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AGENCY PROBLEMS IN CORPORATE GOVERNANCE: Accountability of Managers and Stockholders


"A manager has his cards dealt to him and he must play them." Miller Huggins

Basic Functions of Managers

Planning Organizing Staffing Leading Controlling

Mintzberg's Set of Ten Roles

Category Informational Monitor Disseminator Spokesperson Interpersonal Figurehead Leader Liaison Decisional Entrepreneur Disturbance handler Resource allocator Negotiator Role

Skills needed by managers

Technical Human


5.2 Mechanisms of Stockholders Accountability

Three Key Features:

It is external

It involves social interaction and exchange It implies rights of authority

Four Core Components of Accountability in Global Governance


Answerability or Justification
Compliance Enforcement or Sanctions

Vertical Accountability

refers to mechanisms in which citizens and their associations can directly hold the powerful to account, such as through elections in which voters select representatives and also hold incumbents to account

Horizontal Accountability

refers to inter-institutional mechanisms or checks and balances (Goetz and Jenkins, 2001, p. 7;
Woods, undated, p. 4)

Six Basic Components for Accountability

Person Responsible (A) Stakeholder (B) Subject Matter (M) Evidence (E) Accountability Rule (R) Accountability Analysis Point (AAP)

Proxy Contest

a strategy that involves using shareholder's proxy votes to replace the existing members of a company's board of directors. By removing existing board members, the person or company launching the proxy contest can establish a new board of directors that is better aligned with their objectives.

Steps Involved in a Proxy Contest

The acquiring company and / or a group of major stakeholders such as large institutional investors - decide to join forces and launch a proxy contest against the target company. These investors threaten to use their proxy votes - which is commonly used in large corporations for voting by shareholders to make the target company comply with their wishes. Proxy voting allows shareholders who have confidence in the judgment of others to "stand-in" and vote for them on corporate governance matters such as the election of board members. If successful in gathering enough proxy votes, the acquiring company can then elect new board of directors using proxy ballots. These newly installed board members will be much more agreeable to the takeover or merger, and eventually the deal is finalized.

Tender offer
- formal offer to purchase a given number of shares of a firms stock at a specified price

Two-tier offer
- A tender offer in which the terms offered are more attractive to those who tender shares early

Exchange Offer
- An offer by a firm to exchange its own securities such as bonds or preferred stock.

The Market for Corporate Control

- defined as equity transactions that are large enough to change the control of the company.

5.3 Outside Forces: Regulators, Government Enforcement (Civil and Criminal)


public authority or government agency responsible for

exercising autonomous authority over some area of human

activity in a regulatory or supervisory capacity. They deal in

the area of administrative lawregulation or rulemaking (codifying and enforcing rules and regulations and imposing supervision or oversight for the benefit of the public at large).

Regulators in Corporations
Securities and Exchange Commission (SEC)
The SEC is the securities regulator. The SEC is a centralized institution that generally administers and supervises all corporate acts, In principle, the SEC has the authority to enforce laws and regulations The SEC is mainly empowered and regulated under the SRC

Regulators in Corporations
Philippine Stock exchange (PSE)
In June 1998, the SEC granted SRO status to PSE, allowing it to impose rules as well as implement penalties on erring trading participants and listed companies.

Philippine Depository Trust Corporation (PDTC)

PDTC also provides registry and clearing and settlement infrastructure services to issuers of fixed-income securities such as bonds, commercial paper, negotiable certificates of deposits, and other negotiable instruments.

Regulators in Corporations
Bangko Sentral ng Pilipinas (BSP)
It provides policy direction in the areas of money, banking, and credit. It supervises operations of banks and exercises regulatory powers over non-bank financial institutions with quasi-banking functions.

Department of Trade and Industry (DTI)

Its main role is to contribute to the countrys goal of achieving economic growth towards poverty reduction.

