Chapter 4: Models of Corporate
Governance
Essence of Model:
o L continuous Learning
o O - Oversight
o G - Guidance
o I - Information
o C Culture
Aim:
o To incorporate not only structural
aspects of governance but also
behavioural aspects.
o To check whether there is sound,
integrated approach to governance.
Factors that determined Corp.
Governance:
o Legal and Regulatory framework
o Public acceptance of realities
o Each corporations articles of
association
Models in Developed Capital Markets
o Anglo-US Model
o Japanese Model
o German Model
ANGLO-US MODEL
Characterized by share ownership of
individual and increasingly institutional,
investors not affiliated with the
corporation known as outsiders.
Equity Financing- common method of
raising capital for corp. in UK & US.
US
- largest capital market in the world and
home of most developed system of
proxy voting & shareholder activism by
institutional investors.
- London Stock Exchange is the third
largest stock exchange next to New
York & Tokyo.
- Has the most comprehensive disclosure
requirement & a complex, well-
regulated system for shareholder
communication.
Key Players:
To balance powers of:
CORPORATE GOVERNANCE
TRIANGLE
- Management
- Directors
- Shareholders
- Government agencies
- Stock exchanges- play important role in
by establishing listing, disclosure &
other req.
- Self regulatory organizations
- Consulting firms
Developed within the context of free
market economy- Assumes the
separation of ownership and control in
most publicly held corporations.
Agency Costs - cost of the separation of
ownership and control.
*Investor avoid legal liability by giving
up management control and paying
management for acting.
Composition of Board of Directors:
o Insiders person who is either
employed by the corporation or
somebody who has significant
personal/business relationship with
management. Ex. Executive, Manager
o Outsiders person or institution w/c
has no direct relationship with the
corporation or management.
o Same person as Chairman & CEO-
Led to abuses, including:
1. Concentration of power in 1 hands
only.
2. Concentration of power in small
group of persons.
3. Attempts to retain power over a
long period of time
4. BOA disregard for interest of
outside shareholders.
Disclosure Requirements: Included in
the Annual report in the Annual
General Meeting (Proxy Statement) are:
o Corporate financial data (quarterly)
o Breakdown of Capita Structure
o Substantial Background of all nominee
to BOD
o Aggregate compensation of executive
officers
o All shareholders holding 5% of CS
o Information on proposed mergers
o Proposed amendments to articles
o Names of auditors
Corporate Actions Requiring
Approval of Shareholders
 Routine Actions:
o Election of directors
o Appointment of Auditors
Non Routine Actions:
o Establishment or amendment of stock
option plans
o Mergers or takeover
o Restructuring
o Amendment of Articles
Shareholder proposal shareholder
are allowed to submit proposal to be
included on agenda AGM.
(Annual General Meeting). Shareholder
owning 10% may convene in EGM
(Extraordinary General Meeting).
Note: Voting for Dividend proposed is
not allowed for BOD in US but allowed
in UK.
Monitors of Performance and
Corp. Governance
Specialized investment funds
Venture capital funds
Rating agencies
Auditors
Funds that target investment in
bankrupt and problem corporations
Note: All registered shareholder receive
mail to agenda of meeting including
background of all proposal. Shareholder may
vote by proxy- they exercise right to vote w/o
attending AGM.
JAPANESE MODELS
Characterized by a high level of stock
of ownership by affiliated banks and
companies
Legal, public policy and industrial
policy framework designed to promote
KEIRETSU- Refers to industrial group
linked by trading relationship,
crossholding of debt and equity &
informal business contracts.
BOA composed almost solely of
insiders and comparatively low
sometimes non-existent of outside
shareholders.
Equity Financing is also important in
Jap.Corp
% of foreign ownership in Jap. Stock is
Small.
Key Players:
To link relationships of:
Main Bank is generally a major
shareholder in corp. unlike is U.S
Keiretsu/Affiliated company
Management
Government
OPEN ENDED HEXAGON
Jap.System of Corporate
Governance is many-sided.
It center around MAIN BANK &
KEIRETSU OR FINANCIAL/INDUSTRIAL
NETWORK they are different yet
overlapping and complementary.
link rather than balance of power .
In contrast to Anglo-US model non-
affiliated shareholders have little or no
voice in Japanese govt.
SHARE OWNERSHIP PATTERN:
Financial institutions &
Corporations firmly hold ownership
of the Equity market.
In Japanese & German Model
BANKS are key shareholders and
develop strong relationship to
Corporation. In contrast to Anglo-US
which relationship is prohibited by
Antitrust Legislation.
Composition of Board of Directors:
o Almost completely of Insiders
o Average of 50 members
Note: If profits fall, main bank and
keiretsu may remove directors and appoint.
: Appointment of retiring government
bureaucrats to board is common.
: Government ministries have
traditionally been extremely influential in
developing industrial policy.
