Governance, Business Ethics, Risk Management & Internal Control 202

INTRODUCTION TO CORPORATE GOVERNANCE

Generally, governance refers to a process whereby elements in society wield power,
authority and influence and enact policies and decisions concerning public life and
social upliftment.
GOVERNANCE
the process of decision-making and the process by which decisions are implemented
(or not implemented) through the exercise of power or authority by leaders of the
country and / or organizations.
CHARACTERISTICS OF GOOD GOVERNANCE
1. PARTICIPATION
Freedom of association and expression on one hand and an organized civil society on
the other hand.
2. RULE OF LAW
Full protection of human rights
3. TRANSPARENCY
Information is freely available and directly accessible to those who will be affected
by such decisions and their enforcement.
4. RESPONSIVENESS
Good governance requires that institutions and processes try to serve the needs of all
stakeholders within a reasonable timeframe.
5. CONSENSUS ORIENTED
Understanding of the historical, cultural and social contexts of a given society or
community.
6. EQUITY AND INCLUSIVENESS
This requires all groups, but particularly the most vulnerable, to have opportunities
to improve or their well-being. maintain
7. EFFECTIVENESS & EFFICIENCY
Meet the needs of society; sustainable use of natural resources and the protection of
the environment.
 8. ACCOUNTABILITY
An organization or an institution is accountable to those who will be affected by its
decisions or actions. Accountability cannot be enforced without transparency and the
rule of law.
CORPORATE GOVERNANCE: AN OVERVIEW
system of rules, practices and processes by which business corporations are directed
and controlled.
It basically involves balancing the interests of a company's many stakeholders, such
as shareholders, management, customers, suppliers, financiers, government and the
community.
PURPOSE OF CORPORATE GOVERNANCE
• to facilitate effective, entrepreneurial and prudent management that can
deliver long-term success of the company.
• to enhance shareholders' value and protect the interests of other stakeholders
by improving corporate performance and accountability
OBJECTIVES OF CORPORATE GOVERNANCE
• FAIR AND EQUITABLE TREATMENT OF SHAREHOLDERS
• SELF-ASSESSMENT
• INCREASE SHAREHOLDERS’ WEALTH
• TRANSPARENCY AND FULL DISCLOSURE
BASIC PRINCIPLES OF EFFECTIVE CORPORATE GOVERNANCE
1. Transparency and Full Disclosure
Is the board telling us what is going on?
2. Accountability
Is the board taking responsibility?
3. Corporate Control
Is the board doing the right thing?
Chapter 2: RELATIONSHIP BETWEEN SHAREHOLDERS/OWNERS &
OTHER STAKEHOLDERS
INTRODUCTION
• Many of the characteristics of good governance described in Chapter 1
relevant to both SME's and large listed public companies.
• It is important to recognize that good corporate governance is based on
principles underpinned by consensus and continually developing notions of
good practice.
• There are no absolute rules which must be adopted by all organizations.
• "There is no simple universal formula for good governance"
• When corporate governance is discussed, it is often spoken of in terms of a
company's corporate governance framework.
• The key elements within an effective governance framework, and the issues
relating to each element and are relevant to organizations large and small, in
both the private and the public sectors.
• Many of the matters listed may not be directly relevant in all situations and
some may not, in particular circumstances, be within the board's control, but
it provides a useful context in which any organization can consider its
governance needs so that they might be most appropriately addressed.
SHAREHOLDERS & STAKEHOLDERS
• Governance starts with the shareholders/owners delegating responsibilities
through an elected board of directors to management and, in turn, to
operating units with oversight and assistance from internal auditors.
• The board of directors and its audit committee oversee management and, in
that role, are expected to protect the shareholders' rights.
• However, it is important to recognize that management is part of the
governance framework; management can influence who sits on the board and
the audit committee as well as other governance controls that might be put
into place.
• In return for the responsibilities (and power) given to management and the
board, governance demands accountability back through the system to the
shareholders.
• However, the accountabilities do not extend only to the shareholders.
Companies also have responsibilities to other stakeholders.
• Stakeholders can be anyone who is influenced, whether directly or indirectly,
by the actions of a company.
• Management and the board have responsibilities to act within the laws of
society and to meet various requirements of creditors, employees and the
stakeholders.
• A broad group of stakeholders has an interest in the governance because it
has a relationship to economic performance and the quality of financial
reporting.
• For example, it is likely that many employees have significant funds invested
in pension plans. Those pension plans are designed to protect the financial
interests of those employees in their retirement.
• Regulators are a response to society's wishes organizations, in their pursuit of
returns for their owners, act responsively and operate in compliance with
relevant laws.
• Owners want accountability on such things as:
• Financial performance
• Financial transparency financial statements that are clear with full
disclosure and that reflect the underlying economics of the company.
• Stewardship, including how well the company protects and manages
the resources entrusted to it.
• Quality of internal control
• Composition of the board of directors and the nature of its
activities, including information on how well management incentive
systems are aligned with the shareholders' best interests.
 • The owners want disclosures from management that are accurate and
objectively verifiable. Management has always had the primary responsibility
for the accuracy and completeness of an organization's financial statements.
From a financial reporting perspective, it is management's responsibility to:
o Choose which accounting principles best portray the economic
substance of company transactions.
o Implement a system of internal control that assures completeness and
accuracy in financial reporting.
o Ensure that the financial statements contain accurate and complete
disclosure.

