CHAPTER 7

CORPORATE SOCIAL RESPONSIBILITY

Corporate social responsibility (CSR) has gained currency. Companies are

adopting 'ethical policies' or 'codes of conduct stating how they intend to "behave."
More companies are signing up to such initiatives as the United Nations Global
Compact or the Fair Labor Association. They are joining bodies such as World
Business Council for Sustainable Development and CSR Europe. On both sides of
the Atlantic, there are myriads of conferences and initiatives, where corporate CSR
Executives, some even from companies with a long anti-union record, meet up with
campaigns, NGOs and indeed trade unions.

In the 1990s, McDonald's, the hamburger corporation, took two campaigners

through a long and exhausting libel court case in London after they criticized its
corporate practices. Then, there was the 2004 film 'Super Size Me'. Its public image
thoroughly dented, today McDonald's leaflets in the UK show happy local farmers
producing organic crops for healthy meals. Or, the oil company Unocal, which was
severely criticized for knowingly using forced labor to construct a pipeline in Burma,
a country run by a vicious regime and subject to an international boycott. US labor
rights' groups took Unocal through the courts. Unocal now has a huge area on its
website devoted to CSR.

In fact, CSR means different things to different people. However, certain ideas
are becoming commonly accepted. One is that CSR is not about philanthropy or
charitable work. It refers to something much more fundamental. It is about how
companies take responsibility for their actions in the world at large. Conventional
CSR watchdogs.include labor unions, consumer groups, environmentalists, NGOs
and all 'stakeholders' watching over their interest as opposed to 'stockholders' only.

The role of business worldwide and specifically in the developed economies has
evolved over the last few decades from classical profit maximizing approach to a
social responsibility approach, where businesses are not only responsible to its
stockholders but also to all of its stakeholders in a broader inclusive sense. One can
identify so many reasons for shifting the role of business from classical concept to a
responsible business concept, but negative impression of stakeholders on the
enterprise would get a higher priority among others. In one hand, enterprises create
wealth and job opportunities for the society and on the other, they pollute and
destroy environment and ecology with devastating impact on human health and
bio-diversity worldwide. To address the social problems or the problems of the
stakeholders, the business community evolved a new approach in their business
strategies named CSR. Through CSR, enterprises are intent to strike a balance
between economic and social goals, where resources are used in a rational manner
and social needs are be addressed responsibly.

CSR can be viewed as a comprehensive set of policies, practices, and

programs that are integrated into business operations, supply chains and decision
making processes throughout the company and include responsibilities for current
and past actions as well as adequate attention to future impacts. CSR focuses vary
by business, by size, by sector and even by geographic region. The umbrella of CSR
is quite big and it includes all the good practices that increase the business
profitability and can preserve interest of all stakeholders. To cite, Lotus Holdings
defines CSR as "The integration of the interests of the stakeholders-all those
affected by a company's conduct-into the company's business policies and actions,
with a focus on the social, environmental, and financial success of a company, the
so-called triple bottom-line with the goal being to positively impact society while
achieving business success." Thus, the whole range of stakeholders is considered
as integral parts of CSR.

One important aspect of CSR is that it is not a legal obligation but rather a
voluntary social and environmental positive initiative to establish an image of
environmentally and Socially Responsible Business (SRB) that also encompasses
MSMEs as well as giant corporations. The motivation and drive to pursue is chiefly a
result of pressure from well-organized consumer rights movement, specifically in
developed world that acts as a watchdog and hardly hesitates to impose consumer
boycott against a company that violated established CSR practices. An example is
the consumer boycott imposed on purchasing Bangladesh ready-made garments on
the ground that these are produced by under-aged child labor. Despite the fact that
in the not so distant past, CSR was more of a charity by affluent or socially
responsible business organizations without expecting any financial return, today, it
very much a planned investment in creating positive image to enhance profitability.
Under the CSR concept, companies decide voluntarily to contribute to a better
society and a more sustainable environment. As evolved primarily in the western
world, most of the rising companies there practice CSR to enhance the image and
acceptability in the community (Green Paper, 2001). There are driving forces behind
CSR that include new concerns and expectations from citizens, consumers, public
authorities and investors in the context of globalization. Social criteria are
increasingly influencing the investment decisions of individuals and institutions both
as consumers and as investors. Increased concern about the damages caused to
the environment by economic activities; transparency of business activities brought
about by the media and modern information and communication technologies are all
contributing to the changing scenario regarding CSR. According to Green Paper
(2001), "Few trends I could so thoroughly undermine the very foundations of our free
society than the acceptance by corporate officials of a social responsibility other than
to make as much money for the stockholders as possible." (Friedman, 1962)
CORPORATE SOCIAL RESPONSIBILITY IN A GLOBAL CONTEXT

CSR AND DEVELOPING COUNTRIES

The concept of corporate social responsibility (CSR) aims to examine the role
of business in society and to maximize the positive societal outcomes of business
activity.

In practice, much of the business activity that has so far been labeled CSR
has been driven by the concerns of investors, companies, campaign groups and
consumers based in the world's richest countries. National CSR agendas in middle
and low-income countries have been less visible internationally, and have often not
been labeled CSR. The result has been CSR practices that are largely framed in rich
countries, then internationalized and transferred to other businesses and social
settings through international trade, investment and development assistance. The
strategic challenge for governments at national and local levels is how best to shape
an agenda that has been largely market-driven and responsive to concerns of rich
country stakeholders.

Over the past years, governments, companies and NGOs in many middle-and
low-income countries have accelerated the process of adaptation of the developed
country-driven CSR agenda through greater direct engagement. CSR movements
and initiatives have emerged in countries such as China, India, South Africa,
Philippines and Brazil among others. Governments of some middle-income countries
facing major social challenges have explicitly sought to engage business in meeting
those challenges, as with Black Economic Empowerment in South Africa or
presidential encouragement of business efforts to tackle poverty in the Philippines.

In developed countries too, there is increasing recognition among companies

that a 'one-size fits all' approach to CSR in operations around the world is ineffective
in responding to the business drivers of socially responsible behavior. The result has
been reinvigorated focus on themes of greater importance in middle and low-income
countries including the value of sustainable local enterprise and the role of business
in poverty reduction.

JUSTIFICATIONS FOR CSR

There are two broad sets of justifications for public sector actors in middle and
low-income countries to engage with CSR: defensive and proactive. The two are not
mutually exclusive. A policy initiative that initially has a defensive justification may
quickly become part of a proactive strategy of engagement.
 The defensive justification relates to minimizing the potential adverse effects
of CSR on local communities, environments and markets when it is imposed through
international supply chains and investment. Governments of some major economic
powerhouses such as China have undertaken a variety of initiatives to ensure that
CSR practices with impact in their countries are tailored to national economic and
social interests.

The experience of business-to-business standards is that costs and benefits

tend not to be equitably distributed along value chains, with costs of private
standards borne by producers whereas benefits accrue to the retailer. These issues
are partly rooted in bargaining power disparities between producers and buyers.
Similarly, assurance schemes say very little about the responsibilities of sourcing
companies, the burden is on the producer to comply. Depending on the strength and
durability of ties, however, between buyer and supplier, the former may have an
incentive to assist the latter with compliance. Further problems arise for supplier
firms that have to comply with multiple, even conflicting, codes of different buyers.

The proactive justification for public sector actors to engage with CSR is
provided by the opportunity to increase the domestic public benefits of CSR
practices in economic, social and environmental terms.

In countries whose export sectors are closely associated with consumers'

social, health or environmental concerns (e.g. in agriculture and textiles), there may
be positive opportunities for governments to facilitate market access gains for their
producers.

Foreign investment offers potential to transfer technical expertise to local

enterprises. Many large companies (encouraged by governments) are interested in
exploring practical mechanisms for enhancing the input of local enterprises, and
locally hired workers, into their projects. In some cases, this is encouraged through
investment incentives (e.g. in Nigeria) or through the terms of foreign investment
contracts (e.g. with oil industry investors in Azerbaijan). In others, various kinds of
partnership initiatives seek to transfer knowledge and expertise, including on
environmental and social issues, between large and small companies.

Finally, a number of analysts and governments are also beginning to explore

the hypothesis that promotion of CSR in the domestic economy can bring benefits for
competitiveness as a whole. The extent to which this happens, however, is likely to
depend on the sector and country-specific features. More broadly, there is also
scope for public sector actors in middle and low-income countries to harness
enthusiasm for CSR to help deliver public policy goals and priorities. These avenues
will be further explored below.
POTENTIAL ROLES OF GOVERNMENTS IN THE CSR AGENDA

From a sustainable development perspective, public sector engagement with

CSR potentially spans social, economic and environmental spheres, including issues
of corruption, poverty reduction and human rights. The goals of public sector
engagement in CSR are likely to differ from country to country. They might be
structured in relation to the underlying drivers for public engagement in CSR.

A first broadly defined goal of public engagement in CSR is the alignment of

business activities and public policy to achieve societal goals. A clear government
vision of how it wants to address issues where there are potential trade-offs between
economic. social and environmental considerations, as in the case of the use of the
country's natural resource endowment for socio-economic development, may
increase the likelihood of success of corporate contribution to national development.

A MULTIPLICITY OF POLICY INSTRUMENTS

CSR practice has identified five distinctive roles for public sector engagement
with CSR: regulation, facilitation, partnership, endorsement and demonstration. In
practice, there are no bright lines between them, and many of the policy instruments
governments wanting to promote a CSR agenda can use could be considered as
expressions of more than one of these government roles.

The range of policy instruments used by governments to promote goals

related to CSR is wide and reflects varying policy approaches as well as economic
circumstances. Some governments may prefer interventionist approaches. Others
may prefer to work with the grain of market drivers, including consumer interest or
civil society pressure. The factors that may determine the course of action taken by
any individual government include capacity constraints; the size of domestic markets
for products potentially affected by CSR concerns; the degree of export orientation of
the economy in sectors affected by international CSR drivers (e.g. agriculture,
textiles, pharmaceuticals); the presence of enterprises willing to champion change;
and the degree to which different stakeholders are comfortable working in
partnership for commonly defined outcomes.

In the broadest sense of CSR, the entire body or social and environmental
legislation in any country can be seen as an expression of public sector engagement
with CSR. Other areas of legislation including competition policy, basic investment
and enterprise frameworks, and rights of access to information and public
participation in decision- making are also important parts of the 'enabling
environment' for CSR (Source: UN Sustainable Development Innovation Brief,
February 2007).
CSR IN INTERNATIONAL BUSINESS

With globalization, international market is showing some strong influence on

the development of CSR. Multinational enterprises' activities are faced with diverse
legal system in each country coupled with new public opinion, more demands on
social responsibility, sustainability and transparency. Practicing CSR on a level of
sincerity that satisfies the minimum based on shareholders' opinion can make the
company noticeable in local and international markets which leads to stakeholders'
confidence.

The following are the different ranges of application for CSR in the
international perspective where the socially responsible conduct of a corporation can
assure the increase in acceptance by the stakeholders.

SUSTAINABLE DEVELOPMENT AND ENVIRONMENT

There is a pressing need to promote a new economic development model that

would secure the needs of the current generation without giving any concession on
the chance of future generation to enjoy theirs. As a matter of opinion, today's
generation should invest for the future and therefore, should stop borrowing from
future generations by squandering resources at present.

From the business standpoint, the state regulations cannot always guarantee
that the entrepreneurial conducts of these big enterprises are all compliant with such
development model. In addition, in some cases, there are outsourcing practices and
issues not only in business process but also in labor and materials which can
promote the adoption of standards lower than those prescribed in the home
countries. It is in this context that the corporations should go beyond the minimum.
Many studies have shown that in the medium-term, this model will bring turn out
about better consumer favor, product innovations, process innovations, and the most
basic of all the advantages, raw material savings.

HUMAN AND LABOR RIGHTS

Corporations, particularly the larger ones, have a significant influence not only
on the economy but also on the social and political life of the country in which they
operate. It is therefore expected from a socially responsible behavior standpoint that
corporations should be consistent with the principle of fairness and respect of basic
rights. In affirmation to this, the entrepreneurial strategy of these large enterprises
should be based on the following CSR demands:
 ● Be Compliant

The operational conduct of the enterprise should not be lower than the
standards of the host country; for example, with regard to compliance with
environmental laws, commercial laws, salaries, benefits, working conditions and
many other things directly or indirectly related to any stakeholder of the enterprise.

● Be Consistent

Have partners of the same kind. Human and labor rights are ought to be
respected anywhere and therefore, multinationals in the host countries should press
hard on their partners, both local and international, to adopt the same observance
and recognition of rights the enterprise is following when it does business. In this
way, businesses will move on the same path towards genuine CSR practice.

To be specific, an enterprise must protect the primary rights of its workers

wherever it operates and strive to observe the following
● Refrain absolutely from making recourse to forced or obligatory labor and
intimidation of any form.
● Be an advocate of the abolition of child labor. Respect the right of privacy and
freedom of opinion.
● Respect the exercise of the political rights and of the trade union activities
Refrain from discriminatory treatment by reason of sex, race, religion, political
opinion, citizenship or social extraction.
● Provision for a fair compensation.
● Provision for a healthy and safe working environment.

However, it is hard to determine as to what extent the above standards could

be justifiably attuned on the basis of peculiarities of the host countries particularly on
the socio-economic aspects. For example, average employees' earnings differ on a
country-to-country basis. Equal opportunity in employment may earn the loudest
applauses in many countries but sadly there are still cultures in a number of host
countries that are still too far off on this especially in women issue. For instance in
some parts of India, they still have the "caste system which is a social stratification
system that separated communities into hereditary jobs. A person borne in a caste
will remain in that class unless the person does something extraordinary. These are
just some of the pre-defined realities that the enterprise has to deal with in operating
internationally.

LOCAL ECONOMY AND SOCIETY

It is undeniable that large international enterprises can bring extraordinary

impact on the development of less-developed countries. This is however not without
obstacles, for instance, the disparity on technological capability; the host country's
lack of capacity to adapt to these technologies that are expectedly advanced in most
scenarios. This gap could prevent the local country or economy from maximizing the
benefits that these technologies can bring. Another issue would be that the local
entrepreneurship might be overwhelmed due to entrepreneurial crowding and higher
level of competitiveness of large multinational corporations.

It is necessary to involve the stakeholders in those relevant decisions that

would contribute to the development of the territory or to the host country in
particular. Involving the stakeholders produce local consensus which reduces
investment risks. The following are the typical examples of conduct of multinational
companies considered to be responsible and have gained wide positive recognitions:
● Transfer of technology;
● The grant of licenses for the use of intellectual property rights at costs
compatible with the local market;
● Granting authority to manufacture products and brands that are protected
under international IP laws;
● Training for the development of local skills;
● Development of new products by means of local knowledge and skills
● Creation of viably durable forms of collaboration with local partners, this will
encourage them to gain access to the global market,
● Corporate venturing investment in the local start-up capital.

The real test on the MNCs' sincerity to develop the host economy or country is
to invest on fixed asset if allowed by the host. Seeing their buildings and other fixed
assets could only mean one thing, they will be here for long if not for good.

A good number of international companies have visible initiatives that can be

called "CSR in action", they are manifested by giving out a portion of their income for
projects like maintenance of roads, improvements of public hospitals, adoption of a
school and many other activities that should have been rendered by the government.
These kinds of activities would give a good feedback from the community, create a
good reputation for the company and at the same time, propel the societal
integration and consolidation of stakeholders and the enterprise.

TRANSPARENCY

Corporate transparency is a form of deep-rooted managerial initiative which

evolved into a philosophy of removing walls and facilitating free and easy public
access to corporate information. It involves openness, communication and
accountability. Transparent measures include financial disclosure statements, the
freedom of information legislation, budgetary review, audits and religious compliance
on reportorial requirements of the authorities.
 The success of a corporate policy is closely tied to its "accountability" which
indicates its attitude "to render account" of its objectives, its activity and its achieved
results. It is a very important function because through these types of declarations
the enterprise holds responsibility of what it decides and of what it does, and to some
extent, it avoids acting arbitrarily.

LEGALITY

The adherence to the applicable set of laws in force is the minimum

requirement. The prerequisite of CSR is to go beyond the law provisions in order to
contribute to the establishment of a fair and sustainable development. Therefore, it is
clear that a socially responsible enterprise rejects conducts and practices such as
unfair competition, corruption and tax evasion that put at risk the growth and
development of the societies.

The enterprises that prefer a CSR strategy declare to the public and to the
stakeholders that they do not participate to illegal engagements of financial market
manipulations and insider trading, as well as tax evasion through the practices of
transfer pricing, facilitated by their transnational structure.

CONSUMERS

Since the first environmental movements took stand in the 1960s, and in the
following decades, the consumers' movements have begun to assert themselves at
the international level, with the increasing support of the scientists who denounced
the harmfulness of some productions for the mankind and the environment.

Consumers' organizations point out the importance of a reliable information on

the conditions of production and sale of the products, including any indication on the
potential risks arising from their use and consumption. All enterprises know that their
reputation and, therefore, their success depends on their commitment towards
consumers, but those that have chosen a social responsible behavior not only watch
the consumer-stakeholder as a client, but also as a "collaborator" in pursuing their
CSR strategy.

The "aware consumption" represents, therefore, a new approach to the social

responsibility of enterprise and of consumers that are acquiring growing importance
in the market by promoting a production that is safe and compatible with a
sustainable and fair development. The consumers' demands not only concern health
and eco sustainability of the goods and of all the productive phases, but also the
attestation that they are not produced by means of exploitation of human resources.
SUPPLY CHAINS

Due to market globalization, supply chains have become very complex, often
outsourced in countries where human right protection is low or there are no
environmental regulations, or tolerance of hard labor is high due to absence of
choices (an ugly head of exploitative conduct). This situation represents a critical
point for enterprises that have chosen to adopt a socially-responsible conduct. The
lack of ethical control on the supply chain is becoming a not only a commercial risk
but also a financial one.

On the contrary, companies able to guarantee the observance of ethical

behaviors through the whole production cycle by binding all of their supply chain
partners to their own ethical code, may have many positive effects in terms of:
● improvements in market reputation through specific certifications or quality
labels;
● confidence of the ethical investors and of the consumers;
● good relations with institutions and social organizations.

CORRUPTION IN INTERNATIONAL BUSINESS

According to George Soros, International Financier "There is always somebody who

pays, and international business is generally the main source of corruption."

GLOBALIZATION OF CORRUPTION

Corruption takes many different forms, from the routine cases of bribery or
petty abuse of power that are said to "grease the wheels to the amassing of
spectacular personal wealth through embezzlement or other dishonest means.

For MNCs, bribery enables companies to gain contracts (particularly for public
works and military equipment) or concessions which they would not otherwise have
won. Every year, Western businesses pay huge amounts of money in bribes to win
friends, influence and contracts. These bribes are conservatively estimated to run to
US$80 billion a year; roughly the amount that the United Nations believes is needed
to eradicate global poverty. In 1999, the US Commerce Department reported that in
the preceding five years, bribery was believed to have been a factor in 294
commercial contracts worth US$145 billion. In 1996, the magazine World Business
reported that the bribes paid by German companies alone were over $3 billion. Not
just companies are involved. According to a French secret service report, the official
export credit agency of France paid around $2 billion in bribes to foreign purchasers
of "defense equipment" in 1994.
 Such bribery may be pervasive, but it is difficult to detect. Many Western
companies do not dirty their own hands, but instead pay local agents, who get a 10%
or so "success fee" if a contract goes through and who have access to the necessary
"slush funds" to ensure that it does. Bribery is also increasingly subtle. It often takes
the form of semi-legal fees or "commissions", and inflated or marked-up prices. In
contracts guaranteed by export credit agencies, such "commissions" are included in
the costs and thus, in the total contract value covered by the guarantee. "It is
obvious," comments Transparency International, "that this practice constitutes an
indirect encouragement to bribe which, in future, brings it close to complicity with a
criminal offense." Until recently, bribery was seen as a normal business practice.
Many countries including France, Germany and the UK treated bribes as legitimate
business expenses which could be claimed for as tax deductions.

EXPORTING CORRUPTION

The corrupt practices of multinational corporations affect other countries in

many ways. They undermine development and exacerbate inequality and poverty.
They disadvantage smaller domestic firms. They transfer money that could be put
towards poverty eradication into the hands of the corrupt. They distort
decision-making in favor of projects that benefit the few rather than the many. They
also increase debt; benefit the company, not the country; bypass local democratic
processes; damage the environment; circumvent legislation and promote weapons
sales.

● Increasing Debt

Bribes increase the prices of projects. When these projects are paid for with
money borrowed internationally, bribery adds to a country's external debt. Ordinary
people end up paying this back through cuts in spending on health, education and
public services. Often they also have to pay by shouldering the long-term burdens of
projects that do not benefit them and which they never requested.

The US company, Westinghouse Electric Corp., provides an infamous

example. Westinghouse won a contract in the early 1970s to build the Philippines'
Bataan nuclear plant. It was alleged that it gave President Ferdinand Marcos US$80
million in kickbacks. The plant cost $2.3 billion-three times the price of a comparable
plant built by the same company in Korea. Filipino taxpayers have spent $1.2 billion
servicing the plant's debts even though the plant has never produced a single watt of
electricity because it was built at the foot of a volcano near several earthquake fault
lines. The Philippine government is still paying $170,000 a day in interest on the
loans taken out to finance the nuclear plant and will continue to do so up to the year
2018. The Philippine Treasurer Leonor Briones commented recently:
 "It is a terrible burden which never fails to elicit feelings of rage, anger and
frustration in me. We're talking of money that should have gone to basic
services like schools and hospitals."

● Benefiting The Company, Not The Country

Bribing high-level officials ensures profits and helps off-load risks. In many
power projects in Asia, for example, there has been, according to the World Bank,
both "a high level of corruption" and a tendency to over-estimate demand for
electricity.

In Pakistan, some 21 Western companies were investigated by the national

anti corruption agency in 1998 for alleged kickbacks to the previous government of
Benazir Bhutto and for overpricing. Bhutto's government had signed so many
contracts with power companies some of which were for installations in totally
inappropriate locations that Pakistan was set to produce far more energy than it
could possibly consume until 2010. Yet the government was contractually bound to
buy all the electricity produced.

Although all the companies filed sworn statements denying corruption, six of
them subsequently confessed to offering bribes. So serious were the allegations that
the World Bank sent in a special team of investigators. Yet, far from receiving
support from Western governments for its anti-corruption efforts, Pakistan was
warned by the British, US, Japanese and Canadian governments that its clash with
the power companies would put off other investors. The IMF, meanwhile, went so far
as to make a new package of loans at the end of 1998 conditional on the
government's dropping the charges against the companies.

● Bypassing Local Democratic Processes

Bribery can be a useful way of getting around local opposition to a project and
of bypassing the usual democratic processes involved with awarding contracts. Take,
for example, the Norwegian mining company, MINDEX, that wants to carry out a
nickel and cobalt strip mining on the Philippine island of Mindoro. The local
population believes the mine will seriously damage the environment and ruin their
communities.

MINDEX has responded by attempting to buy off local leaders. It gave gold
watches to local politicians at a critical stage of the project's Environmental impact
Assessment, which had to prove that the mine was socially acceptable to local
people MINDEX has also paid for local district leaders to go on a "study tour to a
luxurious holiday island, built a new house for a local priest and paid local journalists
to write articles favorable to the company. MINDEX claimed the gifts are "signs of
friendship Local people, who oppose MINDEX, believed that such gifts are attempts
to manipulate the local tradition of "utang na loob" or "debt of gratitude towards those
who carry out small acts of generosity and could be against Filipino law.

MINDEX has also gathered local signatures given to mark attendance at a

meeting and used them to indicate local support for the project. At least one
signature was actually a a otest against MINDEX's project. The Mindoro Clergy felt
obliged to issue a disclaimer

"We refute the categorical statement of MINDEX that the local population of
Oriental Mindoro welcomes the mining project. Our people have consistently
manifested their strong opposition to mining operations in a series of protest
actions... We are one with our people in declaring our vehement opposition
against mining activity in our province."

● Destroying the Environment and Getting Around Regulations

Some companies use bribes as a way of getting around environmental

regulations. A report into logging in Papua New Guinea in the 1980s reported that
companies were "roaming the countryside with the self-assurance of robber barons:
bribing politicians and leaders, creating social disharmony and ignoring the laws in
order to rip out and export the last remnants of timber." In May 2000, meanwhile, the
Asian Development Bank warned that the forests in Cambodia were in an "alarming
state" because of corruption. Environmentalists have warned that, at the current rate
of destruction, Cambodia's forests will be gone by the year 2003.

Sometimes such bribes come in the form of illegal political donations. A 1999
audit by the Nicaraguan government revealed that a Canadian mining company,
Greenstone Resources, which controls 70% of the mining areas of Nicaragua,
donated $20,000 to President Arnoldo Aleman. The company was alleged to have
made further donations to other people in Aleman's Constitutional Liberal Party and
bribes to local officials in the area where Greenstone was mining. Nicaraguan law
states that donations can be given only by Nicaraguan citizens from within the
country.

In return for its money, Greenstone has consistently been allowed to get away
with flouting environmental laws and regulations. It carries out massive illegal logging
around the mining area, and pollutes water sources and the local environment at the
expense of local people's health. Says Magda Lanuza, a Nicaraguan activist

"You can smell the cyanide when you are near the mine. Children have
headaches, and there are other health problems. The technicians who visited
the area with us say the water is harmless but when we ask them to drink it,
they refuse."
 Despite such evidence, Greenstone has received favorable environmental
impact assessments from Nicaraguan officials. The Ministry of Environment
personnel visit the firm's sites only when the company wants them and pays them, to
do so.

● Promoting Arms Sales

Half the bribery complaints received by the US Commerce Department

concerns international defense contracts. A 1999 report noted that allegations of
bribery were made in 55 contracts between 1998-1999 worth some US$37 billion
(£23.6 billion) in total. Swedish armaments manufacturer, Bofors, was involved in
"the biggest bribery scandal in the history of independent India". In 1986, the Indian
government paid Bofors $1.3 billion (£802 million) for 400 Howitzer field guns for the
Indian army. Within months of the weapons being delivered, Swedish radio claimed
that £30 million worth of kickbacks had been paid to Prime Minister Rajiv Gandhi and
his associates. In June 1988, the Indian press published documents from the
Swedish auditor-general identifying shell companies that had allegedly channelled
Bofors' pay-offs. In October 1999, the Indian Central Bureau of Investigation brought
charges of "criminal conspiracy" against Indian business people and Bofors
middlemen and employees. Whatever the outcome of this court case:

"The affair has been disaster for the sub-continent. With all the juicy
allegations of larceny and intrigue to savour, it is easy to forget that Bofors guns
added to the ever-growing armouries of India and Pakistan, which now face each
other in an unstable nuclear 'balance of power'... The consequences for Indian
democracy have been as dire... The Bofors scandal led to Rajiv Gandhi's defeat in
the 1989 general election and the emergence of the BJP as the dominant Indian
party."

HIDING THE LOOT

● Western Banks and Third World Assets

"Money laundering is the handmaiden of international corruption... Those who

take bribes must find safe international financial channels through which they
can bank their ill-gotten gains. Those who provide the bribes may well assist
the bribe takers to establish safe financial channels and launder the cash."
Frank Vogl Transparency International

"America cannot have it both ways. We cannot condemn corruption abroad, be

it officials taking bribes or looting their treasuries, and then tolerate American
banks making fortunes off that corruption. US Senator Carl Levin
 Private banking services and offshore financial centers are the major conduits
and repositories for bribes and corrupt gains. An estimated US$40 billion from poor
and former communist economies finds its way into US or European banks every
year, much of it illegitimately gained. Some $30 billion of Western aid "used as part
of the Cold War game of winning friends" has ended up in Swiss bank accounts
alone. Leaders from some African countries have collectively had up to $20 billion on
deposit in Switzerland's banks. Haiti's "Baby Doc" Duvalier is known to have kept
$300 to $900 million in offshore banks while Philippine President Marcos salted
away well over $2 billion in Western banks.

● Private Banking

Today, private banking increasingly used for confidential services to

international elites is believed to be worth as much as $17 trillion worldwide, and is
experiencing phenomenal growth. Globally, private banking is predicted to grow two
to three times as fast as ordinary consumer banking in the next few years.

The private banking boom has its origins in the debt crisis and is a major
reason for the continued indebtedness of many poor countries. Because of the debt
crisis in the late 1980s onwards, Western banks had fewer opportunities to lend to
Third World countries and thus started to pursue wealthy individuals in the Third
World to encourage them to place their wealth in private bank accounts. The result
was a revolving door. International loans to developing countries were creamed off
by those in power and "transferred into banks... ironically often to 'private banking'
branches of the very same international banks that had issued the international
loan... in the first place." This has been at least as profitable for the banks as for the
individuals making the deposits. The average rate of return to banks for private
banking accounts is over 20%.

An estimated 80% of loans made by commercial banks during the 1980s

never reached their destined countries, remaining instead in US bank accounts. In
Latin America, two-thirds of total debt is thought to have been deposited in US
banks.

Although the private banking boom is a global phenomenon (in Latin America,
for example, the market is already estimated at $450 billion), the biggest
beneficiaries have been US banks. According to Raymond Baker, a financial
specialist at the Brookings Institute, the "US has, according to all credible estimates,
become the largest repository of ill-gotten gains in the world," not least because of
lax or inadequate oversight. A 1999 US Senate inquiry revealed that 350 of
Citibank's 40,000 clients were senior foreign government officials or their relatives,
including:
● President Omar Bongo of Gabon, who transferred $100 million through
personal accounts in Citibank's New York branches. Bongo had two private
 accounts in the name of shell (or dummy) corporations as well as a special
account to receive payments from oil companies (which included alleged
bribes or "donations" from the French government's oil company Elf
Aquitaine). Citibank made more than $1 million a year net from Bongo's
accounts.
● Asif Ali Zardari, the husband of former Pakistan prime minister, Benazir
Bhutto, who transferred some $40 million through Citibank accounts, of which
$10 million is believed to be from kickbacks on a gold importing contract.
● The three sons of Nigeria's General Sani Abacha, who held some $110 million
in Citibank accounts, including some in the name of shell corporations set up
by Citibank. The bank lent the two sons $39 million to deposit in another bank
account in Switzerland after the new Nigerian government began
investigations into corruption in 1998.
● Raul Salinas, the brother of former Mexican President Carlos Salinas, who
transferred $80 to 100 million in alleged drug money out of Mexico between
1992 and 1994 through Citibank's accounts.

In Switzerland, too, private banks still hide the assets of Bongo's and
Abacha's families, as well as those of Mali's Moussa Traore and Zaire's Mobutu
Sese Seko. The private banking department at UBS, meanwhile, handles accounts
for the family of Kenyan President Daniel Arap Moi.

● Offshore Banks and Companies

"There is no honest reason for being offshore. Bank secrecy and the offshore
money industry have no place in a globalized economy."- Jack Blum, Offshore
Expert & UN Consultant

Offshore banks and companies are another part of the system through which
money is siphoned out of poor countries and hidden well away from its citizens.
Offshore financial centers became prominent in the 1960s with bank deposits in tax
havens increasing from $11 billion in 1968 to $385 billion in 1978. By 1989, there
was an estimated $1.5 trillion offshore; by 1998, $5 trillion. In 1999, accounts in
some 61 offshore centers around the world held $8 trillion. In the Caribbean and
South Pacific Islands alone, the OECD found that deposits had increased five-fold
between 1985 and 1994, to $200 billion.