REGULATORY FRAMEWORK
Government Ministries been extremely
influential in developing industrial policy
 Comprehensive Industrial Policy
weakens due to:
o Growing role of Jap. Corp
o Increasing internationalization of Jap.
Corp made them less dependent on
domestic market.
o Growth of Japanese capital market
Disclosure Requirement
Included in the Annual report in the
Annual General Meeting are:
o Corporate financial data (semi - annual)
o Breakdown of Capital Structure
o Background information on each
nominee to BOD
o Aggregate compensation of executive
officers and BOD
o Information on proposed mergers
o Proposed amendments to articles
o Names of indv. and/or companies
proposed as auditors.
DIFFERENCE IN US AND JAPAN
DISCLOSURE:
Semi-annual disclosure in Japan;
Quarterly in US.
Aggregate disclosure of executive &
board compensation; indv. data on
executive compensation in US
Disclosure of ten largest shareholder; In
US it disclose all shareholders holding
more than 5% of company total share
Japanese acctg standard and US GAAP.
INTERACTION AMONG KEY PLAYERS:
Interaction among key player generally
links and strengthens relationship.-
Fundamental Charac. Of Japanese model.
Jap.Corp prefer that majority of its
shareholder be long term, preferably
affiliated parties.
Annual reports and material available to
all shareholders.
Shareholder may attend the AGM, vote
by proxy or vote by mail.
AGM is always pro forma and corp.
discourage shareholder to dissent
Shareholder Activism is restricted
Corporate Actions Requiring Approval of
Shareholders
Routine Actions:
o Payment of dividends and allocation
of reserves
o Election of directors and
Appointment of Auditors
o Capital Authorization
o Amendment of Articles
o Payment of retired bonuses to
directors and auditors
o Increase of aggregate composition
ceilings for directors and auditors
Non Routine Actions:
o Mergers, takeovers and restructuring
Note: Shareholder proposal is
relatively new phenomenon in Japan after
1981. Registered shareholder holding at least
10% of company share may propose an issue
included in AGM & EGM.
GERMAN MODEL
Used in Germany, Austria, Netherlands,
Scandivania, France and Belgium.
Prefers Bank Financing
Uses AG (Volkswagen AG) following their
name
Designed to include interests of labour,
corporations, banks and shareholders in
the corporate governance system.
KEY PLAYERS:
GERMAN BANKS & CORPORATE
SHAREHOLDER
THREE UNIQUE ELEMENTS:
o BOARDS (Two tiered Board
structure)
o Supervisory Board is set by law and
cannot be changed.
o Voting rights restrictions are legal
to a certain % regardless of ownership
position.

Composition of Board of Directors:
Management Board (Vorstand):
o Responsible for daily management
o Insiders and executives
Supervisory Board (Aufsichtsrat)
o Appoints and dismisses Man. Board,
approves major decisions and advisor
to the former
o Labor/ Employee/ Sha8reholders
representatives
Disclosure Requirements
: Included in the Annual report in
the Annual General Meeting are:
o Corporate financial data (semi - annual)
o Breakdown of Capital Structure
o Limited Background of all nominee to
BOD
o Aggregate compensation of executive
officers and BOD
o Substantial shareholders holding 5% of
CS
o Information on proposed mergers
o Proposed amendments to articles
o Names of auditors
Note: Corporations are permitted to
amass considerable reserves
Corporate Actions Requiring
Approval of Shareholders
Routine Actions:
o Allocation of Net Income
o Ratification of MBs acts for the
fiscal year
o Ratification of SBs acts for the
fiscal year
o Election of Supervisory board
o Appointment of Auditors
o Capital Authorization
o Affiliation agreements with
subsidiaries
o Amendments to the articles
o Increase of the aggregate
compensation ceiling for SB
Note: Ratification is a seal of
approval or vote of confidence
Non Routine Actions:
o Mergers, takeovers and restructuring
Note: Shareholder proposal and
Shareholder counter proposal are common in
Germany.
Chapter 5: Agency Problems and
Accountability of Corporate Managers
and Shareholders
Agency Theory viewed as a loosely
defined contract between resource
providers and resource controllers;
relationship that came into being
occasioned by the existence of one or
more individuals (principals) employ other
individuals (agents) to carry out some
service and decision making rights.
PRINCIPAL AGENT SPECIFIC ISSUES
o Diversification free cash flow where
managers prefer this fund to be invested
in additional product
o Dividends funds to be declared
dividends
o Managerial Opportunism
o Power Supremacy -principals waiting
for the ultimate result
o Technical Expertise agents doing the
real things
o Trust kind of comfort that agents are
taking pleasure from that would
sometimes make them lose their balance
IDENTIFIED AGENCY PROBLEMS
o Adverse Selection insufficiency of
information obtainable to the principal
and to the agents. It also may be done
by principal
o Agency Costs resources sacrificed to
keep an eye on things that are perceived
or need to be closely controlled from the
perception of the principal
o Conflict of Interest
o Legal requirement
o Opportunistic behaviour
o Self interested behaviour when
agents have the capability to operate in
their own self interest rather than the
firms.