RELATED PARTIES INVOLVED IN CORPORATE GOVERNANCE

RELATED PARTIES IN CG
Governance and financial reporting reliability are receiving considerable attention
from a number of parties including regulators, standard setting bodies, the
accounting profession, lawmakers and financial statement users.

OVERVIEW OF RESPONSIBILITIES
1. SHAREHOLDERS
Broad Role:
• Provide effective oversight through election of board members, approval
of major initiatives.
• such as buying or selling stock, annual reports on management
compensation, from the board.

2. BOARD OF DIRECTORS
Broad Role:
• The major representative of stockholders to ensure that the organization is
run according to the organization's charter and that there is proper
accountability.
Specific activities include among others:
1. Overall Operations
a) Establishing the organization's vision, mission values and ethical
standards.
b) Delegating an appropriate level of authority to management.
c) Demonstrating leadership.
d) Assuming responsibility for the business relationship with CEO
including his or her appointment, succession, performance
remuneration and dismissal.
e) Overseeing aspects of the employment of the management team.
f) Recommending auditors and new directors to shareholders.
g) Ensuring effective communication with shareholders other
stakeholders.
h) Crisis management.
i) Appointment of the CFO and corporate secretary.

2. Performance
a) Ensuring the organization's long-term viability and enhancing the
financial position. Formulating and overseeing implementation of
corporate strategy.
b) Approving the plan, budget and corporate policies.
c) Agreeing key performance indicators (KPIS).
d) Monitoring / assessing assessment, performance of the organization,
the board itself, management and major projects.
e) Overseeing the risk management framework and monitoring business
risks.
f) Monitoring developments in the industry and the operating
environment.
g) Oversight of the and organization, including its control and
accountability systems.
h) Approving and monitoring the progress of major capital expenditure,
capital management and acquisitions and divestitures.
 3. Compliance / Legal Conformance
a) Understanding and protecting the organization's financial position.
b) Requiring and monitoring legal and regulatory compliance including
compliance with accounting standards, unfair trading legislations,
occupational health and safety and environmental standards.
c) Approving annual financial reports, annual reports and other public
documents / sensitive reports.
d) Ensuring an effective system of internal controls exists and is
operating as expected.

3. NON-EXECUTIVE OR INDEPENDENT DIRECTORS

Broad Role:
• The same as the broad role of the entire board of directors
Specific activities include among others.
a) To understand the organization, its business, its operating environment
and its financial position.
b) To apply expertise and skills in the organization's best interests.
c) To assist management to keep performance objectives at the top of its
agenda,
d) To understand that his/her role is not to act as auditor, nor to act as a
manager.
e) To respect the collective, cabinet nature of the board's decisions.
f) To prepare for and attend board meetings.
g) To seek information on a timely basis.
h) To ensure that he/she is in a position to contribute to the discussion when
a matter comes before the board, or alert the chairman in advance to the
need for further information.
i) To ask appropriate questions relative to operations,

4. MANAGEMENT
Broad Role:
• Operations and accountability.
• Manage the organization effectively and provide accurate and timely
reports to shareholders and other stakeholders
Specific activities include among others.
 a) Recommend the strategic direction and translate the strategic plan into the
operations of the business.
b) Manage the company's human, physical and financial resources to
achieve the organization's objectives - run the business.
c) Assume day to day responsibility for the organization's conformance with
relevant laws and regulations and its compliance framework.
d) Develop, implement and manage the organization's risk management and
internal control frameworks.
e) Develop, implement and update policies and procedures.
f) Be alert to relevant trends in the industry and the organization's operating
environment.
g) Provide information to the board.
h) Act as conduit between the board and the organization.
i) Developing financial and other reports that meet public, stakeholder and
regulatory requirements.

