Reviewer: Chapter 1

Chapter 1 summary : Corporation and Corporate Governance

Corporation is an artificial being created by operation of law, having the right
of succession and the powers, attributes and properties expressly authorize
by law or incident to its existence.
Artificial Being by fiction of law a corporation is a juridical person
whose personality is separate and distinct from its owners.
Created by Operation of Law Existence through a charter or a
grant from the state and cannot exist by mere agreement or a
unilateral and self-declaration of existence.
Right of succession Can continue to exist even in death,
incapacity or insolvency of any stockholder or member.
Powers, Attributes and Properties
It is authorized to do activities within the purpose(s) of its creation, it
has its own traits, and it operates based on what has been expressly
provided in the charter including those that are considered incident to its
existence as a corporation.
Stakeholders of a Corporation
1. Management the party given the authority to implement the
policies as determined by the Board in directing the course/ business
activities of the corporation
2. Creditors the party who lend goods, services or money to the
corporation. They gain by way of interest for money loaned or profit
for goods sold or services rendered.
3. Shareholders People who invest their capital in the corporation.
Considered as the first believer of what the entity can do. They are
the part time owner of the entity therefore they cannot demand
payment from the corporation.
4. Employees people who contribute their skills, abilities and
ingenuity to the corporation. They invested their future in the
company with full trust and confidence that the entity would make
them secure.

5. Clients the party considered to be the very reason for existence of

corporation. They are the buyers of the corporations product or
services for final consumption, enjoyment or maybe for the use in
production/ creation of other goods.
6. Government the government has several interests in private
corporations and one of which is taxes which the government
depends on for survival. Corporate activities help the economy by
providing jobs which generate income/ salary which then give
purchasing power to individuals. Corporation help the government in
lessening their burden such in health services, education, vital
industries like power, water and transportation. Corporations help fill
the gap of demands which the government cannot provide.
Government is also a buyer of products of some corporation. They
set standards and regulate important aspects of corporate activities.
7. Public corporation provides the citizens with the essentials such
as goods, services, employment and tax money for public programs.
The results of responsible or irresponsible conduct of these
corporations can also affect public in so many ways.
Purposes of a Corporation
1.
2.
3.
4.

Early Stage Survival

To Increase Profit
To Offer Vital Services to the General Public
To Offer Goods and Services to the Mass Market

Shareholders, Bondholders and Directors

They complete the cast when the corporation starts to operate. They are the
parties which will be having various claims over the entity.

Shareholders Claim from dividends. They are artificial or natural

persons that are legally regarded as owners of the corporation.
Bondholders Claim in the form of interest earned via long-term
agreement. Person or entity that is the holder of the currently
outstanding bond. (creditors)
Board of Directors Claims on salaries, incentives, stock options
and bonuses. Collegial body that exercises the corporate powers of
all corporations formed under the Corporation Code. It conducts all
business and controls or holds all assets of such corporations. They
are formed by the stockholders and act as governing body of the
corporation.

Duties of the Board of Directors:

Governing the organization by establishing broad policies and

objectives
Selecting, appointing, supporting and reviewing the performance of
the chief executive
Ensuring the availability if the adequate financial resources
Approving annual budgets
Accounting to the stakeholders the organizations performance

Multinational and Transnational Corporation

Both Multinational and Transnational Corporation are enterprises that
manage production or delivers services in more than one country. They are
business entities that have their management headquarters in one country,
known as the home country, and operate in several other countries.
Examples are manufacturing, oil, mining, agriculture, consulting, accounting,
construction, legal, advertising, entertainment, hotels, banking and
telecommunications.

Multinational Companies (MNC) have investment in other countries

but do not have coordinated product offerings in each country. Wellknown MNCs are mostly consumer goods manufacturers quick service
restaurants like Unilever, Proctor & Gamble, McDonalds and 7-11
Transnational Corporations (TNC) registered and operates in more
than one country at a time. It has headquarters in one country and
operates wholly or partially owned subsidiaries in one or more countries.
They have foreign operations, central corporate facility but give decision
making, R&D and marketing powers to each individual foreign market.
Examples are Shell, Accenture, Deloitte, Glaxo- Smith Klein and Roche.

