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Ad Majorem Dei Gloriam

Christian Andrew Labitoria Gallardo

Corporate Governance describes a framework of rules, relationships, systems and processes


within and by which authority is exercised and controlled within corporations. It encompasses
the mechanisms by which companies, and those in control, are held to account1.
Promotes investor confidence
-Apply to all ASX listed entities regardless of form and place of business. But certain
sections apply only in externally managed listed entities2.

If Not, Why not Approach


Not mandatory, in recognition of the fact that different entities require different government
practices based on a range of different factors such as size, complexity, history and corporate
culture3.
The Board of Directors decides which governance practices to adopt. However, if the corporation
is a listed entity and the Board decides not to apply a certain practice, it must give the reason
behind such decision4.
Applicable since 20035
-So that SH can have a meaningful dialogue with the Board and stockholders can factor
such in voting for a particular resolution
-Similar to the comply or explain principle in Philippine Corporate Governance

8 Central Principles

(I) Lay solid foundations for management and oversight


Disclose the roles of board and management and the manner of evaluation of their
performance.6
Recommendation 1.1 Articulate the division of responsibilities between the board and
management7
Accordingly, the board is usually tasked to set strategic objectives and oversee the
managements implementation of such strategies
Recommendation 1.2 Appropriate checks must be conducted before the election of a Board
member or the appointment of a manager8
Pertinent information must be given to stockholders before the election

1
Australian Securities Exchange, Corporate Governance Principles and Recommendations 3 rd Edition, available at
http://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf (last accessed
Sep. 15, 2017), at 3.
2
Id, at 4.
3
Id, at 3.
4
Id.
5
Australian Securities Exchange, Principles of Good Corporate Governance and Best Practice Recommendations,
available at http://www.asx.com.au/documents/asx-compliance/principles-and-recommendations-march-2003.pdf
(last accessed Sep. 15, 2017), at 5.
6
Australian Securities Exchange, supra note 1, at 8.
7
Id.
8
Id, at 9.
Recommendation 1.3 written agreements with each director and senior executive setting out the
terms of appointment must be provided9
Recommendation 1.4 The company secretary must be directly accountable to the board, through
its chairman, on all matters relating to the board functions10
The corporate secretary is tasked to advice the board on governance matters, and to
monitor as well adherence to board policies and recommendations
Recommendation 1.5 The company should have a diversity policy specifically on the field of
gender diversity11
Key performance indicators or benchmarks must be established
Recommendation 1.6 Process for periodic evaluation of the board and its committees must be
established and the result of which should be disclosed12
An external facilitator or a non-executive independent director must be tasked for such
Recommendation 1.7 Process for periodic evaluation of the senior executives must be
established and the result of which should be disclosed13
-In 2003, only the division of responsibilities between the board and the management was
recommended to be disclosed14. The evaluation was provided for in a separate principle.
However, in 2007, such recommendation was already integrated in this principle 15. The diversity
policy was integrated in 2010 but the safeguards before the election was only established in
201416.

(II)Structure the board to add value


Size, composition, skills and commitment of Board must be strategically planned17
Recommendation 2.1 The establishment of a nomination committee (I) with at least 3 members,
majority of which are independent directors, (II) is chaired by an independent director and (III)
with a charter, is highly recommended. If there be none, the process for addressing board
succession issues must be established18
Recommendation 2.2 A skills matrix must be established setting out the mix of skills and
diversity in the board19
The disclosure need only be made collectively across the board as a whole, without
identifying the presence or absence of a particular skill by a particular director
Recommendation 2.3 Independent directors must be established 20
To be independent means not to be allied with the interest of the management, a
substantial security holder or a relevant stakeholder