Remedies Within Shareholders
o Proxy Voting
exercise of voting in behalf of
shareholders through the use of a
special authority given by the
shareholder/principal.
It normally limited to voting at the
annual meeting for directors for the
sanctioning of acts of the directors, for
the increase or decrease of capital and
amendments of policies.
The one who cast vote either another
shareholder or fund manager.
The proxy has the right to vote but does
not have the right to debate or
participate in proceeding.
o Benefits of Proxy voting
Routine Decision
Governance
Issue on Anti-takeover
o Derivative suit lawsuit filed by a
shareholder on behalf of the corporation
against a third party (insider of a
corporation, directors and senior officer
in company).
It allows a shareholder to bring an
action in the name of the corp. against
parties that may cause harm to corp.
Directors, officers and senior managers
are mandated to be partly responsible
defending the corp. against suit.
o Takeover transfer of control of a firm
from one group of shareholders to
another group of shareholders. It usually
informs the BOA first before the
takeover.
TYPES:
o Friendly Takeover in
closely held or private
corporations; BOD and
shareholders usually the same
people or closely related. It
usually inform first BOD of
company to be taken over.
o Hostile Takeover permits the
acquirer to be to bypass the
targets management if
uncooperative to agree to a
merger; persistent to pursue
even if the target opposes.
Tender offer makes a public
offer of w/c is higher than the
current market price. Type of
takeover proposal that is public
and open invitation.
Proxy Fight acquiring company
persuades enough shareholders.
Simple majority is sufficient.
Creeping quietly purchasing
enough stock in the open market.
Its purpose is to gather holding
enough holdings that can
influence decision of corp. (20% is
already enough)
o Reverse Takeover merger used by
private companies to become publicly
traded w/o passing an initial public
offering. Private comp. shareholder uses
their share in private comp. to exchange
for shares in public comp.
Financing a Takeover
o Debt Financing leveraged buyouts;
borrowing form a bank or raising funds
through issuance of bonds then the
acquired company has to pay back the
debt.
o Partial or Full Equity Conversion
giving the target markets shareholders
an offer that include a debt instrument in
partial or in full payment of shares.
o Share Swap/ All Share Deal no
money involved. bidder company issues
its own new shares to the acquired to
be companys shareholders then
acquiring comp. will end up as majority
shareholder.
EXTERNAL FORCES AFFECTING
GOVERNANCE
o Competitors other companies w/ the
same product offerings
o Financiers- person or entity that
manages routinely huge amount of
money
o Regulatory agencies public authority Facilitates raising capital for the
that is responsible for existing Govt- SE is serving as one of govt
autonomous authority over some area avenue to raise funds through
for corporate activity. issuance of bonds and other paper.
o Watchdogs independent organizations Indicator of economy- SE is
that tries to police a particular industry residence of advance thinkers of the
o Predator Companies companies that economy and business.
are always on the watch to takeover Financial Press newspapers,
o Information enhancers, providers magazines, TV channels. Broadcast
and gatekeepers independent third programs and other media specializing in
party whose cooperation is important financial news and updates.
because they have the capability to at
least deter misconducts of corp.
Gatekeeper independent 3rd party
persons or entity whose cooperation is
important because they have the
capability at least deter, if not prevent
misconducts of corp.
o Investment Bankers is an individual
or entity which acts as an agent for
corporation issuing securities. Have a
larger role in assisting interested parties
on mergers and acquisition.
Stock Exchange entity w/c offers
trading services and facilities for stock
brokers and traders. To buy and sell
shares and other securities. One of the
most vital components of stock market.
Roles:
Raise Capital- SE offers comp. to
facility to raise capital for expansion.
Mobilize savings- investing in SE
means pulling out money from
deposit and have it part of
circulation.
Facilitates growth- simplest way
for comp. to step on takeover bid for
merger or acquisition is through
stock market.
Distributes profit
Improves Corp. Governance
Comp. that are listed are following
stricter standard and requirements
set by SE.
Creates opportunities for small
investors- It offers chance for small
investors to own shares of the same
comp. being invested in by large
investors.
Chapter 6: Corporate Social
Responsibility
Basic Premises of CSR
Business Leaders- long term company
values is based on capability of
enterprise to respond to society
changing needs.
Consumers- search for products &
services to companies they believe
doing the right thing
Employees- have preference to work
for companies whom share similar
values & mission.
Investors- look for companies that
recognize & manage risk and are
entrepreneurial in terms of attitude.
Local Communities- want to know that
businesses are being good citizens.
Media- expose some examples best or
worst practices to spotlight
NGO- expose these examples of
irresponsible corporate conduct and
campaign greater corporate
accountability
Regulators- want to make certain that
business activities not only generate
business opportunities, jobs but also
help solve serious problems.
