CHAPTER 3 AND 4

SEC CODE OF CORPORATE

GOVERNANCE FOR
PUBLICLY-LISTED
COMPANIES
LEARNING OBJECTIVES:
1. Understand the need for the Code of Governance for publicly-listed companies.
2. Know the sixteen (16) governance responsibilities of the Board of Directors of publicly-
listed companies.
3. Explain the meaning of comply and explain approach.
4. Describe the three aspects of the Code, namely; (Principles, Recommendations and
Explanations)
5. Know what constitutes a competent board and how can it be established.
6. Understand the composition, functions and responsibilities of the board committee that
can be established such as the:
✓ Audit Committee
✓ Corporate Governance Committee
✓ Board of Risk Oversight Committee
✓ Related Party Transaction Committee

7. Know how the directors can show full commitment to the company
8. Understand how independence and objectivity of the board can be reinforced and
enhanced
9. Describe how the performance and effectiveness of the board can be assessed.
CG CODE for PLCs
 Released last November 22, 2016 during the 3rd Annual SEC-PSE
Corporate Governance Forum
 The first of a series of CG Codes for different types of Philippine
corporations under SEC supervision.
 It is intended to raise the corporate governance standards of Philippine
corporations to a level at par with its regional and global counterparts.
 The latest G20/OECD Principles of Corporate Governance and the
ASEAN Corporate Governance Scorecard were used as key reference
materials in the drafting of this Code.
 A new feature of this Code is the adoption of the “comply or explain”
approach. This approach combines voluntary compliance with
mandatory disclosure.
 The Code does not in any way prescribe a “one size fits all”
framework. The Principle of Proportionality will be considered in the
application of its provisions.
INTRODUCTION:
The Code is arranged as follows: Principle, Recommendations and
Explanations.
 Principles - can be considered to be high-level statements of
corporate governance good practices, and are applicable to all
companies.
 Recommendations - objective criteria that are intended to
identify the specific features of corporate governance good
practice that are recommended for companies operating
according to the Code. Alternatives to a Recommendation may
be justified in particular circumstances if good governance can
be achieved by other means.
 Explanations - strive to provide companies with additional
information on the recommended best practice.
PRINCIPLE OF PROPORTIONALITY

It is where SEC addresses specific segments of the

corporate sector, which may be differentiated on the basis
of company type, size, access to public funds and risk
profile, among others. Smaller companies may decide that
the costs of some of the provisions outweigh the benefits or
are less relevant in their case.
This code is designed to allow companies some
flexibility in establishing their own corporate governance
practices.
“COMPLY OR EXPLAIN” APPROACH (voluntary
compliance with mandatory disclosure)

Under “comply and explain” approach, compliance with

the Code is not mandatory. But it is mandatory to submit to
SEC the company’s annual corporate governance reports and
disclose any deviations from the Recommendations of the
SEC. Such reports shall be available to the public, including
the company’s shareholders and other stakeholders.

When a recommendation is not complied with, the company

must disclose and describe this non-compliance, and explain
how the overall principle is being achieved. The alternative
should be consistent with the overall principle.
There are sixteen (16) principles that are distributed among
five (5) main sections, namely:

 Board’s Governance Responsibilities (Principles 1 – 7)

 Disclosure and Transparency (Principles 8 – 11)
 Internal Control and Risk Management Framework
(Principle 12)
 Cultivating a Synergic Relationship with Shareholders
(Principle 13)
 Duties of Stakeholders (Principles 14 -16)
The purpose of CG Code for PLCs is to help companies
develop and sustain an ethical corporate culture and keep
abreast with recent developments in corporate governance.