9
Id, at 10.
10
Id.
11
Id, at 11.
12
Id, at 13.
13
Australian Securities Exchange, supra note 1, at 14.
14
Australian Securities Exchange, supra note 5, at 15
15
Australian Securities Exchange, Corporate Governance Principles and Recommendations 2 nd Edition, available at
http://www.asx.com.au/documents/asx-compliance/final-revised-principles-complete.pdf (last accessed Sep. 15,
2017), at 13.
16
Australian Securities Exchange, supra note 1, at 14.
17
Id.
18
Id.
19
Id, at 15.
20
Id, at 16.
Examples of factors which might affect the independence of a director: (I) employment in
an executive capacity of the company or any of its subsidiaries within 3 years prior the
appointment (II) being a partner, director, senior employee or a material professional service
provider of the company or its subsidiaries within the last 3 years prior to the appointment (III)
material business relationship such as being a supplier or a major customer of the company or its
subsidiaries within the last 3 years prior to the appointment (IV) a substantial security holder, or
being affiliated with such holder, of the entity, or being an officer of such company (V) A
material contractual relationship with the entity or its subsidiaries (VI) Having close family ties
with a person having the qualities enumerated above and (VII) being a director for such period
that independence may be compromised
If however, despite having the qualities enumerated above, the Board is of the opinion
that the independence of the person is not compromised, the nature of the persons interest and
the explanation of the board in arriving at a conclusion that the independence is not
compromised, must be provided
Regular assessment of independence annually or at such time that board succession shall
take effect must be conducted. Results of such assessment must be fully disclosed.
Recommendation 2.4 Majority of the board should be independent directors21
Recommendation 2.5 The chair of the board should be an independent director and must not be
the CEO of the company22
Good governance mandates a separation between those charged with management and
those overseeing the performance of such managers
If the chairman is not an independent director, the entity should consider appointing an
independent director as a deputy chair or a senior independent director who can fulfil the
role whenever the chairman is conflicted
Recommendation 2.6 A program for inducting new directors as well as professional
development opportunities for directors must be established23
-In 2003, no mention was made as to the nomination committee, skills matrix and the
development program for directors24. In 2007, the establishment of a nomination committee was
recommended25. The skills matrix and development program was a new provision in the 2014
version26.

(III) Act ethically and responsibly


The public good must be taken into consideration27
An entitys reputation is one of its valuable asset and, if damaged, can be the most
difficult to restore
Recommendation 3.1 A code of conduct for the directors, senior executives and employees
must be established and disclosed28
Personal integrity of the people composing the entity can be guaranteed by a code of
conduct

21
Id, at 17.
22
Australian Securities Exchange, supra note 1, at 18.
23
Id.
24
Australian Securities Exchange, supra note 5, at 23.
25
Australian Securities Exchange, supra note 15, at 18.
26
Australian Securities Exchange, supra note 1, at 18.
27
Australian Securities Exchange, supra note 1, at 19.
28
Id.
An engagement to (I) act in the best interest of the entity (II) act honestly (III) comply
with the laws and regulations (IV) not knowingly participate in any illegal or unethical activity
(V) not enter into an arrangement that conflicts with the entitys best interest (VI) not take
advantage of the information of the entity or its customers for personal gain and (VII) not take
advantage of position or opportunities therefrom for personal gain, is highly recommended to be
included in the code of conduct
A measure to encourage the reporting of unlawful or unethical behaviour must be
established
-Applicable since 2003 but includes safeguards to prevent trading by potential
insiders29. Merely reinstated in 200730. In 2010, the provision regarding the proscription of
trading by potential insiders was omitted.

(IV) Safeguard integrity in corporate reporting


A formal process must be established to safeguard the integrity of corporate
reporting31
Recommendation 4.1 An audit committee (I) with at least 3 members, all of whom are non-
executive directors and majority are independent directors (II) chaired by an independent director
who is not a chair of the board and (III) with a charter. If it opts not to have an audit committee,
the processes it employs to safeguard the integrity of corporate reporting, including the
appointment of an external auditor and the rotation of which, must be established.32
If the entity has an internal audit function, the method of appointing the head of which
and the scope and adequacy of the work plan is highly encouraged to be disclosed.
Recommendation 4.2 The board shall receive a declaration from its CEO and CFO that the
financial records of the entity has been properly maintained and that the financial statements to
be submitted comply with the accounting standards, using as well sound risk management and
internal control system33
Recommendation 4.3 The external auditor should attend the Annual General Meeting to answer
queries of security holders relevant to the audit34
-These recommendations were already advised since 200335

(V) Make timely and balances disclosure


Material information affecting price and value of securities must be adequately
disclosed36
Recommendation 5.1 A written policy for complying with the continuous disclosure obligation
must be provided37
-Already recommended since 200338

(VI) Respect the rights of security holders


29
Australian Securities Exchange, supra note 5, at 25.
30
Australian Securities Exchange, supra note 15, at 21.
31
Id, at 21.
32
Id.
33
Australian Securities Exchange, supra note 1, at 22.
34
Id, at 23.
35
Australian Securities Exchange, supra note 5, at 29.
36
Australian Securities Exchange, supra note 1, at 24.
37
Id.
38
Australian Securities Exchange, supra note 5, at 35.
Appropriate information so as to allow security holders to properly exercise their
rights must be provided39
Recommendation 6.1 Information about the entity and its governance must be available in the
company website40
Hence, constitution, board charters, committee charters, governance policies, annual
reports, announcements, notices of meetings, among others, must be available in the company
website
Recommendation 6.2 An investor-relations program must be implemented to facilitate
communication with the investors41
Recommendation 6.3 Policies and processes to facilitate participation at meeting of security
holders must be established42
Recommendation 6.4 An option to receive and send communications electronically must be
available to security holders43
-Applicable since 2003 except the option to communicate electronically44. Such option to
send and receive messages electronically is only provided for in 2014.

