Chapter SEC CODE OF CORPORATE GOVERNANCE, CONTINUED ——— ae Expected Learning Outcomes After studying the chapter, you should be able to... 1. Understand. how the ethical behavior of the board can be strengthened. Describe how the company. disclosure policies and procedures can be enhanced. Appreciate how the external auditor's independence can: be strengthened and how audit quality can be enhanced. Understand how a company could increase focus on non-,, financial and stisfainability reporting. . Explain how a company can promoté & éomprehensive and cost- efficient access to relevant information. Understand how integrity, transparency. and proper governance of a company could be ensured through effective internal control system and enterprise risk management framework. Describe briefly how a synergic relationship, with shareholders could be cultivated and promoted. Explain how the rights of stakeholders could by respected and how to institute effective redness for the violation of their rights. WIAs Scanned with CamScannerSEC CODE OF CORPORATE GOVERNANCE, CONTINUED CHAPTER 4 10. INCREASING FOCUS ON NON-FINANCIAL AND SUSTAINABILITY REPORTING —~ Principle 10 The company should ensure that the material and reportable non- financial and sustainability issues are disclosed. Recommendation 10.1 The Board should have a clear and focused policy on the disclosure of non-financial information, with emphasis on the management of economic, environmental, social and governance (EESG) issues of its business, which underpin sustainability. Companies should adopt a globally recognized standard/framework in reporting sustainability and non-financial issues. : Explanation As external pressures including resource scarcity, globalization, and access to information continue to increase, the way corporations respond to sustainability challenges, in addition to financial challenges, determines their long-term viability and competitiveness. One way to respond to sustainability challenges is disclosure to all shareholders and other stakeholders of the company’s strategic (long-term goals) and operational objectives (short-term goals), as well as the impact of a wide range of sustainability issues. Disclosures can be made using Standards/frameworks, such as the G4 Framework by the Global Reporting Initiative (GRI), the Integrated Reporting Framework by the International Integrated Reporting Council (IRC) and/or the Sustainability Accounting Standards Board (SASB)'s Conceptual Framework. Scanned with CamScanner78 Chapter 4 11, PROMOTING A COMPREHENSIVE A ACCESS TO RELEVANT. INFORMATION Principle 11 ND COST-EFFICIENT The company should maintain a comprehensive and cost-efficient communication channel for disseminating relevant information. This channel is crucial for informed decision-making by investors, stakeholders and other interested users. Recommendation 11.1 The company should include media and analysts’ briefings as channels of communication to ensure the timely and accurate dissemination of public, material and relevant information to its shareholders and other investors. Explanation The manner of disseminating relevant information to its intended users is as important as the content of the information itself. Hence, it is essential for the company to have a strategic and well-organized channel for reporting. These communication channels can provide timely and up-to-date information relevant to investors’ decision-making, as well as to other interested stakeholders. INTERNAL CONTROL SYSTEM AND. RISK MANAGEMENT FRAMEWORK 12, STRENGTHENING THE INTERNAL CONTROL SYSTEM AND ENTERPRISE RISK MANAGEMENT FRAMEWORK Principle To ensure the integrity, transparency and proper governance in the conduct of its affairs, the company should have a strong and effective internal control system and enterprise risk management framework. Scanned with CamScannerSEC Code of Corporate Governance, Continued _79 Recommendation 12.1 The Company should have an adequate and effective internal control system and an enterprise risk management framework in the conduct of its business, taking into account its size, risk profile and complexity of operations. Explanation ‘An adequate and effective internal control system and an enterprise risk management framework help sustain safe and sound operations as well as implement management policies to attain corporate goals. An effective internal control system embodies management oversight and control culture; ‘risk recognition and assessment; control activities; information and communication; monitoring activities and correcting deficiencies. Moreover, an effective enterprise risk management framework typically includes such activities as the identification, sourcing, measurement, evaluation, mitigation and monitoring of risk. Recommendation 12.2 The Company should have in place an independent internal audit function that. provides an independent and objective assurance, and consulting services designed to add value and improve the company's operations. Explanation A separate internal audit