Pascual, Kim Carlo M.

4AFM

12/10/11 Prof. Brabante

1. What is Corporate Governance and to be able to describe it as an application in public and private entities. 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. The principal stakeholders are the shareholders, management, and the board of directors. Other stakeholders include labor(employees), customers, creditors (e.g., banks, bond holders), suppliers, regulators, and the community at large. Corporate governance is a multi-faceted subject. An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principalagent problem. A related but separate thread of discussions focuses on the impact of a corporate governance system in economic efficiency, with a strong emphasis shareholders' welfare. There are yet other aspects to the corporate governance subject, such as the stakeholder view and the corporate governance models around the world. It is a system of structuring, operating and controlling a company with a view to achieve long term strategic goals to satisfy shareholders, creditors, employees, customers and suppliers, and complying with the legal and regulatory requirements, apart from meeting environmental and local community needs. 2. Enumerate and briefly discuss the nature and scope covered by Corporate Governance in an Organization. The term corporate governance, although commonly used, has no standard definition. It encompasses a wide range of items and activities, and holds different meanings for different user groups. In the CGC Report, corporate governance refers to the processes and structure by which the businessand affairs of the company are directed and managed, in order to enhance long-term shareholder value through enhancing corporate performance and accountability, whilst taking into account the interests of other stakeholders

3. To be able to discuss the core values of Corporate Governance and to be able give at least 5 examples of practice in an organization. Core Values/Principles ethical approach - culture, society; organizational paradigm balanced objectives - congruence of goals of all interested parties each party plays his part - roles of key players: owners/directors/staff a decision-making process is in place which is based on a model reflecting the above giving due weight to all stakeholders stakeholders are treated with equal concern - albeit some have greater weight than others accountability and transparency: to all stakeholders

Five Golden Rules of best corporate governance practices are: 1. Ethics: a clearly ethical basis to the business 2. Align Business Goals: appropriate goals, arrived at through the creation of a suitable stakeholder decision making model 3. Strategic management: an effective strategy process which incorporates stakeholder value 4. Organization: an organization suitably structured to effect good corporate governance 5. Reporting: reporting systems structured to provide transparency and accountability

4. Enumerate and Briefly discuss at least 10 1. Good Corporate Standards in a Financial Institution. When developing corporate governance practices for private companies, I always recommend that the chief executive officer and chief financial officer provide some attestation that they will be responsible for their companys financial statements. I recommend that private companies establish whistle-blower procedures, similar to those required under Sarbanes-Oxley. Under these procedures, a whistle-blower who reports violations of law or other serious transgressions by another employee, officer, or director can remain anonymous, and there is no retribution against the employee for whistle-blowing Most large private companies have already adopted audited financial statements, independent director positions, disclosure of critical accounting policies and estimates, and disclosure of off-balance sheet and contingent liabilities.

Looking back to the WorldCom and Enron scandals, and even today with respect to the mortgage-backed security crisis, having opaque financials no one can understand and off-balance sheet liabilities that are not clearly disclosed demonstrates very poor governance. Therefore, even private companies must start to bring some clarity to their financial statements, especially if they wish to raise money at any point in time. Review the operations of their employee benefit plans to comply with the Employee Retirement Income Security Act of 1974, as amended, Pub.L. 93406, 88 Stat. 829 (September 2, 1974), fiduciary reporting requirements, and disclosures. Under Sarbanes-Oxley, there are criminal penalties for violating some of those provisions, including blackout requirements that do not permit the officers and directors to trade in a companys stock at a time other employees cannot do so. Board processes relate to the mode by which the board of directors should be established, their roles and responsibilities, and board policies and procedures. These encompass Board Matters and Remuneration Matters as set out in the Code. In addition to sound Board Processes, good corporate governance practices deal with the extent and quality of Disclosures and Transparency in a companys affairs and its conduct. Fundamentally, this relates to effective and comprehensive communication between the company, its shareholders and stakeholders within the community. To some extent, this includes principles set out in section Communication with Shareholders of the Code. Corporate governance practices include the Auditing and Compliance aspects of the companys activities, that is, those mechanisms that safeguard the companys assets and resources. Lastly, corporate governance practices encompass full and proper Accountability to all Shareholders ensuring that fair treatment is accorded to all investors, regardless of the size of their investment or influence. These latter two categories include principles discussed in the section Accountability and Audit of the Code