(VII) Recognize and manage risk


A sound risk management framework must be provided and periodically reviewed 45
Recommendation 7.1 A committee or committees to oversee risk (I) with at least 3 members,
majority of whom are independent directors (II) chaired by an independent director and (III) with
a charter, must be created. If it opts not to have such committee, the processes it employs for
overseeing the entitys risk management framework must be established46
Recommendation 7.2 The board shall review the entitys risk management framework at least
annually 47
Recommendation 7.3 If there be one, the structure of the internal audit, or if none be
established, the processes employed for evaluating risk management and internal control
processes, must be disclosed48
Recommendation 7.4 Material exposure to economic, environmental and social sustainability
risks, as well as the manner of dealing with it, must be disclosed49
-In 2003, only a risk committee was recommended. In 2007, the board review of the risk
management framework was already recommended. 50

(VIII) Remunerate fairly and responsibly


A pay sufficient to attract competitive directors and senior executives must be
provided51
39
Australian Securities Exchange, supra note 1, at 25.
40
Id.
41
Id, at 26.
42
Id, at 27.
43
Id.
44
Australian Securities Exchange, supra note 5, at 41.
45
Australian Securities Exchange, supra note 1, at 28.
46
Id.
47
Id, at 29
48
Id, at 30.
49
Id.
50
Australian Securities Exchange, supra note 15, at 32.
51
Australian Securities Exchange, supra note 1, at 31.
Recommendation 8.1 A remuneration committee (I) with at least 3 members, majority of whom
are independent directors (II) chaired by an independent director and (III) with a charter, must be
established. If the entity chooses not to have one, the processes it employs the level of
remuneration abovestated must be established52
Recommendation 8.2 Separate disclosure of policies and processes regarding the remuneration
of (I) non executive directors and (II) executive directors and senior executives must be
observed53
A fixed remuneration and performance based remuneration is highly encouraged to be
given to executive directors, while cash fees, superannuation fees and non-cash benefits is
recommended to be given to non executive directors. Termination payments should be agreed
upon in advance with executive directors, while it is not recommended to provide non-executive
directors with retirement benefits other than superannuation
Recommendation 8.3 An entity with an equity-based remuneration scheme must have a policy
on whether participants are permitted to enter into transaction which limit the economic risk of
participating in the scheme54
Allowing a participant to hedge may run counter to the objective of the scheme
-In 2003, the 8th Principle was the enhancement of performance by the board and key
executives through regular performance evaluation.55 This is now provided for in the 1 st
Principle. The 9th Principle regarding remunerations did not recommend the disclosure regarding
the possibility of hedging in equity-based remunerations. Such disclosure regarding hedging
however was omitted in 2007.56

Note: In 2003, a 10th Principle regarding the recognition of legitimate interest of stakeholders is
included57. A separate code of conduct for such is recommended to be established. 58 Such was
already eliminated in 200759.

Forms of Reporting

-Listed entities must include in its annual report either a corporate governance statement
or a url of a website where such statement can be found, disclosing the extent to which the entity
followed the recommendations of the council and the reasons for deviating, if such be the case60
-If presented in a company website, it should be clearly presented and easily accessible
on the company website61
-A pedantic or legalistic approach is not recommended. Holistic explanation must be
given in such a way that policies and practices establish in accordance with the governance
framework must be specifically pointed out62

52
Id.
53
Id, at 32.
54
Id, at 34.
55
Australian Securities Exchange, supra note 5, at 35.
56
Australian Securities Exchange, supra note 15, at 47.
57
Australian Securities Exchange, supra note 5, at 51.
58
Id, at 59
59
Australian Securities Exchange, supra note 15.
60
Australian Securities Exchange, supra note 1, at 6.
61
Id.
62
Id.
- If a governance recommendation is not adhered to, a detailed reason must be given and
an alternative corporate governance practice, if any, must be presented63.