function is essential to monitor and guide the implementation of company policies. It helps the company accomplish its objectives by bringing a systematic, disciplined approach to evaluating and improving the effectiveness of the company’s governance, risk management and control functions. The following are the functions of the internal audit, among others: ‘a: Provides an independent risk-based assurance service to the Board, Audit Committee and Management, focusing on reviewing the effectiveness of the governance and control processes in (1) promoting the right values and ethics, (2) ensuring effective performance management and accounting in the organization, (3) communicating risk and control Scanned with CamScanner80 Chapter 4 h. information, and (4) coordinating the activities and information among the Board, external and internal auditors, and Management, Performs regular and special audit as contained in the annual audit plan and/or based on the company’s risk assessment; Performs consulting and advisory services related to governance and control as appropriate for the organization; Performs compliance audit of relevant. laws, rules and regulations, contractual obligations and other commitments, which could have a significant impact on the organization; Reviews, audits and assesses the efficiency and effectiveness of the internal control system of all areas of the company; Evaluates operations or programs to ascertain whether results are consistent with established’ objectives and goals, and whether the operations or programs are being carried out as planned; Evaluates specific operations at the request of the Board or Management, as appropriate; and Monitors and evaluates governance processes. A company’s internal audit activity may be a fully resourced activity housed within the organization or may be outsourced to qualified independent third party service providers. Recommendation 12.3 Subject to a company’s size, risk profile and complexity of operations, it should have a qualified Chief Audit Executive (CAE) appointed by the Board. The CAE shall oversee and be responsible for the internal audit activity of the organization, including that portion that is oytsourced to a _ third party service provider, In case of a fully outsourced internal audit activity, a, qualified independent executi or senior management personnel should be assigned the responsibility for managing the fully outsourced internal audit activity, Scanned with CamScannerSEC Code of Corporate Governance, Continued _81 Explanation - The CAE, in order’ to achieve the necessary independence to fulfill his/her responsibilities, directly: reports functionally to the Audit Committee and administratively to the’ CEO. The following are the responsibilities of thé CAE, among others: a. Periodically reviews the internal audit charter and presents it to senior management and the Board Audit Committee for approval; b. Establishes a risk-based internal audit plan, including policies and procedures, to determine the priorities of the internal audit activity, consistent with the organization’s goals; c. Communicates the internal audit activity’s plans, resource requirements and impact of resource limitations, as well as significant interim changes, to senior management and the Audit Committee for review and approval; - d. Spearheads the. performance of the internal audit activity to ensure it adds value to the organization; e. Reports periodically to the Audit Committee on the internal ‘ audit activity’s performance relative to its plan; and f. Presents findings and recommendations to the Audit Committee and gives advice to senior management and the Board on how to improve internal processes. Recommendation 12.4 Subject. to its size, risk profile and complexity of operations, the company should have a separate risk management function to identify, assess and monitor key risk exposures. Explanation The risk management function involves the following activities, among others: a. Defining a risk management strategy; Scanned with CamScanner82 Chapter 4 b. Identifying and analyzing key risks exposure relating to economic, environmental, social and governance (EESG) factors and the achievement of the organization’s strategic objectives; c. Evaluating and categorizing each identified risk using the company’s predefined risk categories and parameters; d. Establishing a risk register with clearly defined, prioritized and residual risks; e. Developing a risk mitigation plan for the most important risks to the company, as defined by the risk management strategy; f. Communicating and reporting significant risk exposures including business risks (i.e., strategic, compliance, operational, financial and reputational risks), control issues and risk mitigation plan to the Board Risk Oversight Committee; and g. Monitoring and evaluating the effectiveness of the organization's risk management processes. Recommendation 12.5 In managing the company’s Risk Management System, the company should have a Chief Risk Officer (CRO), who is the ultimate