisions decrease
the value of the stock. Given our observations, it follows that the financial manager acts in the
shareholders' best interests by making decisions that increase the value of the stock. The goal
of financial management is to maximize the current value per share of the existing stock.
The separation of stockholders and management has some advantages. It allows share
ownership to change without interfering so much with the operations of the business. It allows
the company to hire professional managers. This dispersion of ownership means that
managers, not owners can control the firm. But it brings problems, if the managers' and owners'
objectives are not the same and whether management really acts in the best interests of the
owners.
 The goal of maximizing the value of the stock avoids the problems associated with the
sometimes-conflicting parochial goals. There is no ambiguity in the criterion, and there is no
short-run versus long run issue. We explicitly mean that our goal is to maximize the current
stock value. By this, we mean that they are only entitled to what is left after employees,
suppliers; and creditors (and anyone else with a legitimate claim) are paid their due. If any of
these groups go unpaid, the stockholders get nothing. Because the goal of financial
management is to maximize the value of the stock, we need to learn how to identify those
investments and financing arrangements that favorably impact the value of the stock.
Agency Relationships and Costs
The connection between owners and managers is called a principal-agent problem and
the conflict is called an agency relationship. Such a relationship exists whenever someone (the
principal) hires another (the agent) to represent his interests. The shareholders are the
principals; the managers are their agents. Shareholders want management to increase the
value of the firm, but managers may have their own axes to grind or nests to feather. Agency
costs are incurred when (1) managers do not attempt to maximize firm value and (2)
shareholders incur costs to monitor the managers and influence their actions. More generally,
the term agency costs refers to the costs of the conflict of interest between stockholders and
management. Of course, there are no costs when the shareholders are also the managers.
Agency costs can be indirect or direct. An indirect agency cost is a lost opportunity such
as the one we have just described. Direct agency costs come in two forms. The first type is a
corporate expenditure that benefits management but costs the stockholders. Perhaps, the
purchase of a luxurious and unneeded corporate jet would fall under this heading. The second
type of direct agency cost is an expense that arises from the need to monitor management
actions. Paying outside auditors to assess the accuracy of financial statement information could
be one example.
Goals of Financial Management
Assuming that we restrict ourselves to for-profit businesses, the goal of financial
management is to make money or add value for the owners. This goal is a little vague, of
course, so we examine some different ways of formulating it in order to come up with a more
precise definition. Such a definition is important because it leads to an objective basis for
making and evaluating financial decisions.
If we were to consider possible financial goals, we might come up with some ideas like
the following:
1. To survive.
2. To avoid financial distress and bankruptcy.
3. To beat the competition.
4. To maximize sales or market share.
5. To minimize costs.
6. To maximize profits.
7. To maintain a steady earnings growth.

What would be the management goal if they have no control at all? One of main answer
comes from outside the mainstream economy. It is the idea that managers prefer the company
to be bigger than more profitable. So, managers left to themselves would tend to maximize the
amount of resources over which they have control or, more generally, corporate power or
wealth. This goal could lead to an overemphasis on corporate size or growth.

Our discussion indicates that management may tend to overemphasize organizational

