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The Board of Directorsin Corporate Governance and Policy Making
CLARO G. GANAC
The Board of Directorsin Corporate Governance and
Policy Making
GRADUATE SCHOOL OF MANAGEMENT
Policy Dynamics
Presentation Objectives
Discuss the legal frameworks and the state of current compliance and practice in corporate governance and policy making by the Governing Body or Board of Directors.
Explore and delineate CG implementation of a small sample of publicly listed corporations.
Examine differences in CG performance and compliance using empirical indicators between large and small-cap corporations
Conceptual Framework
The student used the Donabedian Model as the conceptual framework for examining the state of Corporate Governance and evaluating practice of policy making.
It was developed by Avedis Donabedian, a health researcher. It was originally used to assess healthcare quality and service delivery.
Essentially a model that divides metrics into: “structure,” “process,” and “outcomes."
Conceptual Framework
Corporate Governance Performance Evaluation Framework – Hierarchy of Effects
Structure Process Outcomes
Conceptual Framework
Structure describes the legally mandated framework and organizational structures that are in place to facilitate high-level policy making.
Process denotes the relationships and flows of information and transactions between the Board of Directors, shareholders, Management and stakeholders in the conduct of Corporate Governance.
Outcomes refers to the intended effects of Corporate Governance on key measures of performance.
Corporate GovernanceCorporate Governance (CG) refers to the overall framework of rules, systems and processes relating to the enforcement of decision-making and oversight powers and performance of the Board of Directors and Management in the conduct of their fiduciary responsibility to the owners of the firm as provided for by law (Corporation Code of the Philippines; Securities & Exchange Commission, Code of Corporate Governance 2002).
Conceptual Framework
Research Methodology
Literature review of corporate laws and rules and regulations
Small sample survey of publicly listed corporations to establish a profile of corporate governance practices and processes.
In-depth interview of EEI Corporation to better understand the current level and scope of CG policy making at a private corporation.
Review of corporate disclosures, including shareholder annual reports, CG Scorecard reports and websites.
Board of Directors & Governance
Philippine Stock Exchange
Board of Directors
The Board is the highest policy-making body in a corporation.
It exercises and discharges its responsibility of high-level policy formulation, monitoring and evaluation, and control using Corporate Governance system
The purview of policy-making, however, does not cover all company policies that are in force across the organization.
Board of Directors & Governance
Policy-Making in the Corporation
Board of Directors
CEO/ Senior Mgt
Mid to Lower
Managers
GOVERNANCE
POLICY GUIDELINES
OPERATIONAL POLICIES
Board of Directors and Policy-Making
In practice, the amount of power exercised by the board varies with the type of company.
In small private companies, the directors, shareholders and management are normally the same people. There is no real division of power.
In public companies, the board tends to exercise a supervisory role, and individual responsibility and management are delegated downward to individual professional executives
A Board of Directors (BOD) is composed of members who are appointed or elected by the general shareholder membership.
In non-profit, non-stock corporations, it may be named as board of governors, board of regents, or board of trustees.
Theoretically, the control of a company is divided between the board of directors, and the shareholders as a single body.
BOD Composition
Board of Directors Composition
The BOD members are elected by shareholders of record during the Annual Meeting of the corporation. Term of office is one (1) year.
All elected directors must own at least one (1) share of stock of the corporation.
The number of Directors is determined in the company’s Articles of Incorporation and By-Laws, in accordance with the Philippine Corporation Code.
The minimum number of BOD members is five (5) and the maximum is 15 members.
Board of Directors Powers
In line with the Corporation Code of the Philippines (B.P. 68), the BOD is vested with the final authority to discharge and approve all the corporate powers of a corporation, including the administration of all businesses and activities and all property owned by it.
The general control and management of the business of the corporation with authority to transact businesses rests with the Board, subject to restrictions in the corporate charter or by-laws
BOD Responsibilities & Functions
General Responsibility
“The Board’s responsibility to foster the long-term success of the corporation, and to sustain its competitiveness and profitability in a manner consistent with its corporate objectives and the best interests of its stockholders.
… formulate the corporation’s vision, mission, strategic objectives, policies and procedures that shall guide its activities, including the means to effectively monitor Management’s performance.”
BOD Responsibilities & Functions
Duties and Functions
• Ensure a high standard of best practice for the corporation
• Conduct itself with honesty and integrity
• Implement a process for the selection of directors
• Appoint competent, professional, honest and highly motivated management officers.
BOD Responsibilities & Functions
Duties and Functions
• Adopt an effective succession planning program for Management.
• Provide sound strategic policies and guidelines to the corporation on major capital expenditures (power of the purse).