2. Unethical and Malicious practice in a Financial Institution. For public companies, there seems to be a growing movement toward shareholder-favorable corporate governance. Much of this is endemic to the rise of the institutional investor over the past ten years, but it is also a byproduct of the growing sentiment that boards of directors have been at the heart of much of the corporate malfeasance and major corporate collapses of late. One of the biggest corporate governance issues currently pertains to majority voting for directors. Plurality voting in the election of directors is the default standard in most states, as well as under the Model Business Corporation Act. Plurality voting means a director is elected to office by virtue of having received the most votes in an election. Some corporate activists have said it is unconscionable corporate governance to allow only a plurality of

shareholders to elect a companys directors because it can result in situations where directors are chosen by a ridiculously small percentage Corporate of the total shares eligible to vote on the matter. Plurality voting also has a major impact on the prevalence and strategy behind proxy contests for control of public company boards. In response to the criticism, many large companies have already passed amendments to their articles of incorporation requiring majority approval for directors. In addition, the Model Business Corporation Act and the Delaware General Corporate Law were amended in 2006 to facilitate majority voting, and leading proponents of majority voting continue to lobby for the change. Another recent issue for public companies in the corporate governance area is the push to abandon any practice that appears to entrench current management and directors. Two practices are challenged most often. The first is the poison pill practice, adopted by many companies starting in the 1980s and 1990s. If a person acquires more than a threshold percentage of a companys stock, 15 percent for example, without prior board approval of the target, the purchase will trigger the poison pill, which permits all other shareholders to purchase large amounts of shares at a nominal per-share price. This would result in the acquirors ownership being greatly diluted. Consequently, no acquiror has ever actually purchased enough stock to trigger a poison pill. In most cases, these poison pill contracts last for a tenyear period, and when they expire they come up for renewal by the board. However, there have been a number of proposals by shareholder activists that companies should not renew those poison pills because they serve to entrench management. Consequently, many larger companies have chosen not to renew them. Another governance issue for public companies is director independence. Both the New York Stock Exchange and the NASDAQ require that a majority of a public companys directors be independent, and many shareholders activists have said a public companys board should be mostly independent, not just a bare majority. In response, some companies are passing more stringent standards for their own boards than the exchanges require (i.e., stipulating that 75 percent of their directors be independent). I have several public company clients that have only one or two management directors, such as the chief executive officer and one other insider. Board leadership is another important governance issue for public companies, especially with respect to separating the functions and duties of the chairman and the chief executive officer. Many corporate activists believe too much power is bestowed on a chief executive officer who is also chairman, and that this situation has resulted in a number of vastly overcompensated chief executive officers, even when the company is not performing well. At this time, however, probably less than 25 percent of public companies have a separate chairman and chief executive officer, and far fewer have written binding policies requiring the separation of those positions.

Moreover, most of those companies that have a separate chief executive officer and chairman do not have a written policy that requires those positions to be separate. Additionally, there has been a push in recent years toward stock ownership guidelines for officers and directors. In the 1990s and early 2000s, many corporate officers and directors enjoyed steadily increasing compensation with mega stock option grants, and as soon as the options vested, the companys officers would exercise all of their options, immediately sell the stock, and pocket the money. However, many corporations are now requiring their officers and directors to hold some percentage of their shares for the long term, based on a multiple of their salary or compensation, so they will be in the same position as the other shareholders. Indeed, if all you have is options, you are not really in the same position as the other shareholders, because if the companys stock goes down, you have no downside. Options have no actual money at risk until they exercise their options (i.e., loss of potential profit does not equal the loss of your investment). I am also seeing a lower percentage of equity compensation in stock options. The stock option compensation is being replaced with smaller amounts of restricted stock that are economically equivalent to a larger amount of options. Under this arrangement, a director actually gets the companys stock instead of options, and many think this practice more appropriately aligns the directors interest with that of the long-term shareholders.

Source: http://www.gdm.com/pubs/xprPubDetail.aspx?xpST=PubDetail&pub=369 http://www.scribd.com/doc/54420887/2/NATURE-OF-CORPORATEGOVERNANCE http://www.articlesbase.com/ethics-articles/corporate-governanceacomparative-study-of-select-public-sector-and-private-sector-companiesin-india-868495.html

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