Corporate Governance
Corporate Governance is the process and structure used to direct and
manage the business and affairs of the company towards enhancing
business prosperity and corporate accountability with the ultimate objective
of realizing long-term shareholder value, whilst taking into account the
interests of other stakeholders
Corporate Governance is defined as the structure and process by which
companies are directed and controlled. Good corporate governance help

companies operate more efficiently, mitigate risk and safeguard against

mismanagement, and improve access to capital that will fuel their growth. It
makes companies more accountable and transparent to investors and gives
them the tools to respond to stakeholder concerns, including implementation
of good environmental and social practices.
Fundamental Objectives of Corporate Governance
1. Improvement of Shareholder Value
2. Conscious Consideration of the Interests of Other Stakeholders
What Good Governance Promotes
1. Transparency Information is the currency of democracy by
Thomas Jefferson
2. Accountability - Recognition and assumption of responsibility.
Set Policy
Set Goals
Disclose credible information
3. Prudence Care, caution and good judgement as well as wisdom
in looking ahead.
Benefits of Good Governance
1. Reduced Vulnerability leads to an improved system of internal
control.
2. Marketability leads to easy access to capital in financial markets
and will make the company even more attractive in open market.
3. Credibility leads to increase the trust of investors and then money
and flexibility follows.
4. Valuation leads to better corporate financial and non-financial
value of the enterprise.
Agency Problem in Corporations
1. Agency Relationships and Costs conflict of interest between
stockholders and management.
2. Goals of Financial Management what would be the management
goal if they have no control at all?
3. Do Managers Act in the Stockholders Interests? easier if
everyone had the same information.
4. Managerial Compensation will result to significant economic
incentive to increase the share value.

5. Control of the Firm ultimately rest upon with stockholders who

elect board of directors. Unhappy stockholders can terminate or
replace management by way of proxy fight or takeover
6. Stakeholders parties with interest in firms decision other than
stockholders or creditors. Employees, customers, suppliers and even
government all have financial interest in the firm.

members of the board of directors of the company who does not take
part in the executive function of the management team.
are not employees of the company or connected with it in any other
way.
Separate from inside directors
Role is to give meaningful contribution to the board by providing
objective criticism.

Agency Theory in Governance

Agency Theory suggests that the firm can be viewed as a loosely defined
contract between resource providers and resource controllers. This theory
argues that the agency/ managerial actions conflict to the principals/
shareholders interest which is to maximize share retruns. Agency loss/ cost
maybe reduced if the owners themselves are the ones who directly control
the corporation or by providing financial incentives, compensation, benefits or
rewards for executives and managers for prioritizing the maximization of
shareholders wealth.
Effects of Agency in Governance
1.
2.
3.
4.
5.

Conflict of Interest
Managerial Opportunism
Incurrence of Agency Cost
Shareholder Activism
Managerial Defensiveness

Concept of Goal Congruence -Harmony or alignment of goals of both

principal and the agent which is consistent with the overall objectives of the
organization.
Performance Incentives and Disincentives
1.
2.
3.
4.
5.

Pay Dependent on Profit Level

Shares Incentives
Shareholders Intervention
Threat of being fired
Takeover Threat

Roles of the Non-Executive Directors

(CFO, Audit Committee & External Auditor)
Non-Executive Directors

1.
2.
3.
4.

Strategy
Establishing Networks
Monitoring of Performance
Audit

Roles of the Chief Finance Officer (CFO)

CFO corporate officer principally accountable for managing the
financial risks of the corporation.
1.
2.
3.
4.
5.
6.
7.
8.

Implement Internal Controls

Supervises Major Impact Projects
Develops Relations with Financing Sources
Advisor to Management
Drives Major Strategic Issues
Risk Manager
Relationship Roles
Objective Referee

Roles of the Audit Committee

Audit Committee essential component of the overall corporate
governance system that is geared toward carrying out practical,
progressive changes in the functions and expectations placed on
corporate boards.
1. Understanding the Audit Committees Responsibilities
considering (1) Risk Identification and Response (2) Pressure to
manage earnings (3) Internal controls and company growth
2. Risk Identification and Response
External Risk (Independent)
Rapid technological changes
Downturns in the industry
Unrealistic earnings expectations by analysts
Operating/ Internal Risk
Information and Control Risk

Roles of the External Auditor

Need for External Auditor to cast away doubts on the information given
by the management which are also generated under its direct control.
Factors that Contribute to Information Risk
1.
2.
3.
4.

Remoteness of Information Providers to the Information Users

Bias of Information Providers
The Volume of Data
Complexities of Transactions

Auditors Duties

To make a report on the fact and fairness of the entitys annual

accounts
Has the responsibility to form an opinion on certain matters and
to report any reservations that he has on the reports.
Considering if the following are present:
Proper accounting records being kept by the
company
Financial statement figures that agree with
accounting records

Adequacy of notes to financial statement and other

disclosures necessary.
Compliance with relevant laws and standards of
financial accounting and reporting.
To express an opinion on the financial statements prepared by
management lending credibility to financial statements which
are to be used by the shareholders and other stakeholders.