In general, the New CG Code aims to –

 Increase the responsibilities of the board;
 Ensure the competence and commitment of the directors;
 Strengthen the protection of shareholders and other
stakeholders; and
 Promote full disclosure and transparency in both financial
and non-financial reporting
DEFINITION OF TERMS
CORPORATE GOVERNANCE
- the system of stewardship and control to guide
organizations in fulfilling their long-term economic, moral,
legal and social obligations towards their stakeholders.
- Corporate governance is a system of direction, feedback
and control using regulations, performance standards and
ethical guidelines to hold the Board and senior management
accountable for ensuring ethical behavior – reconciling long-
term customer satisfaction with shareholder value – to the
benefit of all stakeholders and society.
- Its purpose is to maximize the organization’s long-term
success, creating sustainable value for its shareholders,
stakeholders and the nation.
Board of Directors
- the governing body elected by the stockholders that
exercises the corporate powers of a corporation, conducts all its
business and controls its properties.
Management
- a group of executives given the authority by the Board of
Directors to implement the policies it has laid down in the
conduct of the business of the corporation.
Independent director
- a person who is independent of management and the
controlling shareholder, and is free from any business or other
relationship which could, or could reasonably be perceived to,
materially interfere with his exercise of independent judgment
in carrying out his responsibilities as a director
Executive director
- a director who has executive responsibility of day-to-day operations of a
part or the whole of the organization.

Non-executive director
- a director who has no executive responsibility and does not perform any
work related to the operations of the corporation.

Conglomerate
- a group of corporations that has diversified business activities in varied
industries, whereby the operations of such businesses are controlled and
managed by a parent corporate entity.

Internal control
- a process designed and effected by the board of directors, senior
management, and all levels of personnel to provide reasonable assurance on
the achievement of objectives through efficient and effective operations;
reliable, complete and timely financial and management information; and
compliance with applicable laws, regulations, and the organization’s policies
and procedures.
Enterprise Risk Management
- a process, effected by an entity’s Board of Directors, management
and other personnel, applied in strategy setting and across the
enterprise that is designed to identify potential events that may affect
the entity, manage risks to be within its risk appetite, and provide
reasonable assurance regarding the achievement of entity objectives.
Related Party
– shall cover the company’s subsidiaries, as well as affiliates and
any party (including their subsidiaries, affiliates and special purpose
entities), that the company exerts direct or indirect control over or
that exerts direct or indirect control over the company; the company’s
directors; officers; shareholders and related interests (DOSRI), and
their close family members, as well as corresponding persons in
affiliated companies. This shall also include such other person or
juridical entity whose interest may pose a potential conflict with the
interest of the company.
Related Party Transactions
- a transfer of resources, services or obligations between a
reporting entity and a related party, regardless of whether a
price is charged. It should be interpreted broadly to include not
only transactions that are entered into with related parties, but
also outstanding transactions that are entered into with an
unrelated party that subsequently becomes a related party.
Stakeholders
- any individual, organization or society at large who can
either affect and/or be affected by the company’s strategies,
policies, business decisions and operations, in general. This
includes, among others, customers, creditors, employees,
suppliers, investors, as well as the government and community
in which it operates.
 THE BOARD’S
GOVERNANCE
RESPONSIBILITIES
1. ESTABLISHING A COMPETENT BOARD

Principle
The company should be headed by a competent,
working board to foster the long-term success of
the corporation, and to sustain its competitiveness
and profitability in a manner consistent with its
corporate objectives and the long-term best
interests of its shareholders and other stakeholders.
1. ESTABLISHING A COMPETENT BOARD
Recommendation
 Be composed of directors with a collective working
knowledge experience or expertise that is relevant
to the company’s industry/sector
 Be headed by a competent and qualified
Chairperson
 Provide a policy on the training of directors
 Have a policy on Board Diversity
 Be assisted by a Corporate Secretary and
Compliance Officer
TRAINING OF DIRECTORS
DIRECTOR HOUR TOPIC
First-Time 8 hours Orientation Corporation’s business and corporate
Director Program structure, vision and mission, corporate
strategy, Governance Codes and Policies,
Articles, By-laws, Company’s Manual of
Corporate Governances, the Charters, the
SEC-mandated topics on governance matters
and other matters essential for the effective
performance of their duties and
responsibilities.
Incumbent 4 hours Annual Courses on corporate governance matters
Directors Continuing relevant to the company, including audit,
Training internal controls, risk management,
sustainability and strategy.
Roles and Duties of Corporate
Secretary and Compliance Officer
CORPORATE SECRETARY COMPLIANCE OFFICER
Assists the Board and the board Ensures proper onboarding of new
committees in the conduct of their directors (i.e., orientation on the
meetings, including preparing an company’s business, charter, articles of
annual schedule of Board and incorporation and by laws, among
committee meetings and the annual other);
board calendar, and assisting the chairs
of the Board and its committees to set
agendas for those meetings;
Safe keeps and preserves the integrity Ensures the integrity and accuracy of
of the minutes of the meetings of the all documentary submissions to
Board and its committees, as well as regulators; Appears before the SEC
other official records of the when summoned in relation to
corporation; compliance with this Code;
Roles and Duties of Corporate
Secretary and Compliance Officer
CORPORATE SECRETARY COMPLIANCE OFFICER
Attends all Board meetings, except Ensures the attendance of board
when justifiable causes, such as illness, members and key officers to relevant
death in the immediate family and trainings; and
serious accidents, prevent him/her
from doing so;
Oversees the drafting of the by-laws Collaborates with other departments to
and ensures that they conform with properly address compliance issues,
regulatory requirements; and which may be subject to investigation;