survival to protect job security. Also, management may dislike outside interference, so
independence and corporate self-sufficiency may be important goals.
Do Managers Act in the Stockholders' Interests?
Principal—agent problems would be easier to resolve if everyone had the same
information. That is rarely the case in finance. Managers, shareholders, and lenders may all
have different information about the value of a real or financial asset, and it may be many years
before all the information, the perfect information, is revealed. Financial managers need to
recognize these information asymmetries and find ways to reassure investors that there are no
nasty surprises on the way.
Whether managers will, in fact, act in the best interests of stockholders depends on two
factors. First, how closely are management goals aligned with stockholder goals? This question
relates to the way managers are compensated. Second, can management be replaced if they
do not pursue stockholder goals? This issue relates to control of the firm. As we will discuss,
there are a number of reasons to think that, even in the largest firms, management has a
significant incentive to act in the interests of stockholders.
Managerial Compensation
Management will frequently have a significant economic incentive to increase share
value for two reasons. First, managerial compensation, particularly at the top, is usually tied to
financial performance in general and oftentimes to share value in particular. For e*ample,
managers are frequently given the option to buy stock at a bargain price. The more the stock is
worth, the more valuable is this option. In fact, options are increasingly being used to motivate
employees of all types, not just top management.
The second incentive managers have relates to job prospects. Better performers within
the firm will tend to get promoted. More generally, those managers who are successful in
pursuing stockholder goals will be in greater demand in the labor market and thus command
higher salaries. In fact, managers who are successful in pursuing stockholder goals can reap
enormous rewards.
Control of the Firm
Control of the firm ultimately rests with stockholders. They elect the board of directors
who in turn, hire and fire management. An important mechanism by which unhappy
stockholders can act to replace existing management is called a proxy fight, A proxy is the
authority to vote someone else's stock. A proxy fight develops when a group solicits proxies in
order to replace the existing board and thereby replace existing management.
Another way that management can be replaced is by takeover. Those firms that are
poorly managed are more attractive as acquisitions than well-managed firms because a greater
profit potential exists. Thus, avoiding a takeover by another firm gives management another
incentive to act in the stockholders' interests.
Stakeholders
Management and stockholders are not the only parties with an interest in the firm's
decisions. Employees, customers, suppliers and even the government all have a financial
interest in the firm. Taken together, these various groups are called stakeholders in the firm. In
general, a stakeholder is someone other than a stockholder or creditor who potentially has a
claim on the cash flows of the firm. Such groups will also attempt to exert control over the firm,
perhaps to the detriment of the owners.
AGENCY THEORY IN GOVERNANCE
Agency theory suggests that the firm can be viewed as a loosely defined contract
between resource providers and the resource controllers. It is a relationship that came into
being occasioned by the existence of one or more individuals, called principals, employing one
or more other individuals, called agents, to carry out some service and then entrust decision-
making rights to the agents. Agency theory argues that in the modern corporation, in which
share ownership is publicly or widely-held, managerial actions sometimes depart from those
required to maximize shareholder returns. In agency theory language, the owners are principals
and the managers are agents, and there is an agency loss necessary, the extent of which, is the
benefits that should have accrued to the owners had the owners been the ones who exercised
direct control of the corporation.
This agency loss can be reduced through the installation of some mechanism like
providing financial incentives for executives and managers for their efforts of putting priority on
maximizing the shareholders' wealth. This system includes shares options for senior executives
at discounted prices. This way the senior executives' interest will be aligned to that of the
shareholders. Other similar systems tie executive compensation and levels of benefits to the
shareholders' returns and have part of executive compensation deferred to the future. This is to
provide executive rewards on for the long-run value maximization of the corporation. This
system would deter short run executive mentality of "harvest and enjoy while available" and
other actions which harms corporate value.
In similar terms, the related theory of organizational economics, is concerned in
anticipating managerial "opportunistic behavior" which includes policy skirting and indulging in
excessive privileges at the expense of shareholder interests. The key structural mechanism to
restrain such managerial "opportunism" is the board of directors. This body should provide a
monitoring of managerial actions on behalf of Shareholders. Such impartial review will only take
place when the chairman of the board is independent of executive management. Where the
chief executive officer is also chairman of the board of directors, the objectivity of the board will
possibly be compromised. Agency and organizational economics theories predict that when the
CEO also holds the dual role of chair, then the interests of the owners will be sacrificed to a
certain degree in favor of management, that is, there will be managerial opportunism and
agency loss. This loss is way above the owners normal benefits had they been the ones
performing the agents' functions of running the day-to-day corporate activities.
EFFECTS OF AGENCY IN GOVERNANCE
As said earlier, corporation is a form of business organization where a principal agent
relationship exists; the shareholder being the principal and the board of directors, executive and
managers as the agents. This unique relationship also presents a very unique effect in the
context of corporate governance. The following are the effects of agency in corporate
governance:
Conflict of Interest
Principal and agent have diverse interests, and the separation of ownership and control
provides potential for different interests to surface. Shareholders lack direct control of
corporations, especially those which are publicly-traded corporations. Board of directors, on the
other hand, has the direct control on the activities of these enterprises being the ones entrusted
by the shareholders to decide on corporate affairs. In the above situation, it can never be
avoided that sometimes problems arise when the agent makes decisions that result in the quest
of goals that conflict with those of the shareholders.
Managerial Opportunism
Managerial opportunism 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. Sometimes, the
uncalibrated and unchecked enjoyment of corporate resources and capabilities contradicts the
idea of increasing the shareholders' and firm's value. Excessive monetary benefits like bonuses
and privileges, routine efforts of trying to secure comfortable position like undue diversification
to increase compensation and to reduce employment risk, are just some of examples of
managerial opportunism.
Incurrence of Agency Cost
As mentioned earlier, agency presents conflicts of interest because agents might do
things which are detrimental to the maximization of shareholders' wealth. TO counter this, the
principal needs to sacrifice resources for him to closely monitor and control the agent's
behavior. These costs are called agency cost, which refers to the sum of incentive costs,
supervision and monitoring costs, enforcement costs and Other agency losses incurred by
principals in trying to ensure that agent's operating style is consistent with the aim of maximizing
the shareholders' and the firm's value.
Shareholder Activism
Shareholders can call together to discuss the corporation's direction. They can vote as a
block to elect their candidates to the board. Institutional activism will also offer a premium on
companies with good corporate governance since this type of activism carries with it the
capability to give incentive when agents perform well. Another issue that is well connected to
shareholder activism is share ownership. Having some board members, executives and
managers that are at the same time shareholder' may cause alignment of their interests with
plain shareholders. This is especially applicable with institutional investors. The increasing
pressure and power of institutional owners to discipline ineffective top-level managers will now
definitely influence the firm's choice of strategies to be employed in internal governance.
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 the 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. Normally, in a takeover, the non-performing executives and managers are dismissed
from their jobs. These antitakeover tactics are discussed in another chapter of this book.
CONCEPT OF GOAL CONGRUENCE
Goal congruence is the harmony and alignment of goals of both the principal and the
agent which is consistent with the overall objectives of the organization. While it is true that in
agency relations, the presence of self-interested behaviors is a given, nevertheless, managers
can be encouraged to act in shareholders' best interests by giving incentives which will
compensate them for good performance on one hand at the same time give them disincentives
on their poor performance on another.
Corporate Governance at Oracle Corporation