champion of Enterprise Risk Management (ERM) and has adequate authority, stature, resources and support to fulfill his/her responsibilities, subject to a company’s size, risk profile and complexity of operations. Explanation The CRO has the following functions, among others: a, Supervises the entire ERM process and spearheads the development, implementation, maintenance and continuous improvement of ERM processes and documentation; b.. Communicates the top risks and the status of implementation of risk management strategies and action plans to the Board Risk Oversight Committee; Scanned with CamScannerSEC Code of Corporate Governance, Continued _ 83 ©. Collaborates with the CEO in updating and : making recommendations to the Board Risk Oversight Committee; d. eee ERM policies and related guidance, as may be needed; an e. Provides insights on the following: ¢ Risk management processes are performing as intended; - © Risk measures reported are continuously reviewed by risk owners for effectiveness; and ° ¢ Established risk policies and procedures are ‘being complied with. There should be clear communication between the Board Risk Oversight Committee and the CRO. CULTIVATING A SYNERGIC RELATIONSHIP WITH SHAREHOLDERS Ee: 13.. PROMOTING SHAREHOLDER RIGHTS Principle The company should treat all shareholders fairly and equitably, and also recognize, protect and facilitate the exercise of their rights. Recommendation 13.1 The, Board should ensure that basic shareholder rights are disclosed in the Manual on Corporate Governance and on the company’s website. Explanation It is. the responsibility of the Board to adopt a policy informing the shareholders of all their rights. Shareholders are encouraged to exercise their rights by providing clear-cut Processes and procedures for them to follow. Shareholders’ rights relate to the following, among others: Pre-emptive rights; {1 Dividend policies; Scanned with CamScanner84° Chapter 4 : J Right to propose the holding of meetings and to include agenda items ahead of the scheduled Annual ‘ang Special Shareholders’ Meeting; Right to nominate candidates to the Board of Directors; Nomination process; and ' Voting procedures that would govern the Annual and Special Shareholders’ Meeting. The right to propose the holding of meetings and items for inclusion in the agenda is given to all shareholders, including minority and foreign shareholders. However, to prevent the abuse of this right, companies may require that the proposal be made by shareholders holding. a specified percentage of shares or voting rights. On the other hand, to ensure that minority shareholders: are not effectively prevented from exercising this right, the degree of ownership concentration’ is considered in determining the threshold. Further, all shareholders must be given the opportunity to nominate candidates to the Board of Directors in accordance with the existing laws. The procedures of the nomination process are expected to be discussed clearly by the Board. The company is encouraged to fully and promptly disclose all information regarding the experience and background of the candidates to enable the shareholders to study and conduct their own background check as to the:candidates’ qualification and credibility. 5 Shareholders are also encouraged to participate when given sufficient ‘information prior to voting on fundamental corporate changes such as: (1).amendments to the Articles of Incorporation and By-Laws of the company; (2) the authorization on the increase in authorized capital stock; and (3) extraordinary transactions, including the ‘transfer of all or substantially all assets that in effect result in the sale of the company. In addition, the disclosure and ‘clear explanation of the voting procedures, as well as removal of excessive or unnecessary costs and other administrative impediments, allow for the effective exercise of the shareholders’ voting rights, Poll voting is highly encouraged as opposed to the show of hands, Proxy voting is also a good practice, including the electronic distribution of proxy materials, The related shareholders’ rights and relevant company policies should be contained in the Manual on Corporate Governance. Scanned with CamScannerSEC Code of Corporate Governance, Continued _ 85 , Recommendation 13,2 The Board should encourage active shareholder participation by sending the Notice of Annual and Special Shareholders’ Meeting with sufficient and relevant information at least 28 days before the meeting. Explanation Required information in the Notice include, among others, the date, location, meeting agenda and its rationale and explanation, and details of issues to be deliberated on and approved or ratified at the meeting. Sending the Notice in a timely manner allows shareholders to plan their participation in the meetings. It is good practice to have the Notice sent to all shareholders at least 28 days before the meeting and posted on the company website. Recommendation 13.3 The Board should encourage active shareholder participation by making the result of the votes taken during the most recent Annual or Special Shareholders’ Meeting. publicly.