Identifies possible areas of compliance

issues and works towards the resolution
of the same
Roles and Duties of Corporate
Secretary and Compliance Officer
CORPORATE SECRETARY COMPLIANCE OFFICER
Keeps abreast on relevant laws, Monitors, reviews, evaluates and
regulations, all governance issuances, ensures the compliance by the
relevant industry developments and corporation, its officers and directors
operations of the corporation, and with the relevant laws, this Code, rules
advises the Board and the Chairman on and regulations and all governance
all relevant issues as they arise; issuances of regulatory agencies
Advises on the establishment of board Reports the matter to the Board if
committees and their terms of violations are found and recommends
reference the imposition of appropriate
disciplinary action;
Performs required administrative Performs such other duties and
functions; responsibilities as may be provided by
Performs such other duties and the SEC
responsibilities as may be provided by
the SEC.
2. ESTABLISHING CLEAR ROLES AND
RESPONSIBILITIES OF THE BOARD

Principle
The fiduciary roles, responsibilities and
accountabilities of the Board as provided under
the law, the company’s articles and by-laws, and
other legal pronouncements and guidelines should
be clearly made known to all directors as well as
to shareholders and other stakeholders.
2. ESTABLISHING CLEAR ROLES AND
RESPONSIBILITIES OF THE BOARD
Recommendation
It leads in establishing the tone and practices of good corporate governance at
the top by exercising the following responsibilities:
 Fiduciary Duty
 Strategic Direction and corporate performance
 Succession Planning
 Remuneration and Other Incentives of Directors and Senior Management
 Selection, Nomination and Election of Board Members
 Related Party Transactions
 Selection and assessing the performance of the Management
 Effective performance management framework
 Internal Control
 Enterprise Risk Management
 Board Charter
3. ESTABLISHING BOARD COMMITTEES

Principle
Board committees should be set up to the extent
possible to support the effective performance of the
Board’s functions, particularly with respect to audit, risk
management, related party transactions, and other key
corporate governance concerns, such as nomination and
remuneration. The composition, functions and
responsibilities of all committees established should be
contained in a publicly available Committee Charter.
3. ESTABLISHING BOARD COMMITTEES

Recommendation
The board may establish the following committees:
 Audit Committee
 Corporate Governance Committee
 Board Risk Oversight Committee
 Related Party Transactions Committee

The Board may establish such other committees as may be

deemed necessary for the efficient and effective
performance of its functions.
Audit Committee
 The Board should establish an Audit Committee to enhance its
oversight capability over the company’s financial reporting, internal
control system, internal and external audit processes, and
compliance with applicable laws and regulations
 The committee should be composed of at least three appropriately
qualified non-executive directors, the majority of whom, including
the Chairman, should be independent.
 The Chairman of the Audit Committee should not be the chairman
of the Board or of any other committees.
 All of the members of the committee shall preferably be with
accounting, auditing or related financial management expertise
or background, knowledge, skills and experience proportion with
the size, complexity of operations and risk profile of the
company.
Corporate Governance Committee
 The Board should establish an Corporate Governance
Committee that should be tasked to assist the Board
in the performance of its corporate governance
responsibilities, including the functions that were
formerly assigned to a Nomination and Remuneration
Committee.
 The committee should be composed of at least three
members, all of whom should be independent
directors, including the Chairman.
 Ensures the compliance with and proper observance
of corporate governance principles and practices.
Board Risk Oversight Committee
 Subject to a corporation’s size, risk profile and complexity
of operations, the Board should establish a separate Board
Risk Oversight Committee (BROC) that should be responsible
for the oversight of a company’s Enterprise Risk Management
system to ensure its functionality and effectiveness.
 The committee should be composed of at least three
members, the majority of whom should be independent
directors, including the Chairman. At least one member of
the committee must have relevant thorough knowledge and
experience on risk and risk management.
 BROC has the responsibility to assist the Board in ensuring
that there is and effective and integrated risk management
process in place.
Related Party Transaction Committee