Since the 1980s, offshore finance centers or tax havens have been a magnet
for money from Third World countries, both clean and dirty. In the mid-1980s, a
Morgan Guaranty Trust study of "capital flight" from developing countries found that,
in one year alone, a total of $198 billion disappeared offshore from 18 developing
countries. Offshore centers impose little or no taxes, offer themselves to
non-residents to escape taxation in their own country, do not exchange information,
lack transparency, and attract shell companies-businesses "with no substantial
activities."

Because of the secrecy with which they operate, offshore centers have
become excellent places to launder the proceeds of crime and corruption. They have
been implicated in almost all money-laundering schemes. In 1996, the IMF estimated
that $500 billion-between 2 to 5% of global GDP-is laundered offshore every year.
Three years later, the IMF put the figure at anywhere between $590 and $1,500
billion. A 1997 UN report likewise calculated that laundered global revenues from
corruption, fraud, pornography and prostitution stood at between $500 billion and
$1,000 billion. Arms dealers also often use offshore bank accounts to hide their
tracks.

When dirty money disappears offshore, it becomes more difficult for

governments to tackle corruption. The power of crime mafias grows, bringing yet
more corruption in its train and helping to turn the country into a "mafia state."

In some offshore havens, new companies can be set up for as little as £100.
Such companies, which can be set up in as little as 24 hours, are not required to file
annual returns or accounts, or to disclose ownership. In fact, in some offshore
centers, it is a crime to divulge any information about the ownership of banks,
depositors or shareholders of an offshore business. Not surprisingly, wealthy
criminals hold much of their money in such companies rather than as individuals.
Who these companies really represent becomes even more difficult to trace when
they are owned by yet other offshore companies in different jurisdictions.

RECOVERING STOLEN WEALTH

International pressure has been mounting in recent years to return money which has
been stolen from public treasuries and stashed away in Western banks and offshore
tax havens. Several precedents exist for the return of such funds:
● In 1998, US$500 million of former Philippine President Ferdinand Marcos'
money was returned from Swiss banks to the Philippine government. The
Presidential Commission on Good Government set up after Marcos was
deposed has recovered overall some $1 billion of the $5 billion that the
Marcos family squirreled away.
● In March 1999, the High Court in London ordered the freezing of all accounts
belonging to former Nigerian ruler Seni Abacha's family. In October 1999, the
Swiss government called on five banks to freeze several accounts held in the
name of Abacha's son, Mohammed, and thought to contain hundreds of
millions of dollars plundered from the Nigerian central bank and oil revenues.
In January 2000, Swiss banks froze £390 million in accounts belonging to
Abacha and his associates. Four months earlier, the Nigerian government had
announced that it had already managed to recover some $700 million of
 Abacha's money. In all, Abacha is believed to have stashed $1.5 billion in
embezzled funds in Western banks.
● In November 1999, the Bank of England identified and froze the London bank
accounts of Angola's rebel leader, Jonas Savimbi, who was until recently
aided and abetted as an anti-communist "freedom fighter by several Western
governments, including those of the US and UK.

CLOSING THE LOOPHOLES

More sweeping attempts to recover stolen money will require both

promulgating an international convention and closing loopholes that allow ill-gotten
gains to leave countries in the first place.

Closing down offshore centers is vital to stopping the laundering of corrupt

money and the draining of resources from the Third World. In poorer countries,
however, the process will have to be gradual, in order to provide time to build up
other local industries. Many small Caribbean and other islands and small states set
up offshore centers in the first place only because they needed to diversify out of
tourism and agriculture. In the meantime, public disclosure of offshore corporate
ownership, as well as filing of company accounts, is an urgent necessity.

BLACKLISTING COMPANIES

In 1998, the World Bank set up a sanctions committee to investigate cases of

corruption by companies involved in bidding for or carrying out a World Bank-backed
contract. The Sanctions Committee meets regularly to review investigations and to
debar firms found guilty. It also publishes a comprehensive list of debarred firms,
"The World Bank Listing of Ineligible Firms." As of May 2000, there were 54
companies on this list, 36 of them British-by far the biggest country representation on
the list.

The UK government could and should take action against companies

sanctioned by the World Bank. It could also take steps to help ensure that no
Western or OECD company sanctioned by an international financial institution such
as the World Bank, or prosecuted in any country in the world, obtains contracts with
other international or national institutions. This should particularly apply to contracts
with UK government departments such as the Department for International
Development (DfID) and the Export Credit Guarantee Department (ECGD). The UK
government could also ensure that there are binding anti-corruption clauses or
corporate compliance programmes in all contracts at a national and international
level.

At a broader level, concerted international action on corruption could include

creating an international database of 'blacklisted companies which governments
around the world could use when deciding to whom they should award a contract.
Such a database could be held at the United Nations, by UNCTAD (UN Conference
on Trade and Development), for instance. A model already exists, held by the
Information Coordination Group (ICG), an organisation set up by five oil companies
to combat illegal information brokering. The ICG has a database of 2,500 entries
gathered from participating companies and other international sources on individuals
and companies known or alleged to have been involved in procurement irregularities
around the world. Law enforcement agencies already have access to this database
and companies use it to make "integrity checks before pursuing contracts.

NGOs are also calling for an international public index or ranking of corrupt
companies. At the moment, the international anti-corruption NGO, Transparency
International, publishes an annual bribery perceptions index. The index ranks
countries rather than companies. Since it is not countries that do the bribing, this
index remains fundamentally flawed.

GOVERNMENT ACTION

All governments need to clean up their act but they need to do so in an

environment in which donors are not imposing inappropriate, over-hasty policy
changes; in which resources and time permit genuine participation in social and
economic decision making; and in which international agencies are not adding to the
incentives for corruption.

Any successful anti-corruption programme has to be built up at a national

level, be appropriate to local and national contexts, and have full support from
government employees at all levels. In addition, as a 1998 Commonwealth report on
corruption argues:

"Action programmes need to be designed to meet the expectations of citizens,

who need to be informed about the national strategy to combat corruption.
Effective action to fight corruption is most likely through programs which are
nationally owned, designed to meet national circumstances and built on the
foundation of popular empowerment."

Imposing anti-corruption strategies by putting conditions on loans will not work

and may even lead to governments implementing cosmetic changes which, at best,
do little and, at worse, undermine the anti-corruption efforts. In Uganda, for instance,
the Ministry of Ethics and Integrity is seen by some observers as merely a
showpiece created to appease creditors who demanded action on corruption. Its
responsibility is uncertain and clashes with those of other departments engaged in
developing an anti-corruption strategy such as the office of the Inspector General of
Governance and the office of the Auditor General. The new Ministry may even draw
resources away from these desperately under-resourced bodies and, by diffusing
responsibility across government, actually reduce the effectiveness of their work.

In some instances, governments may not be politically committed to reform.

But as the Commonwealth report on corruption notes, "where governments are less
than enthusiastic in tackling corruption, popular support and the agencies of civil
society can still be mobilized in support of an anti-corruption agenda."

Several NGOs are doing just this by, for example, monitoring debt relief funds
to see if they are being spent on poverty reduction measures; mobilizing ordinary
people and raising awareness; and developing the monitoring capacity of local civil
society to keep local governments accountable in a context of decentralization.

In Nicaragua, a new anti-corruption movement, Citizen Action Against Poverty

and Corruption, has organized popular marches against corruption; is campaigning
to get the President and other ministers and politicians to declare their personal
income; and is in the process of producing a popular manual on corruption, which
will be disseminated at "corruption hearings."

In Uganda, local civil society organisations including the Uganda Debt

Network and the International Anti-Corruption Theatre Movement organize an
anti-corruption week every year during which public meetings, plays and a march are
held in a general attempt to raise awareness about corruption and existing laws
holding politicians and ministers accountable.

One of the most successful grassroots anti-corruption movements is the

Indian Mazdoor Kisan Shakti Sangathan (MKSS) or Workers and Farmers' Power
Organisation in Rajasthan. Since 1988, the MKSS has been organizing with local
people to demand access to local government accounts and records. It holds public
hearings to examine local development works and to check whether the accounts
match up to actual spending. So successful have these hearings been that
Sarpanches or local leaders exposed in the hearings as fiddling the books have
returned the stolen money.

DETERRENTS

Economic punishments are some of the most effective deterrents to

corruption. In Singapore, a middleman was convicted in 1996 of paying bribes
totalling US$9.8 million on behalf of Siemens, Pirelli, BICC, Tomen and Marubeni.
Not only did the government ban all five companies from bidding for any government
contracts for five years. It also banned "firms associated with the five companies, any
new company that the firms may jointly set up, and firms that share the same
directors as the five."
 Opening development projects to more public scrutiny can be another
effective deterrent. In the state of Kerala in south India, a new local government
structure, based on massive public participation, has been acclaimed, even by the
World Bank:

"Kerala's decentralisation programme is probably the largest of its kind in the

world. Three million people (10 % of the State's population) take part in
meetings. This is a far-reaching, innovative and courageous new approach to
rural development and local governance... It reflects a profound commitment to
a total change in which governments govern to empower disadvantaged groups
to voice their demands, and to make institutions responsible and accountable
to them."

The system includes massive devolution of funds to local meetings, which are
required to draw up plans for deploying them, and a concerted effort to maximize
public attendance at such meetings. Eight key democratic principles are central,
including: "maximum direct participation of the people; accountability (continuous
social auditing of performance) and transparency through the right to information."

The potential for corruption, a problem before the new system, is minimized
by a commitment to transparency and openness of all documents and decisions. As
The Hindu newspaper notes:

"Total transparency is the only way to check the danger of decentralisation

degenerating into decentralisation of corruption. All documents on beneficiary
selection, reports and minutes of meetings and all documents on works
undertaken by the local bodies through contractors and beneficiary committees
including bills and vouchers are public documents. Copies are available on
payment of a fee."

In Thailand, meanwhile, a new constitution has strengthened the democratic

rights of local communities, illustrated by electricity generation. Before 1997,
governments, multinational companies and the World Bank had pushed electricity
privatization by building independent power plants with little regard to the interests of
local people. The violent breakup of any opposition would often have been the end of
the issue. As a result of the 1997 constitution, however, large development projects
are now subject to public hearings, and local councils, which are now elected rather
than appointed, must give their consent to such projects.

RESISTANCE

Fighting corruption is increasingly engaging the energies of civil society

around the world. To be effective, they must:
 ● Mobilize Ordinary People

Civil society groups will need to be prepared to take on governments in

innovative and sometimes confrontational ways. They will also need to be committed
to being transparent and accountable themselves.

● Push for Freedom of Information (FOI)

Enable ordinary people to use information. Only if they have the relevant
knowledge can citizens hold their governments accountable and ensure that
resources that belong to them are used in the right way.

● Help Increase Citizen Participation in Decision-Making

In Uganda, a popular phrase is abantu babisi, meaning "people do not know

what is going on." It is used to show mistrust of government decisions. Greater
participation by groups that represent the poor is a must in decision-making at every
level-local, regional and national. Greater citizen participation is also required in
monitoring and auditing public expenditure. Civil society groups need to play a
"critical auditing function...if they are to hold the state accountable to their poorer
citizens." In many countries, opposing privatization-for example, water privatization
plans in Panama and Brazil-has proved to be one way to remove potential sources
of corruption. Where work is put out to tender, it is critical to ensure that there is
always an "in-house bid" from the public sector to set against any private contractors'
bids, something that the UK Office of Fair Trading recommends as a key method for
avoiding being cheated by a cartel. Ensuring that such bids are made also makes it
difficult for a contractor to buy a contract at an artificially inflated price.

Cracking down on bribery will not necessarily make international business

more accountable. Nor will it end corruption overnight. But it will help send a clear
message that the international community is intent on restricting the "supply side" of
bribery. Companies must not be allowed to continue to behave in unethical ways that
undermine local democracy and development (Source: Exporting Corruption
Privatization, Multinationals and Bribery by Sue Hawley, cornerhouse.icaap.org).
CHAPTER 7: ACTIVITIES

TRUE or FALSE

TRUE 1. During the 1980s, very few organizations created and implemented ethics
codes,

TRUE 2. A businessperson can take some comfort when faced with an ethical
dilemma by talking openly about it with management because ethical decisions will
always withstand scrutiny.

TRUE 3. It is easy for an organization to develop ethics codes, policies and

procedures to deal with all relationships and every situation.

TRUE 4. Generally, social responsibility does not cost money.

TRUE 5. Social responsibility is good business but it does cost money.

TRUE 6. Customers can't find out which firms are acting responsibly and which are
not.

TRUE 7. Businesses record of social responsibility today is much better than in past
decades.

TRUE 8. When translated, caveat emptor means "let the buyer beware."

TRUE 9. The ability of the Bureau of Food and Drugs to force businesses making or
selling defective products to recall them is most closely related to consumers' right to
choose.

TRUE 10. Recently, consumers and the government have been losing an increasing
number of product liability lawsuits against sellers of defective products.

TRUE 11. One major reason for improving product safety is the consumer's demand
for safe products.

TRUE 12. Corporate social responsibility addresses the social commitment of

companies to world problems.

FALSE 13. With no focus on that issue and attention being paid to sustainability and
transparency in international business, many countries are now making greater
efforts to eradicate corruption, which will create proper conditions for a deeper
involvement of business groups in social responsibility actions.
TRUE 14. Developing countries represent the most rapidly expanding economies,
and hence the most lucrative growth markets for business.

TRUE 15. While individual and organized forms of philanthropy are not new, there
has been a particular explosion of models in the past 20 years in the field of
organized philanthropy.

FALSE 16. Corporate social responsibility has not undergone significant changes in
the past several decades.

TRUE 17. While Friedman's view has theoretical merit, and should not be dismissed
lightly, that position is no longer widely shared by the global business leaders of the
21st century.

TRUE 18. Employee matching gift programs are one such vehicle where the
employee makes the choice and the corporation matches or exceeds the employee
contribution.

TRUE 19. If CSR is to have potential as a way to address social and environmental
challenges, it must be supported by a public that holds companies accountable.

FALSE 20. There must not be enough motivation and momentum in the field to keep
the social responsibility of corporations a priority.

FALSE 21. Pursuing a mission of sustainable development can make our firms more
competitive, more resilient to shocks, nimbler in a fast-changing world and more
likely to attract and hold customers and the best employees.

FALSE 22. Consumers are also increasingly paying attention to corporate behavior.

MULTIPLE CHOICE

1. Caveat emptor

A. is a French term that implies laissez faire..

B. implies disagreements over peer evaluations.
C. is a Latin phrase meaning "let the buyer beware."
D. is a Latin phrase meaning "let the seller beware"
E. is a Latin phrase meaning "the cave is empty."

2. Before the 1930s, most government involvement in day-to-day business was

aimed at
 A. non-payment of income taxes..
B. discrimination.
C. protection of the free-market system.
D. consumer rights.
E. employment practices in factories.

3. You have been asked to complete this year's social responsibility report for
the insurance industry. Which of the following statements would you include
as a valid indication of socially responsible activities in this industry?

A. This year, we sold more insurance policies than in the previous two years,
B. This year marked a 200% increase in the number of new insurance products
and services available to customers.
C. To date, few women and minorities hold management positions in the
insurance industry.
D. This year, more than 300,000 volunteer hours were contributed by
companies through loaned executives and release-time arrangements.
E. Fewer than one-eighth of the companies' charitable contributions go to people
related activities.

4. Which of the following statements reflects the socioeconomic model of

social responsibility?

A. "I did it my way!"- Frank Sinatra

B. "it's easier and better to ban smoking than to risk multimillion-dollar lawsuits."
- a university professor
C. "It's an absolutely preposterous proposal. The idea that any corporation has
the right to reach beyond company gates to what you could even describe as
the bedroom of the employee is ridiculous a spokesperson for the Tobacco
Institute
D. "In the private sector, employers can get away with quite a bit-an attorney
E. "We will not allow our motion pictures to be shown in any movie house
in the south."- a citizen

5. Long-distance providers are becoming increasingly concerned about certain

activities within their industry. Various companies come together voluntarily to
implement new standards of social responsibility that members must abide by.
What seems to be the primary motivation in this case for an increased interest
in social responsibility?

A. Because corporations are creations of society, they are responsible for giving
back to the communities in which they operate.
 B. These companies have realized it is in their best interest to increase
their social responsibility before they are once again subject to stricter
regulations.
C. These companies are using social responsibility as a means to increase their
profitability both short term and long term.
D. Long-distance providers have started taking pride in their industry and its
record for social responsibility.
E. They feel a responsibility to their stockholders, employees, the government,
investors, and society as a whole.

6. Which one of the following is an argument for increased social

responsibilities?

A. Because business is part of our society, it cannot ignore social issues.

B. Management must be concerned with providing a return on owners
investments.
C. Corporate time and money should be used to maximize profits.
D. Individual businesses should not be expected to solve society's problems.
E. Social issues are the responsibility of government officials.

7. Supporters of increased social responsibility would most likely say mat the
goal of a firm is to

A. maximize hareholders wealth.

B. provide jobs for the community and make a reasonable profit.
C. maximize profits while obeying the law.
D. beat the competition and stay in business.
E. create value and benefits for owners, employees, and society.

8. All of the following are arguments against increased social responsibility

except

A. social issues are the responsibility of government officials elected for that
purpose.
B. companies should maximize profits and not solve society's problems with their
time, money and talent.
C. because social problems affect society in general, businesses should not be
expected to solve these problems.
D. social responsibility by firms can prevent increased government
intervention.
E. business managers are primarily responsible to stockholders and providing
them a good return.
9. Which one of the following is an argument for increased social
responsibilities?

A. Because business is part of our society, it cannot ignore social issues.

B. Management must be concerned with providing a return on owners'
investments.
C. Corporate time and money should be used to maximize profits.
D. Individual businesses should not be expected to solve society's problems.
E. Social issues are the responsibility of government officials.

10. MasterCard sends a customer a memo that discloses the true cost of
borrowing with each billing statement. It does this because it realizes that the
customer has the right to

A. choose.
B. obtain credit.
C. be heard.
D. be informed.
E. safety.

11. The motion picture industry uses a rating system to describe the content of
its movies. Movies are accompanied by ratings such as PG (parental guidance
suggested) or R13 (not suitable for those under 13). This rating system
satisfies consumers' right to

A. be heard.
B. safety.
C. be informed.
D. censorship.
E. watch what they want to watch.

12. A credit card company is offering an annual percentage rate of 3.9%.

However, the company fails to mention that this is an introductory rate, and
when consumers receive their bills after six months promo period, the rate has
been increased to 21.9%, the consumers feel their right to has been abused.

A. be treated fairly
B. be informed
C. safety
D. be heard
E. service

13. If Casio were to buy out all other calculator manufacturers, what consumer
right would be at stake?
 A. The right to choose
B. The right to be heard
C. The right to safety
D. The right to service
E. The right to be informed

14. When people in an industrialized society contaminate the environment, the

action is

A. wasteful.
B. recycling.
C. redesign.
D. disposal.
E. pollution

15. Over the past several decades, concern for the environment has

A. been relatively steady because people expect to live in a clean and safe
environment.
B. increased significantly because pollution became a threat to life and
health.
C. been carefully handled by businesses because they are the primary source of
pollutants.
D. become stronger in the US but not yet in the rest of the world.
E. decreased because today's industrialized processes are naturally more
environmentally friendly.

16. When sulfur emitted by smoke stacks combines with moisture in the
atmosphere to form acids that are spread by the wind, results.

A. air pollution
B. fire
C. acid rain
D. emissions
E. wet pollution

17. The company you Work for recently has committed itself to implementing a
program of social responsibility. After the company has gotten the
commitment of top executives, planned the program, and appointed a program
director, you suggest that a(n) be prepared periodically to evaluate the
success of the program.

A. research report
 B. social audit
C. ethics evaluation
D. departmental memorandum
E. social actions report

18. What is the major source of human emissions of air pollution in the upper
atmosphere?

A. Aircraft
B. Automobiles
C. Acid rain
D. Volcanoes
E. Factories

19. Which of the following is not one of the steps in developing and
implementing a program of social responsibility?

A. planning
B. the social audit
C. commitment of employees
D. appointment of a director
E. commitment of top executives

20. What specific gas is internationally considered a top concern for air
pollution?

A. carbon monoxide
B. nitrogen dioxide
C. carbon dioxide
D. greenhouse gas
E. hydrogen monoxide

21. A social audit is a

A. review of the costs of operating a social program.

B. report of what a business has done and is doing about social issues.
C. C.review of a tax statement by the BIR.
D. review of management's social activity for the year.
E. report filed by social sector accountants.

22. Which type of pollution has seen the least improvement since
environmental issues became important?

A. Land
 B. Air
C. Ocean
D. Water
E. Factory

23. A program to implement social responsibility in business begins with

A. total commitment of top management.

B. careful planning
C. appointment of a director.
D. a board of directors meeting
E. conducting a social audit.

24. Implementing social responsibility on a global level is complex because

A. consumers in most countries do not care about social responsibility.

B. of the need to balance economic responsibility with other
responsibilities.
C. employees speak many languages and some information is hard to translate.
D. regional alliances, like NAFTA and APEC, have their own expectations and
standards.
E. global companies are rarely subject to local laws and regulations.
 CHAPTER 8

"Being a CEO still means sitting across the table from big institutional investors and
showing your leadership and having them believe in you." - Christie Hefner

INTRODUCTION

Corporate governance is a process that aims to allocate corporate resources

in a manner that maximizes value for all stakeholders-shareholders, investors,
employees, customers, suppliers, environment and the community at large and holds
those at the helms to account by evaluating their decisions on transparency,
inclusivity, equity and responsibility. The World Bank defines governance as the
exercise of political authority and the use of institutional resources to manage
society's problems and affairs.

Corporate governance is the set of processes, customs, policies, laws, and

institutions affecting the way a corporation is directed, administered or controlled.
Corporate governance also includes the relationships among the many stakeholders
involved and the goals for which the corporation is governed.

In contemporary business corporations, the main external stakeholder groups

are the shareholders, debt holders, trade creditors, suppliers, customers and
communities affected by the corporation's activities. Internal stakeholders are the
board of directors, executives and other employees.

Corporations are created as legal persons by the laws and regulations of a

particular jurisdiction. These may vary in many respects between countries, but a
corporation's legal person status is fundamental to all jurisdictions and is conferred
by statute. This allows the entity to hold property in its own right without reference to
any particular real person. It also results in the perpetual existence that characterizes
the modern corporation. The statutory granting of corporate existence may arise
from general purpose legislation (which is the general case) or from a statute to
create a specific corporation, which was the only method prior to the 19th century.

In addition to the statutory laws of the relevant jurisdiction, corporations are

subject to common law in some countries, and various laws and regulations affecting
business practices. In most jurisdictions, corporations also have a constitution that
provides individual rules that govern the corporation and authorize or constrain its
decision-makers. This constitution is identified by a variety of terms, in some
jurisdictions, it is known as the Corporate Charter, but in the Philippines, it is the
Articles of Incorporation.
INSTITUTIONAL INVESTORS

Institutional investors can be described as organizations that buy and sell

securities in large volume of share quantities or amounts that made them qualify
sometimes for preferential treatment and lower commission cuts. Examples of
institutional investors in the Philippines are the Social Security System (SSS),
Government Service Insurance System (GSIS) and the Armed Forces Savings and
Loan Association Incorporated (AFSLAI).

These institutional investors may also include operating corporations which

decide to invest excess funds or those funds above their liquidity requirements.
Typical investors included in this classification are as follows: banks, insurance
companies, retirement or pension funds, hedge funds, investment advisors and
mutual funds. Their role in the economy is to act as highly specialized investors
whose competencies are focused on taking care of investments on behalf of others.
The good thing about institutional investors is that they manage aggregated sums of
money and have these funds invested in different investment prospects which are
appropriate, ideal, and favorable to each of the contributor under given
circumstances.

These investors are entitled to vote on their shareholdings. With the right,
institutional investors can play an active role in corporate governance. And, with their
significant holdings and war chest at their disposal, their power to make a "to buy" or
"to sell" order of the shares in the investee corporation will certainly exert influence
on the way the investee treats the institutional investor and how it conducts its
business.

TYPES OF INSTITUTIONAL INVESTORS

Hedge Fund

A hedge fund is an investment account open to a narrow range of investors

that take on a wider range of investment and trading activities in addition to
traditional long term investment funds. Every hedge fund has its own investment
approach that determines the category of investments and the methods of
investment it embarks on. Hedge funds, as a class, invest in a wide range of
investments including equity and debt securities, and commodities.

As far as membership, hedge funds are available only to sophisticated or

wealthy investors who meet certain criteria. This selective membership attributes
gives this investor incentives, foremost of this is that, hedge funds are exempt from
many regulations that rules ordinary investment funds. The exemption typically
include limitations on short selling, the application of derivatives and leverage, fee
structures, and on the liquidity of concentration in the fund. Lighter guidelines and
the existence of performance fees are the distinguishing characteristics of hedge
funds.

● Investment Banking

An investment bank refers to a financial institution that helps out corporations

and governments in raising capital by underwriting and acting as the agent in the
issuance of both equity and debt securities. An investment bank also assists
companies involved in business combinations like mergers, acquisitions and other
diversification effort Investment bank also provides auxiliary services such as market
making and the trading of derivatives, fixed income instruments like bonds and other
bills, foreign exchange transactions, commodity and equity securities. The
distinguishing feature of an investment bank is that it does not accept deposit unlike
commercial banks and retail banks.

● Investment Trust

Investment trust refers to Investors' money being pooled together from the
sale of a fixed number of shares a trust issues in its first offering. The board will
normally hand over responsibility to a professional fund manager to invest this
money in the stocks and shares of a wide range of companies. This is typical
investment endeavor where the entity's money is invested in several placements
more than most people could realistically invest in themselves. The investment trust
often has no employees, only a board of directors comprising only non-executive
directors. In recent years, this has started to change, especially with the emergence
of both private equity groups and commercial property trusts both of which every so
often use investment trusts as a holding company, this strategy is normally used to
increase the sources of funds, and consequently enlarge the pipeline of money for
wider investment coverage

● Mutual Fund

Mutual fund is another institutional investor that is a professionally managed

type of collective investment scheme that pools money from many investors and
invests typically in investment securities which includes, stocks, bonds, short-term
money market instruments, other mutual funds and securities, including commodities
such as precious metals. This fund is managed by a fund manager that buys and
sells instruments and commodities from the fund's investments in accordance with
the fund's investment objective. This funds will be are overseen by a board of
directors or trustees, the body taking charge with ensuring that the fund is managed
appropriately by its investment
adviser and other service organizations and dealers, all for the best interests of the
fund's investors.

● Pension Fund

A pension fund is a collection of assets forming a separate legal entity that

came into being from the contributions to a pension plan for the exclusive purpose of
financing pension plan benefits. Pension funds are important shareholders of listed
and private companies because pension fund is considered as one of the biggest
investors in the stock market, any movement of a certain pension fund from one
investment to another can definitely be felt by the entire listed community.

CROSS LISTING

Cross listing refers to listing of equity shares of a company in more than one
stock exchange in different countries. The term can also be used to refer to the
listing of a company on more than one stock exchange in the same country: for
example in the U.S., there are companies that are listed in both the NASDAQ and in
the New York Stock Exchange. Here in the Philippines, we only have one (fused
from the original Manila Stock Exchange and Makati Stock Exchange) stock
exchange which is the Philippine Stock Exchange Inc. (PSE). U.S. companies may
choose to cross-list their shares on different Asian or European stock exchanges as
a strategy to address U.S. dollar positioning against major and dominant global
currencies.

MOTIVES FOR CROSS-LISTING

By cross-listing and selling its shares on a foreign stock exchange, a firm

typically tries to accomplish one or more of the following objectives:

● To Improve Liquidity

By cross-listing company can improve the liquidity of its existing shares at the same
time, find and support a liquid secondary market for new equity issues in foreign
markets. Firms from countries with small illiquid capital markets often outgrow those
markets and are forced to raise new equity abroad. In order to maximize liquidity, the
firm ideally should cross-list and issue equity in more liquid markets in other
countries or regions. The idea still remain, the more source for investors' money, the
better for the company.
 ● To Increase Its Share Price

Another subtle reason in cross-listing is trying to increase the company's

share price by defeating mispricing in a segmented and illiquid home capital market.
In more liquid market or region where share are cross-listed, not only that the
company has fresh source of funds but also the company's share marketability is
enhanced.

● To Increase Firm's Visibility and Acceptance

Cross-listing increases the firm's visibility and acceptance to its customers,

suppliers, creditors, and host governments. Cross-listing in the foreign markets gives
the company the chance to enhance corporate image, to expose and advertise
trademarks and products, to get better local press attention, and more importantly, to
become more familiar with the financial community.

● To Support Takeover Bids

Cross-listing can also be view as one of the initial steps in establishing a

secondary market for shares to be used to acquire other firms in the host countries
or markets. In a takeover or business acquisition scenario for that matter, companies
offer their shares as partial payment and it is significantly more attractive if those
shares have a liquid secondary market in other regions. High liquidity level in the
market can be noted when the firm can issue new securities without any noticeable
traces of depression in terms of market price resulting from the new issuance.

● To Support Share and Options Plan

Create a secondary market for shares that can be used to compensate local
management and employees in foreign subsidiaries. For example, if a company has
foreign subsidiaries and wishes to use stock options and share purchase
compensation plans for local management and employees, cross listing should
reduce transaction and foreign exchange costs for the local beneficiaries.

ROLE OF INSTITUTIONAL INVESTORS IN GOVERNANCE

MONITORING

Close monitoring of corporate performance from institutional investors is

expected considering that investments from these type of investors usually involve
large amounts of money. Another reason for close monitoring is that the profiles and
expectations of these investors are different from the ordinary investors. From the
cost benefit standpoint, the costs of monitoring can be easily offset by the expected
positive returns.

DRIVER OF AGENT'S PERFORMANCE

When the share of investment by institutional investor is so huge that the

balance sheet figure will significantly suffer without its investment, agents in the
corporation will at all times, be in pursuit of pleasing its principal in terms of
performance. Being a valued investor can, most of the time, command better
performance knowing that such an amount of money can be pulled out by the
investor anytime and have it invested in another field of interest by the investor or
worse, be invested in a competitor-investee.

GOOD ACTIVIST

Institutional investors especially those whose investment is significant enough

to earn a board seat can be the fearless fiscalizers on corporate policies. They are
the representatives who can be the voice of the investing institutions in the board.
They can easily ask questions on matters affecting the corporation and of course,
they have access to the records as stockholders.

PRINCIPAL-AGENT ROLE (DUALITY)

When an investor has already a huge influence in the corporation, he can

have the power to elect the officers for the investee corporation. One scenario is an
investor earning a board seat may eventually be elected as the chief executive
officer (CEO). In this case, the institutional investor is in the process performing a
dual roles-the role of being the principal (shareholder) and an agent at the same time
(board member and/or CEO). This unique capability of institutional investors adds
security and protection for their investments in the company.