5. AUDIT COMMITTEES OF THE BOARD OF DIRECTORS

Broad Role:
• Provide oversight of the internal and external audit function and the
process of preparing the annual financial statements as well as public
reports on internal control.
Specific activities include among others.
a) Selecting the external audit firm.
b) Approving any non-audit work performed by the audit firm.
c) Selecting and / or approving the appointment of the Chief Audit
Executive (Internal Auditor).
d) Reviewing and approving the scope and budget of the internal audit
function.
e) Discussing audit findings with internal auditor and external auditor and
advising the board (and management) on specific actions that should be
taken.
 6. REGULATORS
A. BOARD OF ACCOUNTANCY
Broad Role:
• Set accounting and auditing standards dictating underlying financial
reporting and auditing concepts, set the expectations of audit quality
and accounting quality.

Specific activities include among others.

a) Conducting CPA Licensure Board Examinations.
b) Approving accounting principles.
c) Approving auditing standards.
d) Interpreting previously issued standards implementing quality control
processes to ensure audit quality.
e) Educating members on audit and accounting requirements.

B. SECURITIES AND EXCHANGE COMMISSION

Broad Role:
• Ensure the accuracy, timeliness and fairness of public reporting of
financial and other information for public companies.
Specific activities include among others.
a) Reviewing filings with the SEC.
b) Interacting with the Financial Reporting Standards Council in setting
accounting standards.
c) Specifying independence standards required of auditors that report on
public financial statements.
d) Identify corporate frauds, investigate causes, and suggest remedial actions

7. EXTERNAL AUDITORS
Broad Role:
• Perform audits of company financial statements to ensure that the
statements are free of material misstatements including misstatements
that may be due to fraud.
Specific activities include among others.
a) Audit of public company financial statements.
b) Audits of nonpublic company financial statements.
c) Other services such as tax or consulting

8. INTERNAL AUDITORS
Broad Role:
• Perform audits of companies for compliance with company policies and
laws, audits to evaluate the efficiency of operations, and periodic
evaluation and tests of controls.
Specific activities include among others.
a) Reporting results and analyses to management (including operational
management) and audit committees.
b) Evaluating internal controls.
DEFINITION OF TERMS
CORPORATE GOVERNANCE
- the system of stewardship and control to guide organizations in fulfilling their
long-term economic, moral, legal and social obligations towards their
stakeholders.
- Corporate governance is a system of direction, feedback and control using
regulations, performance standards and ethical guidelines to hold the Board
and senior management accountable for ensuring ethical behavior –
reconciling long- term customer satisfaction with shareholder value – to the
benefit of all stakeholders and society.
- Its purpose is to maximize the organization’s long-term success, creating
sustainable value for its shareholders, stakeholders and the nation.
Board of Directors
- the governing body elected by the stockholders that exercises the corporate
powers of a corporation, conducts all its business and controls its properties.
Management
- a group of executives given the authority by the Board of Directors to
implement the policies it has laid down in the conduct of the business of the
corporation.
Independent director
- a person who is independent of management and the controlling shareholder,
and is free from any business or other relationship which could, or could
reasonably be perceived to, materially interfere with his exercise of
independent judgment in carrying out his responsibilities as a director
Executive director
- a director who has executive responsibility of day-to-day operations of a part
or the whole of the organization.
Non-executive director
- a director who has no executive responsibility and does not perform any work
related to the operations of the corporation.
Conglomerate
- a group of corporations that has diversified business activities in varied
industries, whereby the operations of such businesses are controlled and
managed by a parent corporate entity.
Internal control
- a process designed and effected by the board of directors, senior
management, and all levels of personnel to provide reasonable assurance on
the achievement of objectives through efficient and effective operations;
reliable, complete and timely financial and management information; and
compliance with applicable laws, regulations, and the organization’s policies
and procedures.
Enterprise Risk Management
- a process, effected by an entity’s Board of Directors, management and other
personnel, applied in strategy setting and across the enterprise that is
designed to identify potential events that may affect the entity, manage risks
to be within its risk appetite, and provide reasonable assurance regarding the
achievement of entity objectives.
Related Party
- shall cover the company’s subsidiaries, as well as affiliates and any party
(including their subsidiaries, affiliates and special purpose entities), that the
company exerts direct or indirect control over or that exerts direct or indirect
control over the company; the company’s directors; officers; shareholders and
related interests (DOSRI), and their close family members, as well as
corresponding persons in affiliated companies. This shall also include such
other person or juridical entity whose interest may pose a potential conflict
with the interest of the company.
Related Party Transactions
- a transfer of resources, services or obligations between a reporting entity and
a related party, regardless of whether a price is charged. It should be
interpreted broadly to include not only transactions that are entered into with
related parties, but also outstanding transactions that are entered into with an
unrelated party that subsequently becomes a related party.
Stakeholders
- any individual, organization or society at large who can either affect and/or
be affected by the company’s strategies, policies, business decisions and
operations, in general. This includes, among others, customers, creditors,
employees, suppliers, investors, as well as the government and community in
which it operates.