 Subject to a corporation’s size, risk profile and

complexity of operations, the Board should establish
a Related Party Transaction (RPT) Committee, which
should be tasked with reviewing all material related
party transactions of the company.
 The committee should be composed of at least three
non-executive directors, two of whom should be
independent, including the Chairman.
4. FOSTERING COMMITMENT

Principle
To show full commitment to the company, the
directors should devote the time and attention
necessary to properly and effectively perform
their duties and responsibilities, including
sufficient time to be familiar with the
corporation’s business.
4. FOSTERING COMMITMENT

Recommendation
 Directors are required to attend meetings, except
when justifiable causes, such as, illness, death in
the immediate family and serious accidents,
prevent them from doing so.
 And should notify the Board where he/she is an
incumbent director before accepting a directorship
in another company.
5. REINFORCING BOARD INDEPENDENCE

Principle
The board should endeavor to exercise an
objective and independent judgment on all
corporate affairs.
 Executive Non-executive Independent
Executive director is a Non-executive director is An independent director
director who has a director has no is a person who, apart
executive responsibility executive responsibility from shareholdings and
of day to day operations and does not perform any fees received from the
of a part or whole of the work related operations corporation, is
organization. of the corporations. independent of
management and free
They shall constitute at from any business or
least the majority of the other relationship.
Board to promote the
independent oversight of
the management by the
BOD.
Independence of the board:

 Proper mixed of executive and non-executive

directors.
 The separation of the position of chairperson and
the chief executive officers.
 The proper disclosure of adverse interests of
directors affecting the corporation.
Independence of the Board
 The board of the following corporation vested with public
interest shall have independent director constituting at least
20% of such board
▪ Corporations covered by Section 17.2 of RA 8799.
▪ Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money
service business, preneed, trust and insurance companies and other
financial intermediaries.
▪ Other corporations engaged in business vested with public interest.
 The Board of publicly listed companies should have at least 3
independent directors, or such numbers as to constitute at
least 1/3 of the members of the board, whichever is higher.
 The Board of public companies should have at least2
independent directors, or such numbers as to constitute at
least 1/3 of the members of the board, whichever is higher.
Qualification of Independent Director
SEC Memorandum Circular No. 16 Series of 2002

 He shall have at least 1 share of stock of the

corporation
 He shall be at least a college graduate, or he shall
have been engaged or exposed to the business of the
corporation for at least 5 yrs.
 He shall possess integrity/probity; and
 He shall be assiduous
Disqualification of independent Director

The board may also provide disqualifications of independent

director. For example, if during his tenure:
 He becomes an officer or employees of the corporation or
becomes any of the persons enumerated in the definition
who is not an independent director
 His beneficial ownership exceeds the maximum percentage
e.g. 2% set by the company
 He fails to meet the attendance requirement
 Other disqualifications which the company may deem
proper
Term of an Independent director
 The Board’s independent directors should serve for a
maximum cumulative term of 9 years.
 After which, the independent director should be perpetually
barred from re-election as such in the same company but
may continue to qualify for nomination and election as a
non-independent director.
 In the instance that a company wants to retain an
independent director who has served for 9 yrs., the Board
should provide meritorious justification/s and seek
shareholder’s approval during the annual shareholders’
meeting;
CEO roles and responsibilities:
 Determines the corporation’s strategic direction and
formulates and implements its strategic plan on the
direction of the business;
 Directs, evaluates and guides the work of the key
officers of the corporation;
 Has a good working knowledge of the corporation’s
industry and market and keeps up-to-date with its core
business purpose.
 Provides the Board with timely information and
interfaces between the Board and the employees.
Lead Director
 Serves as an intermediary between the Chairman and the
other directors when necessary
 Convenes and chairs meetings of the non-executive
directors
 Contributes to the performance evaluation of the
chairman, as required.
A director with a material interest in any transaction
affecting the corporation should abstain from
taking part in the deliberation for the same.
6. ASSESSING BOARD PERFORMANCE