Regulators in Corporations

Courts of general jurisdiction or the designated RTC have jurisdiction over all cases involving corporate disputes. The Supreme Court has designated certain RTCs in all judicial districts to handle cases involving corporate disputes.

Government Enforcement (Civil and Criminal)

Securities and Exchange Commission and Department of Justice

Corporate Liability

it determines the extent to which a corporation as a legal person can be liable for the acts and omissions of the natural persons it employs.

Criminal sanctions includes:


Community service orders

Criminal law

Represents formal public disapproval and condemnation because of the failure to abide by the generally accepted social norms, codified into the criminal law. Justifies more severe penalties because it is necessary to overcome the higher burden of proof to establish criminal liability.

The theoretical value of punishment is that the offender feels shame, guilt or remorse, emotional responses to a conviction that a fictitious person cannot feel.
If a state turns too often to the criminal law, it discourages selfregulation and may cause friction between any regulatory agencies and businesses that they are to regulate.

Civil law

With the lower burden of proof and better case management tools. But there is little moral condemnation and no real deterrent effect.

Difference of criminal and civil law

Criminal law means that a law (state or federal) has been broken. In a criminal case, you seldom see a judge or a jury reward monetary rewards In the case of criminal law, the burden of proof is always on the state or on the federal government that is prosecuting the case. Civil law no laws have been broken but your rights as a citizen of your state or of the United States has been infringed upon. in civil court, a judge can award cash settlements as part of the punishment In civil court, the burden of proof is on the plaintiff in most cases.

Civil Liability

The Supreme Court held in this case that a corporation is civilly liable in the same manner as natural persons for torts.

Criminal Liability
The Corporation Code of the Philippines specifically states in Section 144 the criminal penalties for violations of any of the provisions of the Corporation Code and the penalties include;

fine of not less than PHP1,000 but not more than PHP10,000 Or imprisonment for not less than 30 days but not more than five years. Or both, at the discretion of the court.


A. Tax Evasion B. Fraud/Swindling C. Foreign Bribery (Internet and Various Media Reports)

D. Large Scale Pilferage


What is the Sarbanes Oxley Act?

The Sarbanes-Oxley Act of 2002 also known as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly called Sarbanes-Oxley, Sarbox or SOX, is a United States federal law enacted on July 30, 2002 and introduced major changes to the regulation of financial practice and corporate governance. The legislation set new or enhanced standards for all U.S. public company boards, management and public accounting firms. The act contains 11 titles, or sections, ranging from additional corporate board responsibilities to criminal penalties.

What does Sarbanes Oxley Address?

Sarbanes Oxley Act Establishes new standards for Corporate Boards and Audit Committees Sarbanes Oxley Act Establishes new accountability standards and criminal penalties for Corporate Management Sarbanes Oxley Act Establishes new independence standards for External Auditors Sarbanes Oxley Act Establishes a Public Company Accounting Oversight Board (PCAOB) under the Security and Exchange Commission (SEC) to oversee public accounting firms and issue accounting standards. Restore public confidence in the nations capital markets by strengthening corporate accounting controls. The act also covers issues such as auditor independence, corporate governance, internal control assessment, and enhanced financial disclosure.

History of Sarbanes-Oxley Act

A variety of complex factors created the conditions and culture in which a series of large corporate frauds occurred between 2000-2002. The spectacular, highly-publicized frauds at Enron WorldCom, and Tyco exposed significant problems with conflicts of interest and incentive compensation practices. The analysis of their complex and contentious root causes contributed to the passage of SOX in 2002.
The hearings produced remarkable consensus on the nature of the problems: inadequate oversight of accountants, lack of auditor independence, weak corporate governance procedures, stock analysts' conflict of interests, inadequate disclosure provisions, and grossly inadequate funding of the Securities and Exchange Commission.