In comparison with the Philippine Corporate Governance Blueprint

Right of Shareholders (I) to participate in the Annual Shareholders meeting (II) to nominate
candidates for the Board (III) to seek redress for violation of rights (IV) to be notified of material
related party transactions (contract with directors/officers) (V) to be informed of changes in
corporate control (VI) to publicize the minutes of the Annual Shareholders meeting within 5
days from the date of the meeting (VII) The right of non-controlling shareholders of certain
threshold to nominate candidates for board membership (pending amendment to the Corporation
Code)64

Role of institutional investors and financial advisors (I) Adherence to stewardship/responsible


investments code of institutional investors (where policies and processes for discharging duties
and engaging other shareholders and the voting policies shall be disclosed) (II) Disclosure of
institutional investors voting policies (III)65
-Institutional investors include Asset Managers such as trust companies and Professional
Managers where the ultimate beneficiaries of it are the clients.

Duties to Other Stakeholders (I) Effective redress for violation of stakeholders rights (II)
Employee participation (III) Anti-Corruption programs (IV) Whistle blowing policy (V) Creating
shared value as new Corporate Social Responsibility66

Disclosure and Transparency (I) Enhancing disclosures in annual reports especially in the field
of financial and operating results, company objectives and ownership structure, remuneration of
boards, foreseeable risk factors and acquisition and disposal of assets (II) Strengthening auditors
independence (in substance and appearance) (III) Implementing sustainability and integrated
reporting67

Board Roles and Responsibilities (I) monitoring managerial performance while preventing
conflict of interest and establishing corporate strategies and business plan (II) Overseeing
succession planning of key officers, aligning key officers with long term goals, transparent board
nomination, overseeing internal control and audit and risk management (III) creation of board
committees such as audit committee, risk oversight committee, corporate governance committee
and related party transactions committee, who shall attend corporate meetings organized by SEC
(IV) board diversity and assessment (V) Designation of a corporate secretary and compliance
officer68

63
Id.
64
Securities and Exchange Commission, Philippine Corporate Governance Blueprint 2015, available at
http://www.sec.gov.ph/wp-content/uploads/2015/01/SEC_Corporate_Governance_Blueprint_Oct_29_2015.pdf (last
accessed Sep. 15, 2017), at 61.
65
Id, at 62.
66
Id.
67
Id.
68
Id, at 62.
Ethical Standards (I) Adoption of Code of Business Conduct and Ethics as well as monitoring
of compliance therewith69

More effective enforcement regime (I) empowerment of SEC (II) Updating laws and
regulations (III) Regulation of external auditors (IV) Use of Alternative Dispute Resolution (V)
Harmonizing regulatory agencies70

Key Points

1. Corporate Governance is dynamic

The principle of corporate governance is an evolving concept. It adapts with the


subsequent developments in modern day business so as to fulfil its mandate of establishing
mechanisms to promote investors confidence. The Australian Stock Exchange Corporate
Governance Principles reflect this concept.
It must be noted that in 2003, only the designation of independent directors was
emphasized in the strategic planning of board structure 71. Come 2007, the establishment of a
nomination committee was recommended72. Such committee was tasked to establish a formal and
transparent procedure for the selection and appointment of competent directors to the Board. It
was only in 2014 when the skills matrix and development program was highlighted 73. The skills
matrix serves as a mechanism to ensure the diversity of skills of directors which would allow
them to have different perspectives in facing corporate issues.
Similarly, only the division of responsibilities between the board and the management
was recommended to be disclosed in 200374. The diversity policy was integrated in 2010 but the
safeguards before the election was only established in 201475. In accordance with such
safeguards, biographical details including relevant qualifications and experience as well as
material directorships currently held by the nominees must be disclosed to the security holders
before the board elections. Such details would apprise them proper information in order to make
proper use of their voting rights.
It must be noted that the other principles are, save of a few minor additions, stable.
Strategic planning of the board structure and functions on the other hand are being constantly
developed. More stringent recommendations are being put in place to ensure the independence
and competence of the board. This shows the importance of the board in an entity. Aside from
setting short-term and long-term goals and developing the corporate strategy, they appoint and
evaluate the performance of the officers of the company.
In the context of Australia specifically, several scandals involving corporate
mismanagement led to corporate insolvency and mass unemployment. In 2001, one of its biggest
insurance company, the HIH Insurance, perceived as a robust and reliable company in 2000,
suddenly collapsed76. Accordingly, it was due to false reports, reckless management, fraud and