Specific Relevance of CSR
Changing Social Expectation
Consumer & public expect more from
companies who produce product and
services.
Competitive Labor Markets
Employees nowadays are more concern
not only on other benefits and take
home pays but also business philosophy
that match their principle.
Disclosure Demands by Stakeholders
Stakeholder know their roles and right it
includes right to be informed. People
can demand information about
corporate conduct w/ more pressure
than before.
Dwindling Government Role
Govt in past rely in strict legislation and
regulations to deliver social and
environmental services. There is now
what we call govt disconnection or
failure of regulations.
Globalization
Borderless transactions and the
increasing influence of the media on
global perspective. There is power in
number. Consumer can easily initiate
collective action.
Pressure From Investors
Ethical standard is part of the system in
assessing company performance.
Supplier Relations
Stakeholders are more concern in
business dealings, companies take step
in make certain that their partners do
things in a socially responsible approach
possible.
Wealth and Vulnerabilities
Consumer can afford to be choosy and
picky on the products they buy,
corporations therefore has to
operationally align itself w/ this
consumer tendencies.
Ethical Leadership
Is a leadership that is concerned in leading a
manner that respect the rights, dignity and
stake of others. It focuses how leaders
employ their business and political power in
the decisions they make and actions they
engage into.
Ethical Decision Making Process in
Organization
Ethics in an organization refers to the
system , values, philosophies and principle
that govern the behavior of organizational
member which are the consequences of
organizational pronouncement.
Ethical decision making is the process of
trying to established organizational values
from which ethical decision will based from.
Decision making is essential process for
organizational effectiveness. The ff. may
help decision makers of organizations lay
down decisions aligned w/ CSR principle:
Withdraw
Before you look objectively, step back
first. Have a calibrated response for
thrilling, rushed and demanding
scenarios whether self-imposed or
outside sourced. Solutions should spring
instead of imposing decisions which
might make some parties unhappy.
Be an Archivist
Organizational history may have much to
learn from. Review how previous
situations are handled to reduce making
mistake. History is a good warehouse of
already invented wheels w/c can save
you time & pain in making a new one.
The Option of Doing Nothing
Gather the facts from all available
standpoints. Issues offer 3 alternatives
1st is personal view, 2nd main alternative
option & 3rd normally under estimated
doing nothing. In large number of
circumstance doing nothing is the truly
wise way.
Be Conscious of Long-term Effects
Do some base-case modeling and think
of what if scenarios. History can again
be a good source of models for any given
situations.
Consider Legalities and Ethics
Basic to check law first once you clear
legal bar check its ethical issue. Not all
legal are ethical.
Ask Around
Consult with people or party most
affected by situation, when you do
examination and assessment analysis
make sure instrument is balanced and
objective.
Be Comprehensively Sensitive
Be concern about the effect as deeply as
possible.
Do Not be A Dangerous Alpha Male
Decision makers should defy the illusion
and arrogance that power & authority
tends to be associated with it. Good
number unethical decision are product of
arrogance & delusion.
Find Win-Win Solution
Decision maker should detach himself
from the diff. partialities of the issue for
him to arrive at objective decision.
Myths about Organization Ethics
Being Ethical is Easy
1st Ethical means business conduct most
of the time in legal requirement. 2nd
there is no such thing as cost-free
compliance effort 3rd ethical means bee
flying towards huge web of unethical
entities.
It is hard to withstand the pressure when
almost everybody deviates and their
deviation is already part of system.
Being carried into this bandwagon
mentality entice the decision makers to
find justification for some acts that is
unethical
Being Ethical is not part of Doing a
Business
Being ethical is part & parcel of doing
business. When state grants authority to
operates it also mandate to comply in
ethical standard.
Being Ethical Brings No Benefit
Ethical companies standout it bring
success and stability. It is not true being
ethical has no reward. Only investment
w/out loss is being ethical.
WHAT IS ETHICS IS NOT
Ethics is not the same as feelings
Feelings provide important info for our
ethical choices.
Ethics is not a Religion
Many people are not religious but Ethics
applies for everyone
Ethics is not Just Following the Laws
Good system of law does not incorporate
many ethical standards but law can
deviate what is ethical.
Ethics is not Following the Culturally
Accepted Norm
Some cultures are ethical but some are
corrupt & blind. Ex.When in Rome, do as
the Romans do
 Ethics is not Science
Science can provide data to help make
better ethical choices. It provide
explanation for what humans are like but
Ethics provides reason for how humans
ought to act.
Corporate Citizenship
It refers to the acceptance by business of
a conscious effort in focusing and
satisfying the economic, legal,
philanthropic and social responsibility &
other acts expected from the corp. to do
its stakeholders.
It recognizes that a company or org is not
and should not act in separation of
community w/in it operates.