Reasons Why SOX Arise

Auditor conflicts of


Boardroom failures
Securities analysts'

conflicts of interest


funding of the SEC

Banking practices



Executive compensation

Contents of Sarbanes-Oxley Act

1. Public Company Accounting Oversight Board (PCAOB) 2. Auditor Independence

Corporate Responsibility

4. Enhanced Financial Disclosures 5. Analyst Conflicts of Interest

6. Commission Resources and Authority

7. Studies and Reports 8. Corporate and Criminal Fraud Accountability

White Collar Crime Penalty Enhancement

10. Corporate Tax Returns 11. Corporate Fraud Accountability

Important Sections in SOX

Section 302- Corporate Responsibility for Financial Reports Section 401- Disclosures in Periodic Reports Section 404- Management Assessment of Internal Controls Section 409- Real Time Issuer Disclosures Section 802- Penalties for altering documents Section 906- Corporate Responsibility for Financial Reports Section 1107 - Criminal penalties for retaliation against whistleblowers

5.5 Gatekeeper and access to capital: Auditors; Investment Banker; Rating Agencies; Exchange, The Financial Press


A gatekeeper is defined as someone who controls access to something. It also refers to individuals who decide whether a given message will be distributed by a mass medium.


Auditors prepare, analyze, and verify financial documents, accounting records, and operating procedures in order to determine the financial status of an establishment and provide information to clients.

Internal auditors

Internal auditors work for one firm or business. Serving as consultants to management and the directors, auditors assist management by examining and evaluating the activities of the firm.

External auditors

An external auditor is an audit professional who performs an audit on the financial statements of a company, government, individual, or any other legal entity or organization, and who is independent of the entity being audited.

Investment Banker

Investment Banker is financial institutions and individuals who assist companies in raising capital, often through a private placement or public offering of company stock. Sometimes investment bankers are referred to as brokers or deal makers.


Transaction Broker Financial Advisor

Transaction Facilitator

Rating Agencies

Rating Agencies is a company that investigates the creditworthiness of companies and governments and assigns ratings to their securities, especially their bonds. Rating agencies perform this service in exchange for a fee.

7.1 Corporate Governance and Foreign Investment

Corporate Governance
- is the set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled.

Scope of Corporate Governance

Principles of Corporate Governance

Rights and equitable treatment of shareholders Interests of other stakeholders Role and responsibilities of the board Integrity and ethical behavior Disclosure and transparency

Role of the Accountant in Corporate Governance

Foreign Investment

Investment by citizens and government of one country in industries of another; also investment within a country by foreigners.

Types of Foreign Investment

Foreign direct investment

Foreign Indirect investment

What concerns foreign investors?

Country Specific

Company Specific

Property Rights Strong Legal & Political Institutions Consistent Government Macroeconomic and Fiscal Policy

Strong Management team with a excellent track record

Good Strategy
Market Dominance Strong Cash Generation Capital Appreciation

Stable political system

Profit/dividend Repatriation

Foreign investment and governance: Macro level

Four main elements to attract foreign investment:

Participation Transparency


Foreign investment and governance: Firm level

Relationship between governance: macro and firm level


Macro level

Increasing FDI in the 1990s

Technology Transfer Corporate Governance Practices

Emerging Market Countries

$ 1214 billions (1990s)

Attracting FDI to Emerging Market Countries $ 1436 billions (2000-2005)

Implementing Corporate Governance

Firm level

Figures source: Inflows of FDI to Developing Countries, UNCTAD, World Investment Report 2006.

Conclusion Impact of Good Corporate Governance on Attracting Investment

Competitiveness Sound governance shows investors a high level of potential for success in a company. Good governance makes a company visible in the domestic and international market. A better allocation of capital overtime, and hence higher productivity and growth. Increased ability of companies to raise funds overseas and compete internationally.

Stronger foundations for further opening of the capital account.

Linkages to international networks, contacts and possible lucrative partnerships. Employment Target firms need good corporate governance practices to evaluate takeover offers A good corporate governance practice prevents firms from being seen as an easy target by other firms and governments. Good corporate governance is also necessary to attract venture capital.

References: TI,articleId-8848.html