DETERRENT TO OPPORTUNISM

There are a lot of challenges to consider when one engages in activities for
purposes of deterring opportunism. One needs something to counter self-interested
behavior of the agents. One of the best antidote to opportunism is to have a voice in
the board. In corporate world, the level of audibility of the investor's voice may be
directly proportionate to the level of investment he is representing. Institutional
investor's representative to the board will serve as watchdog. Opportunistic attitudes
of the other members of the board will therefore be in-check.
CORPORATE GOVERNANCE ORGANIZATIONS

INTERNATIONAL CHAMBER OF COMMERCE (ICC)

An organization focusing on promoting growth and prosperity, spreading

business expertise and advocate for international business. This organization is
considered as the voice of the world business championing the global economy as a
force for economic growth, job creation and prosperity. ICC, the world's only truly
global business organization, responds by being more assertive in expressing
business views. ICC activities cover a broad spectrum, from arbitration and dispute
resolution to making the case for open trade and the market economy system,
business self-regulation, fighting corruption or combating commercial crime.

INTERNATIONAL CORPORATE GOVERNANCE NETWORK (ICGN)

An investor-led organization of governance professionals, ICGN's mission is

to inspire and promote effective standards of corporate governance to advance
efficient markets and economies world-wide. ICGN members are largely institutional
investors who collectively represent funds under management. Breadth and
expertise of ICGN members from investment, business, the professions and
policymaking extends across global capital markets.

ASIAN DEVELOPMENT BANK (ADB)

ADB is an international development finance institution whose mission is to

help its developing member countries reduce poverty and improve the quality of life
of their people. Headquartered in Manila, and established in 1966, ADB is owned
and financed by its 67 members, of which 48 are from the region and 19 are from
other parts of the globe ADB's main partners are governments, the private sector,
non-government organizations, development agencies, community-based
organizations and foundations.

Under Strategy 2020, a long-term strategic framework adopted in 2008, ADB

will follow three complementary strategic agendas: inclusive growth, environmentally
sustainable growth, and regional integration. In pursuing its vision, ADB's main
instruments comprise loans, technical assistance, grants, advice and knowledge.
Although most lending is in the public sector-and to governments-ADB also provides
direct assistance to private enterprises of developing countries through equity
investments, guarantees and loans. In addition, its triple-A credit rating helps
mobilize funds for development.
INTERNATIONAL FEDERATION OF ACCOUNTANTS

IFAC is the global organization for the accountancy profession. It works with
its 159 members and associates in 124 countries and jurisdictions to protect the
public interest by encouraging high quality practices by the world's accountants.
IFAC members and associates, which are primarily national professional
accountancy bodies, represent 2.5 million accountants employed in public practice,
industry and commerce, government and academe.

UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT

Established in 1964, UNCTAD promotes the development-friendly integration

of developing countries into the world economy. UNCTAD has progressively evolved
into an authoritative knowledge-based institution whose work aims to help shape
current policy debates and thinking on development, with a particular focus on
ensuring that domestic policies and international action are mutually supportive in
bringing about sustainable development.

The organization works to fulfill this mandate by carrying out three key functions:
1. It functions as a forum for inter-governmental deliberations, supported by
discussions with experts and exchanges of experience, aimed at consensus
building.
2. It undertakes research policy analysis and data collection for the debates of
government representatives and experts.
3. It provides technical assistance tailored to the specific requirements of
developing countries, with special attention to the needs of the least
developed countries and of economies in transition. When appropriate,
UNCTAD cooperates with other organizations and donor countries in the
delivery of technical assistance.

In performing its functions, the secretariat works together with member

Governments and interacts with organizations of the United Nations system and
regional commissions, as well as with governmental institutions, non-governmental
organizations, the private sector, including trade and industry associations, research
institutes and universities worldwide.

ORGANIZATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

(OECD)

OECD brings together the governments of countries committed to democracy

and the market economy from around the world to:
1. Support sustainable economic growth
2. Boost employment
3. Raise living standards
 4. Maintain financial stability
5. Assist other countries' economic development
6. Contribute to growth in world trade

The Organization provides a setting where governments compare policy

experiences, seek answers to common problems, identify good practices and
coordinate domestic and international policies.

INVESTMENT PROMOTION AND FACILITATION

Specific measures to promote and facilitate investments can be successful if

they take place within the context of, and not substitute for, broader policies for
improving the investment environment. As a country establishes a sound investment
environment, investment promotion and facilitation measures can be useful
instruments to attract new investors, especially in smaller, more remote markets or in
those countries with a recent history of macroeconomic and political instability.
Effective investment promotion also serves to highlight profitable investment
opportunities, by identifying local partners and by raising the positive image of the
economy.

Has the government established an investment promotion agency (IPA)? To what

extent has the structure, mission, and legal status of the IPA been informed by and
benchmarked against international good practices?

The rapid growth in the number of IPAS reflects the growing importance that
governments ascribe to investment promotion. Centralizing foreign investment
promotion and facilitation activities, such as information dissemination and policy
advocacy, within a single agency can be more cost effective and provides an
opportunity to present a coherent impression of a country's attractiveness to
investors. The growth in the number of IPAs also means that a rich body of
experience has been developed with respect to different approaches to investment
promotion agencies and across countries at different levels of development.

Countries that have recently established IPAS, or are contemplating doing so,
can use this experience to inform the design of the IPA following international good
practices. This approach helps to ensure the full effectiveness of the IPA and to
avoid repeating past mistakes.

Is the IPA adequately funded and is its performance in terms of attracting investment
regularly reviewed? What indicators have been established for monitoring the
performance of the agency?
 Experience suggests that unless there is a full commitment to investment
promotion agencies by the government, they are less likely to succeed in attracting
new investors. They need to be adequately funded in order to attract and retain
qualified and motivated staff, ideally with private sector experience. Experience also
suggests that agencies with links to the center of government and with private sector
representation on the board have higher visibility and credibility and hence a better
record in attracting foreign investment. They are also more dynamic and adaptable
to changing economic circumstances, a critical issue for countries undergoing major
economic transformation.

How has the government sought to streamline administrative procedures to quicken

and to reduce the cost of establishing a new investment? In its capacity as a
facilitator for investors, does the IPA take full advantage of investors?

Long delays and costly procedures to establish a new business entity is one
of the obstacles to new investment and entrepreneurial activity. Many governments
have introduced reforms to quicken and simplify the process of starting a new
business. One common approach to this challenge has been the establishment of a
'one-stop shop'. These allow investors to access information on the necessary steps
to start or expand a business and provide services to speed up the granting of
necessary permits and licenses. 'One-stop shops' also provide easy access to other
information that helps to facilitate investment, both domestic and foreign, for
instance, on legal and regulatory matters, on financing options, location choice, or
recruitment and training. 'One-stop shops' make it easier for the government to
centralize the quality provision of these services. This can deliver substantial savings
in time and cost to potential and existing investors, thereby facilitating new
investment.

To what extent does the IPA promote and maintain dialogue mechanisms with
investors? Does the government consult with the IPA on matters having an impact
on investment?

Investment promotion agencies can play an important role facilitating effective

communication between investors and the government. As the interlocutor between
the government and the foreign investor, the IPA is often the main source of
feedback to government policymakers on the concerns of investors. Conversely,
through its regular contact with government and the relevant government agencies,
the IPA can be an effective communication channel for investors on government
activities having an impact on the investment environment.

What mechanisms has the government established for the evaluation of the costs
and benefits of investment incentives, their appropriate duration, their transparency,
and their impact on the economic interests of other countries?
 The use of financial and other incentives to attract foreign investors is not a
substitute for pursuing policy measures that create a sound investment environment,
for domestic and foreign investors alike. In the absence of a solid investment
environment, competition among countries for FDI may lead to no overall increase in
investment and divert public resources away from more productive uses. In some
circumstances, however, incentives may complement an already attractive enabling
environment for investment or serve as a partial rectification for market imperfections
that cannot be addressed by direct policy reforms. Nonetheless, authorities engaging
in incentive-based strategies to attract investment must periodically valuate their
relevance, appropriateness and economic benefits against their budgetary and other
costs, including long-term impacts on resource allocation. In doing so, authorities
also need to consider their commitments under international agreements, since
investment incentives can have effects beyond the countries that offer them,
including bidding contests leading to a waste of resources. Many governments,
including all OECD member countries, consider that it is inappropriate to encourage
investment by lowering health, safety or environmental standards or relaxing core
labor standards.

What steps has the government taken to promote investment linkages between
businesses, especially between foreign affiliates and local enterprises? What
measures has the government put in place to address the specific investment
obstacles faced by SMEs?

Many governments aim to attract foreign direct investment because it can

bring additional benefits to its citizens through the diffusion of new technologies and
human resource and management expertise. These spillovers can materialize more
quickly when foreign investors and local enterprises establish close linkages and are
especially helpful to harness the potential of local small and medium-sized
enterprises (SMEs). These linkages can be fostered through efforts to establish a
sound investment environment. For instance, open trade and investment regimes in
the context of a strong competition policy provide a fertile environment for the
transfer of technology. Close linkages and the broader benefits of foreign investment
are also supported by government efforts to improve human resource development,
through investments in education, training and public health.

Promoting linkages between foreign and local enterprises is a particular

challenge for SMES. SMEs are the largest investor community group, accounting for
over 95 per cent of the business population. SMEs tend to have more difficulties
gaining access to credit and in forming investment linkages with foreign affiliates. As
a result, the take-up of profitable investment opportunities may be delayed, or even
foregone.

Has the government made use of international and regional initiatives aimed at
building investment promotion expertise, such as those offered by the World Bank
and other intergovernmental organizations? Has the IPA joined regional and
international networks?

Many international organizations work with IPAS, facilitating the exchange of

best practices on investment promotion strategies and assisting in building policy
capacity. For instance, the World Association of Investment Promotion Agencies
(WAIPA) assists IPAs in advising their governments on the formulation of investment
promotion strategies; the Foreign Investment Advisory Service, within the World
Bank Group provides investment climate diagnostic studies at the request of host
governments, consisting of recommendations for a combination of policy, regulatory
and procedural reform, institutional frameworks for investment promotion and
methods for monitoring effectiveness; and UNCTAD's Advisory Services on
Investment and Training (ASIT) is experienced in instruction programmes for IPA
staff to improve capacity.

To what extent has the government taken advantage of information exchange

networks for promoting investment?

One of the roles of IPAS is to facilitate the recognition of potential investment

opportunities by promoting partnerships between domestic and foreign enterprises.
A number of initiatives exist to help governments and IPAs in their linkage promotion
efforts. For example, the UNIDO Subcontracting and Partnership Exchanges (SPXS)
act as technical information, promotion and matchmaking centers for industrial
subcontracting. The SPX Network currently provides detailed, standardized, updated
and certified data on approximately 20,000 manufacturing companies worldwide,
thereby favoring the establishment of partnerships between contractors, suppliers
and subcontractors. To date, more than 60 SPXS have been set up with UNIDO's
assistance in more than 30 countries.

SARBANES-OXLEY ACT OF 2002 SUMMARY

METRICS-BASED CORPORATE GOVERNANCE

Sarbanes-Oxley Act seeks to lay the ground for a culture of proactive

management of risks going beyond the reactive approach that has been common so
far. Typically, companies were often caught off-guard as unexpected events struck.
In order to avoid the embarrassment of unmet expectations, companies took
recourse to creative accounting to patch up their financial statements. The chief
executives had a ready excuse that their responsibilities were limited to providing
strategic direction to their companies. Similarly, the directors of boards of companies
pleaded that their powers are limited in the presence of an omnipotent CEO and the
paucity of access to information.
 Sarbanes-Oxley Act ensures that the senior executives have greater
responsibility as well as the means to meet them. Thus, the directors of boards of
companies will have direct access to company information and their committees will
have independent oversight over important matters such as executive compensation,
selection of auditors and governance policy. In turn, the directors will have greater
exposure to liability for any negligence in the management of companies. Similarly,
the chief executives will now be responsible for not only the strategic direction of the
company but also its operational effectiveness. Their hands will be strengthened by
additional support they will receive from the board of directors for strategic planning.
In addition, they will also receive much more detailed information about their
companies than was possible in the past.

Sarbanes-Oxley Act provides for checks and balances that were not available
in the past. Whistleblowers will now have greater protection of the law as well as the
opportunity to report fraud in their companies. Similarly, the auditors of companies
have to report to the independent audit committees.

Above all, Sarbanes-Oxley Act seeks to make companies more transparent

and vigilant by requiring the reporting of all their operational risks as well as the
internal controls put in place to monitor them. Any material change in the monitoring
of risks has to be reported to the shareholders in real time.

Overall, the Sarbanes-Oxley Act seeks to focus the attention of companies on

fortifying their companies by anticipating risks, all across the enterprise, and to take
preemptive action to guard against the damage that they could wreak. The bedrock
of this model of governance would be the business intelligence infrastructure that will
help companies to receive information. This information will be more widely shared
among the executives, shareholders and the board of directors. All the stakeholders
in the company will have both the opportunity and the resources to put all their minds
together to effectively manage their companies.

BOARD OF DIRECTORS

Increasingly, directors on boards of companies are expected to play much

more active roles in the interest of shareholders. The New York Stock Exchange,
consistent with the provisions of the Sarbanes-Oxley Act, expects that
non-management directors should hold regular sessions without the participation of
the management or any other person with a material relationship with it. The regular
meetings of the boards are sought for brainstorming without being biased by the
concerns of the management or its influence.
DISCLOSURES

The rampant misrepresentation of the financial situation of companies,

especially in the technology industry, by the use of pro-forma financial statements is
not possible now without additional disclosures to compare them with GAAP
consistent accounting Under Section 401 (b) of the Sarbanes-Oxley Act, it would not
be possible for pro-forma statements to omit any material fact which misrepresents
the fair or true position of the company. In addition, companies are now required to
provide quantitative measures to reconcile the pro-forma statements with the GAAP
consistent financial statements.

The SEC is also rapidly moving towards real time disclosures so that each
investor has prompt access to information, under Section 409 that will have a
material impact on the company. The filing deadlines for quarterly and annual reports
have been accelerated by a third. The SEC has also identified items that need to be
disclosed in real time.

FRAUD

The premise for fraud control is that managements frequently exploit

weaknesses in internal controls for their dubious purposes. PCOAB's Auditing
Standard 2, therefore, specifically requires that the assessment of internal controls
take into account the susceptibility of the company's processes to fraud. The internal
controls should be able to prevent, deter and detect fraud.

GOVERNANCE POLICIES

The Sarbanes-Oxley Act seeks to encourage explicit discussion of the

corporate governance policies that will set a direction for the board and the
management. The New York Exchange has the operative rules which require that the
boards of companies set up a governance committee which will spell out the
governance principles which will be used to evaluate the board and the
management.

EXECUTIVE COMPENSATION

In order to check fraud from earnings management by senior executives,

Section 304 of the Sarbanes-Oxley Act, requires a company which restates financial
statements due to material noncompliance, misconduct, or with any financial
reporting requirement, the CEO and CFO must reimburse the company for bonus or
other incentive-based or equity-based compensation received during the 12-month
period following issuance of the financial statements and profits realized from the
sale of equity during the same period.
PROTECTION OF WHISTLEBLOWERS

Sarbanes-Oxley has provided added protection to whistleblowers who can

establish a prima facie case of retaliation when they report malfeasance in the
company. The instrument for achieving this goal is the change in the burden of proof
rules which are now in favor of employees. If they submit evidence that the
retaliation was a contributing factor to the adverse employment action, a
presumption of retaliation is created. In order to defeat this presumption, the
employer must establish, by clear and convincing evidence, that it would have taken
the same action with respect to the employee, regardless of the alleged protected
activity.

COMPENSATION COMMITTEES

Sarbanes-Oxley does not explicitly spell out rules governing compensation in

order not to restrict the freedom of companies to make their decisions. However, the
New York Stock Exchange's governance rules require the boards to form
independent compensation committees which have the authority to decide on
compensation policies consistent with the business goals of their companies. They
are also required to make decisions on the incentive component of compensation
and ensure that they are effective in achieving the performance goals of the
company. Compensation committees are also expected to seek advice from
compensation consultants about executive pay.

AUDIT COMMITTEES

Sarbanes-Oxley Has sought to govern auditors at the board level in order to

avoid the conflicts that can happen with the management. These audit committees
are composed of directors and have the responsibility to ensure that the financial
statements of the company and the internal controls are consistent with the
regulatory policy. The audit committees are also required to discuss the company's
exposure to risk and the means to manage them..

DEPARTURES FROM THE PAST

Sarbanes-Oxley recognizes that the mode of compensation, an increasing

share of equity and equity options, in the packages that executives received was
responsible for the frauds that were committed at several large companies. This kind
of compensation created incentives for fudging the balance sheet and the income
statement to engineer stock price increases. In addition, severance packages are
overly generous. A survey by McKenzie in 2003, a management consulting firm,
found that 52% of the directors of companies believe that executive compensation is
way too high. Academic literature also finds significant correlations between a high
component of equity compensation and symptoms of fraud such as accounting
restatements, high proportions of accruals, capitalization of expenses, etc. A widely
quoted study of a professor from the business school of University of Chicago,
reports that in a sample of 50 firms accused of fraud by SEC by contrast to another
50 companies which were not, a clear pattern of higher occurrence of
higher-than-average component of stock compensation was found in the former
sample. Other studies also confirm that companies are more likely to be subject to
enforcement action if their boards are dominated by the management and they don't
have a block holder or an audit committee.

Severance pay is another contentious aspect of executive compensation often

patently unrelated to performance. A striking case is that of the approval of a $140
million severance package for Michael Ovitz by the Disney Board in response to a
request from CEO Michael Eisner, in 1996. Ovitz had hardly worked a year as
Disney's president when Eisner decided he wasn't the right man for the job.

Increasingly, governance bodies are concerned that executive compensation

does not reflect the performance of the chief executive. While equity compensation is
a means to address the agency issue by tying the interests of owners and managers,
the executives undeservedly also benefit from the overall increase in market indices
unrelated to the financial performance of the company. In addition, severance pay
and retirement benefits and a host of other fees paid to former executives are not
related to performance. While Sarbanes-Oxley has not specifically mandate any rule
for compensation for executives, it does vest authority on compensation committees
to decide on executive pay consistent with the overall interest of the company.

SARBANES-OXLEY: IS IT PERFORMING?

Sarbanes-Oxley sweeping provisions greatly add to the costs of SOX

compliance without a doubt. Most companies see compliance including the need of
procuring SOX compliance software as a sunk cost for the long-term benefits of
credibility and efficiency benefits that will extend over many years. In addition, they
expect that the costs of SOX compliance will decline as companies deploy SOX
compliance software and learn to automate their processes. Currently, many
companies are unsure about the benefits they will actually reap and the means to
automate SOX compliance in a situation where processes are hard to standardize.

According to widely quoted figures from Foley and Lardner, the SOX
compliance cost for companies with sales turnover of less than one billion dollars,
the SOX compliance cost was about $2.86 billion in financial year 2003 up from
$2.12 billion in financial year 2002 and the corresponding figures for companies with
revenues in excess of $1 billion is $7.4 billion. The major components of costs were
directors and officers insurance, lost productivity and accounting.
 Figures have been presented in a variety of ways depending on how they are
collected. Other sources such as Parson Consulting indicate that 50% or more of
overall corporate governance cost revolves around process improvement, controls
documentation, testing, SOX compliance software procurement and adapting
controls to changing needs.

In more recent years, however, companies are also increasingly reporting

benefits from their investments in compliance with Sarbanes-Oxley, in a survey of
200 financial executives by Oversight Systems, 49% of them reported that the risk of
fraud and errors has been reduced, 48% of them agree that their financial operations
are now more efficient and 31 % report lower error rates.

Furthermore, companies will be increasingly focused on lowering costs from

automation of their compliance processes through the purchase of SOX compliance
software. As many as 60% of them have plans to implement technology to automate
their manual processes.

ENTERPRISE RISK MANAGEMENT

Corporations are rethinking their strategies towards the management of risk in

the future to effectively comply with the Sarbanes-Oxley Act. Increasingly, companies
are implementing Enterprise Risk Management Systems and employing Chief Risk
Officers to govern their strategies for risk across the enterprise. Companies do not
any longer want to be taken by surprise and incur losses as they are hit by
unexpected events. They now realize that their ability to manage risks depends on
anticipating risks, detecting their risks more effectively by looking at them in all its
inter-dependence and fortifying their systems to withstand shocks. Some of the more
sophisticated corporations, such as Microsoft and Boeing, implemented such
systems in the past, independent of regulatory policy, while other companies are
following in their steps under pressure from new laws and regulatory standards. A
recent survey indicates that 50% of financial executives believe that they integrate
their SOX compliance with enterprise risk management. This best practice has been
spelled out, in all its details, in the seminal document of the Committee of the
Sponsoring Organizations of the Treadway Commission on the subject.

The conceptual breakthrough that under girds the new approach to risk
management is the realization that business risks, financial risk and operational risk
feed on each other and compound the impact of any one type of shock to a
company. Operational risk, such as fraud in the company, can create a liquidity crisis
for the company. Similarly, business risk, such as loss of intellectual property from
outsourcing of business processes overseas, could lead to bankruptcy of a company.
The vulnerability of companies has increased with the growing reliance on
sophisticated financial instruments, an extended enterprise and information
technologies. Increasingly, companies realize that they need to create a culture in
which employees at all levels. respond to unnoticed sources of risk in any corner of
the enterprise and communicate it to the rest of the organization. This is facilitated by
enterprise risk dashboards which help to communicate potential threats to the
company and galvanize organizations to react rapidly before a crisis goes out of
control.

An example of enterprise wide management of risks is the case of TriQuint

Semiconductor Inc., a US-based supplier of communications components and
modules. As part of its compliance effort, TriQuint is conducting a risk assessment of
all the business

processes that affect its balance sheet and income statement. That evaluation is
helping the company uncover latent risk across all its five divisions. TriQuint's
combined Sarbanes Oxley and ERM efforts have helped it to gain insight into risks in
the businesses it acquires. Typically, mergers fail when the cultures of two different
companies clash. TriQuint has made several acquisitions in recent years, and some
of those businesses have operations outside the United States. The company has
been able to identify and discuss the risks new acquisitions face, including
exposures related to specific cultural and regulatory environments.

CHALLENGES CONFRONTING INSTITUTIONAL INVESTORS

The principles of corporate governance embrace the underlying assumption

that shareholders can best look after their own interests provided they have sufficient
rights and access to information. The increased presence of large institutional
investors in the last decade fostered the expectation that a new breed of highly
skilled and well-resourced professional shareholders would make informed use of
their rights, promoting good corporate governance in companies in which they invest
in. These principles are reflected to cover disclosure of voting policies, managing
conflicts of interest and cooperation between investors. However, institutional
investors are not like other shareholders but have a unique set of costs, benefits and
objectives.

Accordingly, they have not always behaved as desired. Institutional investors

are financial institutions that accept funds from third parties for investment in their
own name but on such parties' behalf. They include pension funds, mutual funds and
insurance companies. By 2009, they managed an estimated US$ 53 trillion worth of
assets in the OECD area, including US$ 22 trillion in equity. Additionally, there are
large investments made by the fund management industry directly under their client's
name. This makes institutional investors a major force in many capital markets.

With the goal of optimizing returns for targeted levels of risk, as well as for
prudential regulation, institutional investors diversify investments into large portfolios,
many of them having investments in thousands of companies. Some managers
pursue active investment strategies, but increasingly, they passively manage against
a benchmark, resorting to indexing. At the same time, the investment chain has
lengthened by outsourcing of management, further distancing investee companies
from the beneficial owners. As a result, incentives do not always stimulate
institutional investors to engage in monitoring the corporate governance practices of
investee companies.

Unlike in the case of private equity and hedge funds, most institutional
investors are not remunerated on the basis of the performance of portfolio
companies, but on the basis of the volume of assets under management. Moreover,
fund performance against a benchmark is reviewed often by investors on the basis of
mandates not exceeding three years. Taken together, these factors favor a focus on
increasing the size of assets under management and on investing them in indices,
rather than on improving the performance of portfolio companies. Incentives for
churning of assets and strong conflicts of interest add to those factors and create a
challenging context for the notion of institutional shareholder engagement and their
promotion of better governance practices. The costs of monitoring a large number of
companies are significant, while the benefits are shared with all shareholders,
creating a free rider problem. This often leads to sub-optimal monitoring and analyst
coverage of companies unless collective action is achieved.

A key problem identified is that domestic investors do not vote their foreign
equity. Another relevant aspect deals with whether institutional investors are
becoming increasingly short-term investors or at least promoting short-term thinking
by investee companies. Pension funds, especially defined-benefit schemes should
be able to make long term investment to match liabilities to their beneficiaries that
stretch over many years. But a number of large institutional investors are not acting
in this way.

Nevertheless, large institutional investors are often locked into the

shareholding of most large companies on a long-term basis, since for regulatory or
other reasons, diversification and index investing is the norm. Thus they are
long-term shareholders even if they buy and sell on a regular basis or lend their
shares for a fee. In principle they have incentives to encourage good corporate
governance but such engagement still needs to be encouraged and facilitated.

The nature of institutional investors has evidently evolved over the years into
a complex system of financial institutions and fund management companies with
their own corporate governance issues and incentive structures. A great deal can be
done both by private agents and policy makers to improve the corporate governance
outcomes of institutional investors' behavior. In the private sector, enhancing
collaboration among institutional investors, as by establishing industry associations
to share the costs of monitoring and voting have shown positive results. On the
public policy side, prudential regulations sometimes excessively limit holdings by
institutional investors in individual companies and restrictions on incentive schemes
may also change their behavior in an unintended manner. Given the right set of
conditions, institutional investors can play an important role both in jurisdictions
characterized by dispersed or concentrated ownership, their role facilitated by private
and/or public policy action.

The effectiveness and credibility of the entire corporate governance system

and company oversight will to a large extent depend on institutional investors that
can make informed use of their shareholder rights and effectively exercise their
ownership functions in companies in which they invest.

However, the forces driving the actions of institutional investors are different
from many other shareholders being determined by a unique set of costs, benefits
and objectives. In addition, the funds management industry that does not invest in its
own name is also highly significant. An explicit policy goal is to further the
development of institutional investors via, for instance, pension funds so as to foster
domestic capital markets. However, in other areas the institutions are seen as a
weak link in the company landscape related to short terms and to the pursuit of
political ends. Thus, some see them as already too powerful and their effects
possibly pernicious. Others by contrast, see them as not being robust enough in
promoting good corporate governance and corporate accountability. Not all the
arguments relate to good corporate governance per se but to their potential for
underpinning growth and development, and addressing other issues such as
environmental and social goals. However, there is a close relationship between good
corporate governance that promotes company performance and accountability, and
addressing these broader issues.

With the goal of optimizing returns for targeted levels of risk, institutional
investors pursue a range of portfolio diversification strategies, which in some cases
have led to highly diversified portfolios, many of them having investments in several
thousand companies. Though many managers pursue active investment strategies
and use benchmarks for the purpose of assessing performance, some investors
seek portfolios that are passively managed against a benchmark, in which case
managers typically must purchase all the equities in the share index (e.g. S&P 500).
The level of diversification can therefore be extreme. With the emergence of a broad
universe of professional investment managers and increasing access to information,
active strategies, on average, do not significantly outperform the market on a
net-of-fees basis. At the same time, and investors have increasingly channeled funds
into lower cost, passive diversification funds. This trend towards passive
diversification may not be conducive to the promotion of good corporate governance.

Diversification, in a number of cases, is also driven by prudential regulation

such as capping the percentage of a company's equity that can be held by an
institutional investor, and not just by individual investor concerns. The review of
various countries around the globe noted the benefits of permitting pension funds to
take a significant stake in companies. The investment chain has lengthened by
outsourcing of management to include investment managers and sub-advisors,
further distancing investee companies from the ultimate beneficiaries. As a result, at
every stage of the process there are possibilities that incentives will not encourage
institutional investors to take an interest in the corporate governance practices of
investee companies.

Institutional investors acting as agents for ultimate beneficiaries are very often
not directly remunerated on the basis of the performance of portfolio companies
whether based on company performance or better corporate governance practices.
The exception is certain private equity and hedge funds where performance
incentives are powerful, often 20% of fund performance. Rather, they are
remunerated often on the basis of management fees based on the volume of assets
under management. In the US, performance-based fees are generally not allowed
for mutual funds unless the fee also penalizes the manager for poor performance
(i.e. a fulcrum fee). Moreover, fund performance (either absolute or relative) is
reviewed often by investors and mandates usually last only around three years.
Taken together, the incentive structure often favor a focus on increasing the size of
assets under management, not necessarily bad but also not necessarily an incentive
to improve performance of portfolio companies, The incentive structure might also
contribute to churning of assets (i.e. buying and selling often) where it is possible to
increase the commissions from transactions. Indeed, a number of institutional
investors often exceed their own announced turnover targets. Average holding
periods have declined around the world to under one year on average although a
great deal of the decline might be due to the rising importance of high frequency
traders, another asset class. In addition, the incentive structures influencing many
institutional investors and fund managers are influenced by conflicts of interest
including their own ownership by banks and insurance companies, their relationship
to company sponsors of pension plans and the fact that they may control many funds
that can trade between themselves. Such incentives might work to the disfavor of
investors.

In such a system, the costs involved in monitoring the corporate governance

practices over a large number of companies are significant but the benefits will be
shared with all (i.e. the free rider problem). This implies that monitoring and
analyzing coverage of companies will be sub-optimal unless arrangements can be
put in place to promote collective action. This does not mean that institutional
investors can or should avoid monitoring and engagement with their investee
companies since there are private returns to them and there can be fiduciary duties
such as with private sector pension funds (ERISA) in the US that may be fulfilled
through voting. But it does mean that such activities might not be pursued as
effectively and as energetically as otherwise would be the case.
 In the public and policy debate, too much time and effort is being taken up in
trying to solve the perceived problem of short-termism by appealing to the notion of a
long-term shareholder who is often compared favorably with "patient family owners."
However, a long-term shareholder is clearly not necessarily a long-term engaged
investor and efforts to give incentives to hold shares may not achieve their objective.
The real problem of short-termism may well lie in the executive suites of companies
and financial institutions with an emphasis on short payback periods. Nevertheless,
in a world of fast moving technologies and competition, defining short-termism is still
a challenge.

The principles that cover institutional investors are focused on "bread and
butter" corporate governance issues such as voting at company meetings, the
nomination and election of board members and to making their views known on
remuneration policy. They support acting in cooperation which might take matters
much further by underpinning more engagement, while leaving open the concept of
long and short-term.

In sum, the nature of institutional investors has evolved over the years into a
complex system of financial institutions and fund management companies with their
own corporate governance issues and incentive structures. Investment chains have
lengthened, increasing the number of institutions between the final beneficiary and
an investment in an enterprise. At each point, the incentive system might not lead to
good corporate governance outcomes. Investment strategies have also evolved with
passive investing through indices and exchange traded funds becoming more
important so as to lower costs and increase returns to beneficiaries. Against this
background, the old question of investor oversight of company boards needs to be
examined. With respect to the exercise by institutions of their voting rights, turnout at
company meetings has increased in recent years and there are dedicated corporate
governance investors. However, cross-border voting remains costly and uncertain.
Whether all these developments are sufficient to improve corporate governance
outcomes or whether they are just going in the right direction is an open question,
but a great deal depends on expectations. If the expectation is that institutional
investors act as stewards of companies, then progress might have been limited.
CHAPTER 8 ACTIVITIES

True or False

TRUE 1. Corporate governance is a process that aims to allocate corporate

resources in a manner that maximizes value for all stakeholders-shareholders,
investors, employees, customers, suppliers, environment and the community at large
and holds those at the helms to account by evaluating their decisions on
transparency, inclusivity, equity and responsibility.