• Establish programs that can sustain its long-term viability and strength.
BOD Responsibilities & Functions
Duties and Functions
• Evaluate and monitor the implementation of policies and strategies, including the business plans, operating budgets and Management’s overall performance (Oversight of strategy formulation and management).
• Ensure faithful compliance with all applicable laws, regulations and best business practices.
BOD Responsibilities & Functions
Duties and Functions
• Establish and maintain an investor relations program; keep stockholders informed of important developments.
• Formulate a clear policy of accurate, timely and effective communication with sectors in the community it operates.
BOD Responsibilities & Functions
Duties and Functions
• Adopt a system of check and balance within the Board.
• Ensure the integrity of the decision-making and reporting processes at all times.
• Formulate and implement policies on related party transactions.
• Install the corporation’s internal control system.
Identify key risk areas and performance indicators and monitor these factors with due diligence to prepare for possible threats to its operational and financial viability.
Constitute an Audit Committee and other committees necessary to assist the Board.
Establish dispute resolution system.
Appoint a Compliance Officer.
BOD Responsibilities & Functions
Corporate Governance Practice in the Philippines
PSE Trading Floor
Policy/Governance Outcomes
Fiduciary responsibility
Strategic Management
Review & Control
Ethical/Sound Operations POLICY
Governance Outcomes
Fiduciary Agenda
Protect the interests of all shareholders, particularly minority share owners. Includes:
• ensuring the long-term viability and sustainability of the corporation;
• safeguarding company assets and resources;
• Ensuring welfare of company employees and key stakeholders
Governance Outcomes
Fiduciary Agenda• Ensure that the ownership rights of
shareholders are properly accorded them and exercised, inclusive of the right to vote and be elected as board and the exercise of pre-emptive rights over key decisions about the company as expressed in the Corporation Code and the;
Ethical management and operations of the firm. Accountability, integrity, transparency and
fairness are enshrined as core principles in all dealings by the company, Board, Management, officers and employees with all stakeholders.
Formulation and dissemination and performance due diligence of Code of Business Conduct and Ethics
Governance Outcomes
Strategic direction and management. Modern management practice ascribes powers
over the over-all direction and supervision of the organization by the corporate board.
The BOD is responsible for viable and sustainable operations .
It is responsible for the formulation and review of the corporate Vision-Mission, strategic and annual business plans.
Governance Outcomes
Monitoring and control function.
The BOD possesses oversight powers over the company’s overall and financial performance.
Financial statements are in accord with the Philippine Financial Reporting System and the International Auditing Standards and are reported on an annual and quarterly basis.
Internal and external auditing processes and structures are set by the BOD.
Adoption of control mechanisms including check-and-balance.
Governance Outcomes
Governance Structure/Processes
Bangko Sentral ng Pilipinas
Governance Structure/Processes
Corporation Code of the Philippines
Securities Regulation Code
Revised Code of Corporate Governance SEC Memorandum Circular No. 6 Series of 2009
The company’s Articles of Incorporation and By-Laws
Legal/Regulatory Framework
Governance Structures & Processes
Governance structures and regulatory frameworks set minimum standards of policy compliance
The BOD is equipped with sufficient structure and process powers in the corporate hierarchy, influence to impact policy making and strategy formulation and execution.
Policy Formulation Structure
Governance Structure/ProcessesPolicy Agenda Structure Process
STRATEGY
FORMULATION &
MANAGEMENT
Vision-mission setting
Strategic planning
Annual planning
Approval of plans
Approval of budgets
Ratification of Management’s
actions
FIDUCIARY
AGENDA
Board Meetings
Stockholders Meeting
Board Committees
Corporate governance
scorecard
Election of directors
Independent directors
Disclosure system
Investor relations and
information
ETHICS AND
SOUND
OPERATION
Code of Business Conduct &
Ethics
Compliance officer
Related party transactions
Seminars/orientation
Ethics monitoring
Disclosures and reporting
Corp. Social Responsibility
REVIEW AND
CONTROL
Performance monitoring
Internal audit
Risk management
Annual report
Financial reports
Audits/surveillance
Regulatory information and disclosure systems:
SEC Form 17A, 17Q, related disclosures; Information or Proxy Statement
Policies on disclosures of related party transactions; conflict of interest,
Purchase and trading by directors and Management of shares of stock
Conflict of interest.
Investor relations and communications
Governance Structures & Processes
The Board extends its oversight influence on Strategy Formulation through:
Hiring, selection, evaluation, control and compensation of Management, including the Chief Executive Officer (CEO).
