The role of the board of directors in corporate governance and policy making

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."


Corporate Governance Performance Evaluation Framework – Hierarchy of Effects

Structure Process Outcomes


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).


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.”


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.



• 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.



• 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.



• 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.



• 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.


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.


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;


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


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.


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


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


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 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


BDO P 300.79 B P 18.69

Five Board Committees; Compliant attendance s

Enterprise Wide


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


Enterprise Wide

2 All

Chemrez P 4.35 B P 16.90


Limited

2 Disclosures only

Republic Glass

P 1.74 B P 7.73


Limited

2 Disclosures only

Macro Asia Cor.

P 2.66 B (P 14.07)


Limited

2 Website and disclosures


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

Documents

The role of the board of directors in corporate governance and policy making