TRUE 2. Hedge funds are open only to a narrow range of professional or wealthy
investors who meet certain criteria set by watchdogs and regulators.

FALSE 3. External stakeholders are the board of directors, executives, and other
employees.

TRUE 4. The statutory granting of corporate existence may arise from general
purpose legislation or from a statute to create a specific corporation, which was the
only method prior to the 19th century.

FALSE 5. The growth in the number of IPAs also means that a rich body of
experience has not been developed with respect to different approaches to
investment promotion agencies and across countries at different levels of
development.

FALSE 6. Investment promotion agencies cannot play an important role facilitating

effective communication between investors and the government.

TRUE 7. The principles of corporate governance embrace the underlying assumption

that shareholders can best look after their own interests provided they have sufficient
rights and access to information.

TRUE 8. The nature of institutional investors has evidently evolved over the years
into a complex system of financial institutions and fund management companies with
their own corporate governance issues and incentive structures.

FALSE 9. OECD brings together the governments of countries not committed to

democracy and the market economy from around the world.

TRUE 10. The Sarbanes Oxley Act of 2002 seeks to lay ground for a culture of
proactive management of risks going beyond the reactive approach that has been
common to all industries.
Multiple Choice

1. It is the set of processes, customs, policies, laws, and institutions affecting

the way a corporation (or company) is directed, administered or controlled.

a. business ethics
b. agency costs
C. corporate governance
d. constitution

2. This drives prudential regulation such as capping the percentage of a

company's equity that can be held by an institutional investor and not just by
individual investor concerns.

a. diversification
b. cross listing
c. short selling
d. investment banking

3. These are created as legal persons by the laws and regulations of a

particular jurisdiction.

a. SMEs
b. general professional partnerships
c. corporations
d. MNCs

4. It is an investment account open to a narrow range of investors that take a

wide range of investment and trading activities in addition to traditional
long-term investment funds.

a. dividends
b. hedge funds
c. ready-for-sale securities
d. money market placements

5. The effectiveness and credibility of the entire corporate governance system

and company oversight to a large extent depend on _________ that can make
informed use of their shareholder rights and effectively exercise their
ownership functions in companies in which they invest.

a. government
b. institutional investors
c. managers
 d. securities traders

6. A financial institution that helps out corporations and government in raising

capital by underwriting and acting as the agent in the issuance of both equity
and debt securities.

a. money market trading

b. investment banking
c. corporate banking
d. ordinary savings

7. These are investor's money being pooled together from the sale of a fixed
number of shares a trust issues in its first offering.

a. investment trust
b. mutual fund
C. pension fund
d. IPO

8. A collection of assets forming part of a separate legal entity that came into
being from the contributions to a pension plan for the exclusive purpose of
financing pension plan benefits.

a. mutual fund
b. investment trust
C.pension fund
d. hedge fund

9. It is another institutional investor that is professionally managed type of

collective investment scheme that pools money from many investors and
invests typically in investment securities which includes stocks, bonds,
short-term money, market instruments, other mutual funds and securities,
including commodities such as precious metals.

a. mutual fund
b. investment trust
C. pension fund
d. hedge fund

10. They are the representatives who can bring the voice of the members of
their respective institutions.

a. principal agent
b. Opportunists
 c. good activists
d. institutional investors

11. The listing of equity shares of a company in one more than one stock
exchange in different countries

a. diversification
b. cross listing
c. short selling
d. investment banking

12. It is an international development finance institution whose mission is to

help its developing member countries reduce poverty and improve the quality
of life of people.

a. Asian Development Bank

b. World Bank
C. OECD
d. ICGN

13. It is a global membership organization of around 450 leaders in corporate

governance based in 45 countries with a mission to raise standards of
corporate governance worldwide.

a. Asian Development Bank

b. UNCTAD
C. OECD
d. ICGN

14. Promotes the development-friendly integration of developing countries into

the world economy,

a. Asian Development Bank

b. UNCTAD
C. OECD
d. ICGN

15. These are the board of directors, executives and other employees

a. External stakeholders
b. Internal stakeholders
c. Institutional investors
d. Other interested parties
CHAPTER 9

"Anything that makes your attempt to buy an asset more risky can have a material
effect on the amount of Investment we get. These days, we'd be lucky if we get lots
of foreign direct investment. We should not restrict it. We should make it easier.
-Nouriel Roubini

INTRODUCTION

Foreign direct investment refers to the direct investment in productive assets

by a company incorporated or un-incorporated in a foreign country to the host
country: a system entirely different from the investments in shares of local
companies by foreign entities

Economic theory suggests that foreign direct investment (FDI) can generate
positive spillovers to domestic firms in the host country. Since multinational
corporations MNCs) are an important source of international capital and technology,
their entry can ( facilitate the transfer of technical and business know-how resulting
in productivity gains and competitiveness among local firms. These spillover effects
develop through best practices demonstration and diffusion, or through the creation
of linkages with foreign and domestic firms becoming either suppliers or customers,
or through the movement of experienced workers from foreign to local firms. The
entry of MNCS may also increase competition and force domestic firms to imitate
and innovate

Domestic firms also benefit from spillovers and externalities associated with
FDI through exports and/or international integration (Costa and de Queiroz 2002).
MNCS have established global or regional production bases where domestic firms,
particularly small and medium enterprises, can participate by serving as potential
suppliers of outsourced parts or services. Participation in these networks can also
provide domestic firms access to export markets. Global/regional production
networks have increasingly grown in sectors such as automotive, machineries,
electronics and garments.

There are two broad classifications of technological spillovers from FDI to

domestic firms: horizontal (within or intra-industry) and vertical (inter-industry)
spillover effects Horizontal spillover refers to the effect the presence of MNCS has on
domestic firms in the same sector. Vertical spillovers from FDI occur as a result of
the interaction between domestic and foreign firms that are not in the same industry.
This may take place through backward or forward trade linkages between foreign
and domestic firms Backward linkages are created when MNCs source raw materials
and intermediate products from domestic firms. Forward linkages are created
through contacts between domestic and foreign firms.
 The existing FOI literature shows an increasing number of studies examining
the nology spillovers from FDI to domestic firms. However, the evidence that foreign
essence generates positive productivity externalities remains limited since the
empirical literature indicates mixed results Many show significant positive spillover
effects from while some find no or statistically insignificant result from technology
spillover The erse results may be attributed to differences in countries ability to
benefit from eign investment reflecting varying levels of absorptive capacity and
market structure.

To attract FDI inflows and generate the positive spillover effects from the
essence of foreign firms, the Philippines liberalized its FDI policy and offered various
foreign investment incentive measures To date, however, there are only few studies
that examine the productivity spillovers to domestic firms. Most studies focus on the
impact of FDI on economic growth and on the determinants of FDI to the Philippines.
There are hardly any empirical studies that explicitly apply quantitative analysis in
evaluating whether FDI generates technology spillover from foreign to domestic
firms. Due to the paucity of FDI firm-level panel data, it is difficult to measure or
disentangle the contribution and different effects of FDI

Foreign direct investment (FDI) has grown steadily in volume and is a major
source of development finance. Recognizing that FDI can contribute to economic
development, all governments want to attract it. However, the experience has been
mixed.

A country's development depends on domestic and external financing.

Developing countries have many developmental needs, and they often have a
savings or trade gap. In an economy in equilibrium, it is an accepted identity that
savings equals Investment ( S1) However, economies are seldom in equilibrium, and
in a developing economy, a shortfall normally exists between savings and the
desired level of investment, which countries seek to fill by capital inflows. As such,
external financing is important for economic and social development

Since the Bretton Woods Institutions and the United Nations system were
established, official development assistance (ODA) has grown steadily and played a
lead role as a source of external capital for economic growth and development of
less developed countries around the world (Amerasinghe & Espejo 2006). However,
since the early 1980s, private capital flows, particularly foreign direct investment
(FDI), have grown at a phenomenal rate. FDI has become an important source of
private external finance for developing countries. It is different from other major types
of external private flows in that it is motivated largely by investors' long-term
prospects of making profits from production activities that they control. Foreign bank
lending and portfolio investment, in contrast, are invested in activities which are often
motivated by short-term profit considerations. These investments can be influenced
by a variety of factors (e.g. interest rates) and they are prone to herd behavior.

FOREIGN DIRECT INVESTMENT IN DEVELOPING COUNTRIES

Increasing foreign investment can be one of the indicators that the host
country's than merely moving capital across borders; it has certain advantages to
both the host country and the investor Dunning (1980, 1988) argues that a firm's
foreign investment decisions are mainly influenced by firm and location specific
advantages. Open door economic policy (Singh A Jun 1975, Walder 1996), market
size (Lardy 1995; Milner & Pentecost 1996 Fittock & Edwards 1998), political stability
(Tesal 1994) and host countries macroeconomic policy, tax regime and regulatory
practices are considered as major determinants that attract FDI to developing
countries. FDI inflows generate jobs through new establishments and expanded
business and other economic activities, and indirectly increase competition within
domestic markets and facilitate the transfer of improved technology and
management techniques

For the investor, the potential benefits lie in penetrating a market, gaining
access to low-cost raw materials, diversifying business activity, reduction of cost in
production processes and defeating some of the disadvantages of exporting, such as
trade barriers and transport costs. FDI also enables companies to learn about the
host market and how to compete in it. Multinational enterprises (MNEs) own and
control operations abroad to benefit from diverse production location and
globalization of market

MNES undertake production in different countries to minimize production

costs and expand globally. Firms therefore choose least cost locations for their
production activities that the propensity of a firm to get involved in international
production depends on three conditions: ownership advantages, location advantages
and internalization advantages.

Internal factors in host countries are also important determinants. There are
elements of a host country that are considered location-related factors; First, there
are Ricardian type endowments, which mainly comprise natural resources, most
kinds of labor and proximity to markets. Second, there are environmental variables
that act as a function of political, economic, legal and infrastructural factors of a host
country

These factors play a crucial role in a firm's decision to enter a host country. There
are four types of FDI:
● Resource seeking (motivated by access to local, natural or human resources).
 ● Import substituting (substituting for exports to the local market).
● Export platform (a basis for exporting to a regional market).
● Rationalized or vertically disintegrated (locating each stage of production
according to local costs). A particular investment may be motivated by several
of the above factors simultaneously

An economy that offers a long term business prospect could influence a

decision, but needs to be directly relevant to the profitability of the venture. The
inflow of FDI to a host country depends on the availability of location specific factors
and the opportunity to effectively utilize those resources Overall, the factors that
influence FDI decisions can include the size and growth of the host country market,
factor prices (labor, raw materials etc), economic policies (interest rates, exchange
rates, tax etc.). profitability and the protection afforded to investing firms by tariffs
and/or other measures

FDI POLICY SHIFT IN THE 1990S

In the last two decades, the Philippines has considerably liberalized its FDI
policies. Through the legislation of Republic Act 7042 or the Foreign Investment Act
(FIA) in June 1991, the country allowed foreign equity participation up to 100% in all
areas not specified in the Foreign Investment Negative List At the same time, the
Philippines pursued changes in its investment incentive schemes in order to
encourage FDI inflows

Various investment incentive measures were granted through the different

investment regimes administered by the Board of Investments (BOI), Philippine
Economic Zone Authority (PEZA), Subic Bay Metropolitan Authority (SBMA). Clark
Development Corporation (CDC) and other bodies mandated by various laws to
establish, maintain and manage special economic or free port zones. BOI-registered
enterprises, depending on their status, are allowed income tax holiday between 3 to
6 years, tax and duty free importation of spare parts, and tax credit on raw materials.
PEZA grants the most generous incentives including income tax holiday, basic
income tax rate of 5% of gross income earned, and tax and duty-free importation of
capital equipment, spare parts and raw material inputs. Except for the income tax
holiday, Clark and Subic enterprises enjoy the same incentives available to PEZA
enterprises,

FDI PERFORMANCE

The 1980s witnessed fluctuating FDI inflows but with the liberalization efforts
in the early 1990s, steady increases in FDI inflows were registered from 1991 to
1994 Although substantial declines were observed in 2001 and 2003, some recovery
was felt as FDI increased from 2004 to 2007. In terms of FDI sectoral distribution, a
structural shift seems to be taking place as inflows to the manufacturing sector
slowed down while inflows to the services sector particularly finance and
telecommunications continued to rise

Within manufacturing, FDI inflows have been dominated by the food and
beverage sector with a share of 12.7% from 2000 to 2007. The share of chemicals
and chemical products fell to 4.2 % in the 2000s from 12.2% in the 1980s Coke,
refined petroleum and other fuel products also dropped to only 3.3% in the 2000s
from 9% in the 1990s. Similarly, FDI inflows in machinery, apparatus and supplies fell
to 2% from a share of 9% in the 1990s. There is also a decline in the share of
transport equipment from 3.7% in the 1980s to 2.6% in the 2000s. Only paper and
paper products witnessed an increase from 0.31% in the 1990s to 1.25 % in the
2000s

In terms of FDI sources, the US was the country's largest source of FDI
inflows up to the 1980s. However, its share dropped from 56% in the 1980s to only
13% in the 1990 and 2000 US dominance has been substantially diluted by the
increasing presence of Japan, Netherlands, UK and Singapore, Japan's share
increased from 13% in the 1980s to 24% in the 1990s, although this fell to 18% in
the 2000s.

While the investment policy reforms and opening up of more sectors to foreign
on investors in the past decade resulted in improvements in FDI inflows to the
country, the overall, FDI inflows to the Philippines have been limited and the
country's FDI performance has lagged behind its neighbors in East and Southeast
Asia Compared with FDI inflows to the ASEAN countries, the Philippines received
the lowest level of FDI inflows particularly in the 1990s and the 2000s. In terms of
cumulative FDI inflows, for instance, Vietnam's total soared to US$40 billion while
the Philippines barely increased at US$18.96 billion in 2007

KEY FEATURES OF THE INVESTMENT CLIMATE

The following are some of the major factors that influence firms to decisi
locate their investment in any particular developing country:

ACCESS TO FINANCE AND INTERNATIONAL INTEGRATION

Access to finance considerably influences a firm's tendency to invest.

Businesses invest in projects where the expected benefits exceed the cost of
investment. However, this can only be achieved where businesses do not face credit
constraints unrelated to their own performance Credit constraints are less likely in
countries with well-developed and well-functioning financial systems. Research has
shown the importance of financial sector development for growth (Levine, 1997) A
healthy financial system allows them to expand according to their expected potential,
rather than their current stock of cash. Thus, countries with well-developed financial
systems comprises of banks, financing institutions and securities market has the
greater tendency to grow faster than countries with less developed systems (World
Bank, 2003)

According to World Bank in its 2003 report, countries that aggressively

pursued integration with the global economy such as Brazil, China, India, Malaysia,
Mexico, the Philippines and Thailand grew more quickly in the 1990s than those that
did not. This will send us back to the basic idea that openness to trade and foreign
direct investment accelerates economic growth.

GOVERNANCE

A country's general makeup of governance and the body that govern

interaction between business and government determine the burden that firms face
in complying with government regulations, the quality of government services, and
the degree to which corruption is associated with the procurement of these services.
Modern experiential research confirms, for example, that measures of corruption are
significantly and negatively related to inflows of foreign direct investment
(Smarzynska and Wei 2000 Wel 2000) Regulations in developing countries may tend
to be more complex and bureaucratic than necessary, associated with corruption,
and often are not intended to correct market failures or protect consumers (World
Bank, 2004) Djankov et al (2002) state that more regulations are generally not
associated with better societal outcomes in developing countries. They also find a
correlation between strict regulation and increased corruption

INFRASTRUCTURE

The better the infrastructure of the host economy, the more attractive it is to
foreign investors. For example, the quality of transport and communications system
can be estimated from expenditure on road transport (Hill and Munday, 1991), Ernst
and Young identified the following infrastructure factors as important in attracting
FDI. These include.
● Good base of related and supporting industries like suppliers, sub contractors,
university research center, business services and raw materials,
● Good transport facilities, roads as well as port system for both sea and air.
● Low cost and availability of utilities such telecommunications, energy and
water.
● Environmental regulations and procedures. Availability of sites and premises.

In countries with inferior infrastructure, businesses must dedicate more

resources to acquiring information, procuring inputs, and delivering their products to
the market. This undermines the competitiveness of firms, at best, and at worst,
deters them from entering markets where they could otherwise operate efficiently

SKILLED LABOR FORCE

One of the essential requirements for economic growth of a country is its

knowledge infrastructure and the level of human development. Education, training,
health and social services are tools for human capital development. Realizing this
importance, governments in developing countries need to deploy resources for
human capital development. Systematic assessment of availability of human capital
is therefore necessary before formulating any policy for attracting FDI. Such policies
should be designed to
● Identify critical shortages of skilled manpower in the various sectors of the
economy and take measures to address the reasons for the shortage
● Develop knowledge development strategies for creating a skilled labor force
that foreign investors find advantageous for future growth.
● Set targets for human resource development based on reasonable
expectations of growth.

MACROECONOMIC FACTORS

Investment is motivated by profit, and foreign investors will always choose a

country with an optimistic business sector which is measured in terms of Gross
Domestic Product (GDP) growth rate, inflation rate, level of industrialization, etc.
There is an existence of herd mentality among foreign investors that tends to create
a bandwagon effect in a particular country; China and some other East Asian
countries are recent examples of this. India now exhibits a similar attraction. By
contrast, Nepal, Bangladesh and many other slow growth third world economies
have so far received very negligible amounts of FDI

POLITICAL STABILITY

Political certainty and transparency is a very important determinant for

developing countries to attract FDI. Political uncertainty in a potential host country
may unexpectedly change the 'rules of the game under which businesses operate.

Instability in a host country's government or monetary and fiscal policies results in

more uncertain investment results and may depreciate the firm's value. The following
political factors are the most seriously considered by investors in pre-investment
decision making:
● Frequent changes of government
● Critical attitudes of opposition political parties towards FDI
● Lack of transparency in the public service
● Degree of nationalism
 ● Incidence of corruption
● Possibilities of terrorism

Business and political risks are credible determinants of FDI location variables
such as regulatory environment, inflation, incidence of violent or peaceful power
transitions and host country relationships with other countries are among the factors
identified

TECHNOLOGY FACTOR

Technological progress cast an important role in economic growth, which

encourages innovation and attracts FDL. A well-developed technology infrastructure
sts the implementation of better business processes. It also involves lots of
adaptation To support innovation, the public sector can undertake research and
development activities directly on its own or with private partners to provide
complementary services.

PRIVATIZATION

In the ordinary context, privatization is a stage or course of action of

transferring whole or in part the ownership of a business enterprise, agency or public
service from the public sector to the private sector In a wider perspective,
privatization means the transfer of any government tasks and functions to the private
sectors which may include providing important services like power, water and
transportation Other functions may include revenue collection, law enforcement, and
in some advance countries, this may even include running a prison

PRO-PRIVATIZATION

Proponents of privatization believed that private entities can more efficiently deliver
goods and/or service than government due to free market rivalry. This is based on
the premise that government should be more on the regulatory aspect, that being, it
has no "business in business. Besides, government is not generally known as a
good provider of goods and services most especially in less-developed and
developing countries. In general, it is argued that over time privatization will lead to
lower prices, better quality, more options, lesser corruption, lesser red tape and
faster delivery of both goods and services

From the business economic standpoint, the argument for privatization is that,
the government has few incentives to make certain that they can run well the
enterprises they own. In a state-run business, for instance, there is difficulty in
determining how well it is being run considering that the absence of basis for
comparisons since most deals in state monopolies Another is that the government
administration do not have the fullest of technical competence in evaluating the
effectiveness and efficiency of diverse industries that government are engaging into

Another argument is that when government experiences an insufficiency of

funds it can have easier ways of covering it either by borrowing or taxation, unlike
private enterprise. There is therefore a clear undue advantage by the state-run
enterprises because it can borrow money at cheaper cost compared to private
enterprise. When it is privatized, the taxpayers' money will not be used to cover for
losses.

● Accountability

Managers of privately-owned enterprises are answerable to their shareholders

and to the consumers. Decision makers and managers of publicly owned companies
on the other hand are required to be more accountable to the broader community
and more of it actually will be to the "political stakeholders.

● Funds

Private companies have easy access of investment capital in the financial

markets more especially when the said markets are appropriately liquid. This fluidity
characteristic will make private company capable of maneuvering swiftly to overall
business environment to respond to the market and

● Dispersion of Resources

There are more tendencies that the resources, profits and incentives will be
dispersed and diversified in a highly privatized environment, this would give more
opportunities to more entities. Availability of investment to a good number of entities
will ignite the capital market, promotes activities, and adds more spin to the economy
in the process

● Corruption

A government monopoly is prone to corruption considering that some

decisions are made primarily on the basis of decision-maker's personal gain
Dishonesty would definitely compromise resources which would lead to poor
performance.

● Tainted Purpose

A company or an industry may be run or used by the government mainly as

vehicles in satisfying political goals. And, the government may put off development
and improvements due to its political implications rather than addressing valid
economic concerns.

● No More Subsidies

Efficiency can bring in profits. With profits, none or minimized subsidies will be
needed so taxpayers' money will be saved.

● Natural Monopolies

The existence of natural monopolies does not mean that these sectors must
be state-owned. Governments can enact anti-trust legislation and bodies to deal with
anti-competitive behaviors.

● Political Influence

Nationalized industries are prone to interference from politicians for political or

populist reasons. Examples include making an industry buy supplies from local
producers (when that may be more expensive than buying from abroad), forcing an
industry to freeze its prices/fares to satisfy the electorate or control inflation,
increasing its staffing to reduce unemployment, or moving its operations to marginal
constituencies.

● Profits

Corporations exist to generate profits for their shareholders Private

companies are poised to earn profits by being in the best position to serve the needs
of their targeted consumers. Competition brings improvements on quality.

● Security

Governments have had the tendency to "bailout poorly run businesses, often
due to the sensitivity of job losses, when economically, it may be better to let the
business fold

ANTI-PRIVATIZATION

Those who oppose privatization argue the claims that governments are
ultimately accountable to the people so they have to make certain that the
enterprises they own are well managed. Nationalized enterprises run poorly will
cause government to lose public support and votes. Thus, democratic governments
do have an incentive to maximize efficiency in nationalized companies, due to the
pressure of future elections
 Opponents of certain privatization believe certain parts of the social terrain
should remain closed to market forces in order to protect them from the
unpredictability and ruthlessness of the market (such as private prisons, basic health
care and basic education). Another view is that some of the utilities which
government provides benefit society at large and are indirect and difficult to measure
or unable to produce a profit, such as defense. Still another is that natural
monopolies are by definition not subject to competition and better administrated by
the state

The controlling ethical issue in the anti-privatization perspective is the need

for responsible stewardship of social support missions. Market interactions are all
guided by self interest, and successful actors in a healthy market must be committed
to charging the maximum price that the market will bear. Privatization opponents
believe that this model is not compatible with government mission for social support,
whose primary aim is delivering affordability and quality of service to society.

Some would also point out that privatizing certain functions of government
might hamper coordination, and charge firms with specialized and limited capabilities
to perform functions which they are not suited for. In rebuilding a war torn nation's
infrastructure, for example, a private firm would, in order to provide security, either
have to hire security, which would be both necessarily limited and complicate their
functions, or coordinate with government, which, due to a lack of command structure
shared between firm and government, might be difficult. A government agency, on
the other hand, would have the entire military of a nation to draw upon for security,
whose chain of command is clearly defined.

Furthermore, opponents of privatization argue that it is undesirable to transfer

state-owned assets into private hands for the following reasons:

● Accountability

The public does not have any control or oversight of private companies.

● Capital

Governments can raise money in the financial markets more cheaply to

re-lend to state-owned enterprises

● Concentration of Wealth

Profits from successful enterprises end up in private, often foreign, hands

instead of being available for the common good.
 ● Cuts in Essential Services

Governments have chosen to keep certain companies/industries under public

ownership because of their strategic importance or sensitive nature. If a government
owned company providing an essential service (such as water supply) to all citizens
is privatized, its new owners could lead to the abandoning of the social obligations to
those who are less able to pay or from regions where this service is unprofitable.

● Downsizing

Private companies often face a conflict between profitability and service

levels, and could over-react to short-term events. A state-owned company might
have a longer term view, and thus be less likely to cut back on maintenance or staff
costs, training, etc., to stem short term losses. Many private companies have
downsized while making record profits.

● Goals

The government may seek to use state companies as instruments to further

social goals for the benefit of the nation as a whole.

● Job Loss

Due to the additional financial burden placed on privatized companies to

succeed without any government help, unlike the public companies, jobs could be
lost to keep more money in the company

● Natural Monopolies

Privatization will not result in true competition if a natural monopoly exists.

● Political Influence

Governments can easily exert pressure on state-owned firms to help

implement government policy

● Privatization and Poverty

It is acknowledged by many studies that there are winners and losers with
privatization. Lack of transparency leading to state-owned assets being appropriated
at minuscule amounts by those with political connections, absence of regulatory
institutions, improper design and inadequate control of the privatization process
leading to asset stripping, are some of the major concerns.
 ● Profit

Private companies do not have any goal other than to maximize profits. A
private company will serve the needs of those who are most willing (and able) to pay,
as opposed to the needs of the majority, and are thus anti-democratic

INSOLVENCY REGIMES

INSOLVENCY

Insolvency refers to the inability of a person or an entity to pay its debts as

they fall due. There are two (2) aspects from which insolvency can be defined, first,
cash flow liquidity which is the inability to pay debts when they fall due; second,
asset insolvency, a state where the entity's asset is lesser than its liabilities.

A business can be cash flow illiquid (or temporarily "insolvent") but "balance
sheet solvent if it holds fixed illiquid assets, particularly against short term debt that it
cannot be straight away realize when needed. Conversely, a business can have
negative net assets showing on its balance sheet but its cash flow is healthy by
reason of steady revenue streams that is able to serve debt obligations as they fall
due

Insolvency is commonly confused with bankruptcy. The two however, are not
entirely similar. The only similarity this two have is this two deals deal with troubled
debt. Insolvency is a state of being and bankruptcy is a matter of law. There has to
be bankruptcy proceedings in court and it the court that will be declared that and
entity is bankrupt. Companies can be insolvent but not legally bankrupt. Insolvency
can lead to bankruptcy, but the condition may also be a temporary insolvency and
fixable without legal protection from creditors.

Companies facing the possibility of insolvency can take measures to keep

themselves financially afloat at least. Using existing lines of credit to borrow money
is one way to avoid insolvency; however, this creates more liability and new payment
deadlines; an option that will bury down the company deeper into financial trouble if
not checked. Selling off assets to other companies is also a common hedge against
insolvency Consumers may notice a local grocery store changing hands, for
example,

Another option for avoiding insolvency is by allowing a takeover from a larger

corporation. It is normal for major conglomerates to seek out small but commercially
viable companies for acquisition or takeover proceedings. Even if the smaller
company is currently flirting with insolvency, the rights to its signature product lines
may prove valuable enough to save it from financial ruin on one hand and give the
acquiring company operational leverage on another. This happens quite often in the
wholesale food industry Struggling or insolvent manufacturers of a popular product
may agree to sell off all of their assets to a corporation with better financing

Insolvency does not necessarily lead to bankruptcy, but all bankrupt

companies are also considered insolvent. Once an announcement of insolvency is
made, stockholders may have to decide whether or not to sell off their shares or
remain with the company until it can regain its financial footing

CONSEQUENCE OF INSOLVENCY

The main heart of modern insolvency legislation and debt restructuring

practices is no longer on the easiest solution which is liquidation and the consequent
elimination of insolvent entities. Laws and trend now is on the remodeling of the
financial and organizational structure of the corporation experiencing financial
distress so as to permit the rehabilitation and continuation of their business. This is
known as business turnaround or business recovery. In some jurisdictions, it is a
violation under the insolvency laws for a corporation to continue in business while
insolvent. In others, the business may continue under a declared protective
arrangement while alternative options to achieve recovery are being worked out.

INSOLVENCY LAW AND BUSINESS REHABILITATION

The Philippine insolvency law which was enacted in 1909 has three (3)
principal subjects:

1. Suspension of payments
2. Voluntary insolvency
3. Involuntary insolvency

FEATURES OF INSOLVENCY LAW

● Rehabilitative

It is considered rehabilitative because of its suspension of payment provision

which allows the restructuring of debtor's obligation to enable it to continue its
operation.

● Distributive

On the other hand, it also considered distributive since the purpose of the
insolvency provision of the law is to effect an equitable distribution of properties
among the creditors and to benefit the debtor by discharging him of his obligation for
him to have a new start
REHABILITATION LAW (THE PROCESS)

The basic rehabilitation law can be found in PD 902-A as amended which

contained the following process

● Stay Order

The rehabilitation rules authorize both debtor-initiated and creditor-initiated

petitions. Any creditor or creditors holding at least 25% of the debtor's total liabilities,
can petition the appropriate Regional Trial Court (RTC) to place the debtor under
rehabilitation. If the court finds the petition to be sufficient in form and in substance, it
issues a stay order which among others, suspends enforcement claims of whatever
nature against the debtor

● Adequate Protection

The stay concept is not an absolute rule. During the effectivity of the stay
order, creditors may seek relief from its effects. In this regard, the rehabilitation rules
will adopt the concept of adequate protection. A secured creditor, for example, may
ask relief from the stay order if he lacks adequate protection. A creditor is considered
as lacking adequate protection if it can be shown that
1. the debtor is not honoring a pre-existing agreement to keep the property
insured,
2. the debtor is failing to take commercially reasonable steps to maintain the
property, or
3. the depreciation of the property is increasing to the extent that the creditor
becomes under-secured.

Upon showing of lack of adequate protection, the court shall take steps to
protect the creditor's interest such as ordering the rehabilitation receiver to make
payments or give a replacement security. The court, may, however, refuse to give the
creditor this relief if it would prevent the continuation of the debtor as a going
concern or otherwise prevent the approval and implementation of the rehabilitation
plan.

● Rehabilitation Receiver

The rehabilitation rules authorize the appointment of a duly qualified person

as a rehabilitation receiver for the debtor under rehabilitation. The rehabilitation
receiver, who is considered an officer of the court, does not take over the
management and control
of the debtor. His primary role is to oversee and monitor the operations of the debtor
pending proceedings. He is also tasked to recommend to the court whether the
rehabilitation of the debtor is feasible as well as to implement the rehabilitation plan it
approved to protect the rehabilitation receiver, the rehabilitation rules give him
immunity from suit for any act done or omitted by him in good faith in the exercise of
his function and powers

● "Equality is Equity” Principle

The rehabilitation rule adopt the "equality is equity principle prescribed by the
Supreme Court for rehabilitation cases. This principle basically states that once a
company goes under rehabilitation, all creditors, whether secured or unsecured,
should be placed on equal footing. Consequently, unlike SEC Rules on Corporate
Recovery, The rehabilitation rules do not classify creditors into secured and
unsecured creditors. Neither do they give creditors the right to vote against the
rehabilitation of the debtor. What the rehabilitation rules grant or give the creditors is
the right to oppose or comment on the petition and rehabilitation plan. The court,
may, however, approve the rehabilitation plan even over the objection of the majority
of the creditors if, in its judgment, the rehabilitation of the debtor is feasible and the
opposition of the creditor is manifestly unreasonable.

In deciding whether the opposition of creditor is manifestly unreasonable, the

court may consider the following:
1. the plan would likely provide objecting class of creditors with compensation
greater than that which they would have received if the assets of the debtor
were sold by a liquidator within a three-month period,
2. the shareholder or owners of the debtor lose at least their controlling interest
as a result of the plan; and
3. rehabilitation receiver has recommended approval of the plan.