‘available the next working day. In addition, the Minutes of the Annual and Special Shareholders’ Meeting should be available on the company website within five business days from the end of the meeting. Explanation Voting results include a breakdown of the approving and dissenting votes on the matters raised during the Annual or Special Stockholders’ Meeting. When a substantial number of votes have been cast against a proposal made by the company, it may make an analysis of the reasons for the same ahd consider having a dialogue with its shareholders. The Minutes of Meeting include the following matters: (1) A description of the voting and the vote tabulation procedures used; (2) the opportunity given to shareholders to ask questions, as well as a record of the questions and the answers received; (3) the matters discussed and the resolutions reached; (4) a record of the voting results for each agenda item; (5) a list of the directors, officers and shareholders who attended the meeting; and (6) dissenting opinion on ahy agenda item that is considered significant in the discussion process. Scanned with CamScanner86 Chapter 4 Recommendation 13.4 The Board should make available, at the option of a shareholder, an alternative dispute mechanism to resolve intra-corporate disputes in an amicable and effective manner. This ‘should be included in the company’s Manual on Corporate Governance. Explanation It is important for the shareholders to be well-informed of the company’s processes and procedures when seeking to redress the violation of their rights. Putting in place proper safeguards ensures suitable remedies for the infringement of shareholders’ rights and prevents excessive litigation. The company may also consider adopting in its Manual on Corporate Governance established Alternative Dispute Resolution (ADR) procedures. Recommendation 13.5 The Board should establish an Investor Relations Office (IRO) to ensure constant engagement witt its shareholders. The IRO should be present at every shareholders’ meeting. Explanation Setting up an avenue to receive feedback, complaints and queries from shareholders assure their active participation with regard to: activities and policies of the company. The IRO has a designated investor relations officer, email address and telephone number. Further, creating an Investor Relations Program ensures that all information regarding the activities of the company are properly and timely communicated to shareholders. ‘ Scanned with CamScannerSEC Code of Corporate Governance, Continued _87 DUTIES TO STAKEHOLDERS 14. RESPECTING RIGHTS OF STAKEHOLDERS AND EFFECTIVE REDRESS FOR VIOLATION OF STAKEHOLDER’S RIGHTS Principle The rights of stakeholders established by law, by contractual relations and through voluntary commitments must be respected. Where stakeholders’ rights and/or interests are at stake, stakeholders should have the opportunity to obtain prompt effective redress for the violation of their rights. Recommendation 14.1 The Board should identify the company’s various stakeholders and promote cooperation between them and the company in creating wealth, growth and sustainability. Explanation Stakeholders in corporate governance include, but are not: limited to, customers, employees, suppliers, shareholders, investors, creditors, the community the company operates in, society, the government, "regulators, competitors, external auditors, etc. In formulating the company’s strategic and operational decisions affecting its wealth, growth and sustainability, due consideration is given to those who have an interest in the company and are directly affected by its operations. Recommendation 14.2 The Board should establish clear policies and programs to provide a mechanism on the fair treatment and protection of stakeholders. . Explanation In instances when stakeholders’ interests are not legislated, companies’ voluntary commitments ensure the protection of the stakeholders’ rights. The company’s Code of, Conduct ideally includes provisions on the - company’s policies and procedures on dealing. with various stakeholders. The company’s stakeholders include its customers, Scanned with CamScanner88 Chapter 4 resource providers, creditors and the community in which it operates. Fair, professional and objective dealings as well as clear, timely and regular communication with the various stakeholders ensure their fair - treatment and better protection of their rights. Recommendation 14.3 The Board should adopt a transparent framework and process that allow stakeholders to communicate with the company and to obtain redress for the violation of their rights. Explanation The company’s stakeholders play a role in its growth and long-term viability. As such, it is crucial for the company to maintain open and easy communication with its stakeholders. This can be done through stakeholder engagement touchpoints in the company, such, as the Investor Relations Office, Office of