Key elements of Corporate
citizenship:
Commitment to Quality
Ethics and Legal Compliance
Stewardship and Governance
Superior Employee Relation
Social Advocacy
Environmental Advocacy
Community Involvement
Philanthropy and Social Initiatives
Philanthropy is practice of giving money
and time to help make life better for other
people. It manifest of love and mankind.
Corporate Philanthropy is key
component of corporations broader social
responsibilities. It serves as a major link
between the corporation and
communities it serves.
Benefits to Business
Enhances corporate reputation.
Improves relation w/ the govt, the
community & stakeholders.
Supports company strategic business
goals.
Benefits to Stakeholders
Build employee morale
Enlarge sense of community & social
obligation
Develops future workforce
Benefits to Community
Improves quality of life of community
members
Provides human and capital resources
to non-profit organization.
Social Screening of Investment
SCARE-OFF FROM STRATEGY
The most rigid way of screening of
investment. It can be characterized by
hard policies such as no investment to
companies w/ questionable
environmental records, engage in child
labor, discrimination, use animals in
product testing and many other anti-
earth or anti- green policies.
IMPACT MITIGATION
Some socially concerned investors deal
w/ the problems inherent in absolute
screening by using the strategy of
balance w/ benefit.
It is founded upon the idea that for
everything the company does there is
always impact to stakeholders.
WHOEVER IS THE BEST
This strategy involves a kind of free
market model where companies w/in the
same industries compete w/ one another
for the best records on a variety of social
issues.
*Human Nature 1st Filipino company to
receive prestigious cruelty- free recognition
from PETA (People for the Ethical Treatment
of Animals).
MAIN OR DERIVATIVE CONNECTIONS
This strategy requires investors to decide
whether or not they are concerned if an
investment has a secondary involvement
w/ social problem.
It involves asking how far back in the
industrial process one wants a particular
social screen to go.
Corporate Greenwashing
It refers to the practice of companies
characterized by deceptively making it
 appear that their product, services and
policies are environmentally friendly.
Green marketing tactics refers to the
deceiving use of green PR to win the
hearts of consumer for purpose of
improving image, building goodwill and
drawing more revenue.

Greenwashing Sins:

1. Sin of Hidden Trade-off

Energy efficient electronics that
contain hazardous material.
Candies, drinks and other sweets w/ no
sugar label.
Electric Cars appreciated for zero
omission but forget these need
recharging.
2. Sin of No Proof
Shampoo claimed certified organic w/ no
verifiable certification
Shampoos w/ aloe vera extract added
claim w/ little or no actual extract added.
Paints, sprays and aerosols claiming to
be freshner
3. Sin of Vagueness
Product claiming 100% natural when
many naturally occurring substance are
hazardous like arsenic and
formaldehyde.
Capitalized term biodegradable in
paper bags, cups and other packaging to
improve image
4. Sin of Irrelevance
Product claiming CFC-free even though
CFC were banned 20 yrs ago.
5. Sin of Fibbing
Product falsely claiming to be certified
by an internationally recognized
environmental standard like EcoLogo.
6. Sin of Lesser of Two Evils
Organic cigarettes or environmental
friendly pesticides.
7. Sin of Worshipping False Labels
This is penetrated by a product wherein
by either words or image, gives the
impression of third party endorsement
while in fact and in reality no such
endorsement happen.
CHAPTER 7: CORPORATE SOCIAL
RESPONSIBILITY & CORRUPTION IN
GLOBAL CONTEXT
CORPORATE SOCIAL RESPONSIBILITY
It refers to something much more
fundamental. It is about how companies
take responsibility for their actions in the
world at large.
To address the social problems or the
problems of the stakeholders on the
business community evolved new
approach called CSR.
CSR strike balance between economic
and social goals, where resources are
used in a rational manner and social
needs are 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 process throughout the company
and include responsibilities for current
and past actions as well as adequate
attention to future impacts.
CSR is not a legal obligation but rather a
voluntary social and environmental
positive initiative to establish image of
environmentally and socially responsible
business that also encompasses Msme as
well giant corp.
CSR aims to examine the role of business
in society and to maximize the positive
societal outcomes of business activity.
JUSTIFICATION FOR CSR
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.
Proactive justification for public sector
to engage with CSR is provided by the
opportunity to increase the domestic
public benefits of CSR practices in
economic, social and environmental
terms.
CSR IN INTERNATIONAL BUSINESS
SUSTAINABLE DEVELOPMENT OF
ENVR.
Promote a new economic
development model that would
secure needs of current generation
without giving any concession on
chance of future generation to enjoy
theirs.
HUMAN AND LABOR RIGHTS
Corporations particularly larger ones has
significant influence in economy but also on
social and political life of country.
Entrepreneurial strategy of these large
enterprise should be based on ff. CSR
demands:
Be Compliant
- Operational conduct of the enterprise
should not be lower than the standards of
the host country.
Be Consistent
- Have partners the same kind. Human and
labor rights are ought to be respected
anywhere , multinationals company
should press hard on their partners both
local and international.
