College of Management

BUSINESS ADMINISTRATION DEPARTMENT

Course Number: BA 314

Module Number: 5
Module Title: Corporate Governance
Course Facilitators: Mariane Vonne C. Delfin
John Fritz L. Villora
Semester: 1ST Semester, A.Y. 2020-2021

GOOD GOVERNANCE
AND SOCIAL
RESPONSIBILITY
Module 5
Corporate
Governance

At the end of the session, the students must have:

1. Explained the term corporate governance
2. Understood the responsibilities of the board of directors and the major
governance committees
3. Explained the differences between “comply or explain” and “comply or else”
4. Identified an appropriate governance model for an organization

Expected Outputs:
1. “Incriminating Evidence”—Adam Makes a Decision
2. GlobalMutual: A Case Study

MODULE 5 – Corporate Governance 1|PAGE

 CORPORATE GOVERNANCE
Corporate governance is the process by which organizations are
directed and controlled. As the organizations grew, wealthy owners started
to hire professional managers to run the businesses on their behalf, which
raised some interesting questions:
 Could the managers be trusted to run the businesses in the best interests
of the owners?
 How would they be held accountable for their actions?
 How would absentee owners keep control over these managers?
Some argue that managers are accountable to the public interest—
or, more specifically, to their stakeholders: their customers, their vendor
partners, state and local entities, and the communities in which they
conduct their business operations. So corporate governance is concerned
with how well organizations meet their obligations to all these people.
Ideally, mechanisms are in place to hold them accountable for that performance and to introduce corrective action if
they fail to live up to that performance expectation.
Corporate governance is about the way in which boards oversee the running of a company by its managers, and
how board members are in turn accountable to shareholders and the company. This has implications for company
behavior toward employees, shareholders, customers, and banks.
Good corporate governance plays a vital role in underpinning the integrity and efficiency of financial markets.
Poor corporate governance weakens a company’s potential and at worst can pave the way for financial difficulties and
even fraud. If companies are well governed, they will usually outperform other companies and will be able to attract
investors whose support can finance further growth.

WHAT DOES CORPORATE GOVERNANCE LOOK LIKE

The figure below shows us a blueprint of governance of the modern corporation.

As seen on the figure, on

top of the blueprint are the
owners. They are the ones who
supply equity or risk capital to the
company by purchasing shares in
the corporation.
They are a fragmented
group usually composed of
individual public shareholders,
large blocks of private holders,
private and public institutional
investors, employees, managers,
and other companies.
Following the owners are
the Board of Directors and major
oversight committees.
The Board of Directors
are a group of individuals who
oversee governance of an
organization. Elected by vote of
the shareholders at the annual

MODULE 5 – Corporate Governance 2|PAGE

 general meeting, the true power of the board can vary from institution to institution from a powerful unit that
closely monitors the management of the organization to a body that merely rubber-stamps the decisions of the
chief executive officer (CEO) and executive team.
Effective corporate governance models typically include three major oversight committees, staffed by
members of the board of directors and appropriately qualified specialists:
 The audit committee, which oversees the financial reporting process; monitors internal controls
over corporate expenditure; monitors accounting policies and procedures; and oversees the
hiring and performance of external auditors in producing the company’s financial statements.
 The compensation committee, which oversees compensation packages for the senior executives
of the corporation (such as salaries, bonuses, stock options, and other benefits such as, in
extreme cases, personal use of company jets).
 Corporate governance committees assigned to monitor the ethical performance of the
corporation and oversee compliance with the company’s internal code of ethics as well as any
federal and state regulations on corporate conduct, as corporations come under increasing
pressure to publicly demonstrate their commitment to ethical business practices.

TWO GOVERNANCE METHODOLOGIES

In corporate governance, there are two approaches being
practiced: the “comply or explain” approach and the “comply or
Comply or Comply or else” approach.
Explain Else The “comply or explain” approach is a regulatory approach
used in some European countries and is now recognized under the
Organization for Economic Cooperation and Development (OECD)
principles of corporate governance. Under this approach, the
government sets a code instead of setting rules for which the
publicly listed companies may either comply with or if they do not,
they have to explain publicly. It is principles-based, rather than
rules-based. It provides recommendations, rather than imposes
rules. The approach recognizes that good governance cannot
prescribe a “one size fits all” solution. It recognizes the reality that not all companies are the same. It allows
flexibility to address specificities of individual companies. The principle however does not mean that the listed
company can always explain away noncompliance. It must find alternatives that comply with good corporate
governance. The company’s explanation should illustrate how its practices are consistent with the relevant
principle and contribute to good governance.
The other approach is the "Comply or Else" method which results in "stiff financial penalties" and
leaves no room for explanation or error in compliance to company guidelines. This approach is very aggressive
and is really bad to hear about or be in contact with if you are a business owner, because not only will you
have to pay hefty fines but the company will be discredited.