the Corporate Secretary, Customer Relations Office, and Corporate Communications Group. ARTICIPATION 15. ENCOURAGING EMPLOYEE: Principle A mechanism for employee participation should be developed to create a symbiotic environment, realize the company’s goals and participate in its corporate governance processes. Recommendation 15.1 The ‘Board should establish policies, programs and procedures that encourage employees to actively participate in the realization of the company’s goals and in its governance. Explanation The establishment of policies and programs covering, among others, the following: (1) health, safety and welfare; (2) training and development; and (3) reward/compensation for employees, encourages employees to perform better and motivates them to take a more dynamic role in the corporation. Active participation is further fostered when the company Scanned with CamScannerSEC Code of Corporate Governance, Continued _89 recognizes the firm-specific skills of its employees and their potential contribution in corporate governance. The employees’ viewpoint in certain key decisions may also be considered in governance processes through work councils or employee representation in the board. Recommendation 15.2 The Board should set the tone and make a stand against corrupt practices by adopting an anti-corruption policy. and program in its Code of Conduct. Further, the Board should disseminate the policy and program to employees across the organization through trainings to embed them in the company’s culture. Explanation The adoption of an anti-corruption policy and program endeavors to mitigate corrupt practices such as, but not limited to, bribery, fraud, extortion, collusion, conflict of interest and money laundering. This encourages employees to report corrupt practices and outlines procedures on how to combat, resist and stop these corrupt practices. Anti-corruption programs are more effective when the Board sets the tone and leads the company in their execution. Recommendation 15.3 © The Board should establish a suitable framework for whistleblowing that allows employees to freely communicate their concerns about illegal or unethical practices, without fear of retaliation and to have direct access to an independent member of the Board or a unit created to handle whistleblowing concerns. The Board should be conscientious in . establishing the framework, as well as in supervising and ensuring its enforcement. Explanation A suitable whistleblowing framework sets up the procedures and safe- harbors for complaints of employees, either personally or through their representative bodies, concerning illegal and unethical behavior. One essential aspect of the framework is the inclusion of safeguards to secure the confidentiality of the informer and to ensure protection from retaliation. Further, part of the framework is granting individuals or Scanned with CamScanner90 _ Chapter 4 representative bodies confidential direct access to either an independent director or a unit designed to deal with whistle blowing concerns, Companies may opt to establish an ombudsman to deal with complaints and/or established’ confidential phone and e-mail facilities to receive allegations. 16. ENCOURAGING SUSTAINABILITY AND SOCIAL RESPONSIBILITY Principle ‘The company should be socially responsible in all its dealings with the communities where it operates. It should ensure that its interactions serve its environment and stakeholders in a positive and progressive manner that is fully supportive of its comprehensive and balanced development. Recommendation 16.1 The company should recognize and place an importance on the interdependence between business and society, and promote a mutually beneficial relationship that allows the company to grow its business, while contributing to the advancement of the society where it operates. Explanation The company’s value chain consists of inputs to the production process, the production process itself and the resulting output. Sustainable development means that the company not only complies with existing regulations, but also voluntarily employs value chain processes that takes into consideration . economic, -environmental, social and governance issues and concerns. In considéring sustainability concerns, the company plays an indispensable role alongside the government and civil society in contributing solutions to complex global challenges like poverty, inequality, unemployment and climate change. Scanned with CamScannerSEC Code of Corporate Governance, Continued 91 Updates on Corporate Governance On February 7, 2021 the Philippine Star, Business Section published a report of Iris Gonzales entitled “Ayala Land scores High in Corporate Governance”. The report goes ... “ayala Land Inc. (ALI) made it to the list of top listed companies with high scores in corporate governance. ALI was again recognized for “outstanding corporate governance practices by the Securities and Exchange Commission (SEC) and the Institute of Corporate Directors. “Reflecting its strong and consistent