LOCAL ECONOMY AND SOCIETY
- International enterprises can bring
extraordinary impact on development of
less-developed countries.
- 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 hospital. These
kind of activities would give a good
feedback from the community, create a
good reputation for the company
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 info.
- Success of corporate policy is closely tied
to accountability which indicates
 attitude to render account of its
objective.
LEGALITY
- Adherence to the applicable set of laws in
force is the minimum requirement.
- Enterprises prefer CSR strategy to declare
to public and to the stakeholder that they
do not participate in illegal engagements.
CONSUMERS
- Consumer organizations point out
importance of reliable information on
conditions of production and sale of
products including potential risk arising
from their consumption.
- Not only a client but also a collaborator
in pursuing CSR.
- Aware consumption approach to the
social responsibility of enterprise and of
consumer that are acquiring growing
importance in market by promoting a
production that is safe and compatible.
SUPPLY CHAINS
- Due to market globalization supply chain
become more 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.
- Companies guarantee observance of
ethical behaviors binding all supply chain
partner has positive effect:
o Improve market reputation through
specific certifications
o Confidence of ethical investors and of
consumers
o Good relations with institutions and social
org.
CORRUPTION IN INTERNATIONAL
BUSINESS
How corruptions affect other
countries?
Increasing the Debts
- Bribes increase the prices of project.
When these project are paid for with
money borrowed internationally, bribery
adds to countrys debt.
Benefitting the company, not the
country
-Bribing the high officials ensure profits and
help off-load risks.
Bypassing Local Democratic Process
- Bribery can be useful way of getting
around local opposition to a project and of
bypassing the usual democratic way
processes involved in awarding contracts.
Destroying the Environment and
Getting around Regulations
Promoting Arm Sales
Hiding the Loot
Private banking services and offshore
financial centers are major conduits and
repositories for bribes and corrupt gains.
Estimate of US$40 billion from poor and
communist economies find its way into
US or Europe banks every year,
illegitimately gain.
Private Banking
- Increasingly used for confidential services
to international elites believed to be
worth as much $17 trillion worldwide.
- Private banking boom has its origin in the
debt crisis and is a major reason for
continued indebtedness of many poor
countries.
- Average return to banks for private
banking accounts is over 20%.
- Although private banking boom global
phenomenon biggest beneficiaries are US
banks.- US become the largest repository
of ill-gotten gains in the world.
Offshore Banks and Companies
- It is another part of the system through
which money is siphoned out of poor
countries and hidden well away from its
citizen.
- Morgan Guaranty Trust study of capital
flight from developing countries found
that in one year alone total $198 billion
disappeared.
- Offshore centers impose little or no taxes,
offer themselves to non-residents to
escape taxation I their own country, do
not exchange information, lack
transparency and attract shell companies
business with no substantial activities.
- Because of secrecy which they operate
offshore centers have become excellent
 places to launder the proceeds of crime
and corruption. When money disappear
from offshore it becomes more difficult for
govt. to tackle corruption.
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.
Closing the Loopholes
- More sweeping attempts to recover stolen
money will require both promulgating an
international convention and closing
loopholes that allow ill-gotten wealth to
leave country first.
- Closing down of offshore center is vital in
stopping laundering the corrupt money
and draining resources from third world
country.
Blacklisting Companies
- In 1998, World bank set up Sanctions
Committee investigate cases of
corruption by companies.
- It publish comprehensive list of debarred
firms The World Bank Listing of Ineligible
Firms.
- Concerted international action on
corruption creates an International
database of blacklisted companies which
governments around the world could use
when deciding whom to award contract.
Government Action
- Successful anti-corruption programme
has to be built up to a national level, be
appropriate to local and national context
and have full support from govt.
employees at all levels.
- One of the most successful grassroots
anti-corruption is the Indian Mazdoor
Kisan Shakti Sangathan (MKSS) or
Workers and Farmers Org. in Rajasthan.
Deterrents
- Economic punishments are some of the
most effective deterrents to corruption
- Ex. In Singapore, middleman convicted of
paying bribes. The govt. not only banned
the 5 company for any govt. contracts for
5 yrs. it also banned all firms associated
with it.
Resistance
Mobilize Ordinary People
- Civil society groups needs to be prepared
to take on govt. in innovative and
confrontial ways they also need to be
committed to being transparent and
accountable themselves.
Push for Freedom of Information
- Enable people to use information.
Help Increase Citizen Participation in
Decision-Making
- In Uganda abantu babisi meaning
people do not know what is going on. It is
used to show mistrust govt. decision
- Greater participation by groups represent
the poor is a must in decision making at
every level local, regional or national.