Principle
The best measure of the Board’s effectiveness
is through an assessment process. The Board
should regularly carry out evaluations to appraise
its performance as a body, and assess whether it
possesses the right mix of backgrounds and
competencies.
 The board should conduct an annual self-
assessment of its performance, including the
performance of the Chairman, individual members
and committees. Every three years, the
assessment should be supported by an external
facilitator.
 The Board should have in place a system that
provides, at the minimum, criteria and process
to determine the performance of the Board, the
individual directors, committees and such
system should allow for a feedback mechanism
from shareholders.
7. STRENGTHENING BOARD ETHICS

Principle
Members of the Board are duty-bound to apply
high ethical standards, taking into account the
interests of all stakeholders.
 The Board should adopt a Code of Business
Conduct and ethics, which would provide
standards for professional and ethical behavior,
as well as articulate acceptable and
unacceptable conduct and practices in internal
and external dealings.
 The Board should ensure the proper and
efficient implementation and monitoring of
compliance with the Code of Business Conduct
 DISCLOSURE
AND
TRANSPARENCY
8. ENHANCING COMPANY DISCLOSURE
POLICIES AND PROCEDURES

Principle
The company should establish corporate
disclosure policies and procedures that are
practical and in accordance with best practices
and regulatory expectations.
 The Board should establish corporate disclosure
policies and procedures to ensure a
comprehensive, accurate, reliable and timely
report to shareholders and other stakeholders
that gives a fair and complete picture of a
company’s financial condition, results and
business operations
 The Company should have a policy requiring all
directors and officers to disclose/report to the
company any dealings in the company’s shares
within three business days.
 The Board should fully disclose all relevant and
material information on individual board
members and key executives to evaluate their
experience and qualifications, and assess any
potential conflicts of interest that might affect
their judgment.
 The company should provide a clear disclosure
of its policies and procedure for setting Board
and executive remuneration, as well as the level
and mix of the same in the Annual Corporate
Governance Report. Also, companies should
disclose the remuneration on an individual basis,
including termination and retirement provisions.
 The company should disclose its policies
governing Related Party Transactions (RPTs) and
other unusual or infrequently occurring
transactions in their Manual on Corporate
Governance. The material or significant RPTs
reviewed and approved during the year should
be disclosed in its Annual Corporate Governance
Report.
 The company should make a full, fair, accurate
and timely disclosure to the public of every
material fact or event that occurs, particularly
on the acquisition or disposal of significant
assets, which could adversely affect the viability
or the interest of its shareholders and other
stakeholders. Moreover, the Board of the offeree
company should appoint an independent party to
evaluate the fairness of the transaction price on
the acquisition or disposal of assets.
 The company’s corporate governance policies,
programs and procedures should be contained in
its Manual on Corporate Governance, which
should be submitted to the regulators and
posted on the company’s website.
9. STRENGTHENING THE EXTERNAL AUDITOR’S
INDEPENDENCE AND IMPROVING AUDIT QUALITY

Principle
The company should establish standards for the
appropriate selection of an external auditor, and
exercise effective oversight of the same to
strengthen the external auditor’s independence
and enhance audit quality.
10. INCREASING FOCUS ON NON-FINANCIAL AND
SUSTAINABILITY REPORTING

Principle
The company should ensure that the material
and reportable non-financial and sustainability
issues are disclosed.
11. PROMOTING A COMPREHENSIVE AND COST-
EFFICIENT ACCESS TO RELEVANT INFORMATION

Principle
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.
 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.
CULTIVATING A
SYNERGIC
RELATIONSHIP
WITH
SHAREHOLDERS
13. CULTIVATING A SYNERGIC RELATIONSHIP WITH
SHAREHOLDERS

Principle
The company should treat all shareholders
fairly and equitably, and also recognize, protect
and facilitate the exercise of their rights.
 DUTIES TO
STAKEHOLDERS
14. DUTIES TO STAKEHOLDERS

Principle
The rights of stakeholders established by law, by
contractual relations and through voluntary
commitments must be respected. Where stakeholders’
right and/or interest are at stake, stakeholders should
have the opportunity to obtain prompt effective redress
for the violations of their rights.
15. DUTIES TO STAKEHOLDERS

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.
16. DUTIES TO STAKEHOLDERS

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
commitment and stakeholders in a positive and
progressive manner that is fully supportive of its
comprehensive and balanced development.
THANK YOU!