The Board of Oracle Corporation has throughout its history developed corporate governance
practices to fulfill its responsibility to Oracle Corporation stockholders. The composition and activities of
the Company's Board of Directors, the approach to public disclosure and the availability of ethics and
business conduct resources for employees exemplifies the Company's commitment to good corporate
governance practices, including compliance with new standards.

The Board has adopted the following corporate and committee guidelines to help ensure it has the
necessary authority and procedures in place to oversee the work of management and to exercise
independence in evaluating Oracle Corporation's business operations. These guidelines allow the Board
to align the interests of directors and management with those of Oracle Corporation's stockholders. All
guidelines are subject to future refinement or changes as the Board may find necessary or advisable for
Oracle Corporation in order to achieve the above objectives.

Oracle continually applies good corporate governance principles to multiple areas of the Company. In
addition to these guidelines, Oracle has had a Code of Ethics and Business Conduct since 1996.

PEFORMANCE INCENTIVES AND DISINCENTIVES

Pay Dependent on Profit Level
When management is rewarded based of the level of profits made, naturally members of
management will make every effort to achieve high profit levels for them to earn more. This
system is the most effective way to increase not only the value of shareholders wealth but also
the value of the firm, both in tangible and intangible context. The flip side of this scheme,
however, is that it encourage the use of creative accounting and reporting practices to attain
certain profit objectives. For example, the infamous corporate scandals, the mark to market
accounting used by Enron Corporation is one of the most glaring of these creative practices.
Shares Incentives
This can be done when a company is a publicly-listed company and managers are given
a chance to subscribe shares of the company at a discounted price. Managers will have
something to protect and it can be naturally expected that they will venture into projects which
will improve the firm's value. In this system, there is commonality of stake between the plain
shareholders, and those executives and managers that are at the same time shareholders.
Duality of capacities of executives and managers are not without disadvantages, intricacies on
shareholders at the same time agents will be discussed further in agency problem in a
succeeding chapter of this book.
Shareholders' Intervention
There is now a visible shift of character of shareholders by a large scale. Shareholders
of today are now more active than before. They now dip their hands more unlike before when
some of them will just wait on what the board will present on the table. Some shareholders are,
now active institutional investors who will definitely exercise a more direct influence over the
performance of an enterprise. They are now taking an active role by scrutinizing Performance of
the company, and are very swift in their efforts of lobbying with other small shareholders when
they believe poor service or any mismanagement by the directors is happening.
It is the above characters that will make board, executives, and managers more
conscious on the way they manage and decide things. It will make their decisions more leaning
in favor of shareholders knowing that somebody is watching over their shoulders. Somebody
keenly monitoring on the operating philosophies they employ.

