Managing Corporate Governance: LegalRegulatory Environment and Corporate Governance Practices in the

1
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 in Corporate Governance in Asia
RVR-AIM Center for Corporate Responsibility Asian
Institute of Management
2
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
• Key Developments (up to 2002) 13
• Lessons Learned 14-16
• V. Recapitulation 17

RVR-AIM Center for Corporate Responsibility Asian
Institute of Management
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3/17
I. Corporate Governance in the Philippine Context
TWIN GOALS INTERNAL EXTERNAL

• Sustainable Growth
• Efficient Market
• Legal Regulatory Frameworks
• Capital Market Development

• Effective Protection of
• Share/Stakeholders
• Creditors
• Competent Management
• Probability of Returns
• Resolution of Agency Issue

C. V. Starr Chair in Corporate Governance in Asia
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I. Corporate Governance in the Philippine
Context 2001 Survey

• RESPONDENTS
• China 93
• Korea 88
• India 53
• Japan 50
• Philippines 46
• Malaysia 38
• Singapore 28
• Thailand 23
• Taiwan 21
• TOTAL 440

Your Core Concept of CG (Only 1 Most
Important) RoK RP Accuracy, Transparency,
1 1 Protection Profls Manage Assets 2
3 (Efficiently) Corporate Growth 3 2
Country Growth Compliance Internal Control
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I. Corporate Governance in the Philippine
Context 2001 Survey

• SYSTEM REQUIREMENTS
• (Multiple Answers) RoK RP
• Capable
• Trained BoD 1 1
• Transparent
• Rating System 2 2
• Management
• Incentives 3 3
• Minority Rights 4
• Easier Rules
• to Sue
• 3rd Party
• Watchdog
• Limited of
• Directorships

• REQUIRED ELEMENTS
• (Multiple Answers) RoK RP
• Independent Director 1 4
• Annual Report Analysis 2 8
• External Auditor 3 2
• Board-level Audit 4 9
• Internal Audit 5
• Mission/Value Statement 3
• Company Code of Ethics 1
• Disclosure
• Mandated Scheduled 6
• Disclosure
• Related Party New 7
• Directors Code of Conduct 10

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• Corporate Governance
• in the Philippine Context

INTERNAL Corporate Strategy Structure
C. V. Starr Chair in Corporate Governance in Asia
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II. The Philippines Business Legal Environment
7/17

• 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)

RVR-AIM Center for Corporate Responsibility Asian
Institute of Management
8
II. The Philippines Business Legal Environment
8/17

• CORPORATE
• Concentrated Ownership
• Interlocking Directors
• Pyramid Structures
• Banks Drive Market

LEGAL REGULATORY - Common law origin
- Corporation Code - Securities Regulations
Code - General Banking Law - Stock
Exchange Listing Requirements
FAMILY FIRMS BUSINESS GROUPS DOMINATE.
AS IN MANY DEVELOPING COUNTRIES, THERE IS NO
SHORTAGE OF LAWS.
C. V. Starr Chair in Corporate Governance in Asia
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II. The PhilippinesBusiness Legal Environment
9/17

• BUT ENFORCEMENT IS WEAK.
• Relatively Weak Institutions (regulatory agencies
  and market institutions)
• Poor Judicial Process
• Low Level of Governance in PRACTICE

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Institute of Management
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II. The Philippines FAMILY FIRMS
In Philippine Family Firms, there is a Weak
Correlation between Size Improved Governance.

• TO CONGLOMERATES
• Still like small firms, BUT
• Listing Publish PL BS
• More Debt
• More Non-Crony Banks
• Road-Shows Transparency
• More JVs/Alliances
• Strong Minority (Local)
• Minority Overseas
• Children w/Overseas MBAs

• FROM SMALL FIRMS
• Crony/Rubber Stamp
• Chairman CEO
• Pre-Cooked Agenda
• No Minority Rights

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II. The Philippines The PSE
HISTORICALLY (1) Two Camps (2) Both
Fil-Chinese, (3) Physically Separate

• MANILA (OLD)
• No Foreigners
• Many Brokers
• Small Volumes
• Entrepreneurial
• Conservative
• Old Boys Club
• Follow the Leader
• (80-20 Distribution)

• MAKATI (NEW)
• Foreigners OK
• Fewer Brokers
• Higher Volumes
• Includes Foreign Brokers
• Relatively Progressive (Foreigners)
• Female Leader
• Still Follow the Leader

MERGED IN EARLY-1990s.
1997 ASIAN CRISIS.
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II. The Philippines WEAKNESSES (Based on OECD
Principles)
12/17

• 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)
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Institute of Management
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III. The Philippine SituationKey Developments
(up to 2002)
13/17

• 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.

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IV. Managing Corporate GovernanceWhat can be
learned from the experience?
14/17

• 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

RVR-AIM Center for Corporate Responsibility Asian
Institute of Management
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IV. Managing Corporate GovernanceWhat can be
learned from the experience?
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 in Corporate Governance in Asia
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IV. Managing Corporate GovernanceWhat can be
learned from the experience?
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

RVR-AIM Center for Corporate Responsibility Asian
Institute of Management
17
V. Managing Corporate Governance RECAPITULATION
17/17

• 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 in Corporate Governance in
Asia
RVR-AIM Center for Corporate Responsibility Asian
Institute of Management