(NOTE: SA CHAPTER 7 MORE ON
EXAMPLE SYA MULA SA CORRUPTION
IN INTERNATIONAL BUSS. HANGGANG
DULO KAYA MAGBASA DIN KAYO
BAKA SA QUIZ SA EXAMPLES GALING
TANUNG HINDI SA DEFINITION O
IDEA)
CHAPTER 8: CORPORATE
GOVERNANCE
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, environments
and the environment and the
community at large and holds those at
the helms to account by evaluating
their decisions on transparency,
inclusivity, equity and responsibility.
Is the set of processes, customs,
policies, laws and institutions affecting
the way corp. is directed,
administered or controlled.
 World bank define governance as the
exercise of political authority and the
use of institutional resources to
manage society problem and affairs.
Institutional Investors
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.
It includes operation corp. which
decides to invest excess funds or
those funds above their liquidity
requirements.
Institutional investors managed
aggregated sums of money and have
these funds invested in different
investment prospects.
These investors entitled to vote on
their shareholdings and can play
active role in corporate governance.
Power of institutional investor to make
a to buy or to sell order of the
shares in the investee corporation will
certainly exert influence on way the
investee treats institutional investors.
Types of Institutional Investors
1. Hedge Fund
is an investment account open to a
narrow range investors that take
over on wider range of investment
and trading activities in addition to
traditional long-term investment
funds.
Invest in wide range of investment
including equity and debt securities
and commodities.
Available only to sophisticated or
wealthy investors who meet certain
criteria. Selective membership
attributes gives investor incentives
from many regulations.
Lighter guidelines and existence of
performance fee are distinguishing
characteristic
2. Investment Banking
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.
It assist companies involves in
business combination like mergers,
acquisitions and other
diversification.
It provides auxiliary services such as
market making and trading
derivatives.
It does not accept deposit unlike in
commercial and retail banks.
3. Investment Trust
It refers to Investors money being
pooled together from the sale of
fixed number of share a trust issues
in its first offering. Board will hand
over responsibility to a professional
fund manager to invest money in
stocks and shares of wide range of
companies
This strategy normally used to
increase sources of funds and
consequently enlarge the pipeline of
money for wider investment
coverage.
4. Mutual Fund
Institutional investor that is a
professionally managed type of
collective investment scheme that
pools money from many investors
and invests in investment securities
 w/c includes stocks, bonds, short
term money market instruments.
Fund is managed by fund manager
that buy and sells instruments and
commodities from the fund
investment in accordance with the
fund investment objective.
This fund will be over seen by a
board of director or trustee- body
taking charge ensuring fund is
managed properly.
5. Pension Fund
Collection of asset forming a separate
legal entity that came into being from
the contributions to a pension plan for
the exclusive purpose of financing
pension plan benefit.
It is considered one of the biggest
investors in the stock market.
CROSSLISTING
Listing of equity shares of a company
in more than one stock exchange in
different countries.
It may also use to refer to the listing
of a company on more than one stock
exchange in the same country. Ex in
US is NASDAQ & New York Stock
Exchange.
In Phil. We only have one (fused from
the original Manila Stock Exchange
and Makati Stock Exchange) which is
the Philippine Stock Exchange Inc.
Motives of Cross-Listing
By cross listing and selling its shares on
foreign stock exchange, a firm typically
tries to accomplish:
Improve Liquidity
-by cross listing can improve the
liquidity of its existing share at the same
time, find and support a liquid
secondary market for new equity issues
in foreign markets.
Increase Its Share Price
- Cross listing is trying to increase the
companys share price by defeating
mispricing in a segmented and illiquid
home capital markets.
- Liquid market where share are cross
listed, they not only had fresh source
fund
Increase Firm Visibility and
Acceptance
- It increases visibility acceptance to its
customer, supplier, creditors and govt.
- It gives the company chance to
enhance corporate image, to expose
and advertise trademarks and
products and to become more familiar
in financial community.
Support Takeover Bids
- Cross listing can be view as one of
initial step in establishing secondary
market for shares to be used to
acquire other firms.
- In takeover or business acquisition,
companies offer their shares as partial
payment and it is more attractive if
shares have liquid secondary market
region.
Support Share and Options Plan
- Create a secondary market for share
that can be used to compensate local
management and employees in
foreign subsidiaries.
ROLE OF INSTITUTIONAL INVESTORS
IN GOVERNANCE
 MONITORING
- Close monitoring is expected
considering that investment from
these type of investors usually involve
large money.
- Another reason for close monitoring is
that profiles and expectations of
investors are different from ordinary
expectations.
DRIVER OF AGENTS
PERFORMANCE
- When investment of institutional
investor is so huge that balance sheet
will significantly suffer without it,
agents in corporation will at all times
be in pursuit of pleasing its principal
terms of performance.
- The corporation will aim to become
more valued investor most of the time
and command better performance.
GOOD ACTIVIST
- Investment significantly enough to
earn a board seat can be fearless
fiscalizer on corporate policy.
- They are representative who can voice
of investing institutions in board.
- They can easily ask question on
matters affecting corp. and access
records as stockholders.