Threat of Being Fired

The shareholders who have ultimate control over of the corporation can take a straight
and hostile approach by threatening the board, executives and managers with removal from
office if they place their personal interests over that of shareholders' and that of maximizing the
value of the firm. The increase in numbers of institutional investors has enhanced the
shareholders powers to discharge directors since they are able not only to dominate but also
lobby other shareholders in decision making.
Takeover Threat
It is but normal for board, executives, and managers to move heaven and earth to avoid
or discourage corporate takeovers as they are aware that their job would at least be at risk if not
to be lost totally if takeover takes place. To push for goal congruence, that is to have things in
accordance with welfare of shareholders and enhancement of firm's value, the shareholders can
easily make a threat to accept takeover proposal if their set objectives are not met by the agents
(board, executives, and managers) in general.
ROLES OF THE NON-EXECUTIVE DIRECTORS
A non-executive director is a member of the board of directors of a company who does
not take part in the executive function of the management team. This director is not an
employee of the company or connected with it in any other way. He is separate from the inside
directors who are members of the board who also serve or previously served as executive
managers of the company.
Fundamentally, the non-executive director's role is to give a meaningful contribution to
the board by providing objective criticism. At present, it is widely accepted that non-executive
directors have an important contribution to make for the proper administration of companies
and, therefore, on the economy at a larger context. Non-executive director "should bring an
independent judgment to bear on issues of strategy, performance and resources including key
appointments and standards of conduct." (taken from The Cadbury Report).
Non-executive directors have the responsibilities in the following areas:
Strategy
As an outsider, the non-executive director may have an impartial, clearer, and wider
view of external factors affecting the company and its business environment than the executive
directors. The normal role of the non-executive director in strategy development is therefore to
offer a creative contribution and to act as a constructive reviewer in looking at the goals and
plans developed by the chief executive and his executive team.
Non-executive director should continually face and contribute in the development of the
company's long-term goals and visions. Together with the other directors and officers of the
company, he is expected to participate in setting long-term broad operational principles and
policies that benefits the stakeholders in areas that concerns on company stability, increasing
the firm's value, and ultimately, in increasing shareholders' value.
Establishing Networks
One of the important functions of the non-executive director is to represent the company in
some external corporate undertakings. It is the job of the non-executive director (NxD) to
connect the company to the outside world and in the process, gain benefit from networks of
businesses. This network of businesses are no doubt beneficial to the organization since this
could spark certain avenues for alliances which the most effective way to survive in a very
competitive environment.
Monitoring of Performance
Non-executive directors should take responsibility for monitoring the performance of executive
management, more particularly on matters relating to the progress made towards realizing the
established company strategies. Non-executive directors should not be concern only on strategy
alone. Included in his responsibility is to monitor and examine the performance of management
in meeting agreed goals and objectives of the company. Succession planning is also part of his
responsibilities but taking into consideration the sensitivity of the matter he should do it more
carefully with the concurrence of the other directors and officers.
Audit
It is the duty of the whole board to ensure that the company report properly to its shareholders,
this can be done by presenting a true, fair and real reflection on how the company was
administered at any given time. Included in this report is financial performance and highlights
that are deemed necessary, including the assurance that the internal control systems are in
place and monitored routinely and thoroughly. A nonexecutive director has an important role to
play in fulfilling this responsibility whether or not a formal audit committee of the board has been
established.
ROLES OF THE CHIEF FINANCIAL OFFICER (CFO)
The chief financial officer (CFO) is a corporate officer principally accountable for
managing the financial risks of the corporation. This officer is also responsible for financial
planning and record-keeping, as well as financial reporting to higher management. He will’ be
the one who will direct the corporation’s finances. In corporations large and small, a CFO is
needed to handle both the cash inflow and outflow and to create reports about the corporation’s
spending. Keeping track on the working capital requirements of the company to meet. Short-
term and daily requirements on operation are also the responsibilities of the CFO.
In large corporations, the primary duties of the CFO may be to supervise and manage a
large accounting department, while coming up with ways to maximize profit to the company. A
CFO might, for example, evaluate the way in which employees work to determine the way to
most efficiently get work done for the least amount of money. These responsibilities however
can be shared with other corporate heads or with general managers or lower level supervisors.
CFOs have different specific roles depending on so many things: industry peculiarity,
corporate structure, profile of investors (e.g. majority family-owned), government intervention,
and whether the company listed or not both in local stock exchange or international exchanges.
However, the following roles cut across corporate CFOs around the world:
Implements Internal Controls
A CFO will be the one responsible for conveying the important financial controls to a
company. These controls features should include the effective administration of cash flow and
overhead expenses, establishing credit policies for customers and working with major vendors