The BOD delegates to Management the task of formulating and executing strategy and overseeing business operations.
Strategy Formulation Structure
Supervision of the direction of the corporation.
The BOD is responsible for the strategic function of approving the vision, mission and goals of the organization, usually determined by the CEO and Senior Management.
Strategic plans and guidelines then goes down the hierarchical chain of command.
At the lowest-level, the policies can take the form of specific rules of conduct.
Strategy Formulation Structure
Agenda setting and formal relationship structure with the CEO and Management. Monthly regular Board meetings Pre-planned agenda and documentation of
proceedings Deliberation and approvals of the strategic
and annual plan and budgets, and capital expenditure budgets;
Strategy Formulation Structure
Ratification/confirmatory powers. Ratification of all acts of Management
during Stockholders Meeting Quarterly and annual review of corporate
and financial performance through annual and interim financial statements of the company
Strategy Formulation Structure
CG Performance of Selected Philippine Corporations
Corporate Governance: Actual Practice
The regulatory structure has set minimum governance compliance standards and performance.
The author undertook a review of the website, shareholders annual report, SEC disclosures, CG and internal communications materials of eight (8) listed corporations.
The list includes the giant PLDT which had a market capitalization of P581 billion as of end 2012 and a free float of 54%, which shows a large minority shareholder base of over 50,000 persons.
Corporate Governance: Actual Practice
COMPLIANCE(Regulatory Framework)
CG Best Practice
Exceeds minimum standards• Transparent
director actions• Information
symmetry• Advocacy of ethics
and CG principles to employees, stakeholders and general public
PLDT, Ayala Group,< BDO
GOVERNANCE STRUCTURE COMPLIANCE:Publicly listed of good standing (inclusive of surveyed companies) are compliant :
Filing and submission of Corporate Governance Manual and Code of Business Conduct and Ethics
Filing and submission of SEC disclosure reports:
SEC Form 17A (Annual Report), SEC Form 17Q (Quarterly Interim Financial Statement),
Information or Proxy Statement,
General Information Statement
Corporate Governance Scorecard
Corporate Governance: Actual Practice
GOVERNANCE STRUCTURE COMPLIANCE:
Formulation and submission of Code of Business Conduct and Ethics
Filing and submission of annual Corporate Governance Scorecard
Organization of Audit, Nomination and Remuneration committees in the Board
Agenda setting and monthly Board Meetings
Appointment of external auditor and installation of Internal Audit System
Corporate Governance: Actual Practice
WEAKNESSES:
Lip service – selective or non-practice of governance policies and processes
Insufficient dissemination of business conduct/ethics and governance principles to employees, shareholders and investors
“Paper” board meetings and poor strategic management
Independent directors can still be swayed by the major owners and/or management
Lack of consultations in high-level decisions
Corporate Governance: Actual Practice
Corporate Governance: Actual PracticeCOMPANY
MARKET CAP.
PRICE EARNINGS
RATIO
BOARD COMMITTEE &MEETINGS
RISK MGT/ INTERNAL
AUDIT
IND.DIRECTORS
DISCLOSURES & COMMUNICATIONS
PLDT P 581.19 B P 16.50
Five Board Committees; Compliant attendance
Enterprise Wide
4 All; with investor relations
Ayala Corp P 347.67 B P 33.09
Five Board Committees; Compliant attendance
Enterprise Wide
3 All; with investor relations
BDO P 300.79 B P 18.69
Five Board Committees; Compliant attendance s
Enterprise Wide
3 All; with investor relations
Jollibee Foods Corp
P 166.18 B P 45.28
Three Board Committees; Compliant attendance
Limited2 (Minimum)
Website and disclosures with investor relations
EEI Corp P 11.19 B P 11.46
Three Board Committees; Compliant attendance
Enterprise Wide
2 All
Chemrez P 4.35 B P 16.90
Three Board Committees; Compliant attendance
Limited
2 Disclosures only
Republic Glass
P 1.74 B P 7.73
Three Board Committees; Compliant attendance
Limited
2 Disclosures only
Macro Asia Cor.
P 2.66 B (P 14.07)
Three Board Committees; Compliant attendance
Limited
2 Website and disclosures
Corporate Governance: Actual Practice
BEST PRACTICE PLDT and to lesser extent BDO and Ayala stands
out in CG practice by exceeding performance on most standards and processes.
PLDT’s BOD and Management has been engaging in an advocacy communication program to expand awareness and foster an employee culture that promotes for corporate ethics and corporate governance principles.
Mobilizing the BOD in other key areas of management – Risk Management, Management selection, etc.
PLDT CG Advocacy