PRINCIPAL-AGENT ROLE
(DUALITY)
- Investor who has huge influence in
corp. can have power to elect officer
for the investee cop.
- Ex. Institutional investor is in process
performing dual roles-role of principal
(shareholder) and agent at same time
(CEO/BOD)
- Unique capability of institutional
investor adds security and protection
for their investments.
DETERRENT TO OPPORTUNISM
- Self- interested behavior of the
agents.
- Best antidote to opportunism is to
have voice in board.
- Level of audibility of investor directly
represent level of investment he
represent
- Institutional investor representative to
board serve as a watchdog to
opportunistic attitude of other BOD.
CORPORATE GOVERNANCE
ORGANIZATIONS
International Chamber of
Commerce (ICC)
- Org. focusing on promoting growth
and prosperity, spreading business
expertise and advocate for
international business.
- Considered as voice of world business
championing global economy as a
force for economic growth, job
creation and prosperity.
- World only truly global business org.
responds by being more assertive in
expressing business views.
International Corporate
Governance Network (ICGN)
- Investor-led org. of governance
professionals.
- Its mission is to inspire and promote
effective standards of corporate
governance to advance efficient
market and economies world wide.
- Its member are largely institutional
investors.
Asian Development Bank (ADB)
- Finance institution whose mission is to
help its developing member countries
reduce poverty and improve the
quality of life of their people.
- Owned and financed by 67 member.
Has headquarter in Manila established
1966.
- Its main partner are govt, private
sector, NGO, devp. Agencies and
community based org.
 International Federation of
Accountants
- Global organization for accountancy
profession.
- It works with its 159 members and
associates in 124 countries to protect
the public interest by encouraging
high quality practice by worlds
accountant.
United Nations Conference on
Trade & Development
- Established in 1964
- Promotes friendly integration of
developing countries into world
economy.
- It progressively evolved into an
authoritative knowledge based
institution whose work aims to help
current policy debates and thiking
development.
3 key functions:
1. Functions as a forum for inter-
governmental deliberations,
supported by discussions with
experts
2. It undertakes research policy analysis
and data collection for debates of
govt. rep and experts
3. It provides technical assistance
tailored to the specific req. of
developing counties
Organizations for Economic Co-
operation and Development
(OECD)
- Brings together the govt. of countries
committed to democracy and market
economy from around the world to:
o Support sustainable economic growth
o Boost employment
o Raise living standard
o Maintain financial stability
o Assist other countries economic devp.
o Contribute to growth in world trade.
- Org. provides setting where govt.
compare policy experiences, seek
answers to common problems, identify
good practices and coordinate
domestic and international policies.
INVESTMENT PROMOTION AND
FACILITATION
SARBANES-OXYLEY ACT OF 2002
SUMMARY
Metric-based corporate governance
SOA seeks to lay the ground for
culture of proactive management of
risks going beyond the reactive
approach that has been common so
far.
SOA ensures that the senior
executive have greater responsibility
as well as the means to meet them.
SOA provides checks and balances
that were not available in the past.
SOA seeks to make companies to be
more transparent and vigilant by
requiring the reporting of all their
operational risks as well as the
internal control put in place to
monitor them.
Overall SOA, seeks to focus the
attention of companies on fortifying
their companies by anticipating risk,
all across enterprise and to take
preemptive action to guard against
the damage that they could wreak.
Board of Directors
- Directors on boards of companies are
expected to play much more active
roles in the interest of shareholders.
- New York Stock Exchange consistent
with provisions of the SOA.
-
Disclosures
- It would not be possible for pro-forma
statements to omit any material fact
 which misinterprets the fair and 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 fs.
- SEC moving towards real time
disclosure so each investor has
access. Filing of deadlines for
quarterly and annual reports have
been accelerated by third.
- SEC also identified items need to be
disclosed in real time.
Fraud
- Premise of fraud control is that
management frequently exploits
weakness in internal control for their
dubious purposes. Internal control
should be able to prevent, deter and
detect fraud.
Governance Policies
- SOA seeks to encourage explicit
discussion of corporate governance
policies that will set direction for
board and management.
- Ex. New York Exchange has operative
rules which require boards companies
to set up governance committee.
Executive Compensation
- Check fraud from earnings
management by senior executive.
- SOA requires a company which
restates its fs due to material
noncompliance, misconduct, or with
financial reporting requirement.
Protection of Whistleblower
- SOA provided added protection to
whistleblower who can establish prima
facie case of retaliation when they
report malfeasance in company.
Compensation Committees
- SOA does not explicitly spell out rules
governing compensation in order not
to restrict the freedom of companies
to make decision.
Audit Committees
- SOA has sought to govern auditors at
the board level in order to avoid
conflicts that can happen in
companies.
Departures from the Past
- SOA recognizes that the mode of
compensation an increasing share of
equity and equity options in the
package that are executive receive
was responsible for frauds that were
committed.