The Internal and External Institutions of Corporate Governance: Regulators, Markets, Auditors and Others As reported by:Gallardo, Ralph Lauren Granada, Mon Cedric April 20, 2013 A Reaction Paper by: Lacsamana, Rodrigo II Submitted to: Carolina Guerrero, CPA The External Institutions of Corporate Governance:
Regulators, Markets, Auditors and Other Institutions “The Price of Greatness is Responsibility” -Winston Churchill Corporate governance may refer to the structures and processes for the efficient and proper direction and control of companies (both public and private) in the interest of all stakeholders, though the bottom line of it all is RESPONSIBILITY.
Responsibility to direct the business’ core processes to be able to maximize the shareholders’ wealth; Responsibility to ensure that in attaining that goal, the entity is playing on fair ground, that is, providing employees with proper remuneration, adhering to set rules and regulations (external and internal),; Responsibility to other stakeholders such as the government, markets, environment and the general public by securing that their interests are given equal attention and action and not just being left on the bottom list of their priorities.
Since a corporate entity, a major contributor and creator of wealth to the society, is the pivot player on our economic activities, they too, have the most critical responsibilities to name a few. These “critical responsibilities” are the price they have to pay for using the society’s key resources, such as people (human resources), the environment (natural resources), the government (political resources), and money (economic resources). They have to guarantee that whatever is taken, is given back, in its form or another, and o ensure that at the end of the day, everyone is happy and fulfilled. Having forenamed all of these, external institutions are given the power and much greater responsibility to check and account if the corporate governance of an entity is fulfilling its responsibilities. To encapsulate therefore, external institutions has the “Responsibility over Responsibilities”. Top of the list are the regulators. They consist of government and some other institutions that ultimately articulate accurately the community’s voice concerning power relationships, responsibility and accountability.
Specifically, government agencies regulate corporate governance through formulation and implementation of rules and regulations on the operations of corporate institutions within of course its jurisdiction. In instance, the Corporation Code of the Philippines or the Batas Pambansa Bilang 68 is where all other laws and interpretations are derived concerning a corporation and corporate governance. It is, in my opinion, the mother of all corporation laws, bylaws, rules and regulations and policies. Discussing it immensely will require tedious hours to complete.
Aside from this constitutional law, the government also provided specific special laws; most of them enable the government to create agencies, commissions, and overseeing committees to help them ensuring that all laws are practiced, are incorporated to its activities, and that the interest of the people (by saying people it is because our government is by the people, of the people and for the people) are taken into account. The list goes on and on, from Securities and Exchange Commission, Bangko Sentral ng Pilipinas, Department of Trade and Industry to name a few.
In having this long list of government-regulating agencies, the good, and the bad happen. On the general concept of law, everyone is given fair and equal treatment; may you be a small-medium enterprise or a multinational corporation. But as I said, concept. Let’s take a look at the adverse effects of having multitude laws for corporate regulation. I’m not kind enough to tell the happy tales of law implementation because that side of story is given enough emphasis.
Let’s take for example Republic Act 7942 or the Philippine Mining Act of 1995 (facts are from Sunday issue of Phil. Star 04/21). The government attitude on flip-flopping mining policies (that is, politicizing) has given mining companies to have a second thought of investing in the country and several of them are backing off to some of its projects that would create the much needed jobs in the country and contribute to our economic wealth and progress. Some politically affiliated groups would argue environmental issues; well the answer still lies on the government.
We have government agencies such as as the DENR to overlook and ensure environmental laws and policies are followed by these companies. Again, it is concept versus action. Yes, the burden lies on the government, because it is for the fact that they will be heavily benefited from these activities, from their share on mine extraction down to taxes. They just have to make sure that all laws and policies are sound and effective. On this point, I recommend that aside from corporations, the government should also take responsibilities of its actions towards the betterment of life of all.
The market has one of the most vital positions on the list of external institutions of corporate governance. It is where the core business process is centered. In a manufacturing or service companies, market serves as the meeting place where product and services are sold, consumed and rendered. In capital markets, it is the location where demanders and makers of fund met for capital transactions where firms can generate additional funding requirements for investments, expansion and for other reasons where the company sees fit to acquire further capitalization.
