Lesson 3 (“CG CODE for PLCs)

Securities and Exchange Commission (SEC): Securities and Exchange Commission

Code of Corporate Governance Sec MC No. 19, Series of 2016

Expected Learning Outcomes On November 10, 2016, the Securities and

Exchange Commission approved the Code of Corporate
After studying the lesson, student should be able to Governance for publicly-listed companies. Its goal is to
1. Understand the need for the Code of help companies develop and sustain an ethical
Governance for publicly-listed companies corporate culture and keep abreast with recent
developments in corporate governance.
2. Know the sixteen (16) governance
responsibilities of the Board of Directors of One of its salient provisions if or publicly-listed
publicly-listed companies companies to establish a code of business conduct and
submit a new manual on Corporate Governance that
3. Explain the meaning of “company and explain” would “provide standards for professional and ethical
approach behavior as well as articulate acceptable and
unacceptable conduct and practices”. The Board of
4. Describe the three aspects of the Code, namely
Directors is required to implement the code and make
 Principles sure that management and employees comply with the
internal policies set.
 Recommendations
While many companies have already developed
 Explanations their Code of Business Conduct and Ethics, the real
challenge, is in its implementation and monitoring
5. Know what constitutes a competent board and
compliance.
how can it be established
The SEC Code of Corporate Governance is
6. Understand the composition, functions, and
published in this module, not only to acquaint readers
responsibilities of the board committee that can
particularly future professionals and businessman of
established such as the
these rules and regulations but also to serve as
 Audit Committee reference and guidelines to currently existing publicly-
listed corporation.
 Corporate Governance Committee
Code of Corporate Governance for Publicly-Listed
 Board Risk Oversight Committee Companies.

 Related Party Transaction Committee THE BOARD’S GOVERNANCE RESPONSIBILITIES

7. Know how the directors can show full Principle 1: The company should be headed by a
commitment to the company competent, working board to foster the long-term
success of the corporation, and to sustain its
8. Understand how independence and objectivity
competitiveness and profitability in a manner consistent
of the board can be reinforced and enhanced.
with its corporate objectives and the long-term best
9. Describe how the performance and interests of its shareholders and other stakeholders.
effectiveness of the board can be assessed.
Principle 2: The fiduciary roles, responsibilities and
SEC CODE OF CORPORATE GOVERNANCE FOR accountabilities of the Board as provided under the law,
PUBLICLY-LISTED COMPANIES the company’s articles and by-laws, and other legal
pronouncements and guidelines should be clearly made Principle 10: The company should ensure that material
known to all directors as well as to stockholder and and reportable non-financial and sustainability issued
other stakeholders. are disclosed.

Principle 3: Board committees should be set up to the Principle 11: The company should maintain a
extent possible to support the effective performance of comprehensive and cost-efficient communication
the Board’s functions, particularly with respect to audit, channel for disseminating relevant information. This
risk management, related party transactions, and other channel is crucial for informed decision-making by
key corporate governance concerns, such as nomination investors, stakeholders and other interested users.
and renumeration. The composition, functions and
responsibilities of all committees established should be INTERNAL CONTROL SYSTEM AND RISK MANAGEMENT
contained in a publicly available Committee Charter. FRAMEWORK

Principle 4: To show full commitment to the company, Principle 12: To ensure the integrity, transparency and
the directors should devote the time and attention proper governance in the conduct of its affairs, the
necessary to property and effectively perform their company should have a strong and effective internal
duties and responsibilities, including sufficient time to control system and enterprise risk management
be familiar with the corporation’s business. framework.