to attain more favorable payment terms, and implementing measures for assessing and
evaluating optimal inventory levels. At a higher level, a CFO should also develop effective
controls that provide supervision against fraudulent activities.
Supervises Major Impact Projects
Outside of implementing and monitoring company controls relating finance, an effective
CFO also handles and supervises those projects that require significant quantitative and
qualitative interpretations and analysis in order to reach an understanding of the options that are
available. For example, a CFO will take responsibility for developing a company’s annual
budget, work together with the business owners and division or department managers to ensure
that the final financial product accurately and objectively projects the real requisites of the
business. A CFO might also carry out a meticulous analysis of a company’s future capital
investment requirements as a prerequisite in securing additional financing.
Develops Relations with Financing Sources
One of the most important responsibilities of an effective CFO is to institute good
working relationships with banks and other financial institutions that may impact on the
company's ability to finance its operations. Specific activities in this area may include regular
meetings with officers of the company's bank(s) to review ongoing operations, discussing
possible future loan transactions, revisiting loan covenants if there is any, negotiating more
favorable terms for bank lines of credit, and discussions with private investors on how additional
capital might be invested into the enterprise.
Advisor to Management
An effective CFO is also an important member of the management team of some
emerging companies. Because of his financial sharpness and general business knowledge, a
good CFO can facilitate and help the business owners, executives and other top managers
make the substantial Connection between a company’s operations and its financial performance
that are reflected in the actual figures and also with that of projections.
Drives Major Strategic Issues
A good CFO can also be expected to take part in important role of getting involved on
some major strategic issues that will have an impact on the company's long-term future. These
issues include the hatching of the company acquisition strategy which in the end would help fuel
and boost the company’s additional growth. Keeping an eye on diversification of a particular
product lines, business activities, and portfolio is also part of the CFOs concern. A CFO would
also play a significant role in any endeavor the purpose of which is to seek investment from the
public or financial markets especially in times when the company is having an initial public
offering (IPO).
Risk Manager
The CFO is in the best position to foresee risks considering that they have this rare
perspective on how the company operates. CFOs are close to the internal control system and
financial reports which pass through many operational areas. CFOs are high ranking officers
doing real and actual things in the infantry. Their views are not just "tree top", their views are
real and they are in proximity of hard figures that could back their decision.
The CFO's viewpoint on risk can be a helpful source to the board of directors and the
CEO as well as other senior officers as they manage the corporate affairs. The CFO may be in
the best position to anticipate high risks transactions and the adverse consequences of a
changing external environment. This unique capability of CFOs however is only valuable if the
CFO is communicating well with the CEO, the board and the other officer of the organization.
Relationship Role
More often, the CFO is the nucleus in an organization with many connections. The CFO
will work together with the CEO, the board of directors, the audit committee, the internal auditor
and the external auditor. Strong verbal and written communication skills are indispensable if the
nucleus is to support the connections effectively. CFO serves the bridge between these a
variety of parties within the organization.
Objective Referee
CFO needs to demonstrate impartiality such as when advising the CEO or the board of directors
on accounting matters. The skill to present important financial issues is an invaluable resource
but it should always be in the context that it is not being done to favor somebody. CEOs are not
valued by board of directors or audit committees on attributes or tendencies of boosting financial
figures with sacrificed transparency.
In consonance with the principle of good corporate governance, boards of directors, audit
committees and CEOs need to understand all sides of a financial accounting or disclosure
issues so they can make an informed and rational decision. The CFO can and should be a
trusted adviser in matters of financial reporting.
ROLES OF THE AUDIT COMMITTEE
 The audit committee is an essential component in the overall corporate governance
system. The objectives of this committee should be geared toward carrying out practical,
progressive changes in the functions and expectations placed on corporate boards. One of the
fundamental principles of an effective audit committee is that committee members should be
independent from the operational aspects of the company. This means that a company's senior
management should not be audit committee members. The senior management however has to
be given the opportunity for important communication with the audit committee.
Understanding the Audit Committee's Responsibilities
An audit committee should be engage mainly in an oversight function and ultimately is
responsible for the company's financial reporting processes and the quality of its financial
reporting. For the committee to carry out the said responsibilities, the committee must have a
working knowledge on the company's goals and its long-term plans and visions including the
issues the company is facing in trying to achieve these objectives. Examples of issues that the
audit committees should consider:
Risk identification and response
• Pressure to manage earnings
• Internal controls and company growth
• Risk Identification and Response
To be effective, an audit committee must have an understanding of the risks the company faces,
and more importantly, the company's internal control system for identifying and mitigating those
risks. Risks that could affect the company and that the audit committee should be conscious
about include:

 External Risk (independent)

Rapid technological changes

Audit committee should always be on the lookout for the company not to be left
behind due to advancement of technology. The new rule in this modern time is embrace
things brought about by technology and be a survivor.

Downturns in the industry

The product that the company is selling may have passed already its maturity
stage and it is already its way down, The audit committee should have a clear picture of
the "what if scenario" of the entity. A very good example, Nokia began as a textile
company then went into electronics, and from electronics migrated to wireless devices
(mobile phone) but they missed the next boat.

Unrealistic earnings expectations by analysts

An audit committee is expected to be not just composed and collected but also
less aggressive when it comes to expectations of business outcomes, Audit comrnjttees
should be associated with conservative and realistic information, and thus they should
deal figures from the realist point of view. They should reasonably know how much meat
 within a cup of soup because this would be the real basis in putting up plans for the
compam/s future.

 Operating/lnternal Risk
Recurring organizational changes, turnover of key personnel are some of the
danger signs that the audit committee cannot afford to neglect. Things like this hamper
the operational momentum of the company rendering it slow in its progress in achieving
its vision.

Another internal risk worthy of consideration is the complexities of transactions,

complex organizational structure, swift growth, performancebased compensation that
are excessively inappropriate, exposure to currency differences on foreign currency
denominated loans, and financial results that are abnormally different from that of the
industry.