adherence to good corporate governance practices, ALI is part of the prestigious ASEAN Asset Class PLCs that scored a minimum of 97.5 points in the scorecard. Together with Ayala Land and Globe, Ayala Corp, and BPI were also recognized for this honor,” the ASEAN Capital Markets Forum (AMF) said. ALI ranked among the Top 3 publicly listed companies (PLCs) in the Philippines and Top 20 in the ASEAN region based on the 2019 ASEAN Corporate Governance Scorecard Assessment ‘of AMCF, which was organized in partnership the Asian Development Bank (ADB). "This award is very meaningful to our company, especially since good corporate govemance has always been integral to the way we do business and has been a pillar in executing our plans,” said ALI president and CEO Bemard Vincent Dy. With the onset of COVID-19, its importance is highlighted now more than ever as we pivoted to adapt to this ‘next normal’,” Dy Said. ACMF and ADB jointly developed the ASEAN Corporate Governance Scorecard as an assessment based on publicly available information and benchmarked against international best practices on corporate governance. This is part of efforts to promote regional integration and the ASEAN region as an asset class. This is supported by a rigorous methodology developed by corporate governance experts across the region fo assess the corporate governance standing and performance of publicly- fisted companies in the six participating ASEAN member countries namely Indonesia, Malaysia, Philippines, Singapore, Thailand, and Vietnam. ALI has consistently ranked among the leading companies in the scorecard through the years as it continues to practice good corporate governance in compliance with its own corporate govemance manual, the code of corporate governance and all listing rules of the Philippine Stock Exchange, the Philippine Dealing Exchange Corp. and the SEC.” Scanned with CamScannerQUA Chapter Philippine Inquirer, February 15, 2021 “SM-companies receive 10 top awards on corporate governance” SM Investments Corp. (SMIC) and its subsidiaries clinched 10 awards for scoring high in the recently concluded 2019 Asean Corporate Governance Scorecard (ACGS) assessments. For the 2019 ACGS Assessment, three award categories were recognized: Top 20 Asean Publicly Listed Companies, Asean Asset Class Award and Top 3-Publicly Listed Companies per Country. Under the Asean Asset Class Award, cited were SMIC, SM Prime Holdings, Inc. (SM Prime), 2GO Group, Inc., BDO Unibank, Inc,, Belle.Group., China Banking Corp. (China Bank) and Premium Leisure Corp. China Bank and SM Prime were named under Top 20 Asean Publicly Listed Companies. China Bank was recognized among the Top 3 Publicly Listed Companies per Country. The Asean Capital Markets Forum in partnership with the Asian Development Bank have jointly developed the ACGS, an assessment based on publicly available information and benchmarked against international best practices on corporate governance. Through the years, the ACGS has been a driving force in underpinning good corporate governance practices among publicly listed companies. Scanned with CamScannerSEC Code of Corporate Governance, Continued _91B REVIEW QUESTIONS Questions 1. Assume that management had determined that its organization’. audit committee is not effective. How do the weaknesses in audit committee affect -management’s evaluation of internal control over financial reporting?. Would an ineffective audit committee constitute a material weakness in internal control over financial reporting? State the rationale for your response. 2. Why is there a need for a corporation to maintain_a comprehensive and cost-efficient communication channels to shareholders and other investors? 3. What is the objective of the company in having a, strong and effective internal control system? 4, What is the purpose of having an independent internal audit funetion in a publicly-listed corporation? 5, Give at least four (4) responsibilities of the Chief Audit Executive. 6. Enumerate the activities of the Risk Management department in a publicly-listed corporation. 7. To what may the shareholders’ rights relate? 8. How may participation of employee in corporate governance be encouraged? 9. True or False. Sustainability reporting includes voluntary corporate disclosures about sustainability initiatives, plans, and associated outcomes. 10. True or False. The terms non-financial reporting, corporate social responsibility réporting, and triple bottom-line reporting are each : sustainability-related terms. Scanned with CamScanner92 Chapter 4 | Define the terms nonfinancial reporting, corporate social responsibitiny reporting, and triple bottom-line reporting, How do these terms relate sustainability reporting? |. What factors have driven the demand for sustainability reporting? . Why is there a demand for independent assurance on sustainability reporting? . In unethical for a company to provide a sustainability report, but provide no assurance on the reliability of the information contained therein? Scanned with CamScanner