Principle 5: The Board should endeavor to exercise CULTIVATING A SYNERGIC RELATIONS WITH
objective and independent judgment on all corporate SHAREHOLDERS
affairs. Principle 13: The company should treat all shareholders
Principle 6: The best measure of the Board’s fairly and equitably and also recognize, protect and
effectiveness is through an assessment process. The facilitate the exercise of their rights.
Board should regularly carry out evaluations to appraise DUTIES TO STAKEHOLDERS
its performance as a body, and assess whether it
possesses the right mix of backgrounds and Principle 14: The right of stakeholders established by
competencies. law, by contractual relations and through voluntary
commitments must be respected. Where stakeholder’s
Principle 7: Members of the Boards are duty-bound to rights and/or interests are at stake, shareholders should
apply high standards, taking into account the interest of have the opportunity to obtain prompt effective redress
all stakeholders. for the violation of their rights.
DISCLOSURE AND TRANSPARENCY Principle 15: A mechanism for employee participation
Principle 8: The company should establish corporate should be developed to create a symbiotic
disclosure policies and procedures that are practical and environment, realize the company’s goals and
in accordance with the best practices and regulatory participate in its corporate governance processes.
expectations Principle 16: The company should be socially
Principle 9: The company should establish standards for responsible in all its dealings with the communities
the appropriate selection of an external auditor, and where it operates. It should ensure that its interaction
exercise effective oversight of the same to strengthen serve its environment and stakeholders in a positive and
the external auditors’ independence and enhance audit progressive manner that is fully supportive of its
quality. comprehensive and balance development.
INTRODUCTION 5. The explanations strive to provide companies
with additional information on the
1. The Code of Corporate Governance is intended recommended best practice.
to raise the corporate governance standards of
Philippine Corporations to a level at par with its This code doe not, in any way prescribe a “one size fits
regional and global counterparts. The lates all” framework. It is designed to allow boards some
G20/OECD1 Principes of Corporate Governance flexibility in establishing their corporate governance
and the Association of Southeast Asian Nations arrangements. Larger companies and financial
Corporate Governance Scorecard were used as institutions would generally be expected to follow most
key reference materials in the drafting of this of the Code’s provisions. Smaller companies may decide
code. that the cost of some of the provisions outweigh the
benefits, or are less relevant in their case. Hence the
2. The code will adopt the “comply or explain” principle of proportionality is considered the application
approach. This approach combines voluntary of its provisions.
compliance with mandatory disclosure.
Companies do not have to comply with the 6. The Code of Corporate Governance for publicly
Code, but they must state in their annual listed companies is the first of a series of Codes
corporate governance reports whether they that is intended to cover all types of
comply with the Code provisions, identify any corporations in the Philippines under
areas of non-compliance, and explain the supervision of Securities and Exchange
reasons for non-compliance. Commission (SEC)

3. The Code is arranged as follows: Principles, 7. Definition of Terms:

Recommendation and Explanations. The
principles can be considered as high-level Corporate Governance – the system of stewardship and
statement of corporate governance good control to guide organizations in fulfilling their long-
practice, and are applicable to all companies. term economic, moral, legal, and social obligations
towards their stakeholders.
4. The recommendations are objective criteria
that are intended to identify the specific Corporate governance is a system of direction, feedback
features of corporate governance good practice and control using regulations, performance standards,
that are recommended for companies operating and ethical guidelines to hold the Board and senior
according to the Code. Alternatives to a management accountable for ensuring ethical behavior
Recommendation may be justified in particular – reconciling long-term customer satisfaction with
circumstance if good governance can be shareholder value – to the benefit of all stakeholders
achieved by other means. When a and society.
recommendation is not complied with. The Its purpose is to maximize the organization’s long-term
company must disclose and describe the non- success, creating sustainable value for its shareholders,
compliance and explain how the overall stakeholders and the nation.
principle is being achieved. The alternative
should be consistent with the overall principle. Board of Directors – the governing body elected by the
Descriptions and explanations should be written stockholders that exercises the corporate powers of a
in plain language and in a clear, complete, corporation, conduct all its business and control its
objective and precise manner, so that properties.
shareholders and other stakeholders can assess
Management – a group of executives given the
the company’s governance framework.
authority by the Board of Directors to implement the
policies it has laid down in the conduct of the business that may affect the entity, manage risks to be within its
of the corporation. risk appetite, and provide reasonable assurance
regarding the achievement of entity objectives.
Independent Director – a person who is independent of
management and the controlling shareholder, and is Related Party – shall cove the company’s subsidiaries,
free from any business or other relationship which as well as affiliates and any party (including their
could, or could reasonably be perceive to, materially subsidiaries, affiliates and special purpose entities) that
interfere with his exercise of independent judgement in the company exerts direct or indirect control over or
carrying out his responsibilities as a director. that exerts direct or indirect control over the company;
the company’s directors; officers; shareholders and
Executive Director - a director who has executive related interests (DOSRI), and their close family
responsibility of day-to-day operations of a part or the members as well as corresponding persons in affiliated
whole of the organization. companies. This shall also include such other person or
Non-executive Director – a director who has no juridical entity whose interest may pose a potential
executive responsibility and does not perform any work conflict with the interest of the company.
related to the operation of the corporation. Related Party Transactions – a transfer of resources,
Conglomerate – a group of corporations that has services or obligations between a reporting entity and a
diversified business activities in varied industries, related party, regardless of whether a price is charged.
whereby the operations of such businesses are It should be interpreted broadly to include not only
controlled and managed by a parent corporate entity. transactions that are entered into with related parties
but also outstanding transactions that are entered into
Internal Control – a process designed and effected by with an unrelated party that subsequently becomes a
the board of directors, senior management, and all related party.
levels of personnel to provide reasonable assurance on
the achievement of objectives through efficient and Stakeholders – any individual, organization or society at
effective operations; reliable, complete and timely large who can either affect and/or be affected by the
financial and management information; and compliance company’s strategies, policies, business decisions and
with applicable laws, regulations, and the organization’s operations, in general. This includes among others,
policies and procedures. customers, creditors, employees, suppliers, investors as
well as the government and community in which it
Enterprise Risk Management - a process, effected by an operates.
entity’s Board of Directors, management and other
personnel, applied in strategy setting and across the
enterprise that is designed to identify potential events