Managing Corporate Governance:: Legal/Regulatory Environment and Corporate Governance Practices in The Philippines

Managing Corporate Governance:
Legal/Regulatory Environment and Corporate

Governance Practices in the Philippines
Francisco L. Roman, Jr., Fellow,
The 2nd Asia Corporate Governance Conference Program

Asian Institute for Corporate Governance
Seoul, Korea
16 May 2002
C. V. Starr Chair RVR-AIM Center for Corporate

Responsibility
in Corporate Governance in Asia
Managing Corporate Governance:
Legal/Regulatory Environment and Corporate
Governance Practices in the Philippines
TABLE of CONTENTS
I. Corporate Governance in the Philippine Context 3-6
II. Business & Legal Environment 7-12
III. Key Developments (up to 2002) 13
IV. Lessons Learned 14-16
V. Recapitulation 17
RVR-AIM Center for Corporate
Responsibility
Asian Institute of Management
3/17
I. Corporate Governance in the

Philippine Context
TWIN GOALS
“INTERNAL” “EXTERNAL”
Effective Protection of Sustainable Growth
Share/Stakeholders & • Efficient Market
Creditors • Legal & Regulatory
Frameworks
• Competent Management • Capital Market
• Probability of Returns Development
• Resolution of Agency Issue
C. V. Starr Chair
4/17

Philippine Context: 2001 Survey
RESPONDENTS
Your Core Concept of CG
• China 93
(Only 1 = Most Important)
• Korea 88
RoK RP
• India 53
* Accuracy, Transparency, 1 1
• Japan 50
& Protection
• Philippines 46
* Prof’ls Manage Assets 2 3
• Malaysia 38
(Efficiently)
• Singapore 28
* Corporate Growth 3 2
• Thailand 23
= Country Growth
• Taiwan 21
* Compliance
TOTAL 440
* Internal Control
Responsibility
5/17
Philippine Context: 2001 Survey
SYSTEM REQUIREMENTS
REQUIRED ELEMENTS (Multiple Answers) RoK RP
(Multiple Answers) RoK RP • Capable &
• Independent Director 1 4 Trained BoD 1 1
• Annual Report Analysis 2 8 • Transparent
• External Auditor 3 2 Rating System 2 2
• Board-level Audit 4 9 • Management
• Internal Audit 5 Incentives 3 3
• Mission/Value Statement 3 • Minority Rights 4
• Company Code of Ethics 1 • Easier Rules
• Disclosure: to Sue
Mandated & Scheduled 6 • 3rd Party
• Disclosure: “Watchdog”
Related Party & New 7 • Limited # of
• Directors Code of Conduct 10 Directorships
6/17
I. Corporate Governance
in the Philippine Context
EXTERNAL DRIVERS:
• Market Players
Environment
• Information
INTERNAL • Complete, Accurate & Timely
Corporate • Policies
Strategy & • Corporate & Government
Structure • Enforcement
• “Level Playing Field”
• Self-Discipline
• Internal Controls, Risk Mgt.
C. V. Starr Chair
7/17
II. The Philippines:

Business & Legal Environment
CURRENT THRUSTS (Starting 2001)
FROM Quantity (# of Judges) TO Quality (training)
* Improving Judicial Redress
FROM Creating Market Institutions
TO Improving Efficiency in Practices
FROM Common Practices TO Best Practices
* Codes of Governance
* Mechanisms (for addressing investor/minority
shareholder expectations)
Responsibility
8/17

CORPORATE LEGAL & REGULATORY

 Concentrated Ownership - Common law origin
 Interlocking Directors - Corporation Code
 Pyramid Structures - Securities Regulations Code
 Banks Drive Market - General Banking Law
- Stock Exchange
FAMILY FIRMS & BUSINESS
Listing Requirements
GROUPS DOMINATE.
AS IN MANY DEVELOPING COUNTRIES,

THERE IS NO SHORTAGE OF LAWS.
C. V. Starr Chair
9/17

BUT ENFORCEMENT IS WEAK.

Relatively Weak Institutions (regulatory agencies and
market institutions)
+
Poor Judicial Process
=
Low Level of Governance in PRACTICE

Responsibility
10/17
II. The Philippines: FAMILY FIRMS
In Philippine Family Firms, there is a “Weak”