 Information and Control Risk

The audit committee, in carrying out its responsibility has to address the following
concerns which are considered as perennial in most organizations: unsuitable control
environment that are sometimes "toned at the top." Another is the lack of sincere
management supervision a nd inappropriate management override of existing controls
which is by description, the best habitat for abuse. Timeliness is another concern since
information needs to be communicated early enough to the stakeholder for these
information to be useful.
Who is responsible for financial reporting? The responsibility for financial reporting is
vested in three groups:
1. The BOD - the company's board of directors including the audit committee
2. Finance and Accounting - financial management including the internal auditors
3. Auditor - the independent auditors
While it is true that this triumvirate forms a '"three-legged stool," there is a need to
emphasize that the audit committee must take the lead in the financial reporting process, since
the audit committee is an extension of the full board and hence the ultimate monitor of the
process. An audit committee that functions well could definitely send a strong message partial
assurance to the other stakeholders that the system is in place and it is protecting the
organization both in short and in long-term basis.
ROLES OF THE EXTERNAL AUDITOR
Auditing is a systematic process by which a competent, independent person objectively
obtains and evaluates evidence regarding assertions about economic actions and events to
ascertain the degree of correspondence between those assertions and established criteria and
communication the results to interested users (American Accounting Association).
There is a need for independent auditor because of the apparent separation of
ownership and management. Audit services are used extensively by business organizations to
cast away doubts on the information given by the management which are also generated under
its direct control. There exist information risk. Business structures are becoming more complex
which increases the possibility that unreliable information might be fed not only to decision
makers but more importantly to the shareholders.
Factors that Contribute to Information Risk
1. Remoteness of Information Providers to the Information Users
This makes first-hand knowledge difficult to obtain by some stakeholders
because they are divorced from management. Complex corporate structures, less
involvement by the shareholders in day-to-day operations 'or decisions as well as
geographical dispersion are just some of the 'factors that widen the distance between the
information user and provider.
2. Bias of Information Providers
There is an assumed conflict of interest between the shareholder and
management regarding financial information. Financial statements and other financial
information serve as the "report card "of management of its stewardship, the only report
card prepared by the one being graded, Having said this, information may be presented in
favor of the provider when his goals are different with some stakeholders.
3. The Volume of Data
When business grow, possibly thousands if not millions of transactions are
processed daily through the use of sophisticated computer programs or via manual
system. There is this possibility therefore that itnproperly recoded information may be
buried in the records leaving the overall results inaccurate if not misleading, trained
professionals therefore are needed in the area.
4. Complexities in Transactions
Changing and new relationship in business leads to sotne innovations in accounting and
reporting process. Transactions nowadays are getting complicated and becoming more
difficult to record let alone be understood by the stakeholders. Examples of these are
derivatives, futures, multi-level mortgages in securities, reinsurances, different valuations
and other complex transaction in the financial markets which the board of directors and
other decision makers in the company might venture into.
Auditing is an endeavor of assuring the readers of the financial statements with
confidence in the figures of financial statements. This is highlighted by the accountancy
profession's meaning of an audit. Audit of financial statements which is; an exercise, the
objective of which is to permit auditors to express an opinion as to whether the financial
statements give a true and fair view of the affairs of an entity at a given period in accordance
with the relevant frameworks and standards (lifted and reworded from International Standard on
Auditing (ISA) 2000, Objective and General Principles Governing an Audit of Financial
Statements).
The logic behind this definition is that the auditor's opinion will lend and add some
credibility to the financial statements. It is expected that the auditor, as an independent expert
on financial preparation and reporting, should conduct the examination exhaustively for him to
have good backings on the opinion he will be expressing in the independent audit report.
Auditor's Duties
In most countries, the auditor has a legal duty to make a report to the enterprise on the
fact and fairness of the entity's annual accounts. This report should state the auditor's opinion
on whether the statements have been prepared in accordance with the relevant standards more
importantly on relevant legislation and whether they present a true and fair view of the profit or
loss at any given period. The responsibility to report on the truth and fairness of the financial
statements rests with the management, the auditor therefore has a responsibility to form an
opinion on certain other matters and to report any reservations that he has on the reports. In the
audit report, these reservations can be seen in the qualification of opinion by the auditor.
In the conduct of an audit, the auditor must consider whether the following are present:
1. Proper accounting records being kept by the company.
2. Financial statement figures that agree with accounting records.
3. Adequacy of notes to financial statement and other disclosures necessary.
4. Compliance with relevant laws and standards of financial accounting and reporting.

In three (3) of the above, the auditor is impliedly given the right to access to any
information or material that is relevant to examination of the financial statements. In addition, the
auditor has a duty to review the other information issued alongside the audited financial
statements. There is, however, no guarantee that the statements are free from misstatements
and errors, this is partly because the auditor is only required to form an opinion for him to
discharge his duties. This must be understood that audit is not designed to discover errors,
irregularities and fraud. Activities in external auditing are only designed to form an opinion, not a
conclusion; it can only give reasonable assurance, not absolute assurance.
Based on the preceding items, it can be summarized that the external auditor is there to
attest to the data and other information prepared by management in accordance with some
legal and other established criteria. The criteria in the Philippine setting are provided by
Philippine Financial Reporting Standards and other standards. The overall role of the external
auditor is to express an opinion on the financial statements prepared by management. This
means that an external auditor lends credibility to financial statements which are to be used by
the shareholders and other stakeholders.