● Cram Down

The rehabilitation rules provides that in approving a rehabilitation plan, the

court may impose such terms, conditions or restrictions as may be required for its
effective implementation or for the protection and preservation for creditors if the
plan fails. Once the plan is approved, it is binding upon the debtor and all persons
who may be affected by it, including the creditors, whether or not they participated in
the proceedings or opposed the plan Payments to the creditors shall be allowed only
to the extent called for by the plan.

An approved rehabilitation plan may be modified or altered only on motion

and if the Court determines that such is necessary to achieve the desired targets or
goals set forth therein.
 In case of the failure of the rehabilitation plan, the court, motu proprio or upon
recommendation of the rehabilitation receiver, may terminate the proceedings

PROPOSED CORPORATE RECOVERY AND INSOLVENCY ACT

There are several proposed laws now pending with the Philippines Congress
to date the antiquated insolvency law regime. The proposed Corporate Recovery
Act. which has been renamed the Corporate Recovery and Insolvency Act ("CRIA"),
contains the usual provisions of a modern bankruptcy statute. It generally follows the
world's best insolvency practices. There are provisions on voluntary and involuntary
initiation of proceedings, effect of commencement of proceedings, duration of stay
order and adequate protection. The proposed legislation also deals with
administrative expenses, sament of post commencement interest, rescission of
pre-commencement mansactions, new money and cram down. The CRIA also takes
into consideration existing local context such as the effect of a stay order on
government financial institutions which enjoy special protection under Philippine law
Unlike the rehabilitation rules, the CRIA provides for a classification of creditors and
grants them separate voting rights. It even addresses the interplay between good
corporate governance and insolvency. In response to bankruptcies with international
repercussions, the CRIA contains provisions on cross border insolvency

Unlike the Insolvency Act and the Rehabilitation Law, the proposed Corporate
Recovery Act expressly categories different forms of debt relief available to a
corporate debtor in financial distress. They are as follows:

● Suspension of Payments

This limited remedy provides a company with a moratorium on debt payments

while it negotiates an out-of-court arrangement with its creditors. To prevent abuse,
the moratorium is limited to three months under the watch of a conservator. Further,
if a debtor chooses this remedy, it is precluded from obtaining relief under
court-supervised rehabilitation or pre-negotiated rehabilitation for an entire year
thereafter. This "election of remedies" is designed to prevent debtors from delaying
the enforcement of creditors daims by first suspension of payments and then seeking
rehabilitation.

● Fast Track Rehabilitation

This is the default relief under the proposed legislation. A debtor is limited to
this remedy, unless (a) it has initiated a pre-negotiated rehabilitation proceeding: (b)
the debtor is a non-stock corporation or partnership; and (c) a majority of the
creditors have requested conversion of the proceeding to court-supervised
rehabilitation proceeding
 This remedy involves the transfer of the assets of the debtor into a new
company which will be owned by creditors of the debtor in exchange for their credit.
The objective is to continue the old business under a new corporation with minimum
or no debts at all. This involves quite an intricate procedure. Involved in the process
is the setting up of a new company that will initially be fully-owned by the old debtor
in exchange for its assets, issuance of bonds, auctioning off of the shares of the new
company to the creditors of the debtor company in exchange for their credit and the
eventual ownership of the new company by the creditors of the debtor

This relief has encountered a lot of criticism as statutory relief. It will most
likely be deleted as a form of statutory relief, without prejudice to it being part of a
court supervised or pre-negotiated rehabilitation plan.

● Court-Supervised Rehabilitation

This is the counterpart of the rehabilitation proceedings under the present

regime. Unlike the present rehabilitation process which is court-driven, the CRIA
makes court supervised rehabilitation creditor-driven.

The remedy contemplates the formulation of a plan under the supervision of

the court. The legislation establishes minimum standards for the plan to maintain
transparency and fairness. The creditors vote on the plan according to specifics
classes (secured creditors, for instance would usually be a separate class) If the vote
of the majority of each of the creditor classes (voting on the basis of size of claim) is
obtained, the court shall approve the rehabilitation plan.

If support from all the voting creditor classes is not obtained, the court may
nevertheless approve the plan if evidence is shown that eighty percent of all the
voting creditors support it.

If the court approves the plan, it becomes binding on all creditors, even those
who voted against it. The proceeding is converted to liquidation is case of (a) late
submission of the plan, (b) the court's failure to approve the plan, or (c) the debtor's
breach of plan.

● Pre-Negotiated Rehabilitation

Experience in the Philippines has shown that the informal workout process or
out of court restructurings are quite common. This process, however, suffers from
the need of near unanimity among the creditors. Dissenting or "maverick" creditors
can frustrate the whole process. Accordingly, there is a need for accelerated court
approval of the restructuring agreement.
 The pre-negotiated rehabilitation process allows for summary judicial
proceedings for debtors seeking ratification of a rehabilitation that was approved by a
majority of the creditors before the debtor sought relief from the court. It allows a
debtor to establish a comprehensive plan without needing to obtain unanimity, so
long as the minimal standards in the legislation are met, and a majority of the
creditors supports the plan. Once the court approves the plan, the pre-negotiated
plan is crammed down on non-participating or dissenting creditors. This relief,
therefore, combines the benefit of an accelerated court process and cram down
concept in insolvency law.

● Dissolution and Liquidation

This is the final resort under the legislation. The proposed law calls for the
appointment of a liquidator and formulation of a liquidation plan. The provisions are
envisioned to ensure that the debtor's assets are sold quickly. It also seeks to amend
gosting legal provisions on preference of credits. For example, under the proposed
law, the proceeds from the sale of mortgaged properties are distributed to the
secured creditors. Proceeds remaining from such sales, and from sales of
non-mortgaged properties, are distributed as follows:
1. first, to meet unpaid administrative expenses,
2. second, to workers for back wages;
3. third, to the government for back taxes,
4. fourth, to all creditors not specifically mentioned; and
5. fifth, to creditors whose claims are subordinated by law or agreement.

There are encouraging developments in the insolvency law regime of the

Philippines. While there was no statutory movement in this area for a significant
number of years, our Supreme Court has responded to the need of the times by
quickly adopting the Rehabilitation Rules that gave meat to our rehabilitation law.
Call it judicial activism but the reality of the situation is that this singular act of the
Supreme Court has contributed, in no insignificant part, to the restoration of public
confidence and order in this area of law

More importantly, the Philippine Congress is now responding insolvency law

developments more than it ever did before. Several legislative bills have been filed in
the present Congress. The House Committee on Economic Affairs is conducting
several hearings on the proposed legislation more than any other congressional
committee had done before Practitioners, academicians and experts-both from the
private and government sectors-are actively participating in the deliberations

It is hoped that the insolvency law of the Philippines will come to par with the
world's best insolvency law practices in the not-so-distant future (Adapted from the
Article: Recent Developments on Insolvency Laws and Business Rehabilitation in the
Philippines, by Francis Lim)
OPENNESS TO AND RESTRICTIONS UPON FOREIGN INVESTMENT

The Government of the Philippines (GPH) actively seeks foreign investment to

promote economic development. The Philippine investment landscape has some
noteworthy advantages such as its free trade zones, including the Philippine
Economic Zone Authority (PEZA) (http://www.peza.gov.ph). Certain industries have
experienced impressive growth in recent years, especially those that leverage
educated, English speaking Philippine labor

Despite these strengths, legal restrictions, regulatory inconsistency,

inadequate public investment in social and physical infrastructure and a lack of
transparency hinder foreign investment In many sectors of the economy, GPH
regulatory authority remains ambiguous and corruption is a significant factor. In
addition, a complex and slow judicial system inhibits the timely and fair resolution of
commercial disputes.

Measure Year Index/Ranking

TI Corruption Index 2012 105 of 176 (34)

Heritage Economic Freedom 2013 97 of 177 (58.2)

World Bank Doing Business 2013 138 of 185

MCC Gov't Effectiveness 2013 91%

MCC Rule of Law 2013 41%

MCC Control of Corruption 2013 19%

MCC Fiscal Policy 2013 73%

MCC Trade Policy 2013 52%

MCC Regulatory Quality 2013 63%

MCC Business Start Up 2013 50%

MCC Land Rights Access 2013 61%

MCC Natural Resource Protection 2013 66%

Philippine law generally treats foreign investors the same as their domestic
counterparts, with important exceptions outlined in the Foreign Investment Act
(detailed below). Corporations or partnerships must register with the Securities and
Exchange Commission (SEC) (http://www.sec.gov.ph) and sole proprietorships must
be registered with the Bureau of Trade Regulation and Consumer Protection
(BTRCP) in the Department of Trade and Industry (DTI) (http://www.dti.gov.ph).
Investors generally report that the Philippine bureaucracy is non-discriminatory but
slow to process these requirements. To streamline business registration process, the
GPH is implementing the Philippine Business Registry (PBR), a single, web-based
business registration system that integrates business registration processes now
handled by five government agencies.

The 1991 Foreign Investment Act (FIA) requires the GPH to publish the
Foreign Investment Negative List (FINL), which outlines sectors in which foreign
investment is restricted or limited The GPH is required by the FIA to update the FINL
every two years. The 9th FINL was published in October 2012 The broad scope of
the FINL contributes to the poor Philippine record in attracting foreign investment
particularly compared to its ASEAN counterparts. The FINL is comprised of two parts
Part A details sectors in which foreign equity participation is restricted by the
Constitution or laws. Part B lists areas in which foreign ownership is limited
(generally to 40 %) for reasons of national security, defense, public health, morals
and the protection of small and medium enterprises (SMES). There is no procedural
mechanism to request a waiver from the negative lists.

The 1987 Constitution prohibits foreign nationals from owning land in the
Philippines. The Investors' Lease Act of 1994 (ILA) allows foreign investors to lease
a contiguous parcel up to 1,000 hectares for 50 years, renewable once for 25
additional years. The 2003 Dual-Citizenship Act, which allows natural-born Filipinos
who became naturalized citizens of a foreign country to re-acquire Philippine
citizenship, gave Philippine dual citizens full rights to possess land. Ownership
deeds continue to be difficult to establish and are poorly reported and regulated. The
court system is slow to resolve land disputes.

Only Philippine citizens can practice licensed professions such as

engineering. medicine and allied professions, accountancy, architecture, interior
design, chemistry, environmental planning, social work, teaching, law, real estate
services, respiratory therapy and psychology. There are changes brought about in
the ASEAN through Mutual Recognition Agreements (MRA). Companies that register
with the Board of Investments (801) (http://www.boi gov.ph) may employ foreign
nationals in supervisory, technical, or advisory positions for five years from the date
of registration, extendable by BOI upon request. Top positions and elective officers of
majority foreign owned BOI-registered enterprises (ie, president, general manager
and treasurer, or their equivalents) are exempt from the five-year limitation Other
investment areas reserved for Filipinos include mass media (except recording),
small-scale mining private security, utilization of marine resources including
small-scale utilization of natural resources in rivers, lakes, and lagoons, and the
manufacture of firecrackers and pyrotechnic devices.
 Foreign investment is highly restricted in the retail trade industry. Retail trade
enterprises with paid-up capital of less than US$2.5 million, or less than US$250,000
for retailers of luxury goods, are reserved for Filipinos. Foreign investors are
prohibited from owning stock in lending, financing or investment companies unless
the investor's home country affords the same reciprocal rights to Filipino investors.
Foreign ownership in enterprises engaged in financing and securities underwriting
that are regulated by the SEC is limited to 60%. Changes in the 9th FINL cap foreign
ownership at 49% for lending companies.

Other specific limits on foreign investment include: private radio

communications networks (20%), employee recruitment and locally-funded public
works construction and repair (25%), advertising agencies (30 %), natural resource
exploration, development, and utilization (40 %, with exceptions), educational
institutions (40 %), operation and management of public utilities (40 %), operation of
commercial deep sea fishing vessels (40 % ), Philippine government procurement
contracts (40 % for supply of goods and commodities, 25% for construction of
locally-funded public works, with some exceptions), adjustment companies (40 %),
operations of Build-Operate Transfer (BOT) projects in public utilities (40%),
ownership of private lands (40%), rice and corn processing (40%, with some
exceptions), financing companies and investment houses (60%).

The Philippines limits foreign ownership for reasons of national security,

defense and public health. Industries such as the manufacturing of explosives,
firearms, and military hardware, as well as the operation of massage clinics, are
generally limited to 40% foreign equity, Foreign ownership in SMEs is also limited to
40 % in non-export firms. The SEC has implementing rules and regulations that will
enable it to monitor, investigate, and impose penalties on corporations that do not
comply with foreign ownership equity requirements of sectors covered by the FINL

Foreign ownership in the banking sector is restricted by the 1994 Foreign

Bank Liberalization Act. The Act limits at 10 the number of new foreign banks that
could open full-service branches in the Philippines, and those licenses have already
been issued. The banks are limited to six branch offices, each. In addition, each of
the four foreign banks operating in the Philippines prior to 1948 is allowed to open up
to six branches each. Publicly listed foreign banks with national or global rankings
may own up to 60% of a locally-incorporated subsidiary Foreign banks that do not
meet these requirements are limited to a 40 % stake. Since 1999, the Bangko
Sentral ng Pilipinas (Philippine Central Bank) (http://www.bsp.gov.ph) has imposed
moratorium on the issuance of new bank licenses. Micro-finance institutions are
exempt. Philippine law also requires that majority Filipino-owned banks must control
at least 70% of the total banking resources in the country
 The insurance industry is open to 100 % foreign ownership, subject to a
sliding scale of minimum capital requirements depending on the level of foreign
equity. As a general rule, government agencies, including government owned and
controlled corporations, must secure insurance protection from the state owned
Government Service Insurance System (GSIS) (http://www.gsis.gov.ph). This policy
extends to the government's interests in projects implemented under the BOT law,
but BOT regulations also allow proponents/operators to secure bid security and
performance bonds from surety or insurance companies accredited by the Philippine
Insurance Commission.

Offshore companies not incorporated in the Philippines may underwrite

Philippine issues for foreign markets but not the domestic market. Current law also
restricts membership on boards of directors for mutual fund companies to Philippine
citizens.

The Lending Company Regulation Act of 2007 which established a regulatory

framework for credit enterprises that do not clearly fall under the scope of existing
laws, requires majority Philippine ownership for such enterprises.

In addition to the restrictions detailed in the FINL, firms with more than 40%
foreign equity that qualify for BOI incentives must divest to the 40% level within 30
years from registration date or within a longer period as determined by the BOI.
Foreign controlled companies that export 100% of production are exempt from this
requirement. Certain non-fuxury retail establishments must offer at least 30% of their
equity to the public within eight years from the start of operation.

In July 2012, President Benigno Aquino III issued an executive order closing
78 areas to new mining. The order imposes a moratorium on the new mining
agreements until the Philippine Congress defines a revenue-sharing scheme It
additionally confines small-scale mining to designated areas, requires the
government to review and renegotiate existing contracts, requires reserves to be
rewarded through a public bidding process, provides state ownership of mine wastes
upon the expiration of a contract, creates the Mining Industry Coordinating Council to
implement reforms, and bans the use of mercury in small-scale mining.

The BOT Law provides the legal framework for private sector participation in
large infrastructure projects: Franchises in public utilities-railways, urban rail mass
transit systems, electricity and water distribution, and telephone systems-may only
be awarded to enterprises with at least 60 % Philippine ownership While US firms
have won contracts under the law, mostly in the power generation sector, more
active foreign participation under BOT is often frustrated by legal and administrative
problems, including weaknesses in planning, tendering, and executing private sector
infrastructure projects: regulatory and legal challenges to collecting and/or increasing
tolls and fees; and lingering ambiguities about guarantees and other support
provided by the government.

The Aquino administration has established the "Public Private Partnership

(PPP) Center" (http://ppp gov ph) to promote transparency and oversee project
development and approval Resources for right-of-way and land acquisition have
been allocated and single borrower (SB) limits for Philippine banks that finance PPP
arrangements have been relaxed. PPP infrastructure projects costing more than P1
billion (about US$25 million) undertaken through contractual arrangements
authorized under the BOT Law may register with BOI to be entitled to incentives
under the Omnibus Investment Code

FDI AND REGIONAL PRODUCTION NETWORKS

Participation in regional/global production networks provide domestic firms not

only access to export markets but to newer technologies as well. These can
generate substantial positive spillovers and externalities. The current regional
economic integration process is important in facilitating the establishment and
development of regional production networks.

The Philippines host to affiliates of foreign automakers and electronics

companies and has participated in their production networks. However, given the
country's narrow participation in the production networks of MNCs in these
industries, opportunities for spillovers into the local economy become limited. While
the Philippines' largest exports are high technology products such as electronics and
auto parts, these are mainly concentrated in labor-intensive, highly
import-dependent, and low value added segments like semi-conductors and wiring
harnesses. Hence, the backward linkages to the domestic economy created by these
high tech exports have remained limited

ASSESSMENT OF FDI SPILLOVER EFFECTS

The empirical analysis done by Prof. Rafaelita Aldaba and Prof. Fernando
Aldaba from the Philippine Institute for Developmental Studies (Nov. 2010) shows
that based on the full sample, productivity spillovers take place horizontally from
multinational corporations to domestic firms within the same industry at the five-digit
level. There is no evidence that productivity or employment spillovers take place
between foreign and domestic firms either through backward linkages (where
domestic firms supply intermediate inputs to foreign firms) or through forward
linkages (where foreign firms supply intermediate inputs to domestic firms). Though
these results may be attributed partly to the data aggregation and other limitations of
the dataset, these are consistent with the present condition of the manufacturing
industry characterized by the weakness of forward and backward linkages between
firms. Given these limited linkages between domestic firms and MNCS, it would be
difficult for productivity spillovers from foreign affiliates to take place through forward
or backward linkages channels

POLICY RECOMMENDATIONS

The experience of the Philippines shows that FDI spillover effects are not
automatically generated opening up the economy to FDI has contributed to the
country's exports of high technology products and overall economic growth However,
the spillover effects of FDI to domestic firms has remained limited due to the
domestic firms' weak competitiveness and inability to absorb the technology or
knowledge being transferred This implies that for spillovers to take place, the
absorptive capacity of domestic firms must be strengthened

To deepen the firm linkages within the economy, the development of domestic
parts and suppliers would be crucial. With the increasing regional economic
integration in East and Southeast Asia, potential opportunities could arise from the
growth of regional production networks where domestic parts and supplier firms
could act as subcontractors of outsourced parts and components. To improve the
competitiveness of domestic parts and suppliers and strengthen their linkages with
foreign affiliates, the government needs to adopt a more comprehensive approach
that would combine industrial policy to improve and develop domestic parts and
supplier firms with measures to create an environment conducive to the creation and
expansion of FDI-related spillovers as well as increase participation in higher
segments of industry value chain. The following policies are suggested:

● Human Resource Development and Training.

The government must implement substantial reforms in all stages of

education and training system to raise the learning capabilities of firms and upgrade
labor skills.

● Industrial and Technology Upgrading.

For the Philippines to move up the technology scale, design and development
als and technological capabilities must be improved. Industrial upgrading would
necessitate a strong base of domestic knowledge. This would require the
development of specialized skills and technological capabilities, particularly in
electronics and auto parts,

● SME Finance Support Programs.

In the country, the lack of access to financing has severely constrained the
growth of SMEs. Private banks were able to overcome these challenges by providing
assistance in preparing accounting records, business advice, and simplifying loan
documentation and tailor fitting loans to match the borrower's cash flow

● Linkages Improvement and Promotion of Subcontracting and

Outsourcing Activities.

It is important to develop a program to provide information exchange to local

firms to make strategic linkages with MNCS. Supplier development and linkage
programs can be loped to improve linkages between domestic firms, especially
SMEs, with foreign affiliates of MNCS

● Improvement of Infrastructure and Logistics and Overall Investment

Climate.

Good infrastructure and logistics that lower production cost and facilitate the
easy supply chain management from the procurement of inputs to the export of
outputs are important for the operations of production networks. The government
must continue to pursue policies to lower power and communication costs, provide
sufficient port systems, reduce travel time, and offer travel and shipment options. To
improve the country's investment climate, it is important that the government
immediately focus not only on inadequate infrastructure but also on the country's low
institutional quality, corruption and inefficient bureaucracy that continue to constrain
doing business in the country.

● Capacity Building and Adequate Funding for the Department of Trade

and Industry and Board of Investments' Competitiveness and Linkages
Program.

Strengthen the capacity of the staff and provide adequate resources for the
effective implementation of the programs to be designed to improve industry
competitiveness and linkages between domestic firms and MNCs

● Conversion and Transfer Policies

The Central Bank has worked since 2007 to relax and streamline the
Philippine foreign exchange (forex) regulatory framework. There are no restrictions
on the full and immediate transfer of funds associated with foreign investments,
foreign debt servicing. or payment of royalties, lease payments and similar fees.

Central Bank regulations provide specific requirements for foreign exchange

purchases from banks and their subsidiary foreign exchange corporations and from
non bank foreign exchange dealers, money changers, and remittance agents. There
is no mandatory foreign exchange surrender requirement imposed on export earners
or other foreign currency earners such as overseas workers. The Central Bank
follows a market determined exchange rate policy, with scope for intervention
targeted mainly at smoothing excessive foreign exchange volatility. To curb foreign
exchange speculation and temper the Peso's rapid appreciation from surges in
foreign portfolio capital, the monetary authority announced in late 2012 that it would
impose ceilings on non deliverable forward transactions relative to bank's capital.

● Expropriation and Compensation

Philippine law allows for expropriation of private property for public use or in
the interest of national welfare or defense. In such cases, the Philippine government
offers compensation for the affected property. In the event of expropriation, foreign
investors have the right under Philippine law to remit sums received as
compensation in the currency in which the investment was originally made and at the
exchange rate at the time of remittance. However, agreeing on a
mutually-acceptable price can be a protracted process.

There are no recent cases of actual expropriation involving US companies in

the Philippines. Since the implementation of the BOT law in 1990, some BOT
contractors in the energy sector, including US firms, have reported disputes with
local government units (LGUS) on real property tax assessments. Some LGUs
initiated auction and/or confiscation proceedings on the contractors' assets, which
the companies have challenged in the courts.

● Dispute Settlement

Many foreign investors describe the inefficiency and uncertainty of the judicial
system as a significant disincentive for investment. Investment disputes can take
years to resolve. While the judiciary is constitutionally independent of the executive
and legislative branches, it faces many problems including understaffing and
corruption. In addition, a number of Philippine government actions in recent years
have raised questions over the sanctity of contracts in the Philippines. High-profile
cases include the government-initiated review and renegotiation of contracts with
independent power producers, court decisions voiding disadvantageous and
allegedly tainted BOT agreements, and challenges to foreign participation in
large-scale natural resource exploration activities. The GPH has received foreign
donor support for judicial reform projects through the Asian Development Bank, the
World Bank and USAID,

In July 2012, President Aquino signed an executive order requiring all

government contracts involving PPP, BOT and joint ventures with the private sector,
to include provisions for alternative dispute resolution. According to the order, the
goal is to make resolving disputes less expensive, tedious, and time-consuming,
particularly for large. scale capital-intensive infrastructure and development
contracts.
 The Philippines is a member of the International Center for the Settlement of
vestment Disputes (ICSID) and has adopted the Convention on the Recognition and
Enforcement of Foreign Arbitral Awards (the "New York Convention"). However,
Philippine courts have shown a reluctance to abide by the arbitral process of its
resulting decisions Enforcing an arbitral award in the Philippines can take years:

In July 2010, the Philippine Congress passed a new bankruptcy and

insolvency law that provides a more predictable framework for the rehabilitation and
liquidation of stressed companies. Rehabilitation may be initiated by debtors or
creditors under court supervised, pre-negotiated, or out-of-court proceedings. The
law also sets the conditions for voluntary (debtor-initiated) and involuntary
(creditor-initiated) liquidation. The law recognizes cross-border rency proceedings in
accordance with the United Nations Center for International Trade and
Development's Model Law on Cross-Border insolvency, allowing the courts to
recognize proceedings in a foreign jurisdiction involving a foreign entity with assets in
the Philippines. Regional trial courts designated by the Supreme Court have
jurisdiction over insolvency and bankruptcy cases. According to the international
Finance Corporation's 2013 Ease of Doing Business report, the Philippines ranks
65th of the 85 economies studied in resolving insolvency and bankruptcy cases.

PERFORMANCE REQUIREMENTS AND INCENTIVES

● Performance Requirements

Performance requirements are established by the BOI for investors who are
granted incentives and are usually based on the approved project proposal. BOI
registered companies provide a projected yearly production schedule and export
performance targets Registered projects must maintain at least 25% of total project
cost in the form of equity and comply with the 25% local value-added sourcing
requirement. As of March 2010, foreign retailers are no longer subject to local
sourcing requirements.

The Philippines is not a signatory to the WTO Agreement on Government

Procurement. The Government Procurement Reform Act of 2003 requires the public
sector to procure goods, supplies, and consulting services from enterprises that are
at least 60 % Filipino-owned and infrastructure services from enterprises with at least
75% Filipino interest. Although Philippine law outlines objective criteria for selection
of a single portal electronic procurement system, US and other foreign companies
continue to raise concerns about irregularities in government procurement and
inconsistent implementation.

Philippine law also gives preference to local products and/or

Filipino-controlled enterprises in the bid evaluation process for public sector
purchases of goods and supplies. When the lowest bid is from a supplier of imported
goods and/or from a foreign owned enterprise, the lowest domestic bidder can claim
preference and match the offer provided its original bid was no more than 15 %
higher than that of the foreign bidder or foreign entity

Filipino consultants also enjoy preferential treatment in government projects. If

Filipino consultants work for foreigners on such projects due to technical need, the
law requires that they are the lead consultants. Where foreign funding is
indispensable, foreign consultants must enter into joint ventures with Filipinos.
Multilateral donor agencies report that their implementing partners have thus far
been able to comply with both donors' internal procurement guidelines and Philippine
law. Foreign bidders may participate in foreign-funded development assistance
projects provided the foreign assistance agreement expressly provides for use of the
foreign government or international financing institution's procurement procedures
and guidelines. The Official Development Assistance Act further authorizes the
President to waive statutory preferences for local suppliers for foreign-funded
projects

The Government Procurement Reform Act does not cover projects under the
BOT Law, which allows investors in qualifying projects to engage the services of
Philippine and/or foreign firms for the construction of infrastructure projects.
Procurement by government agencies and government-owned or controlled
corporations is subject to a countertrade requirement entailing the payment of at
least US$1 million in foreign currency Implementing regulations set the level of
countertrade obligations at a minimum of 50% of the import price and set penalties
for nonperformance of countertrade obligations

● Incentives

According to the Senate Tax Study and Research Office, there are about 180
fiscal incentives laws and issuances in the Philippines as of December 2012.
President Aquino has stated his support for fiscal incentives rationalization publicly
and listed fiscal incentives reform as a priority legislative measure. A number of bills
have been filed in the Philippine Congress but the scope and detail of reform remain
contentious.

Every year, the Investment Priorities Plan (IPP) outlines the list of investment
areas entitled to incentives

Screening for the legitimacy and regulatory compliance of companies seeking

investment incentives appears to be non-discriminatory, but the application process
can be complicated. Incentives granted by the BOI often depend on action by other
agencies such as the Department of Finance (DOF) (http://www.dof.gov.ph),
including its Bureau of Customs (BOC) (http://customs.gov.ph). Significant incentives
offered to BOI registered companies currently include a 4 to 6 years income tax
holiday (ITH) (depending on whether the project is non-pioneer or pioneer), which
may be extended for another three years upon compliance of certain criteria, with the
aggregate benefit not to exceed eight years; additional deduction from taxable
income of 50% of the wages corresponding to the increment in number of direct
labor as against the previous year for the first five years from date of registration, but
not simultaneously with ITH, duty-free importation of capital equipment, spare parts,
and accessories for five years from date of registration tax and duty exemptions on
imported breeding stocks and genetic materials for ten years, exemption from
wharfage dues and any export tax, duty, impost, and fees on non traditional export
products for ten years; the ability to employ foreign nationals in supervisory,
technical, or advisory positions; and the simplification of customs procedures. A
project study is required when applying for BOI registration and enterprises must
adhere with the representations they submitted to the Board during its application.
Registered projects must maintain the 75/25 debt-equity ratio.

To encourage wider distribution of industry across the Philippines,

BOI-registered enterprises that locate in less-developed areas are entitled to
"pioneer" incentives. Such enterprises can deduct from taxable income 100% of the
cost of the necessary and major infrastructure works BOI-registered enterprises may
also deduct from its taxable income 100% of its incremental labor expenses for five
years, which is double the rate that is allowed for BOI-registered projects not located
in less developed areas.

Incentives also apply specifically to export-oriented firms. An enterprise with

more than 40% foreign equity that exports at least 70% of its production may be
entitled to incentives even if the activity is not listed in the IPP from ITH and duty-free
importation of capital equipment, registered enterprises may also be entitled to tax
credit for taxes and duties paid on imported raw materials used in the processing of
export products for ten years and may have exemption from taxes and duties on
imported spare parts, and access to customs bonded manufacturing warehouses

Generally, the export commitment for export-oriented BOI-registered

enterprises is 50% of total production if Filipino-owned (e. with 60% or more Filipino
equity) and 70 % if foreign-owned (ie. less than 60% Filipino equity) B01-registered,
foreign-owned firms must divest to the 40 % level within 30 years from registration
date or within a longer period determined by B01 BOI-registered, foreign owned
firms that export 100% of production are exempt from this requirement.

Export-oriented firms with at least 50% of their revenues derived from exports
may register for additional incentives under the Export Development Act of 1994.
Registered exporters may be eligible for both these and BOI incentives, provided the
exporters are registered according to BOI rules and regulations and the exporter
does not take advantage of the same or similar incentives twice. Specific export
incentives include a tax credit ranging from 2.5 % to 10 % of annual incremental
export revenue.

Philippine law also provides incentives for multinational enterprises to

establish regional or area headquarters and regional operating headquarters in the
Philippines. Regional headquarters are defined as branches of multinational
companies that do not earn or derive income from the country, and which act as
centers for supervision, communications, or coordination. Incentives include
exemption from income tax, exemption from branch profits remittance tax, exemption
from value-added tax, sale or lease of goods and property and rendition of services
to the regional headquarters subject to 0% value-added tax, exemption from all
taxes, fees, or charges imposed by a local government unit (except real property
taxes), and value-added tax and duty-free importation of training and conference
materials and equipment solely used for the headquarters functions.

Regional operating headquarters enjoy many of the same incentives as

regional headquarters but are subject to the standard 12% value-added tax,
applicable branch profits remittance tax, and 10% corporate income tax Foreign
executives working at regional operating headquarters may import personal and
household effects duty free and may obtain immigration benefits. Eligible
multinationals establishing regional operating headquarters must spend at least
US$200,000 yearly to cover operations.

Multinationals entities that establish regional warehouses for the supply of

spare parts, manufactured components, or raw materials for foreign markets also
enjoy incentives on imports that are re-exported, including exemption from customs
duties, internal revenue taxes, and local taxes Imported merchandise intended for
the Philippine market is subject to applicable duties and taxes.