Correlation between Size & Improved Governance.
FROM SMALL FIRMS TO CONGLOMERATES
• Crony/Rubber Stamp Still like small firms, BUT
• Chairman = CEO • Listing = Publish P&L & BS
• “Pre-Cooked” Agenda • More Debt =
• No Minority Rights • More Non-Crony Banks
• “Road-Shows” = Transparency
• More JVs/Alliances =
• Strong Minority (Local)
• Minority Overseas
C. V. Starr Chair • Children w/”Overseas” MBAs
11/17
II. The Philippines: The PSE
HISTORICALLY:
(1) Two Camps (2) Both Fil-Chinese, & (3) Physically Separate
MANILA (OLD) MAKATI (NEW)
• No Foreigners • Foreigners OK
• Many Brokers • Fewer Brokers
• Small Volumes • Higher Volumes
• “Entrepreneurial” • Includes Foreign Brokers
• Conservative • Relatively Progressive (Foreigners)
• “Old Boy’s Club” • Female Leader
• Follow the Leader • Still Follow the Leader
(80-20 Distribution)
MERGED IN EARLY-1990s. 1997 ASIAN CRISIS.
12/17
II. The Philippines: WEAKNESSES
(Based on OECD Principles)
VIOLATION OF BASIC SHAREHOLDER RIGHTS

 Disclosure & Access (to corporate info)
 Limited Participation (& voting in AGM)
 Inefficient & Unclear Corporate Control
 Limited Redress
The Egregious Violation is in the Disclosure of Information on

- Risk Mgt. (& Instruments)
- Preparation (of information & audit)
- Annual Audit (by independent auditors)
- Channels for Dissemination (to allow for fair, timely
and cost-efficient access by users)
Responsibility
13/17
III. The Philippine Situation:

Key Developments (up to 2002)
INSTITUTIONAL
• Revived Capital Markets Development Council.
• Aggressive Institute for Corporate Directors.
• SEC Reform.
NEW FORUMS/FORA
• Multi-Sector Business Advisory Group
• Governance Advisory Council
• Created by President GMA
• Both Public & Corporate Governance
JUSTICE SYSTEM
• SC Appoints Commercial Court Judges.
• ADB-Funded Training on Law & Governance.
14/17
IV. Managing Corporate Governance:
What can be learned from the experience?
1/3. Basic legal and regulatory framework weakest in:

 Role of boards and committees (especially audit)
 Rights of independent directors
 Protection of rights of minority shareholders (both

basic and under special circumstances, e.g.
insolvency, mergers, takeovers)
 Disclosure of non-financial information
 Quality and independence of audits
 Related party transactions and intra-group

transactions
Responsibility
15/17
2/3. Redress for minority shareholder protection

 Importance of courts as arbiters
 Problem of capacity and capability of the judicial
system and the courts to address intra-corporate

disputes
(NOTE: If courts are slow, then the importance of

the internal system of controls to prevent poor
governance increases.)
C. V. Starr Chair
16/17
3/3. Capacity-building in governance is important in

 Accounting standards and regulations
 Accounting and auditing services in-country
 Director training
 Supervisor/regulator training to help monitor and

promote company-level governance
Responsibility
17/17
V. Managing Corporate Governance:

RECAPITULATION
Developing a Corporate Governance System:

Start with the Legal framework
+ Regulation (Rules and rules enforcement)
+ Supervision (Capacity-building)
+ Market discipline (self-regulation, internal controls,
risk management)
= System of Corporate Governance
C. V. Starr Chair RVR-AIM Center for Corporate

Responsibility
in Corporate Governance in Asia Asian Institute of Management

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Managing Corporate Governance:

Legal/Regulatory Environment and Corporate

Francisco L. Roman, Jr., Fellow,

The 2nd Asia Corporate Governance Conference Program

C. V. Starr Chair RVR-AIM Center for Corporate

II. Business & Legal Environment 7-12

III. Key Developments (up to 2002) 13

IV. Lessons Learned 14-16

I. Corporate Governance in the

I. Corporate Governance in the

II. The Philippines:

II. The Philippines:

CORPORATE LEGAL & REGULATORY

AS IN MANY DEVELOPING COUNTRIES,

II. The Philippines:

BUT ENFORCEMENT IS WEAK.

RVR-AIM Center for Corporate

II. The Philippines: FAMILY FIRMS

In Philippine Family Firms, there is a “Weak”

II. The Philippines: The PSE

VIOLATION OF BASIC SHAREHOLDER RIGHTS

 Limited Participation (& voting in AGM)

 Inefficient & Unclear Corporate Control

The Egregious Violation is in the Disclosure of Information on

III. The Philippine Situation:

1/3. Basic legal and regulatory framework weakest in:

 Rights of independent directors

 Protection of rights of minority shareholders (both

 Quality and independence of audits

 Related party transactions and intra-group

2/3. Redress for minority shareholder protection

 Problem of capacity and capability of the judicial

system and the courts to address intra-corporate

(NOTE: If courts are slow, then the importance of

3/3. Capacity-building in governance is important in

 Accounting and auditing services in-country

 Supervisor/regulator training to help monitor and

V. Managing Corporate Governance:

Developing a Corporate Governance System:

C. V. Starr Chair RVR-AIM Center for Corporate

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