Furthermore, as they are integrated on the business process, the corporation must take responsibility on ensuring that these markets are dealt with utmost forbearance and care that their intention for existence is equally satisfied as much as the company’s desire to gain required sales volume and funding. Differing market requirements requires congruent company action and policy making strategies so as to ensure continuing satisfaction of both parties’ intentions. Take a look of what the conglomerate Ayala Corporation owned telecommunication giant Globe Telecom did to satisfy market demands.
Globe has seen the growing needs of their market-based customer services like post-paid plans for mobile users for personal and fully customizable mobile data plans. In order to meet these market demands, Globe has introduce the world’s first ever fully-customizable mobile data plans that give their customers the power to choose their monthly recurring fees, the length or period of their data plans, their services according to their preferred usage such as mobile internet plans, voice and text messaging services, other mobile services that will boost up their mobile experience to suit their usage and mobile data needs.
By introducing this innovative platform to their market, Globe has ensured their leadership in telecommunication services and sustainability of their profits while satisfying what the market has demanded. The external auditors are professionals or an audit-service provider company who performs an audit in accordance with specific laws or rules on the financial statements of a company, government entity, other legal organization, and who is independent of the entity being audited.
Users of these entities’ financial information such as investors, government agencies and the general public rely on external auditors to present an unbiased and retain transparency among the internal and external users of financial information who wants their interest on the company be protected from inside misjudgment and misinformation. They are the silent reminders to any company that there are eyes looking on them to ensure that interest of others are protected and enables the company to act consciously, with proper diligence and conscientious.
In effect, this feeling of being watched can lead the company to formulate strategies, policies and corporate governance practice in ensuring transparency and reliability is observed at all times. One of the most prominent other external institutions is the media. The media can turn both ways the fate of the corporation, the good, and the bad. The media can sensationalize, and will sensationalize everything, from simple employer-employee relation, waste management issues, down to malicious conclusion on corporate policies, leaders and their personal ventures, all in the name of public information and lurid news report.
Several corporations throughout history failed not because of inability to operate profitably, but by being put into limelight by the media, who throws issues backed-up not by hard facts but by malicious intent to get a scoop to feed the public. Let’s take a look where corporate governance and the media play together. Television giant ABS CBN, owned by Lopez Group of Companies, have reported and allotted a series of prime time news report concerning waste disposal of Philex Mining Corporation and the adverse effects it has on people and environment.
It has drawn attention and entices pro-environment movement against the corporation which cost the company to suffer public scrutiny. It appears that both companies have their fair share of hard strings. Well here’s the catch, Philex Mining is primarily owned by MVP Group of Companies through its subsidiaries, the same conglomerate who owns ABS CBN television rival TV5 and happens also to be the purchaser of Lopez ex-owned shares in MERALCO. See the conflict of interest here? Further, the Lopez has their own affiliates in a mining company who are also under scrutiny of corporate malpractice.
Analysts say that ABS CBN used the issue on Philex Mining to direct public’s eyes away from their own not-so-friendly mining affiliate. And by government pressures, Philex have to allocate P 1 billion for clean-up costs and affected family economic rehabilitation and compensation program. There’s a lot of egg-cooking show between this two media giants but I think I have laid out my points well and long enough. External institutions can both adversely and favorably affect corporations and their governance policies.
But then again, all conclusions will be drawn back to responsibility. The corporate responsibility to create sustainable relationship on regulators, markets, auditors and other institutions that will promote goodwill and preserve the interest of everyone. It will help if the corporations and these external institutions will work hand-in-hand for the preferment of common good among stakeholders. But in any case, the responsibility doesn’t dissolve to the corporations and external institutions alone.
But rather to us, the general public, who is the ultimate institution, with ultimate responsibility that our rights as citizen are protected, the responsibility to protect the environment and our interest, the responsibility to oversee corporate governance, to ensure that their policies include us, and the responsibility to guarantee that our rights to live, to self-preservation and to the pursuit of happiness is not impede by corporations and their policies, and the external institutions of corporate governance.