● Right to Private Ownership and Establishment

Philippine law recognizes the private right to acquire and dispose of property
or business interests, subject to foreign nationality caps specified in the Philippine
Constitution and other laws. The 1987 Constitution grants the government authority
to regulate competition and prohibit monopoly, but there is no implementing law. The
Aquino administration has prioritized the enactment of an anti-trust law. Congress is
considering several anti-trust bills In June 2011, President Aquino issued an
executive order designating the Department of Justice (DOJ) as the government's
competition authority until anti-trust legislation is passed.

A few sectors are closed to private enterprise, generally on grounds of

security, health or public morals. For example, the Philippine government operates or
licenses all casinos through the Philippine Amusement and Gaming Corporation
(PAGCOR) (http://www.pagcor ph) and runs lottery operations through the Philippine
Charity Sweepstakes Office (PCSO) (http://www.pcso.gov.ph)

Generally, only the state-owned GSIS may insure government-funded

projects. BOT projects and partially privatized government corporations must meet
GSIS insurance and bonding requirements in proportion to Philippine government
interests. In addition, government funds are usually deposited in the Central Bank or
in government-owned banks.

● Protection of Property Rights

The Philippines has established procedures for registering claims on property,

but delays and uncertainty caused by the judicial system remain a problem.
Questions regarding the general sanctity of contracts, and the property rights they
support, have also clouded the investment climate.

Of particular concern in the Philippines is the challenge of intellectual

property rights protection, for which the Philippines is listed on United States Trade
Representative (USTR) Special 301 Watch List. US distributors continue to report
pirated optic discs of cinematographic, musical works, computer games, and
business software, as well as widespread unauthorized transmissions of motion
pictures and other programming on cable television systems. Furthermore,
trademark infringement of a variety of product lines remains prevalent.

The Intellectual Property (IP) code provides the legal framework for
intellectual property rights protection in the Philippines, especially in the key areas of
patents, trademarks, and copyright. The Electronic Commerce Act extends the legal
framework established by the IP Code to the Internet. Investor concern include
deficiencies in the IP Code and other IP Laws that have unclear provisions relating to
the rights of copyright owners over broadcast, rebroadcast, cable retransmission or
satellite retransmission of their works, and burdensome restrictions affecting
contracts to license software and other technology.

The Philippines has generally strong patent and trademark laws. Its first-to-file
patent system grants patents valid for 20 years from the date of filing. The holder of
a patent is guaranteed an additional right of exclusive importation of his invention.
The United States announced its Patent Prosecution Highway (PPH) partnership
with the Philippines starting in January 2013. The PPH is a global program that
streamlines the examination process for patent applications filed in participating
countries. However, the Cheaper Medicines Act limits patent protection for
pharmaceuticals and significantly liberalizes the grounds for the compulsory
licensing of pharmaceuticals. The Philippine Intellectual Property Office. (IPOPHL)
(http://www.ipophil.gov.ph) reported it has not received any application for licensing
since the law passed in 2008.
 Trademark law protects well-known marks, which do not need to be in actual
use or registered to be protected under the law, and prior use of a trademark in the
Philippines is not required to file a trademark application. In July 2012, the
Philippines acceded to the Madrid Protocol, an agreement that facilitates the
protection of trademarks in a large number of countries by obtaining an international
registration.

In the area of copyright law, legislation that would fully implement the World
Intellectual Property Organization (WIPO) Copyright and Performances and
Phonograms treaties has been ratified by the Philippine Congress after being
pending for more than a decade. Once enacted, a copyright bureau will be created
under the IPOPHL to handle copyright matters. Philippine law also protects computer
software as literary work, and exclusive rental rights may be offered in several
categories of works and sound recordings. Terms of protection for sound recordings,
audiovisual works, newspapers, and periodicals are compatible with the Agreement
on the Trade-Related Aspects of Intellectual Property Rights (TRIPS). Further, the
enactment of the Anti-Camcording Act in 2010 provided stringent penalties for illegal
camcording of motion pictures in theaters. The Act has reportedly helped to
significantly reduce unlawful camcording incidents in the Philippines.

The IP Code also recognizes industrial designs, performers' rights, and trade
secrets. The registration of a qualifying industrial design is for a period of five years
and may be renewed for two consecutive five-year periods. While Philippine law
recognizes performers' rights for 50 years after death, the exercise of exclusive
rights for copyright owners over broadcast and retransmission is ambiguous. While
there are no codified rules on the protection of trade secrets, Philippine officials
assert that existing civil and criminal statutes protec secrets and confidential
information. Other important laws defining intellectual property rights are the Plant
Variety Protection Act, which provides plant breeders intellectual property rights
consistent with the 1991 Union for the Protection of New Varieties of Plants
Convention, and the Integrated Circuit Act, providing WTO-consistent protection for
the layout designs of integrated circuits.

Generally, the Philippine government enforcement agencies are most

responsive to those copyright owners who actively work with them to target
infringement. Agencies will not proactively target infringement unless the copyright
owner brings it to their attention and works with them on surveillance and
enforcement actions. The IPOPHL has jurisdiction to resolve certain disputes
concerning alleged infringement and licensing. In June 2011, IPOPHL launched its
IPR Arbitration and Mediation Center to receive and facilitate IP disputes presented
to the center for review, resolution, and settlement through mediation and arbitral
proceedings. Although intellectual property owners have sometimes used the
IPOPHL's administrative complaint system as an alternative to the judicial system,
the process can be slow-moving due to limited resources. Joint efforts between the
private sector and the National Bureau of Investigation (NBI), Philir National Police
(PNP), Bureau of Customs (BOC), Optical Media Board 31 (http://www.omb.gov.ph),
and several LGUs have resulted in successful enforce actions.

Enforcement actions are not often followed by successful prosecutions.

Intellectual property infringement is not considered a major crime within the
Philippine judicial system and takes a lower precedence in court proceedings. In
October 2011, the Philippine Supreme Court approved Rules of Procedure for
Intellectual Property Rights Cases, key judicial reform identified in several recent
Special 301 reports. The special rules include: streamlined procedures to expedite
cases and rules of evidence for IPR cases; provisions for the speedy, summary
destruction of seized goods; designation of four courts with national jurisdiction to
issue search warrants; and regional IP commercial courts. The special rules have
the potential to improve IPR-related convictions as it shortens lengthy court action
that led many cases to be settled out of court. Convicted intellectual property
violators rarely spend time in jail, since the six-year penalty enables them to apply for
probation immediately under Philippine law. As of November 2012, IPOPHL reported
that 161 out of 231 IP violations cases filed in their office since 2001 have been
dismissed, while the latest statistics on court convictions on IP violations are not yet
available as of the reporting period.

● Transparency of the Regulatory System

Philippine national agencies are required by law to develop regulations via a

public consultation process, often involving public hearings. In most cases, this
ensures some transparency in the rulemaking process. New regulations must be
published in national newspapers of general circulation or in the GPH's official
gazette before taking effect.

On the enforcement side, however, regulatory action is often weak,

inconsistent, and unpredictable. Regulatory agencies in the Philippines are generally
not statutorily independent, but are attached to cabinet departments or the Office of
the President and, therefore, subject to political pressure. Many US investors
describe business registration, customs, immigration, and visa procedures as
burdensome and a source of frustration. To counter this, some agencies, such as the
SEC, BOI and the Department of Foreign Affairs (DFA) (http://www.dfa.gov.ph), have
established express lanes or "one-stop shops" to reduce bureaucratic delays, with
varying degrees of success.

● Efficient Capital Markets and Portfolio Investment

The Philippines is generally open to foreign portfolio capital investment. Non

residents may purchase domestically-issued securities and invest in equities and
money market instruments. They may also invest in bank deposits, although foreign
exchange purchases from banks to remit profits and repatriate capital for peso time
deposits with maturities of under 90 days face some restrictions.

The securities market is growing but remains dominated by government

bills/bonds. Nevertheless, private sector issuances have been steadily increasing
and now constitute an important source of financing for major Philippine enterprises.
Between June 2011 and October 2012, Fitch, Standard & Poor's, and Moody's
upgraded the Philippines' sovereign credit ratings to one notch below investment
grade, contributing to robust expansion of the Philippine capital market.

● Philippine Stock Exchange

Membership in the Philippine Stock Exchange (PSE) is open to

foreign-controlled stock brokerages incorporated under Philippine law. Although
growing, the Philippine stock market lags many of its neighbors in size, product
offerings, and trading activity. Investments in any publicly-listed firm on the PSE are
governed by foreign ownership ceilings stipulated in the Constitution and other laws.

There are less than 260 listed firms and the ten most actively-traded
companies account for nearly 40% of trading value and about 35% of domestic
market capitalization. To encourage publicly-listed companies to widen their investor
base, the PSE introduced reforms in 2006 to include trading activity and free float
criteria in the selection of companies comprising the stock exchange index. The 30
companies included in the benchmark index are subject to review every six months.
In November 2010, the PSE reinstated a policy for listed companies to maintain at
least 10% public ownership of their issued and outstanding shares to promote
greater market liquidity and fairer and more transparent stock pricing. Listed firms
were given up to the end of 2012 to comply with the minimum public float rule or face
de-listing/suspension and higher taxes.

Hostile takeovers are not common because most companies' shares are not
publicly listed and controlling interest tends to remain with a small group of parties.
Cross ownership and interlocking directorates among listed companies also lessen
the likelihood of hostile takeovers.

The Securities Regulation Code of 2000 strengthened investor protection by

requiring full disclosure in the regulation of public offerings, and implementing stricter
rules on insider trading, mandatory tender offer requirements, and the segregation of
broker-dealer functions. The Code also significantly increased sanctions for
securities. violations, and mandated steps improve the internal management of the
stock exchange and future securities exchanges. Moreover, the Code expressly
prohibits any one industry group (including brokers) from controlling more than 20%
of the stock. exchange's voting rights, though the PSE has yet to fully comply.
 The enforcement of these strengthened laws is mixed. While there has been
some progress from the creation of special commercial courts, the prosecution of
stock market irregularities can be subject to delays and uncertainties of the
Philippine legal system.

● Banking

As of September 2012, the five largest commercial banks in the Philippines

represented 47% of total commercial banking system resources, with estimated total
assets the equivalent of about US$162 billion. The Central Bank has worked to
strengthen banks' capital bases, reporting requirements, corporate governance and
risk management systems.

Commercial banks' published average capital adequacy ratio was 18.4% on

consolidated basis as of March 2012, well above the 10% statutory limit and the 34
internationally-accepted benchmark. Time-bound fiscal and regulatory incentives.
encourage the sale of non-performing assets to private special purpose vehicles and
asset management companies promoted a resilient post-Asian crisis banking sector
in the Philippines. Philippine banks also had limited direct exposure during the global
financial crisis to investment products issued by troubled financial institutions
overseas. As of September 2012, non-performing loans and non-performing asset
ratios of commercial banks were estimated at 2.1% and 2.6%, respectively.

The General Banking Law of 2000 paved the way for the Philippine banking
system to phase in internationally accepted, risk-based capital adequacy standards.
Since 2011, the Central Bank has broadly revised its risk-based capital framework in
step with adjustments in the Basel capital adequacy rules. In July 2007, the
Philippines adopted the Basel 2 capital adequacy framework for commercial banks
and their bank/quasi-bank subsidiaries, expanding coverage from credit and market
risks to include operational risks and enhancing the risk-weighting framework and
disclosure of capital adequacy and risk management systems. The Central Bank
began the staggered adoption of Basel 3 capital adequacy rules for commercial
banks in January 2011. Full implementation is scheduled for January 2014-four
years ahead of the timeline provided by the Basel Committee on Banking
Supervision.

Thrift, rural, and cooperative banks that are not subsidiaries of commercial
banks are covered by a modified, risk-based capital framework consisting of Basel 1
with some elements of Basel 2, such as new capital adequacy requirements for
operational risks and enhanced disclosure.

Other important provisions of the General Banking Law strengthened

transparency, bank supervision and bank management. However, some
impediments remain to more effective bank supervision and prompt corrective
action, including stringent bank deposit secrecy laws and inadequate liability
protection for Central Bank officials and bank examiners.

Credit is generally granted on market terms and foreign firms are able to
obtain credit from the domestic market. However, some laws require financial
institutions to set aside loans for certain preferred sectors, which may translate into
increased costs and/or credit risks. Banks must set aside 25% of loanable funds for
agricultural credit, with at least 10% earmarked for agrarian reform programs and
beneficiaries. In early 2010, a new law tightened alternative modes of
compliance-which used to include low-cost housing, educational, and medical
developmental loans-to those directly targeting the agricultural sectors. Recent
investor experience with "agri-agra" eligible bonds raise questions about implied
guarantees by the Philippine government and investors are cautioned to exercise
due diligence.

Banks are also required to set aside 10% of their loans for micro-, small- and
medium-sized (MSME) borrowers, 80% of which should be earmarked for micro and
small enterprises. While most domestic banks are able to comply with these
mandatory lending requirements, operating and branching restrictions make it more
difficult for foreign bank branches to comply. To help incentivize lending to MSMEs
with limited or non-existing collateral to guarantee their lending, the Philippine
government seeks to enhance MSME access to finance through the Central Credit
Information Corporation (CCIC). It would operationalize a system that collects and
disseminates fair and accurate information about the track record of borrowers, as
well as the credit activities of all entities participating in the financial system. The
legal and regulatory framework for a centralized credit information system is in place
but not yet operational. The Credit Information System Act was adopted in October
2008 (Republic Act No. 9510). The implementing rules and regulations were adopted
in May 2009.

Direct lending by non-financial government agencies is limited to the

Department of Social Welfare and Development (DSWD), focusing on the poorest
areas not being served by micro-finance institutions.

● Anti-Money Laundering and Information Exchange

The Paris-based Financial Action Task Force (FATF) continues to monitor

implementation of the Philippine Anti-Money Laundering Act through the Anti-Money
Laundering Council. Covered institutions include foreign exchange dealers and
remittance agents, which are required to register with the Central Bank and must
comply with various Central Bank regulations and requirements related to the
implementation of the Philippines' anti-money laundering law. The Philippines is a
member of the Egmont Group, the international network of financial intelligence units
and the Asia Pacific Group on Money Laundering.

The Philippine government has been working to address "strategic

deficiencies" that pose potential risks to the international financial system, as
identified by the Asia Pacific Group on Money Laundering. In June 2012, the FATF
moved the Philippines from its "dark gray" to "gray" list following the enactment of
key laws allowing ex parte inquiry into bank deposits/investments and making
terrorist financing a stand-alone crime. Legislation to address remaining major
deficiencies is pending before the Philippine Congress. Bills include broadening the
definition of the crime of money laundering and expanding predicate crimes and
covered institutions. President Aquino has certified the matter as urgent.

Following the signing into law of the Exchange of Information Tax Matters Act
in March 2010, and the issuance of implementing rules and regulations in September
2010, the Organization for Economic Cooperation and Development (OECD)
upgraded the Philippines from its tax standards "blacklist" to the list of jurisdictions
that "have substantially implemented the internationally agreed tax standard" for the
exchange of information.

● Accounting Standards

In 2005, the Philippines started to fully adopt the Philippine Financial

Reporting Standards patterned after the International Financial Reporting Standards
issued by the International Accounting Standards Board (IASB). Effective Jan. 1,
2010, the Philippines also adopted International Financial Reporting Standards for
SMEs which except for limited circumstances, apply to enterprises which do not
have public accountability and with total assets from P3 million to P350 million (about
US$75,000 to US$8.75 million) or liabilities from P3 million to P250 million (about
US$75,000 to US$6.25 million).

The Philippine SEC requires the corporations' president, chief executive

officer and chief financial officer to assume management responsibility and
accountability for financial statements. Financial statements are examined by
independent auditors in accordance with the Philippine Standards on Auditing, which
are based on International Auditing Standards. The SEC reviews and revises
guidelines, as necessary, on the accreditation of auditing firms and external auditors
to promote quality control and discipline in the financial reporting environment.
Certain regulatory agencies, such as the Central Bank, Insurance Commission and
Bureau of Internal Revenue, enforce separate accreditation rules. The SEC requires
listed companies to disclose to the SEC its actions on any material external audit
findings within five days of receipt. Material findings include fraud or error, losses or
potential losses aggregating 10% or more of a company's consolidated assets,
indications of company insolvency, and internal control weaknesses that could result
in financial reporting problems.

A number of local accountancy firms are affiliated with the "Big Four"
international accounting firms, namely KPMG, PricewaterhouseCoopers, Ernst &
Young, and Deloitte.

● Outward Investments

There are generally no restrictions on outward investments by Philippine

residents, although foreign exchange purchases from banks and their foreign
exchange subsidiaries/affiliates above US$60 million per investor or per fund per
year require prior approval from the Central Bank. As part of the US$60 million
ceiling, residents may also purchase foreign exchange from banks and their foreign
exchange subsidiaries/affiliates to invest in foreign currency bonds/notes, as well as
peso-denominated securities for settlement in foreign currency, issued offshore by
the Philippine government or resident entities.

Qualified investors, such as mutual funds, pension or retirement funds,

investment trust funds and insurance companies may apply with the Central Bank for
higher annual outward investment limits. All outward investments of banks in
subsidiaries and affiliates abroad require prior Central Bank approval.

Foreign exchange earnings and divestment proceeds from outward

investments that were funded with foreign exchange purchased from banks or their
subsidiary/affiliate foreign exchange corporations are not required to be inwardly
remitted and sold for Pesos.

Competition From State-Owned Enterprises Private and state-owned

enterprises generally compete equally, with some clear exceptions. In 2002, the
government's National Food Authority (NFA) (http://www.nfa.gov.ph) allowed the
private sector to import rice. Though, in 2012, the GPH ceded about 83% of all rice
importation to the private sector, including minimum access volume ( MAV) and
country specific quota (CSQ) imports. With limited exceptions, only the state-owned
GSIS may provide coverage for the government's insurance risks and interests,
including those in BOT projects and privatized government corporations, at least in
proportion to the Philippine government's interest.

The government has also intervened to directly cap or control pricing in some
additional private markets. During heavy typhoons and flooding, the Philippine
government may impose temporary price controls on gasoline and a basket of basic
goods and services. Under Philippine law, the President may freeze prices on basic
goods and services for a period of 90 days under a state of emergency.
 The Philippine government's privatization program is managed by the
Privatization Management Office under the DOF. Apart from restrictions under the
FINL, there are no regulations that discriminate against foreign buyers. The bidding
process appears to be transparent, though the Supreme Court has twice overturned
high-profile privatization transactions to foreign buyers. The Power Sector Assets
and Liabilities Management Corporation is required to sell 70% of the
government-owned National Power Corporation's (NPC) generating assets and to
transfer 70% of NPC-Independent Power Producer contracts to private companies.

The Philippine government has opened access and retail competition through
several measures, including unbundling rates, removing cross-subsidies,
establishing the Wholesale Electricity Spot Market and privatizing 92% of the NPC's
generation assets as of 2012.

● Corporate Social Responsibility

Corporate social responsibility (CSR) constitutes a basic aspect of most

significant business operations in the Philippines. US companies report strong and
favorable responses to CSR programs among employees and within local
communities. Many CSR programs focus on poverty alleviation efforts, promoting of
the environment, health initiatives, and education. Under the 2012 IPP, registered
enterprises are encouraged to undertake sustainable CSR projects in the locality
where the projects are implemented. In some cases, the Philippine government has
compelled its own entities to engage in CSR. For example, the Philippine Bases
Conversion and Development Authority is mandated to declare portions of its
property in Fort Bonifacio and surrounding areas as low-cost housing sites.

● Political Violence

Terrorist groups and criminal gangs operate in some regions of the country.
The Department of State publishes a consular information sheet at
http://travel.state.gov and advises all Americans living in or visiting the Philippines to
review this information periodically. The Department strongly encourages visiting and
resident Americans in the Philippines to register with the Consular Section of the US
Embassy in Manila through http://travelregistration.state.gov, the State Department's
travel registration website.

Arbitrary, unlawful, and extrajudicial killings by national, provincial, and local

government actors continue to be a serious problem. The justice system is
constrained by limited resources that results in limited investigations, few
prosecutions, and lengthy trials. Corruption, impunity, and abuse of power remain
endemic.
 On May 10, 2010, approximately 75% of registered citizens voted in elections
for president, both houses of congress, and provincial and local governments. The
election was generally free and fair, but was marked by some violence and
allegations of vote buying and electoral fraud.

Peace talks between the government and the Mindanao-based insurgent

group Moro Islamic Liberation Front (MILF) are ongoing. After years of negotiations,
during which both sides generally adhered to a cease-fire, the government and the
MILF signed a Framework Agreement in October 2012 that appears to outline the
basis for a durable solution to the longstanding conflict between the parties, though
much work remains to be done. As of January 2013, the parties continued to
negotiate the modalities for implementing a final peace accord.

The New People's Army (NPA), the military arm of the Communist Party of the
Philippines, is responsible for general civil disturbance through assassinations of
public officials, bombings, and other tactics. It frequently demands "revolutionary
taxes" from local and, at times, foreign businesses, and business people. To enforce
its demands, the NPA sometimes attacks infrastructure such as power facilities,
telecommunications towers, and bridges, mostly in Mindanao. The National
Democratic Front (NDF), an umbrella organization that includes the Communist
Party and its allies, has engaged in intermittent peace talks with the Philippine
government. The NDF has not targeted foreigners in recent years but could threaten
US citizens engaged in business or property management activities.

Terrorist groups, including the Abu Sayyaf Group and Jema'ah Islamiyah,
periodically attack civilian targets in Mindanao, kidnap civilians for ransom and
engage in armed skirmishes with the security forces.

● Corruption

Corruption is a pervasive and long-standing problem in the Philippines.

Recent government efforts have improved the country's ranking in Transparency
International's Corruption Perceptions Index from 129 in 2011 to 105 (out of 176
economies) in 2012. Nevertheless, corruption was still ranked as the most
problematic factor for doing business in the 2012-2013 Global Competitiveness
Report.

The current administration continues to implement the anti-corruption reforms

outlined in the Philippine Development Plan 2011-2016. Its 2012-2016 Good
Governance and Anti-Corruption Cluster Plan further identifies specific measures to
curb corruption through greater transparency and accountability in government
transactions. Since President Aquino took office in 2010, corruption charges have
been filed against several high-profile public officials. In May 2012, the Philippine
Senate removed the Chief Justice of the Supreme Court after he was impeached on
charges of failing to fulfill wealth disclosure obligations. Efforts to reign in corruption
have, in general, improved public perception, though achieving tangible change
remains a serious challenge to the Aquino administration.

The Philippines is not a signatory to the OECD Anti-Bribery Convention. It

ratified the UN Convention against Corruption in 2003. The Philippine Revised Penal
Code, the Anti-Graft and Corrupt Practices Act, and the Code of Ethical Conduct for
Public Officials aim to combat corruption and related anti-competitive business
practices. The Office of the Ombudsman (http://www.ombudsman.gov.ph)
investigates and prosecutes cases of alleged graft and corruption involving public
officials. Cases against high-ranking officials are brought before the special
anti-corruption court, the "Sandiganbayan". Cases against low-ranking officials are
filed before regional trial courts. Several bills supporting anti corruption efforts are
currently filed in Congress, including freedom of information rights, whistle-blower
protection, and strengthening the country's witness protection program.

President Aquino abolished the Presidential Anti-Graft Commission in

November 2010 and transferred its investigative, adjudicatory, and recommendatory
functions directly under his office. This enabled the Office of the President to directly
investigate and hear administrative cases involving presidential appointees in the
executive branch and government-owned and controlled corporations.
Soliciting/accepting and offering/giving a bribe are criminal offenses, punishable by
imprisonment (6 to 15 years), a fine, and/or disqualification from public office or
business dealings with the government.

● Bilateral Investment Agreements

As of 2012, the Philippines had signed bilateral investment agreements with

40 partner countries (Argentina, Australia, Austria, Bahrain, Bangladesh, Belgium
and Luxembourg, Burma, Cambodia, Canada, Chile, China, the Czech Republic,
Denmark, Equatorial Guinea, Finland, France, Germany, India, Indonesia, Iran, Italy,
Japan, Republic of Korea, Kuwait, Laos, Mongolia, Netherlands, Pakistan, Portugal,
Romania, Russian Federation, Spain, Sweden, Switzerland, Syria, Taiwan, Thailand,
Turkey, United Kingdom, and Vietnam). It has four regional free trade agreements
that include an investment chapter (ASEAN Comprehensive Investment Agreement,
ASEAN-Australia-New Zealand Free Trade Agreement, Agreement on Investment
under the Framework Agreement on Comprehensive Economic Cooperation among
Governments of ASEAN and Republic of Korea, and Agreement on Investment
under the Framework Agreement on Comprehensive Economic Cooperation among
Governments of ASEAN and China).

The Philippines does not have a bilateral investment agreement with the
United States.
 ● Taxes/Bilateral Tax Treaty

The Philippines has a tax treaty with the United States for the purposes of
avoiding double taxation, providing procedures for resolving interpretative disputes,
and enforcing taxes of both countries. The treaty also encourages bilateral trade and
investments by allowing the exchange of capital, goods and services under clearly
defined tax rules and, in some cases, preferential tax rates or tax exemptions.

Pursuant to the most favored nation clause of the Philippine-United States tax
treaty, US recipients of royalty income qualify for the preferential rate provided in the
Philippine-United Arab Emirates tax treaty. Accordingly, a 10% tax rate applies with
respect to most royalties. A 15% tax applies on the remittance of profits by Philippine
branches of US companies to their head offices and dividends remitted by Philippine
subsidiaries of US companies to their parent companies.

There are issues about the application of the preferential tax treaty rates on
dividends, interests, and royalties paid or payable to US residents. An entity must
obtain a tax treaty relief ruling from the BIR to qualify for preferential tax treaty rates
and treatment. However, according to several tax lawyers, the requirements for tax
treaty relief applications are burdensome. Even stricter regulations issued in 2010
disqualifying late filings from availing of the preferential tax rates. The volume of tax
treaty relief applications also has resulted in processing delays, with most
applications reportedly pending for over a year. Some publicly-listed companies
reportedly have opted to withhold a final 30% withholding tax on dividend payments
to foreign investors rather than go through the tedious process of securing tax treaty
relief rulings for preferential tax rates.

The Supreme Court of the Philippines ruled in favor of Deutsche Bank AG

Manila Branch (DB Branch) and held that the failure to strictly comply with the
domestic law requirement under Revenue Memorandum Order (RMO) No. 1-2000 to
file a tax treaty relief application (TTRA) 15 days prior to the transaction should not
deprive a taxpayer of the benefit of a tax treaty. The Supreme Court reversed the
decision of the Court of Tax Appeals (CTA) and upheld the provisions of the tax
treaty over a BIR administrative issuance. This is following the time-honored
international law principle of "pacta sunt servanda" which in English means
"agreements must be kept". This principle demands that all states that enter into
treaties must perform its treaty obligations in good faith (Deutsche Bank AG Manila
Branch vs. Commissioner of Internal Revenue, G.R. No. 188550, promulgated Aug.
19, 2013).

The BIR appears to be altering its position on tax gains through liquidation.
Previously, it had consistently applied Philippine United States Tax Treaty provisions
exempting foreign companies from capital gains and corporate income tax on profit
from the redemption and sale of shares by Philippine affiliates/subsidiaries being
liquidated. However, a 2009 ruling involving a foreign company held that such gains
were subject to corporate income tax but not to capital gains tax. In another case,
the BIR ruled that the Bains were subject to tax on dividends. A number of
transactions involving partial liquidations through shares redemption reportedly are
on hold because of this unresolved issue. Tax lawyers maintain that any gains from
partial or full liquidation should be exempt under the Philippines-Unites States Tax
Treaty.

A recent BIR ruling also states that a liquidating company and its
shareholders are taxable upon distribution of residual assets, but the ruling does not
clarify which taxes apply to the liquidation company.

The BIR has issued rulings involving non-US investors asserting that the
stock transfer tax is an ad valorem transactional tax-different from the capital gains
tax-and therefore, applies on the sale of publicly-listed shares in the stock exchange.
These rulings contradicted previous exemptions from the stock transfer tax by virtue
of bilateral tax treaty provisions exempting foreign nationals from tax on capital
gains. This interpretation could complicate the processing and resolution of
applications by US and other foreign investors. milar tax treaty relief

A foreign company without a branch office that renders services to Philippine

clients is considered a permanent establishment and is liable to pay Philippine taxes
if its personnel stay in the country for more than 183 days for the same or a
connected project in a twelve-month period. However, BIR rulings on the taxation of
permanent establishments have been inconsistent on whether to treat them as
resident or non resident foreign corporations.

● OPIC and Other Investment Insurance Programs

The Philippine government currently does not provide guarantees against

losses due to inconvertibility of currency or damage caused by war. The Overseas
Private Investment Corporation (OPIC) can provide US investors with political risk
insurance against risks expropriation, inconvertibility and transfer, and political
violence, pursuant to the US-Philippines Investment Incentive Agreement that
enables OPIC to support investment in the country. The Philippines is a member of
the Multilateral Investment Guaranty Agency.

● Labor

Managers of US-based companies widely report that Philippine labor is

relatively low cost and motivated. In addition, the Philippine labor force possesses
strong English language skills. As of October 2012, the Philippine labor force was
estimated at 40.4 million, with an unemployment rate at 7%. This figure includes
employment in the informal sector and does not capture the substantial
underemployment in the country.

Multinational managers report that total compensation packages tend to be

comparable with those in neighboring countries. In the call center industry, the
average labor cost is between US$2.22 and US$3.74 per hour (Source: Business
Process Association of the Philippines). Regional Wage and Productivity Boards
meet periodically in each of the country's 16 administrative regions to determine
minimum wages, with the National Capital Board setting the national trend.

During the reporting period, the non-agricultural daily minimum wage in the
National Capital Region is P446 (approximately US$10.37), although some private
sector workers receive less. Cost of living allowances are given across the board.
Most other regions set their minimum wage significantly lower than Manila. The
lowest minimum wage rates were in the Southern Tagalog Region, where daily
agricultural wages were P199 (US$4.59). Regional Boards may grant various
exceptions to the minimum wage, depending on the type of industry and number of
employees at a given firm.

Literacy in both English and Filipino is relatively high, although there have
been concerns in the business and education communities that English proficiency
was on the decline. The Department of Education, under its National English
Proficiency Program, continues its efforts to strengthen English language training,
including school-based mentoring programs for public elementary and secondary
school teachers aimed at improving their English language skills.

Violation of minimum wage standards is common, especially non-payment of

social security contributions, bonuses, and overtime. Philippine law provides for a
comprehensive set of occupational safety and health standards, although workers do
not have a legally-protected right to remove themselves from dangerous work
situations without risking loss of employment. The Department of Labor and
Employment (DOLE) (http://www.dole.gov.ph) has responsibility for safety inspection,
but a severe shortage of inspectors makes enforcement extremely difficult.

The Philippine Constitution enshrines the right of workers to form and join
trade unions. The mainstream trade union movement recognizes that its members'
welfare is tied to the productivity of the economy and competitiveness of firms;
frequent plant closures have made many unions even more willing to accept
productivity-based employment packages. The trend among firms of using temporary
contract labor continues to grow. During the reporting period, DOLE reported one
strike involving 20 workers. The DOLE Secretary has the authority to end strikes and
mandate a settlement between the parties in cases involving the national interest,
which can include cases where companies face strong economic or competitive
pressures in their industries. In 2012, there were 135 registered labor federations
and 16,647 private sector unions. The 1.38 million union members represented
approximately 3.4% of the total workforce of 40.4 million. Mainstream union
federations typically enjoy good working relationships with employers.