69
Id, at 64.
70
Securities and Exchange Commission, supra note 64, at 66.
71
Australian Securities Exchange, supra note 5, at 23.
72
Australian Securities Exchange, supra note 15, at 18.
73
Australian Securities Exchange, supra note 1, at 15.
74
Australian Securities Exchange, supra note 5, at 19.
75
Australian Securities Exchange, supra note 1, at 18.
self-dealing when it acquired troubled insurance companies for a high price77. Several of its
officials were found guilty for accepting bribes from such troubled companies 78. In 2008, one of
its biggest financial services company, Storm Financial, collapsed 79. The federal court found its
directors liable for giving inappropriate advice to clients 80. Accordingly, its double gearing
storm model which forces clients to take step investments over time was inappropriate for
investors with few assets or income 81. Instead of protecting their clients from market falls, they
were more concerned with the profits they derive from step investments82.

2. Philippine Corporate Governance places more safeguards against the withholding of the
power of the Board.

According to the Geert Hofstede study of corporate cultures, the power distance in
Philippines is so high83. As of 2017, the Philippines received a numerical score of 96 as
compared to the score of 34 of Australia in terms of power distance 84. Given such, decisions of
management and board receive less questioning given the authority they possess over the
company. Furthermore, given the accepted hierarchy in the firm, promotions are based mostly on
seniority and not on competence. Hence, there is a greater need to safeguard the companies from
board or management abuses.
One of the features present in the Philippine Corporate Governance Blueprint which is
not emphasized in the Australian Corporate Governance Model is the adherence to a stewardship
code of institutional investors85. Accordingly, asset managers should be transparent as to how
they manage the investments of their clients. Specific mention is made as to the policy in voting
the shares held by them, since the possibility of collusion with nominees is very high.
Another feature emphasized in the Philippine Blueprint is the creation of a related party
transactions committee tasked to disclose transactions of the company with an entity of which a
director of the company has an interest 86. Obviously, such transactions, if kept in the dark, might
pave way for fraudulent schemes of the interested director to the prejudice of the company. The
nature of the transaction, which involves a conflict of interest on the part of a director, demands
its full disclosure to the shareholders so as to allow them to scrutinize the details of such dealing.
Furthermore, it is encouraged that non-controlling shareholders of certain threshold to be
determined by Securities and Exchange Commission should be given the right to nominate
candidates for board membership87. This feature is actually incorporated in the pending

76
Parth Paliwal and Krishna Mittal, Corporate Failure of HIH Insurance, available at
https://www.slideshare.net/Kmittal928/corporate-failure-for-hih-insurance (last accessed September 15, 2017).
77
Id.
78
Id.
79
Stuart Washington, Collapse of Financial Planner was Inevitable, THE SUNDAY MORNING HERALD, May
28, 2010, available at http://www.smh.com.au/business/collapse-of-financial-planner-was-inevitable-20100527-
whtv.html (last accessed September 15, 2017).
80
Id.
81
Id.
82
Id.
83
Geert Hofstede, Culture Compass, available at https://geert-hofstede.com/cultural-survey.html (last accessed
September 15, 2017).
84
Id.
85
Securities and Exchange Commission, supra note 64, at 20.
86
Id, at 40.
87
Id, at 61.
amendments to the Corporation Code88. Accordingly, such will allow minority shareholders to
have a representative in the board to voice out their concerns.

3. No requirement of Independent Directors in the Board

In light of the discussion above, the Philippine Corporate Governance Blueprint has
encouraged the appointment of independent directors to safeguard the company from possible
collusion of the duly elected Board members. However, it is to be noted that there is no law
which requires private entities, except insurance companies, to appoint such independent
directors89. This is contrary to our neighbour countries in the ASEAN. Indonesia requires the
appointment of at least 1 independent director in all its listed companies90. Malaysia has a stiffer
requirement; it requires that majority of its board should be an independent director 91. Singapore,
Vietnam and Thailand require 1/3 of the Board of companies within its jurisdiction to be an
independent director92.
This reflects the personal concept of businesses in the Philippines. While there is a
pooling of funds to generate profits, the investors generally refuse an outsider access to their
management policies since such business is their personal property. This reflects the ancient view
that businesses, being personal in nature, are not a public concern. Obviously, such is not the
case nowadays. More than a stimulant of economic growth, how businesses behave define the
everyday lives of Filipinos. As such, more control to ensure their positive growth must be put in
place.

88
Id.
89
Id, at 48.
90
Securities and Exchange Commission, supra note 64, at 48.
91
Id.
92
Id.