EFFECTIVE CORPORATE GOVERNANCE

To be considered eff ectively governed, organizations must have mechanisms in place that oversee
both the long-term strategy of the company and the appointment of those personnel tasked with the
responsibility of delivering that strategy. The following are the steps that should be followed for corporate
governance to be effective:

MODULE 5 – Corporate Governance 3|PAGE

 Create a climate of trust and candor. The board of directors and the senior executives
should be working in partnership toward the successful achievement of organizational
goals rather than developing an adversarial relationship where the board is seen as an
obstacle to the realization of the CEO’s strategic vision. This essentially means that the
board needs to work together on issues and there can be no animosity amongst all those involved with the
committee
Foster a culture of open dissent. Proposals should be open for frank discussion and
review. Disagreement ensures that all aspects of proposals are reviewed and discussed
thoroughly. The board needs to be open with each other. The board must talk everything
over thoroughly and think about every option before coming to a conclusion.
Mix up roles. Rotation of assignments can avoid typecasting, and a conscious effort to
switch between “good cop” and “bad cop” supporting and dissenting roles can ensure
positive debate of all key proposals brought before the board. Change up responsibilities
within the committee and keep ideas fresh.
Ensure individual accountability. Approving without proper consideration, known as
Rubberstamping, generates collective indifference. If there is significant fallout from a
4 major strategic initiative, all members should consider themselves accountable. This
approach would address any pretense of being ambushed or in the dark. Make sure that
everyone on the board can be held responsible for their good or bad actions.
Let the board assess leadership talent. The board members should actively meet with
future leaders in their current positions within the organization rather than simply waiting
5 for them to be presented when a vacancy arises. Constantly evaluate potential board
members in order to fill positions immediately when they become vacant.
Evaluate the board’s performance. Many critics consider board seats as the U.S.
equivalent of life peerages in Great Britain—that is, you win the title of “Lord” on the
6 basis of what you have done in your career or whom you know, without any further
assessment of your contribution or performance. Effective corporate governance
demands superior performance from everyone involved in the process. Keep track of how
well the board is working and if they are doing their job. This can be done by an outside party in order to
have non bias results.

MODULE 5 – Corporate Governance 4|PAGE

 Republic of the Philippines
CAPIZ STATE UNIVERSITY
PONTEVEDRA CAMPUS
Bailan, Pontevedra, Capiz

College of Management
Module 5: Worksheet 1 in BA 314
“Incriminating Evidence”—Adam Makes a Decision
1st Semester, A.Y. 2020-2021

EXERCISE #1

Name: Course/Yr./Sec.:

Directions: Read the following case and analyze the questions that follow. Write your answers on the space
provided after each question.

Adam broke into a cold sweat as soon as he finished reading the e-mail. He realized that if it were made public,
it would mean the end for the CEO of Chemco, the senior managers, Jim Lewis, and probably anyone assigned
to the Chemco case. What the heck was he supposed to do now? Tell Jim Lewis? Pretend he hadn’t found it
and shred it? Should he go public with it or send it anonymously to the lawyers for the Chemco shareholders?
He started imagining the consequences for each of those actions and decided that anything that involved him
looking for a new paralegal position wasn’t a good choice. He also thought about the Enron case and how
long it had taken to get the two senior officers, Ken Lay and Jeff Skilling, into court, with no money left at
the end of it all to return to shareholders who had lost their life savings when the company collapsed. “It’s just
not worth it,” Adam thought. “And anyway, who would pay attention to a rookie paralegal?” With that, he
took the piece of paper and placed it into the shredder. (Adapted from the book Business Ethics Now by Andrew
Ghillyer)

Questions:
1. What could Adam have done differently here?