Special economic zones or cozones often offer on-site labor centers to assist
investors with recruitment. These centers coordinate with DOLE and Social Security
Agency, and can offer services such as mediating labor disputes. Although labor
laws apply equally to ecozones, unions have noted some difficulty organizing inside
them.

There have been some reports of forced labor in connection with human
trafficking in the commercial sex, domestic service, agriculture, and fishing
industries.

The Philippines is a signatory to all International Labor Organization (ILO)

conventions on worker rights, but has faced challenges enforcing them. Unions
allege that companies or local officials use illegal tactics to prevent them from
organizing workers. The quasi-judicial National Labor Relations Commission reviews
allegations of intimidation and discrimination in connection with union activities. In
September 2009. the government cooperated with a high-level ILO mission to
investigate labor rights violations in the country. The ILO mission noted issues
relating to violence, intimidation, threat, and harassment of trade unionists and the
absence of convictions in relation to those crimes. It also observed obstacles to the
effective exercise in practice of trade union rights. response to ILO mission
recommendations, the government constituted the Tripartite Industrial Peace Council
(TIPC) to monitor the application of international labor standards and has proposed
several legislative measures to address weaknesses in the Labor Code.

Congress passed the Kasambahay Bill in September 2012, which provides

more benefits and protection to domestic workers. This legislation came on the heels
of the Senate ratification of the ILO Convention on Decent Work for Domestic
Workers and the Maritime Labor Convention, the "bill of rights" for almost 2.5 million
household workers and 400,000 seafarers worldwide.

● Foreign Trade Zones/Free Ports

Enterprises enjoy preferential tax treatment when located in export processing

zones, free trade zones, and certain industrial estates, collectively known as
economic zones, or "ecozones." Enterprises located in ecozones are considered to
be outside the customs territory and are allowed to import capital equipment and raw
material free from customs duties, taxes, and other import restrictions. Goods
imported into free trade zones may be stored, repacked, mixed, or otherwise
manipulated without being subject to import duties and are exempt from the GPH's
Selective Pre-shipment Advance Classification Scheme. While some ecozones have
been designated as both export processing zones and free trade zones, individual
businesses within them are only permitted to receive incentives under a single
category.

● Philippine Economic Zone Authority (PEZA)

There are 273 operating ecozones in PEZA, composed primarily of

manufacturing, IT parks and centers, tourism, medical tourism parks and
agro-industrial ecozones. Of these 273 operating ecozones, PEZA manages three
government-owned export processing zones (Mactan, Baguio, and Cavite) and
administers incentives to enterprises located in the other 270 privately-owned and
operated ecozones. Any person, partnership, corporation, or business organization,
regardless of nationality, control and/or ownership, may register as an export, IT,
tourism, medical tourism, or agro industrial enterprise with PEZA, provided that the
enterprise physically locates its activity inside any of the proclaimed ecozones. PEZA
administrators have earned a reputation for maintaining a clear and predictable
investment environment within the zones of their authority. As of October 2012,
PEZA reported investments amounting to P137.9 billion (about US$3.39 billion),
10.30% higher than the P125.104 billion (about US$3.07 billion) for the same period
in 2011.

Information technology parks or centers house PEZA-registered enterprises

that export IT-enabled activities such as software development, multimedia graphics,
animation, engineering and architectural designs, IT research and development, data
encoding, transcribing, call centers, and other business process outsourcing (BPO)
and knowledge process outsourcing (KPO) activities. Information technology parks
or centers are not allowed to host manufacturing activities.

● Bases Conversion Development Authority

The ecozones located inside former US military bases are independent of

PEZA and subject to the Bases Conversion and Development Authority (BCDA)
(http://www.bcda.gov.ph). BCDA-administered zon include Clark Freeport Zone
(Angeles City, Pampanga), the John Hay Special Economic Zone (Baguio), Poro
Point Freeport Zone (La Union), and, the Bataan Technology Park (Morong, Bataan).
The BCDA also oversees the Subic Bay Freeport Zone (Subic Bay, Zambales).

These ecozones offer incentives comparable to those offered by PEZA.

Additionally, both Clark and Subic have their own international airports, power plants,
telecommunications networks, housing complexes, and tourist facilities.
 ● Other Zones

The Phividec Industrial Estate (Misamis Oriental, Mindanao) is governed by

the Phividec Industrial Authority, a government-owned and controlled corporation.
Incentives available to investors are comparable to those offered by PEZA and also
include special low rates for land lease. Two lesser-known ecozones are the
Zamboanga City Economic Zone and Freeport (Zamboanga City, Mindanao) and the
Cagayan Special Economic Zone and Freeport (Santa Ana, Cagayan Province). The
incentives available to investors in these zones are very similar to PEZA incentives
but are administered independently. In addition to offering export incentives, the
Cagayan Economic Zone Authority is authorized by law to grant gaming licenses.

● Foreign Direct Investment Statistics.

The Philippine SEC, BOI, National Economic and Development Authority

(NEDA) (http://www.neda.gov.ph), and the Central Bank each generate direct
investment statistics. SEC, BOI and NEDA record investment approvals. The Central
Bank records actual investments based on the balance of payments methodology,
readily available US dollar terms. Central Bank data are widely used as a reasonably
reliable indicator of foreign investment stock and foreign investment flows.

The figures in Table 1 below refer to foreign direct investment (FDI) stock
reported by the Central Bank. Disaggregation of net FDI flows by country and by
industry is presented in Tables 2 and 3, respectively. Table 4 provides a list of top
foreign investors in the Philippines, using the latest available published information
from the SEC. Some figures indicated in earlier Investment Climate Statement were
revised to reflect updated Central Bank data.
CHAPTER 9 ACTIVITIES

True or False

TRUE 1. The entry of MNC increases competition and force domestic firms to imitate
and/or innovate.

TRUE 2. Foreign direct investment has grown steadily in volume and is a major
source of development finance.

FALSE 3. Various investment incentive measures were granted through the different
investment regimes administered by the Board of Investments (BOI), Philippine
Economic Zone Authority (PEZA), Subic Bay Metropolitan Authority (SBMA), Clark
Development Corporation (CDC) and other bodies not mandated by various laws to
establish, maintain, and manage special economic or free port zones.

TRUE 4. Compared with FDI inflows to the ASEAN countries, the Philippines
received the lowest level of FDI inflows particularly in the 1990s and the 2000s.

TRUE 5. Legal restrictions, regulatory inconsistency, inadequate public investment in

social and physical infrastructure, and a lack of transparency hinder foreign
investment.

TRUE 6. The Philippines limits foreign ownership for reasons of national security,
defense, and public health.

TRUE7. Investors generally report that the Philippine bureaucracy is

non-discriminatory but slow to process these requirements.

FALSE 8. The 1987 Constitution allows foreign nationals from owning land in the
Philippines.

TRUE 9. Foreign ownership in the banking sector is restricted by the 1994 Foreign
Bank Liberalization Act.

TRUE10. Offshore companies not incorporated in the Philippines may underwrite

Philippine issues for foreign markets but not the domestic market.

Multiple Choice

1. Refers to the effect the presence of MNCs has on domestic firms in the
same sector.

a. vertical spill over

 b. cross listings
c. institutional investing
d. horizontal spill over

2. The Government of the Philippines (GPH) actively seeks foreign investment

to

a. gain geo-political mileage.

b. attain industrial status.
c. encourage MNCs.
d. promote economic development.

3. It has become an important source of private external finance for developing

countries.

a. institutional investing
b. SMES
c. FDIs
d. MNCs

4. Clark and Subic enterprises enjoy the same incentives available to PEZA
enterprises except for

a. direct importation.
b. repatriation of profit.
c. tax holiday.
d. tax free export.

5. Within manufacturing, FDI inflows have been dominated by what sector

which has a share of 12.7% in the 2000-2007 period.

a. food and beverage

b. chemical
c. petroleum
d. paper

6. Philippine law generally treats foreign investors in the same manner as their
domestic counterparts with important exceptions outlined in the

a. Securities Regulations Code.

b. Foreign Investment Act.
c. Omnibus Investment Act.
d. Bureau of Trade Regulation and Consumer Protection Circulars.
7. Companies that register with the Board of Investments (BOI) may employ
foreign. nationals in supervisory, technical, or advisory positions for

a. three years from the date of registration, extendable by BOI upon request.
b. four years from the date of registration, extendable by BOI upon request.
c. five years from the date of registration, extendable by BOI upon
request.
d. six years from the date of registration, extendable by BOI upon request.

8. The 1991 Foreign Investment Act (FIA) requires the GPH to publish the
Foreign Investment Negative List (FINL) which outlines sectors in which
foreign investment is

a. restricted or limited.
b. open to Filipino investors.
c. open to foreign corporations.
d. limited to Filipinos.

9. Foreign investment is highly restricted in the

a. manufacturing.
b. oil exploration.
c. retail trade industry.
d. mining.

10. Vertical spillovers from FDI occur as a result of the interaction between
domestic and foreign firms that are not in the same industry.

a. vertical spill over

b. cross listings
c. institutional investing
d. horizontal spill over
 GOVERNANCE FINALS QUIZ
Putting conditions on loans is considered very effective in False
imposing anti-corruption strategies.
Corruption takes many different forms, from the routine True
cases of bribery of petty abuse of power to amassing of
spectacular personal wealth through embezzlement or
other means.
Economic Punishments are some of the least effective False
deterrents to corruption.
In developed countries too, there is increasing recognition False
among companies that a “one-size fits all” approach to
CSR operations around the world is effective.
CSR is all about philanthropy or charitable work. False
Institutional investors acting as agents for ultimate False
beneficiaries are very often directly remunerated on the
basis of the performance of portfolio companies whether
based on company performance or better governance
practices.
Specific measures to promote and facilitate investments True
can be successful if they take place within the context of,
and not substituted for, broader policies for improving the
investment environment.
The nature of institutional investors has evidently evolved False
over the years into a very simple system of financial
institutions and fund management companies with their
own corporate governance issues and incentive structures.
Companies now realize that their ability to manage risks False
depends on anticipating risks, detecting their risks more
effectively and petrifying their systems to withstand
shocks.
Operational risk, such as loss of intellectual property from False*
outsourcing of business processes overseas, could lead to
bankruptcy. Note: naka-true sa quiz
to
Foreign direct investment has grown steadily in volume but False
is minor source of development finance
The "equality is equity" principle states that one a company True
undergoes rehabilitation, all creditors, whether secured or
unsecured, should be placed on equal footing.
Compared with FDI inflows to the ASEAN Countries, the False
Philippines received one of the highest level of FDI inflows
particularly in the 1990s and the 2000s
An insolvent company is essentially also a bankrupt False
company.
Increasing foreign investment can be one of the indicators True
that the host country’s economy is growing and opening to
globalization.
All of the following pertain to pro-privatization, except Certain parts of the
social terrain should
remain closed to the
market forces in order
to protect them from the
unpredictability and
ruthlessness of the
market.
With regard to human labor rights, the entrepreneurial Be compliant and be
strategy of large enterprises should be based on the consistent
following CSR demands:
It has become an important source of private external FDIs
finance for developing countries
Which of the following is an example of an institutional All of the choices
investor in the Philippines?
MasterCard sends a customer a memo that discloses the
true cost of borrowing with each billing statement. It does be informed
this becaue it realizes that the customer has the right to
One of the ways on how civil society groups ca effectively Mobilize Ordinary
fight corruption where they need to be prepared to take on People
governments in innovative and sometimes confrontational
ways
One of the roles of institutional investors where being a Driver of Agent’s
valued investor can, most of the time, command better Performance
performance knowing that such an amount of money can
be pulled out by the investor anytime.
An investor-led organization of governance professionals ICGN
with a mission to inspire and promote effective standards
of corporate governance to advance efficient markets and
economies world-wide
One type of FDI motivated by access to local, natural, Resource seeking
or human resources
One of the roles of institutional investors where institutional Good Activist
investors, especially those whose investment is significant
enough to earn a board seat can be the fearless fiscalizers
on corporate policies.
An investment account open to a narrow range of investors Hedge Fund
that take on a wider range of investment and trading
activities in addition to traditional longterm investment
funds
Philippine law generally treats foreign investors in the Foreign Investment Act
same manner as their domestic counterparts with
important exceptions outlined in the
Which of the following is not one of the five distinctive roles Regularization
for public sector engagement with CSR?
Refers to the effect the presence of MNCs has on domestic
firms in the same sector Horizontal spill over

Companies able to guarantee the observance of ethical All of the choices

behaviors through the whole production cycle by binding of
all of their supply chain partners to their own ethical code,
may have positive effects in terms of which of the following
Provides a setting where governments compare policy OECD
experiences, seek answers to common problems, identify
good practices and coordinate domestic and international
policies.
One of the key features of investment climate where Access to Finance and
businesses invest in projects where there are they do not International Integration
face credit constraints unrelated to their own performance
One of the ways on how corrupt practices of MNCS affect None of the choices
other countries include the following, except
It is one of the ways of hiding the loot from corruption which Private Banking
is increasingly used for confidential services to
international elites
This drives prudential regulation such as capping the diversification
percentage of a company's equity that can be held by an
institutional investor and not just by individual investor
concerns
One of the different ranges of application for CSR in the Legality
international perspective which is about the adherence to
the applicable set of laws in force
A professionally managed type of collective investment Mutual Fund
scheme that pools money from many investors and invests
typically in investments securities which includes stocks,
bonds, short-term money market instruments, other mutual
funds and securities.
Within manufacturing, FDI inflows have been dominated by Food and beverage
what sector which has a share of 12.7% in the 2000-2007
period?
One of the reasons to transfer state-owned assets into Tainted Purpose
private hands because a company or an industry may be
run or used by the government mainly as vehicles in
satisfying political goals.
One motive of cross listing where the company will have Increase firm’s share
fresh source of funds but also have an enhancement in the price
marketability of its shares
One motive of cross listing where a secondary market for Support share and
shares is created that can be used to compensate local opinion plans
management and employees in foreign subsidiaries
Domestic firms benefit from spillovers and externalities movement of
associated with FDI through the following, except experienced workers
from local to foreign
firms
One of the justifications for CSR which relates to Defensive
minimizing the potential adverse effect of CSR on local
communities, environments, and markets when it is
imposed through international supply chains and
investments.
One of the different ranges of application for CSR in the Sustainable
international perspective which is about the need to Development and
promote a new economic development model that would Environment
secure the needs of the current generation without any
concession on the chance of the future generation to enjoy
theirs
One of the reasons to not transfer state-owned assets into Accountability
private hands because the public does not have any
control or oversight of private companies
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Finals Quiz (Chap 7 to 9)

Due May 6 at 1pm Points 45 Questions 45
Available May 6 at 10:30am - May 6 at 1pm about 3 hours Time Limit 60 Minutes

Instructions
You are given a MAXIMUM OF 60 MINUTES on May 06, 2021, Thursday, from 11:30AM to 01:00PM to
answer the quiz provided. The access code will be sent at 11:29AM through a Canvas announcement.
The 60-minute time limit will begin to run as as soon as you input the access code after clicking
"Take the Quiz". This means that the time will continue to run even if you leave the quiz for whatever
reason.

PLEASE BE REMINDED OF THE FOLLOWING:

1. This is an independent quiz; do not work with others. Taking photos/screenshots of the contents of
the quiz, disclosing information to other students regarding the contents of the quiz, or answering the
quiz on behalf of another person are considered cheating. Students who commit such acts will be
sanctioned in accordance with the HAU Student Handbook.
2. All answers will be submitted through the Canvas questions.
3. Choose the best answer from among the choices, and click "next" to proceed to the next item. Make
sure that you have chosen your final answer because once done with each item, you cannot go
back to the previous anymore. (No multiple attempts). Be mindful not to click "submit" unless you
are finished taking the quiz.
4. You are given a MAXIMUM OF 60 MINUTES on May 06, 2021, Thursday, from 11:30AM to
01:00PM . You were already informed by your instructor on the schedule of this departmental quiz,
so you should have a backup plan in case you will experience problems, such as power interruption
in your area or internet-related problems. Please be reminded that the time limit will begin to run
as as soon as you input the access code after clicking "Take the Quiz" even if you leave the
quiz page for whatever reason. If you experience any problems in taking the quiz, inform your
instructor IMMEDIATELY. Your instructor will have the discretion on what to do in case you will
encounter any problems in taking the quiz
5. Once answers have been submitted, changing of answers will NOT be allowed.
6. If you are unsure of some items or some instructions, you may ask your instructor for clarifications.

This quiz was locked May 6 at 1pm.

Attempt History

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 1/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Attempt Time Score

LATEST Attempt 1 44 minutes 43 out of 45

Score for this quiz: 43 out of 45

Submitted May 6 at 12:22pm
This attempt took 44 minutes.

Question 1 1 / 1 pts

CSR is all about philanthropy or charitable work.

True

Correct! False

Question 2 1 / 1 pts

All governments need to clean up their act but they need to do so in an

environment which donors are not imposing inappropriate, over-hasty
policy changes.

Correct! True

False

Question 3 1 / 1 pts

CSR is not a legal obligation but rather a voluntary social and

environmental positive initiative.

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 2/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Correct! True

False

Question 4 1 / 1 pts

In developed countries too, there is increasing recognition among

companies that a “one-size fits all” approach to CSR operations around
the world is effective.

True

Correct! False

Question 5 1 / 1 pts

Economic Punishments are some of the least effective deterrents to

corruption.

True

Correct! False

Question 6 0 / 1 pts

Operational risk, such as loss of intellectual property from outsourcing of

business processes overseas, could lead to bankruptcy.

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 3/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

orrect Answer True

ou Answered False

Question 7 1 / 1 pts

There are a few challenges to consider when one engages in activities for
purposes of deterring opportunism.

True

Correct! False

Question 8 1 / 1 pts

Investment promotion agencies cannot play an important role facilitating

effective communication between investors and the government.

True

Correct! False

Question 9 1 / 1 pts

Institutional investors acting as agents for ultimate beneficiaries are very

often directly remunerated on the basis of the performance of portfolio
companies whether based on company performance or better governance
practices.

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 4/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

True

Correct! False

Question 10 1 / 1 pts

The Sarbanes-Oxley Act seeks to lay the ground for a culture of reactive
management of risks going beyond the proactive approach that has been
common so far.

True

Correct! False

Question 11 1 / 1 pts

Privatization is the act of transferring in whole or in part the ownership of a

private sector to the public sector.

True

Correct! False

Question 12 1 / 1 pts

The corporations’ president, CEO, and CFO are not required to assume
management responsibility and accountability for financials statements.

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 5/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

True

Correct! False

Question 13 1 / 1 pts

The "equality is equity" principle states that one a company undergoes

rehabilitation, all creditors, whether secured or unsecured, should be
placed on equal footing.

Correct! True

False

Question 14 1 / 1 pts

An insolvent company is essentially also a bankrupt company.

True

Correct! False

Question 15 1 / 1 pts

Compared with FDI inflows to the ASEAN Countries, the Philippines

received one of the highest level of FDI inflows particularly in the 1990s
and the 2000s

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 6/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

True

Correct! False

Question 16 1 / 1 pts

Philippine law generally treats foreign investors in the same manner as

their domestic counterparts with important exceptions outlined in the

Omnibus Investment Act

Correct! Foreign Investment Act

Bureau of Trade Regulation and Consumer Protection Circulars

Securities Regulations Code

Question 17 1 / 1 pts

This drives prudential regulation such as capping the percentage of a

company's equity that can be held by an institutional investor and not just
by individual investor concerns

short selling

investment banking

cross listing

Correct! diversification

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 7/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Question 18 1 / 1 pts

Provides a setting where governments compare policy experiences, seek

answers to common problems, identify good practices and coordinate
domestic and international policies.

IFAC

UNCTD

ADB

Correct! OECD

Question 19 1 / 1 pts

One of the reasons to not transfer state-owned assets into private hands
because the public does not have any control or oversight of private
companies

Correct! Accountability

Cuts in Essential Services

Concentration of Wealth

Downsizing

Question 20 1 / 1 pts

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 8/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

An investor-led organization of governance professionals with a mission

to inspire and promote effective standards of corporate governance to
advance efficient markets and economies world-wide

ICC

Correct! ICGN

ADB

OECD

Question 21 1 / 1 pts

One of the justifications for CSR which relates to minimizing the potential
adverse effect of CSR on local communities, environments, and markets
when it is imposed through international supply chains and investments.

Proactive

None of the choices

Directive

Correct! Defensive

Question 22 1 / 1 pts

One type of FDI motivated by access to local, natural, or human

resources

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 9/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Correct! Resource seeking

Export Platform

Import substituting

Rationalized or vertically disintegrated

Question 23 1 / 1 pts

All of the following pertain to pro-privatization, except

Private sectors can do the functions and tasks more efficiently

Correct!
Certain parts of the social terrain should remain closed to the market
forces in order to protect them from the unpredictability and ruthlessness of
the market.

Taxpayers’ money will not be used to cover loses.

Privatization will lead to lower prices, better quality, more options, lesser
corruption, lesser red tape, and faster delivery of both goods and services.

Question 24 1 / 1 pts

One motive of cross listing where the company will have fresh source of
funds but also have an enhancement in the marketability of its shares

Increase firm’s visibility and acceptance

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 10/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Correct! Increase firm’s share price

Improve liquidity

Support share and opinion plans

Question 25 1 / 1 pts

Refers to the effect the presence of MNCs has on domestic firms in the
same sector

Cross listings

Institutional investing

Correct! Horizontal spill over

Vertical spillover

Question 26 1 / 1 pts

An investment account open to a narrow range of investors that take on a

wider range of investment and trading activities in addition to traditional
longterm investment funds

Investment Trust

Investment Banking

Mutual Fund

Correct! Hedge Fund

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 11/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Question 27 1 / 1 pts

MasterCard sends a customer a memo that discloses the true cost of

borrowing with each billing statement. It does this becaue it realizes that
the customer has the right to

obtain credit

be heard

choose

Correct! be informed

Question 28 1 / 1 pts

A professionally managed type of collective investment scheme that pools

money from many investors and invests typically in investments securities
which includes stocks, bonds, short-term money market instruments,
other mutual funds and securities.

Pension Fund

Correct! Mutual Fund

Hedge Fund

Investment Trust

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 12/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Question 29 1 / 1 pts

One of the different ranges of application for CSR in the international

perspective which is about the need to promote a new economic
development model that would secure the needs of the current generation
without any concession on the chance of the future generation to enjoy
theirs

Local Economy and Society

Correct! Sustainable Development and Environment

None of the choices

Human Labor Rights

Question 30 1 / 1 pts

It is one of the ways of hiding the loot from corruption which is

increasingly used for confidential services to international elites

Third World Assets

Offshore Banks and Companies

Correct! Private Banking

Western Banks

Question 31 1 / 1 pts

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 13/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Which of the following is not one of the five distinctive roles for public
sector engagement with CSR?

Demonstration

Correct! Regularization

Facilitation

None of the choices

All of the choices

Question 32 1 / 1 pts

It has become an important source of private external finance for

developing countries

SMEs

MNCs

Correct! FDIs

Institutional Investing

Question 33 1 / 1 pts

One of the roles of institutional investors where being a valued investor

can, most of the time, command better performance knowing that such an
amount of money can be pulled out by the investor anytime.

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 14/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Good Activist

Principal-Agent Role

Correct! Driver of Agent’s Performance

Deterrent to Opportunism

Question 34 1 / 1 pts

One of the key features of investment climate where businesses invest in

projects where there are they do not face credit constraints unrelated to
their own performance

Technology Factors

Correct! Access to Finance and International Integration

Political Stability

Infrastructure

Question 35 1 / 1 pts

One of the reasons to transfer state-owned assets into private hands

because a company or an industry may be run or used by the government
mainly as vehicles in satisfying political goals.

Political Influence

Correct! Tainted Purpose

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 15/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Dispersion of Resources

Corruption

Question 36 1 / 1 pts

One motive of cross listing where a secondary market for shares is

created that can be used to compensate local management and
employees in foreign subsidiaries

Increase firm’s share price

Increase firm’s visibility and acceptance

Correct! Support share and opinion plans

Support takeover bids

Question 37 0 / 1 pts

Domestic firms benefit from spillovers and externalities associated with

FDI through the following, except

creation of linkages becoming suppliers or customers

ou Answered exports and international integrations

orrect Answer movement of experienced workers from local to foreign firms

None of the choices

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 16/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

All of the choices

best practice demonstration and diffusion

Question 38 1 / 1 pts

With regard to human labor rights, the entrepreneurial strategy of large

enterprises should be based on the following CSR demands:

Either be compliant or be consistent

Be compliant but not consistent

Correct! Be compliant and be consistent

Be consistent but not compliant

Question 39 1 / 1 pts

Within manufacturing, FDI inflows have been dominated by what sector

which has a share of 12.7% in the 2000-2007 period?

Paper

Petroleum

Chemical

Correct! Food and beverage

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 17/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Question 40 1 / 1 pts

One of the ways on how civil society groups ca effectively fight corruption
where they need to be prepared to take on governments in innovative and
sometimes confrontational ways

Help Increase Citizen Participation in Decision-Making

Push for Freedom of Information

None of the choices

Correct! Mobilize Ordinary People

Question 41 1 / 1 pts

One of the ways on how corrupt practices of MNCS affect other countries
include the following, except

Increasing Debt

Benefiting the Company, Not the Country

Correct! None of the choices

Bypassing Local Democratic Processes

All of the choices

Question 42 1 / 1 pts

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 18/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

One of the different ranges of application for CSR in the international

perspective which is about the adherence to the applicable set of laws in
force

Local Economy and Society

Supply Chains

Correct! Legality

None of the choices

Question 43 1 / 1 pts

One of the roles of institutional investors where institutional investors,

especially those whose investment is significant enough to earn a board
seat can be the fearless fiscalizers on corporate policies.

Deterrent to Opportunism

Correct! Good Activist

Principal-Agent Role

Monitoring

Question 44 1 / 1 pts

Which of the following is an example of an institutional investor in the

Philippines?

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 19/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Correct! All of the choices

AFSLAI

SSS

None of the choices

GSIS

Question 45 1 / 1 pts

Companies able to guarantee the observance of ethical behaviors through

the whole production cycle by binding of all of their supply chain partners
to their own ethical code, may have positive effects in terms of which of
the following

confidence of the ethical investors and consumers

improvements of market reputation

good relations with institutions and social organizations

Correct! All of the choices

Quiz Score: 43 out of 45

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 20/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Finals Quiz (Chap 7 to 9)

Due May 6 at 1pm Points 45 Questions 45
Available May 6 at 10:30am - May 6 at 1pm about 3 hours Time Limit 60 Minutes

Instructions
You are given a MAXIMUM OF 60 MINUTES on May 06, 2021, Thursday, from 11:30AM to 01:00PM to
answer the quiz provided. The access code will be sent at 11:29AM through a Canvas announcement.
The 60-minute time limit will begin to run as as soon as you input the access code after clicking
"Take the Quiz". This means that the time will continue to run even if you leave the quiz for whatever
reason.

PLEASE BE REMINDED OF THE FOLLOWING:

1. This is an independent quiz; do not work with others. Taking photos/screenshots of the contents of
the quiz, disclosing information to other students regarding the contents of the quiz, or answering the
quiz on behalf of another person are considered cheating. Students who commit such acts will be
sanctioned in accordance with the HAU Student Handbook.
2. All answers will be submitted through the Canvas questions.
3. Choose the best answer from among the choices, and click "next" to proceed to the next item. Make
sure that you have chosen your final answer because once done with each item, you cannot go
back to the previous anymore. (No multiple attempts). Be mindful not to click "submit" unless you
are finished taking the quiz.
4. You are given a MAXIMUM OF 60 MINUTES on May 06, 2021, Thursday, from 11:30AM to
01:00PM . You were already informed by your instructor on the schedule of this departmental quiz,
so you should have a backup plan in case you will experience problems, such as power interruption
in your area or internet-related problems. Please be reminded that the time limit will begin to run
as as soon as you input the access code after clicking "Take the Quiz" even if you leave the
quiz page for whatever reason. If you experience any problems in taking the quiz, inform your
instructor IMMEDIATELY. Your instructor will have the discretion on what to do in case you will
encounter any problems in taking the quiz
5. Once answers have been submitted, changing of answers will NOT be allowed.
6. If you are unsure of some items or some instructions, you may ask your instructor for clarifications.

This quiz was locked May 6 at 1pm.

Attempt History

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 1/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Attempt Time Score

LATEST Attempt 1 44 minutes 43 out of 45

Score for this quiz: 43 out of 45

Submitted May 6 at 12:22pm
This attempt took 44 minutes.

Question 1 1 / 1 pts

CSR is all about philanthropy or charitable work.

True

Correct! False

Question 2 1 / 1 pts

All governments need to clean up their act but they need to do so in an

environment which donors are not imposing inappropriate, over-hasty
policy changes.

Correct! True

False

Question 3 1 / 1 pts

CSR is not a legal obligation but rather a voluntary social and

environmental positive initiative.

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 2/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Correct! True

False

Question 4 1 / 1 pts

In developed countries too, there is increasing recognition among

companies that a “one-size fits all” approach to CSR operations around
the world is effective.

True

Correct! False

Question 5 1 / 1 pts

Economic Punishments are some of the least effective deterrents to

corruption.

True

Correct! False

Question 6 0 / 1 pts

Operational risk, such as loss of intellectual property from outsourcing of

business processes overseas, could lead to bankruptcy.

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 3/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

orrect Answer True

ou Answered False

Question 7 1 / 1 pts

There are a few challenges to consider when one engages in activities for
purposes of deterring opportunism.

True

Correct! False

Question 8 1 / 1 pts

Investment promotion agencies cannot play an important role facilitating

effective communication between investors and the government.

True

Correct! False

Question 9 1 / 1 pts

Institutional investors acting as agents for ultimate beneficiaries are very

often directly remunerated on the basis of the performance of portfolio
companies whether based on company performance or better governance
practices.

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 4/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

True

Correct! False

Question 10 1 / 1 pts

The Sarbanes-Oxley Act seeks to lay the ground for a culture of reactive
management of risks going beyond the proactive approach that has been
common so far.

True

Correct! False

Question 11 1 / 1 pts

Privatization is the act of transferring in whole or in part the ownership of a

private sector to the public sector.

True

Correct! False

Question 12 1 / 1 pts

The corporations’ president, CEO, and CFO are not required to assume
management responsibility and accountability for financials statements.

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 5/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

True

Correct! False

Question 13 1 / 1 pts

The "equality is equity" principle states that one a company undergoes

rehabilitation, all creditors, whether secured or unsecured, should be
placed on equal footing.

Correct! True

False

Question 14 1 / 1 pts

An insolvent company is essentially also a bankrupt company.

True

Correct! False

Question 15 1 / 1 pts

Compared with FDI inflows to the ASEAN Countries, the Philippines

received one of the highest level of FDI inflows particularly in the 1990s
and the 2000s

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 6/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

True

Correct! False

Question 16 1 / 1 pts

Philippine law generally treats foreign investors in the same manner as

their domestic counterparts with important exceptions outlined in the

Omnibus Investment Act

Correct! Foreign Investment Act

Bureau of Trade Regulation and Consumer Protection Circulars

Securities Regulations Code

Question 17 1 / 1 pts

This drives prudential regulation such as capping the percentage of a

company's equity that can be held by an institutional investor and not just
by individual investor concerns

short selling

investment banking

cross listing

Correct! diversification

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 7/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Question 18 1 / 1 pts

Provides a setting where governments compare policy experiences, seek

answers to common problems, identify good practices and coordinate
domestic and international policies.

IFAC

UNCTD

ADB

Correct! OECD

Question 19 1 / 1 pts

One of the reasons to not transfer state-owned assets into private hands
because the public does not have any control or oversight of private
companies

Correct! Accountability

Cuts in Essential Services

Concentration of Wealth

Downsizing

Question 20 1 / 1 pts

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 8/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

An investor-led organization of governance professionals with a mission

to inspire and promote effective standards of corporate governance to
advance efficient markets and economies world-wide

ICC

Correct! ICGN

ADB

OECD

Question 21 1 / 1 pts

One of the justifications for CSR which relates to minimizing the potential
adverse effect of CSR on local communities, environments, and markets
when it is imposed through international supply chains and investments.

Proactive

None of the choices

Directive

Correct! Defensive

Question 22 1 / 1 pts

One type of FDI motivated by access to local, natural, or human

resources

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 9/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Correct! Resource seeking

Export Platform

Import substituting

Rationalized or vertically disintegrated

Question 23 1 / 1 pts

All of the following pertain to pro-privatization, except

Private sectors can do the functions and tasks more efficiently

Correct!
Certain parts of the social terrain should remain closed to the market
forces in order to protect them from the unpredictability and ruthlessness of
the market.

Taxpayers’ money will not be used to cover loses.

Privatization will lead to lower prices, better quality, more options, lesser
corruption, lesser red tape, and faster delivery of both goods and services.

Question 24 1 / 1 pts

One motive of cross listing where the company will have fresh source of
funds but also have an enhancement in the marketability of its shares

Increase firm’s visibility and acceptance

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 10/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Correct! Increase firm’s share price

Improve liquidity

Support share and opinion plans

Question 25 1 / 1 pts

Refers to the effect the presence of MNCs has on domestic firms in the
same sector

Cross listings

Institutional investing

Correct! Horizontal spill over

Vertical spillover

Question 26 1 / 1 pts

An investment account open to a narrow range of investors that take on a

wider range of investment and trading activities in addition to traditional
longterm investment funds

Investment Trust

Investment Banking

Mutual Fund

Correct! Hedge Fund

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 11/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Question 27 1 / 1 pts

MasterCard sends a customer a memo that discloses the true cost of

borrowing with each billing statement. It does this becaue it realizes that
the customer has the right to

obtain credit

be heard

choose

Correct! be informed

Question 28 1 / 1 pts

A professionally managed type of collective investment scheme that pools

money from many investors and invests typically in investments securities
which includes stocks, bonds, short-term money market instruments,
other mutual funds and securities.

Pension Fund

Correct! Mutual Fund

Hedge Fund

Investment Trust

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 12/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Question 29 1 / 1 pts

One of the different ranges of application for CSR in the international

perspective which is about the need to promote a new economic
development model that would secure the needs of the current generation
without any concession on the chance of the future generation to enjoy
theirs

Local Economy and Society

Correct! Sustainable Development and Environment

None of the choices

Human Labor Rights

Question 30 1 / 1 pts

It is one of the ways of hiding the loot from corruption which is

increasingly used for confidential services to international elites

Third World Assets

Offshore Banks and Companies

Correct! Private Banking

Western Banks

Question 31 1 / 1 pts

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 13/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Which of the following is not one of the five distinctive roles for public
sector engagement with CSR?

Demonstration

Correct! Regularization

Facilitation

None of the choices

All of the choices

Question 32 1 / 1 pts

It has become an important source of private external finance for

developing countries

SMEs

MNCs

Correct! FDIs

Institutional Investing

Question 33 1 / 1 pts

One of the roles of institutional investors where being a valued investor

can, most of the time, command better performance knowing that such an
amount of money can be pulled out by the investor anytime.

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 14/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Good Activist

Principal-Agent Role

Correct! Driver of Agent’s Performance

Deterrent to Opportunism

Question 34 1 / 1 pts

One of the key features of investment climate where businesses invest in

projects where there are they do not face credit constraints unrelated to
their own performance

Technology Factors

Correct! Access to Finance and International Integration

Political Stability

Infrastructure

Question 35 1 / 1 pts

One of the reasons to transfer state-owned assets into private hands

because a company or an industry may be run or used by the government
mainly as vehicles in satisfying political goals.

Political Influence

Correct! Tainted Purpose

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 15/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Dispersion of Resources

Corruption

Question 36 1 / 1 pts

One motive of cross listing where a secondary market for shares is

created that can be used to compensate local management and
employees in foreign subsidiaries

Increase firm’s share price

Increase firm’s visibility and acceptance

Correct! Support share and opinion plans

Support takeover bids

Question 37 0 / 1 pts

Domestic firms benefit from spillovers and externalities associated with

FDI through the following, except

creation of linkages becoming suppliers or customers

ou Answered exports and international integrations

orrect Answer movement of experienced workers from local to foreign firms

None of the choices

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 16/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

All of the choices

best practice demonstration and diffusion

Question 38 1 / 1 pts

With regard to human labor rights, the entrepreneurial strategy of large

enterprises should be based on the following CSR demands:

Either be compliant or be consistent

Be compliant but not consistent

Correct! Be compliant and be consistent

Be consistent but not compliant

Question 39 1 / 1 pts

Within manufacturing, FDI inflows have been dominated by what sector

which has a share of 12.7% in the 2000-2007 period?

Paper

Petroleum

Chemical

Correct! Food and beverage

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 17/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Question 40 1 / 1 pts

One of the ways on how civil society groups ca effectively fight corruption
where they need to be prepared to take on governments in innovative and
sometimes confrontational ways

Help Increase Citizen Participation in Decision-Making

Push for Freedom of Information

None of the choices

Correct! Mobilize Ordinary People

Question 41 1 / 1 pts

One of the ways on how corrupt practices of MNCS affect other countries
include the following, except

Increasing Debt

Benefiting the Company, Not the Country

Correct! None of the choices

Bypassing Local Democratic Processes

All of the choices

Question 42 1 / 1 pts

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 18/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

One of the different ranges of application for CSR in the international

perspective which is about the adherence to the applicable set of laws in
force

Local Economy and Society

Supply Chains

Correct! Legality

None of the choices

Question 43 1 / 1 pts

One of the roles of institutional investors where institutional investors,

especially those whose investment is significant enough to earn a board
seat can be the fearless fiscalizers on corporate policies.

Deterrent to Opportunism

Correct! Good Activist

Principal-Agent Role

Monitoring

Question 44 1 / 1 pts

Which of the following is an example of an institutional investor in the

Philippines?

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 19/20
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Correct! All of the choices

AFSLAI

SSS

None of the choices

GSIS

Question 45 1 / 1 pts

Companies able to guarantee the observance of ethical behaviors through

the whole production cycle by binding of all of their supply chain partners
to their own ethical code, may have positive effects in terms of which of
the following

confidence of the ethical investors and consumers

improvements of market reputation

good relations with institutions and social organizations

Correct! All of the choices

Quiz Score: 43 out of 45

https://hau.instructure.com/courses/5163/assignments/137550/submissions/6299 20/20
Finals Quiz (Chap 7 to 9)
Due May 6 at 1pm Points 45 Questions 45
Available May 6 at 10:30am - May 6 at 1pm about 3 hours Time Limit 60 Minutes

Instructions
You are given a MAXIMUM OF 60 MINUTES on May 06, 2021, Thursday, from 11:30AM to 01:00PM to
answer the quiz provided. The access code will be sent at 11:29AM through a Canvas announcement.
The 60-minute time limit will begin to run as as soon as you input the access code after clicking
"Take the Quiz". This means that the time will continue to run even if you leave the quiz for whatever
reason.

PLEASE BE REMINDED OF THE FOLLOWING:

1. This is an independent quiz; do not work with others. Taking photos/screenshots of the contents of
the quiz, disclosing information to other students regarding the contents of the quiz, or answering the
quiz on behalf of another person are considered cheating. Students who commit such acts will be
sanctioned in accordance with the HAU Student Handbook.
2. All answers will be submitted through the Canvas questions.
3. Choose the best answer from among the choices, and click "next" to proceed to the next item. Make
sure that you have chosen your final answer because once done with each item, you cannot go
back to the previous anymore. (No multiple attempts). Be mindful not to click "submit" unless you
are finished taking the quiz.
4. You are given a MAXIMUM OF 60 MINUTES on May 06, 2021, Thursday, from 11:30AM to
01:00PM . You were already informed by your instructor on the schedule of this departmental quiz,
so you should have a backup plan in case you will experience problems, such as power interruption
in your area or internet-related problems. Please be reminded that the time limit will begin to run
as as soon as you input the access code after clicking "Take the Quiz" even if you leave the
quiz page for whatever reason. If you experience any problems in taking the quiz, inform your
instructor IMMEDIATELY. Your instructor will have the discretion on what to do in case you will
encounter any problems in taking the quiz
5. Once answers have been submitted, changing of answers will NOT be allowed.
6. If you are unsure of some items or some instructions, you may ask your instructor for clarifications.

This quiz was locked May 6 at 1pm.

Attempt History
 Attempt Time Score
LATEST Attempt 1 54 minutes 42 out of 45

Score for this quiz: 42 out of 45

Submitted May 6 at 12:30pm
This attempt took 54 minutes.

Question 1 1 / 1 pts

CSR is all about philanthropy or charitable work.

True

Correct! False

Question 2 0 / 1 pts

There immediate and complete closure all offshore centers in all countries
is vital to stopping the laundering of corrupt money and the draining of
resources from the Third World.

ou Answered True

orrect Answer False

Question 3 1 / 1 pts

Corruption takes many different forms, from the routine cases of bribery
of petty abuse of power to amassing of spectacular personal wealth
through embezzlement or other means.
Correct! True

False

Question 4 1 / 1 pts

CSR is not a legal obligation but rather a voluntary social and

environmental positive initiative.

Correct! True

False

Question 5 1 / 1 pts

Economic Punishments are some of the least effective deterrents to

corruption.

True

Correct! False

Question 6 1 / 1 pts

Companies now realize that their ability to manage risks depends on

anticipating risks, detecting their risks more effectively and petrifying their
systems to withstand shocks.
 True

Correct! False

Question 7 1 / 1 pts

Specific measures to promote and facilitate investments can be

successful if they take place within the context of, and not substituted for,
broader policies for improving the investment environment.

Correct! True

False

Question 8 1 / 1 pts

Institutional investors acting as agents for ultimate beneficiaries are very

often directly remunerated on the basis of the performance of portfolio
companies whether based on company performance or better governance
practices.

True

Correct! False

Question 9 1 / 1 pts
 Investment promotion agencies cannot play an important role facilitating
effective communication between investors and the government.

True

Correct! False

Question 10 1 / 1 pts

The Sarbanes-Oxley Act seeks to lay the ground for a culture of reactive
management of risks going beyond the proactive approach that has been
common so far.

True

Correct! False

Question 11 1 / 1 pts

The corporations’ president, CEO, and CFO are not required to assume
management responsibility and accountability for financials statements.

True

Correct! False

Question 12 1 / 1 pts
 Foreign direct investment has grown steadily in volume but is minor
source of development finance

True

Correct! False

Question 13 1 / 1 pts

Compared with FDI inflows to the ASEAN Countries, the Philippines

received one of the highest level of FDI inflows particularly in the 1990s
and the 2000s

True

Correct! False

Question 14 1 / 1 pts

The "equality is equity" principle states that one a company undergoes

rehabilitation, all creditors, whether secured or unsecured, should be
placed on equal footing.

Correct! True

False

Question 15 1 / 1 pts
 Privatization is the act of transferring in whole or in part the ownership of a
private sector to the public sector.

True

Correct! False

Question 16 1 / 1 pts

One of the justifications for CSR which relates to minimizing the potential
adverse effect of CSR on local communities, environments, and markets
when it is imposed through international supply chains and investments.

Directive

Proactive

Correct! Defensive

None of the choices

Question 17 1 / 1 pts

It is one of the ways of hiding the loot from corruption which is

increasingly used for confidential services to international elites

Correct! Private Banking

Western Banks

Offshore Banks and Companies

 Third World Assets

Question 18 1 / 1 pts

One motive of cross listing where a secondary market for shares is

created that can be used to compensate local management and
employees in foreign subsidiaries

Increase firm’s visibility and acceptance

Correct! Support share and opinion plans

Increase firm’s share price

Support takeover bids

Question 19 1 / 1 pts

Philippine law generally treats foreign investors in the same manner as

their domestic counterparts with important exceptions outlined in the

Correct! Foreign Investment Act

Omnibus Investment Act

Bureau of Trade Regulation and Consumer Protection Circulars

Securities Regulations Code

 Question 20 1 / 1 pts

One of the different ranges of application for CSR in the international

perspective which is about the need to promote a new economic
development model that would secure the needs of the current generation
without any concession on the chance of the future generation to enjoy
theirs

Local Economy and Society

Human Labor Rights

Correct! Sustainable Development and Environment

None of the choices

Question 21 1 / 1 pts

Which of the following is an example of an institutional investor in the

Philippines?

AFSLAI

GSIS

Correct! All of the choices

SSS

None of the choices

Question 22 1 / 1 pts
 One of the roles of institutional investors where institutional investors,
especially those whose investment is significant enough to earn a board
seat can be the fearless fiscalizers on corporate policies.

Deterrent to Opportunism

Monitoring

Principal-Agent Role

Correct! Good Activist

Question 23 1 / 1 pts

A professionally managed type of collective investment scheme that pools

money from many investors and invests typically in investments securities
which includes stocks, bonds, short-term money market instruments,
other mutual funds and securities.

Investment Trust

Pension Fund

Hedge Fund

Correct! Mutual Fund

Question 24 1 / 1 pts

One type of FDI motivated by access to local, natural, or human

resources
 Export Platform

Import substituting

Correct! Resource seeking

Rationalized or vertically disintegrated

Question 25 1 / 1 pts

One of the different ranges of application for CSR in the international

perspective which is about the adherence to the applicable set of laws in
force

Supply Chains

None of the choices

Local Economy and Society

Correct! Legality

Question 26 1 / 1 pts

An investor-led organization of governance professionals with a mission

to inspire and promote effective standards of corporate governance to
advance efficient markets and economies world-wide

Correct! ICGN

OECD
 ICC

ADB

Question 27 0 / 1 pts

Which of the following is not one of the five distinctive roles for public
sector engagement with CSR?

Demonstration

orrect Answer Regularization

Facilitation

ou Answered None of the choices

All of the choices

Question 28 1 / 1 pts

It has become an important source of private external finance for

developing countries

SMEs

Correct! FDIs

MNCs

Institutional Investing
 Question 29 1 / 1 pts

One of the key features of investment climate where businesses invest in

projects where there are they do not face credit constraints unrelated to
their own performance

Political Stability

Technology Factors

Correct! Access to Finance and International Integration

Infrastructure

Question 30 0 / 1 pts

Domestic firms benefit from spillovers and externalities associated with

FDI through the following, except

creation of linkages becoming suppliers or customers

exports and international integrations

best practice demonstration and diffusion

All of the choices

ou Answered None of the choices

orrect Answer movement of experienced workers from local to foreign firms

 Question 31 1 / 1 pts

Companies able to guarantee the observance of ethical behaviors through

the whole production cycle by binding of all of their supply chain partners
to their own ethical code, may have positive effects in terms of which of
the following

good relations with institutions and social organizations

Correct! All of the choices

improvements of market reputation

confidence of the ethical investors and consumers

Question 32 1 / 1 pts

One of the ways on how corrupt practices of MNCS affect other countries
include the following, except

Correct! None of the choices

Benefiting the Company, Not the Country

All of the choices

Bypassing Local Democratic Processes

Increasing Debt

Question 33 1 / 1 pts
 Refers to the effect the presence of MNCs has on domestic firms in the
same sector

Vertical spillover

Institutional investing

Cross listings

Correct! Horizontal spill over

Question 34 1 / 1 pts

With regard to human labor rights, the entrepreneurial strategy of large

enterprises should be based on the following CSR demands:

Correct! Be compliant and be consistent

Either be compliant or be consistent

Be compliant but not consistent

Be consistent but not compliant

Question 35 1 / 1 pts

Provides a setting where governments compare policy experiences, seek

answers to common problems, identify good practices and coordinate
domestic and international policies.

ADB
 UNCTD

IFAC

Correct! OECD

Question 36 1 / 1 pts

An investment account open to a narrow range of investors that take on a

wider range of investment and trading activities in addition to traditional
longterm investment funds

Investment Trust

Investment Banking

Mutual Fund

Correct! Hedge Fund

Question 37 1 / 1 pts

One of the roles of institutional investors where being a valued investor

can, most of the time, command better performance knowing that such an
amount of money can be pulled out by the investor anytime.

Correct! Driver of Agent’s Performance

Good Activist

Deterrent to Opportunism
 Principal-Agent Role

Question 38 1 / 1 pts

MasterCard sends a customer a memo that discloses the true cost of

borrowing with each billing statement. It does this becaue it realizes that
the customer has the right to

Correct! be informed

be heard

obtain credit

choose

Question 39 1 / 1 pts

One of the reasons to transfer state-owned assets into private hands

because a company or an industry may be run or used by the government
mainly as vehicles in satisfying political goals.

Dispersion of Resources

Correct! Tainted Purpose

Corruption

Political Influence
 Question 40 1 / 1 pts

Within manufacturing, FDI inflows have been dominated by what sector

which has a share of 12.7% in the 2000-2007 period?

Correct! Food and beverage

Paper

Chemical

Petroleum

Question 41 1 / 1 pts

This drives prudential regulation such as capping the percentage of a

company's equity that can be held by an institutional investor and not just
by individual investor concerns

cross listing

Correct! diversification

investment banking

short selling

Question 42 1 / 1 pts

One motive of cross listing where the company will have fresh source of
funds but also have an enhancement in the marketability of its shares
 Increase firm’s visibility and acceptance

Improve liquidity

Correct! Increase firm’s share price

Support share and opinion plans

Question 43 1 / 1 pts

One of the ways on how civil society groups ca effectively fight corruption
where they need to be prepared to take on governments in innovative and
sometimes confrontational ways

None of the choices

Correct! Mobilize Ordinary People

Push for Freedom of Information

Help Increase Citizen Participation in Decision-Making

Question 44 1 / 1 pts

All of the following pertain to pro-privatization, except

Correct!
Certain parts of the social terrain should remain closed to the market
forces in order to protect them from the unpredictability and ruthlessness of
the market.
 Taxpayers’ money will not be used to cover loses.

Privatization will lead to lower prices, better quality, more options, lesser
corruption, lesser red tape, and faster delivery of both goods and services.

Private sectors can do the functions and tasks more efficiently

Question 45 1 / 1 pts

One of the reasons to not transfer state-owned assets into private hands
because the public does not have any control or oversight of private
companies

Concentration of Wealth

Downsizing

Correct! Accountability

Cuts in Essential Services

Quiz Score: 42 out of 45

5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Finals Quiz (Chap 7 to 9)

Due May 6 at 1pm Points 45 Questions 45
Available May 6 at 10:30am - May 6 at 1pm about 3 hours Time Limit 60 Minutes

Instructions
You are given a MAXIMUM OF 60 MINUTES on May 06, 2021, Thursday, from 11:30AM to 01:00PM
to answer the quiz provided. The access code will be sent at 11:29AM through a Canvas
announcement. The 60-minute time limit will begin to run as as soon as you input the access
code after clicking "Take the Quiz". This means that the time will continue to run even if you leave
the quiz for whatever reason.

PLEASE BE REMINDED OF THE FOLLOWING:

1. This is an independent quiz; do not work with others. Taking photos/screenshots of the contents
of the quiz, disclosing information to other students regarding the contents of the quiz, or
answering the quiz on behalf of another person are considered cheating. Students who commit
such acts will be sanctioned in accordance with the HAU Student Handbook.
2. All answers will be submitted through the Canvas questions.
3. Choose the best answer from among the choices, and click "next" to proceed to the next item.
Make sure that you have chosen your final answer because once done with each item, you
cannot go back to the previous anymore. (No multiple attempts). Be mindful not to click
"submit" unless you are finished taking the quiz.
4. You are given a MAXIMUM OF 60 MINUTES on May 06, 2021, Thursday, from 11:30AM to
01:00PM . You were already informed by your instructor on the schedule of this departmental
quiz, so you should have a backup plan in case you will experience problems, such as power
interruption in your area or internet-related problems. Please be reminded that the time limit will
begin to run as as soon as you input the access code after clicking "Take the Quiz" even if
you leave the quiz page for whatever reason. If you experience any problems in taking the quiz,
inform your instructor IMMEDIATELY. Your instructor will have the discretion on what to do in
case you will encounter any problems in taking the quiz
5. Once answers have been submitted, changing of answers will NOT be allowed.
6. If you are unsure of some items or some instructions, you may ask your instructor for
clarifications.

This quiz was locked May 6 at 1pm.

Attempt History
Attempt Time Score
LATEST Attempt 1 46 minutes 42 out of 45

https://hau.instructure.com/courses/5163/quizzes/43412?module_item_id=419682 1/19
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Score for this quiz: 42 out of 45

Submitted May 6 at 12:21pm
This attempt took 46 minutes.

Question 1 1 / 1 pts

Economic Punishments are some of the least effective deterrents to

corruption.

True

Correct! False

Question 2 0 / 1 pts

There immediate and complete closure all offshore centers in all

countries is vital to stopping the laundering of corrupt money and the
draining of resources from the Third World.

ou Answered True

orrect Answer False

Question 3 1 / 1 pts

Corruption takes many different forms, from the routine cases of

bribery of petty abuse of power to amassing of spectacular personal
wealth through embezzlement or other means.

Correct! True

False

https://hau.instructure.com/courses/5163/quizzes/43412?module_item_id=419682 2/19
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Question 4 1 / 1 pts

The goals of public sector engagement in CSR are likely different from
country to country.

Correct! True

False

Question 5 1 / 1 pts

All governments need to clean up their act but they need to do so in an

environment which donors are not imposing inappropriate, over-hasty
policy changes.

Correct! True

False

Question 6 0 / 1 pts

Operational risk, such as loss of intellectual property from outsourcing

of business processes overseas, could lead to bankruptcy.

orrect Answer True

ou Answered False

https://hau.instructure.com/courses/5163/quizzes/43412?module_item_id=419682 3/19
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Question 7 1 / 1 pts

The Sarbanes-Oxley Act seeks to lay the ground for a culture of

reactive management of risks going beyond the proactive approach
that has been common so far.

True

Correct! False

Question 8 1 / 1 pts

Institutional investors acting as agents for ultimate beneficiaries are

very often directly remunerated on the basis of the performance of
portfolio companies whether based on company performance or better
governance practices.

True

Correct! False

Question 9 1 / 1 pts

Investment promotion agencies cannot play an important role

facilitating effective communication between investors and the
government.

True

Correct! False

https://hau.instructure.com/courses/5163/quizzes/43412?module_item_id=419682 4/19
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Question 10 1 / 1 pts

Companies now realize that their ability to manage risks depends on

anticipating risks, detecting their risks more effectively and petrifying
their systems to withstand shocks.

True

Correct!
False

Question 11 1 / 1 pts

An insolvent company is essentially also a bankrupt company.

True

Correct!
False

Question 12 1 / 1 pts

Increasing foreign investment can be one of the indicators that the host
country’s economy is growing and opening to globalization.

Correct!
True

False

Question 13 1 / 1 pts

https://hau.instructure.com/courses/5163/quizzes/43412?module_item_id=419682 5/19
5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

The corporations’ president, CEO, and CFO are not required to

assume management responsibility and accountability for financials
statements.

True

Correct! False

Question 14 1 / 1 pts

Foreign direct investment has grown steadily in volume but is minor

source of development finance

True

Correct! False

Question 15 1 / 1 pts

The 1987 Constitution allows foreign nationals from owning land in the
Philippines.

True

Correct! False

Question 16 1 / 1 pts

It is one of the ways of hiding the loot from corruption which is

increasingly used for confidential services to international elites

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5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Offshore Banks and Companies

Western Banks

Correct! Private Banking

Third World Assets

Question 17 1 / 1 pts

One of the roles of institutional investors where institutional investors,

especially those whose investment is significant enough to earn a
board seat can be the fearless fiscalizers on corporate policies.

Principal-Agent Role

Deterrent to Opportunism

Monitoring

Correct! Good Activist

Question 18 1 / 1 pts

One of the reasons to not transfer state-owned assets into private

hands because the public does not have any control or oversight of
private companies

Downsizing

Cuts in Essential Services

Concentration of Wealth

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Correct! Accountability

Question 19 1 / 1 pts

One of the justifications for CSR which relates to minimizing the

potential adverse effect of CSR on local communities, environments,
and markets when it is imposed through international supply chains
and investments.

Directive

Proactive

Correct! Defensive

None of the choices

Question 20 1 / 1 pts

With regard to human labor rights, the entrepreneurial strategy of large

enterprises should be based on the following CSR demands:

Be consistent but not compliant

Be compliant but not consistent

Correct! Be compliant and be consistent

Either be compliant or be consistent

Question 21 1 / 1 pts

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5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

It has become an important source of private external finance for

developing countries

Institutional Investing

Correct! FDIs

SMEs

MNCs

Question 22 1 / 1 pts

Which of the following is not one of the five distinctive roles for public
sector engagement with CSR?

Demonstration

Correct! Regularization

None of the choices

All of the choices

Facilitation

Question 23 1 / 1 pts

A professionally managed type of collective investment scheme that

pools money from many investors and invests typically in investments
securities which includes stocks, bonds, short-term money market
instruments, other mutual funds and securities.

Pension Fund

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5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Hedge Fund

Investment Trust

Correct! Mutual Fund

Question 24 1 / 1 pts

All of the following pertain to pro-privatization, except

Private sectors can do the functions and tasks more efficiently

Correct!
Certain parts of the social terrain should remain closed to the market
forces in order to protect them from the unpredictability and
ruthlessness of the market.

Privatization will lead to lower prices, better quality, more options, lesser
corruption, lesser red tape, and faster delivery of both goods and
services.

Taxpayers’ money will not be used to cover loses.

Question 25 1 / 1 pts

Philippine law generally treats foreign investors in the same manner as

their domestic counterparts with important exceptions outlined in the

Correct! Foreign Investment Act

Securities Regulations Code

Omnibus Investment Act

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5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Bureau of Trade Regulation and Consumer Protection Circulars

Question 26 1 / 1 pts

An investment account open to a narrow range of investors that take on

a wider range of investment and trading activities in addition to
traditional longterm investment funds

Investment Trust

Mutual Fund

Investment Banking

Correct! Hedge Fund

Question 27 1 / 1 pts

This drives prudential regulation such as capping the percentage of a

company's equity that can be held by an institutional investor and not
just by individual investor concerns

investment banking

Correct! diversification

short selling

cross listing

Question 28 1 / 1 pts

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5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

One motive of cross listing where the company will have fresh source
of funds but also have an enhancement in the marketability of its
shares

Increase firm’s visibility and acceptance

Improve liquidity

Correct!
Increase firm’s share price

Support share and opinion plans

Question 29 1 / 1 pts

One of the different ranges of application for CSR in the international

perspective which is about the adherence to the applicable set of laws
in force

Correct!
Legality

Local Economy and Society

Supply Chains

None of the choices

Question 30 1 / 1 pts

Provides a setting where governments compare policy experiences,

seek answers to common problems, identify good practices and
coordinate domestic and international policies.

Correct!
OECD

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5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

IFAC

ADB

UNCTD

Question 31 0 / 1 pts

Domestic firms benefit from spillovers and externalities associated with

FDI through the following, except

orrect Answer movement of experienced workers from local to foreign firms

ou Answered exports and international integrations

creation of linkages becoming suppliers or customers

All of the choices

best practice demonstration and diffusion

None of the choices

Question 32 1 / 1 pts

Which of the following is an example of an institutional investor in the

Philippines?

SSS

GSIS

None of the choices

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5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

AFSLAI

Correct! All of the choices

Question 33 1 / 1 pts

One type of FDI motivated by access to local, natural, or human

resources

Export Platform

Correct! Resource seeking

Import substituting

Rationalized or vertically disintegrated

Question 34 1 / 1 pts

Refers to the effect the presence of MNCs has on domestic firms in the
same sector

Cross listings

Vertical spillover

Correct! Horizontal spill over

Institutional investing

Question 35 1 / 1 pts

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5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

One of the roles of institutional investors where being a valued investor

can, most of the time, command better performance knowing that such
an amount of money can be pulled out by the investor anytime.

Good Activist

Deterrent to Opportunism

Correct!
Driver of Agent’s Performance

Principal-Agent Role

Question 36 1 / 1 pts

Within manufacturing, FDI inflows have been dominated by what sector

which has a share of 12.7% in the 2000-2007 period?

Paper

Correct!
Food and beverage

Petroleum

Chemical

Question 37 1 / 1 pts

Companies able to guarantee the observance of ethical behaviors

through the whole production cycle by binding of all of their supply
chain partners to their own ethical code, may have positive effects in
terms of which of the following

improvements of market reputation

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5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

good relations with institutions and social organizations

confidence of the ethical investors and consumers

Correct! All of the choices

Question 38 1 / 1 pts

One of the ways on how corrupt practices of MNCS affect other

countries include the following, except

Correct! None of the choices

Benefiting the Company, Not the Country

Bypassing Local Democratic Processes

Increasing Debt

All of the choices

Question 39 1 / 1 pts

One of the key features of investment climate where businesses invest

in projects where there are they do not face credit constraints unrelated
to their own performance

Technology Factors

Political Stability

Infrastructure

Correct! Access to Finance and International Integration

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5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

Question 40 1 / 1 pts

An investor-led organization of governance professionals with a

mission to inspire and promote effective standards of corporate
governance to advance efficient markets and economies world-wide

ICC

ADB

OECD

Correct! ICGN

Question 41 1 / 1 pts

One of the different ranges of application for CSR in the international

perspective which is about the need to promote a new economic
development model that would secure the needs of the current
generation without any concession on the chance of the future
generation to enjoy theirs

Human Labor Rights

Local Economy and Society

Correct! Sustainable Development and Environment

None of the choices

Question 42 1 / 1 pts

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5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

One of the reasons to transfer state-owned assets into private hands

because a company or an industry may be run or used by the
government mainly as vehicles in satisfying political goals.

Political Influence

Correct!
Tainted Purpose

Dispersion of Resources

Corruption

Question 43 1 / 1 pts

MasterCard sends a customer a memo that discloses the true cost of

borrowing with each billing statement. It does this becaue it realizes
that the customer has the right to

choose

be heard

obtain credit

Correct!
be informed

Question 44 1 / 1 pts

One of the ways on how civil society groups ca effectively fight

corruption where they need to be prepared to take on governments in
innovative and sometimes confrontational ways

Correct!
Mobilize Ordinary People

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5/17/2021 Finals Quiz (Chap 7 to 9): Governance, Business Ethics, Risk Management and Internal Control

None of the choices

Help Increase Citizen Participation in Decision-Making

Push for Freedom of Information

Question 45 1 / 1 pts

One motive of cross listing where a secondary market for shares is

created that can be used to compensate local management and
employees in foreign subsidiaries

Increase firm’s share price

Correct! Support share and opinion plans

Support takeover bids

Increase firm’s visibility and acceptance

Quiz Score: 42 out of 45

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