2. What do you think will happen now?

3. What will be the consequences for Adam, Jim Lewis, and Chemco Industries?

MODULE 5 – Corporate Governance 5|PAGE

 Republic of the Philippines
CAPIZ STATE UNIVERSITY
PONTEVEDRA CAMPUS
Bailan, Pontevedra, Capiz

College of Management
Module 5: Worksheet 2 in BA 314
GlobalMutual: A Case Study
1st Semester, A.Y. 2020-2021

EXERCISE #2
Name: Course/Yr./Sec.:

Directions: Read the following case and analyze the questions that follow. Write your answers on the space
provided after each question.

GlobalMutual was, by all accounts, a model insurance company. Profits were strong and had been for several
years in a row. The company carried the highest ratings in its industry, and it had recently been voted one of
the top 100 companies to work for in the United States in recognition of its very employee-focused work
environment. GlobalMutual offered very generous benefits: free lunches in the cafeteria, onsite day care
facilities, and even free Starbucks coffee in the employee break rooms. In an industry that was still struggling
with the massive claims after a succession of hurricanes in the United States, Global Mutual was financially
stable and positioned to become one of the major insurance companies in the nation. So, why were the CEO,
William Brown; the CFO, Anne Johnson; and the COO, Peter Brooking, all fired on the same day with no
explanation other than that the terminations were related to issues of conduct? 1. 2. 3. 4. How are the
stakeholders of GlobalMutual likely to react to this news? Explain your answer. (Adapted from the book Business
Ethics Now by Andrew Ghillyer)

Questions:
1. Who would most likely have intervened to terminate the senior team over issues of conduct?

2. Give some examples of the kind of ethical misconduct that could have led to the termination of the
entire senior leadership of GlobalMutual.

3. Was it a good idea to fire them all at the same time with no detailed explanation?

4. How are the stakeholders of GlobalMutual likely to react to this news? Explain your answer.

MODULE 5 – Corporate Governance 6|PAGE

 Republic of the Philippines
CAPIZ STATE UNIVERSITY
PONTEVEDRA CAMPUS
Bailan, Pontevedra, Capiz

College of Management
Module 5: Worksheet 3 in BA 314
Doing Essays
1st Semester, A.Y. 2020-2021

EVALUATION: ESSAY

Name: Course/Yr./Sec.:

Directions: Analyze the following questions carefully. Write your answers on the space provided after each
question.

Discussion Questions:
1. Why do you think corporations need board of directors?
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
______________________________
2. Which is more important to effective corporate governance: an audit committee or a compensation
committee? Why?
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
______________________________
3. Many experienced senior business executives serve on multiple corporate boards. Is this a good thing?
Explain your answer.
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
______________________________

MODULE 5 – Corporate Governance 7|PAGE

Additional Readings and References

Additional Readings:
 https://idbinvest.org/en/blog/corporate-governance-pathway-sustainability-strategy
 https://corporatefinanceinstitute.com/resources/knowledge/other/corporate-
governance/#:~:text=Corporate%20governance%20is%20a%20system,transparency%2C%20accoun
tability%2C%20and%20security.
 https://www.investopedia.com/terms/c/corporategovernance.asp

References:

Ghillyer, A. W. (2018). Business Ethics Now, Fifth Edition. New York: McGraw-Hill Education.
Lim, F. (2017, April 13). Comply or Explain. Retrieved from Inquirer.net:
https://business.inquirer.net/227752/comply-or-explain
Two Governance Methodologies: "Comply or Explain" or "Comply or Else". (2020). Retrieved from
Weebly.com: http://corporategovern.weebly.com/-comply-or-explain-or--comply-or-else.html
What is Corporate Governance? (2020). Retrieved from Business Ethics Now: Corporate Governance:
http://businessethicsnow.weebly.com/what-is-corporate-governance.html

Image Sources:
https://idbinvest.org/en/blog/corporate-governance-pathway-sustainability-strategy
https://www.shutterstock.com/image-vector/step-one-two-three-bookmark-ribbon-366151214
https://blog.v-comply.com/holds-key-to-successful-corporate-governance/
https://www.vectorstock.com/royalty-free-vector/woman-choosing-between-two-options-vector-29336292

MODULE 5 – Corporate Governance 8|PAGE