Assessment of CG in The Phil PDF
Assessment of CG in The Phil PDF
Assessment of CG in The Phil PDF
Debbie C. Wong*
Corporate governance has been a global buzzword in the public and private
sectors for more than a decade now. Renewed interest on corporate governance
was in full swing especially after the 1997-98 Asian financial crisis and after a
spate of international corporate failures and scandals in the early 2000 that
rocked some of the more developed and solid economies in the world. Leading
the corporate scandals is the high-profile Enron fiasco that robbed many of
their investment and retirement money. Against this dwindling public
confidence backdrop, corporate governance initiatives and reforms, which aim
to restore market integrity and to regain lost trust of investors, were rekindled
all around the world. The Philippines, specifically its various regulatory bodies,
has implemented many of the reforms recommended by the Organization for
Economic Cooperation and Development (OECD), the World Bank (WB), the
International Finance Corporation (IFC), the Asian Development Bank (ADB),
the Center for International Private Enterprises (CIPE), the International
Corporate Governance Network and the Asian Corporate Governance
Association to mention a few.
I. INTRODUCTION
In early December 2008, the Legacy notifying the SEC. The group allegedly
Group of Companies, which primarily involved in questionable activities including
composed of rural banks and pre-need pyramiding (Dela Pea, 2008; Lucas, 2008;
companies, ceased operations without Dalangin-Fernandez, 2009), double-your-
________________________
* Assistant Professor of Accounting and Finance, College of Business Administration, University of the
Philippines, Diliman, Quezon City. (Email: debbiecbp@yahoo.com).
DEBBIE C. WONG 25
money schemes (Lucas, 2008; Fernandez, but taxpayers money will also be used to
2009; Fernandez & Marasigan, 2009) and pay off these victims.
using of fictitious loans to siphon money
from the banks1 invoked Section 119 of the Global Governance Reform Initiatives
Corporation Code and filed for voluntary
dissolution claiming that continuing the Corporate governance reforms have
operation is no longer viable and will result come a long way since the 1997-98 Asian
in more losses to the greater prejudice of all financial crisis and the series of international
its stockholders. The depositors and clients corporate failures and scandals in the early
of the rural banks were lured to place their 2000 that gravely shook investors
hard earned money with the rural banks confidence around the world. Are they
double-your-money schemes. The closure adequate? At the forefront, actively
of the rural banks is aggravated by the promoting good corporate governance
payment of the Philippine Deposit Insurance practices is the Organization for Economic
Corporation (PDIC) to 95 percent of Cooperation and Development (OECD), an
Legacys depositors who were advised to international organization assisting
split up deposits in excess of the PDICs governments in tackling social, economic
maximum insurable amount of Php250,000 and governance challenges in the globalized
to avail of the deposit insurance protection. economy with the end goal of securing
Further investigation by Bangko Sentral ng economic stability and growth for world
Pilipinas (BSP) revealed massive diversion markets. Though most of its thirty (30)
of funds by said banks using fictitious loans. members are mostly from the developed
Many of the bank borrowers admitted to countries, it has organized many roundtable
having signed blank documents in dialogues with various non-OECD countries
consideration of commission fees ranging notably in Asia, Latin America, and Russia.
from Php10,000 to Php15,000 for supposed It recognizes the fact that with the current
loans. Falsified documents that had been global economic set up, one local crisis may
used to support alleged loans were also and can have impact on the financial system
discovered. While BSP filed cases against worldwide.
officers and employees of rural banks under The OECD Principles of Corporate
the group, no charge against Legacy founder Governance or simply known as the OECD
and owner, Celso de los Angeles, was filed Principles is the leading authority on
due to lack of evidence linking the founder- corporate governance. It was originally
owner to the alleged scams. The Senate and issued in 1999 in response to the Asian
the House of Representatives had questioned financial crisis. Through a process of open
why the SEC and BSP failed to protect the consultations and dialogues with many non-
public against companies that solicit funds in OECD countries and taking into account
trust such as banks and pre-need companies. developments since 1999, the OECD
BSP pointed out that the Legacy Group of Principles was revised in 2003 and the new
rural banks invoked deposit secrecy on the version issued in 2004. Many countries have
examiners of the BSP. This case not only since adopted the OECD Principles and
proves that loopholes in our legal and patterned their national codes of corporate
regulatory framework still exist, but it also governance on it. However, the first original
shows that the inability of our regulatory advocacy of corporate governance came
bodies in performing their duties can have about in the United Kingdom in late 1992.
very costly repercussions to the public.2 Not As early as 1990s, United Kingdom already
only do the victims suffer monetary losses had its share of corporate and accounting
scandals. The Financial Reporting Council,
26 AN ASSESSMENT OF CORPORATE GOVERNANCE REFORMS IN THE PHILIPPINES: 2002-2009
the London Stock Exchange and the The OECD principles focuses on six key
accounting profession of the U.K. worked areas of corporate governance. Table 1
together to publish the Cadbury report, which summarizes the main areas of OECD
featured how Boards should carry out their Principles with short explanatory annotation.
fiduciary responsibilities to better ensure Central to the success of the OECD
the reliability of company accounts. The Principles is that they are principles-based
Cadbury report provided a Code of Best and non-prescriptive so that they retain their
Practice as instrument for guiding a relevance in varying legal, economic and
directors behavior. social contexts (OECD, 2004).
Table 1
Key Areas of the OECD Principles
Business theories, practices and States between 1880 and 1930 put
principles have been evolving through time professional managers at the forefront as
as the business environment changes. From closely held companies that dominated most
a simple proprietor business setup, where industries gave way to large, publicly traded
the owner runs the business, modern corporations (Cheffins & Bank, 2009). This
corporations have grown so complex not led to the separation of ownership from
only in its operations but also in its control, which is a prevalent characteristic of
organizational structure and objectives. This most modern corporations, particularly
complexity leads to the separation of public corporations (Bainbridge, 2008-2009).
ownership and control, with managers Adolf Berle and Gardiner Means in their
gaining and owners-shareholders losing 1932 book The Modern Corporation and
control. At the heart of the separation of Private Property first introduced such
ownership and control is the agency problem, phenomenon, which later will be considered
which dominates the corporate governance as the fundamental and core problem of
research. Moreover, as resources become corporate governance (Dent, 2005). From an
scarce and companies compete intensely for economic perspective, this conflict of
capital, the firms objective elevates from interest can be better understood using the
simply generating short-term economic profit agency theory, which treats the shareholders
to maximizing shareholders value, which is as the principal and management as the
the ultimate goal of corporate governance. agent. Agency theory assumes that
While the debates persist on about individuals are rational and maximize their
shareholder value maximization versus short- utility, resulting in conflicting interests
term economic profit, another dimension of among managers, shareholders and other
the issue becomes more apparent, resulting in corporate constituents (Szilagyi & Batten,
the analysis of how the conflicting objectives 2004). At the very least, information
of individual participants associated with asymmetry exists between owners and
firms might be aligned so as to yield the managers that is exploited by management
hypothesized focus on profit maximization (Bedo & Acs, 2007). When corporations
(Cheffins, 2004). This dimension is referred lack shareholders who hold sufficiently
to as the separation of ownership and control. sizeable stakes to exercise influence over the
The corporate revolution in the United board of directors and the executives,
28 AN ASSESSMENT OF CORPORATE GOVERNANCE REFORMS IN THE PHILIPPINES: 2002-2009
III. METHODOLOGY
Table 2
A Barren Landscape of Best Practices in 1997
Country/Market Was there an official Did the idea of the Did the idea of the
code of best independent audit committee
practice? director exist? exist?
China None None None
Hong Kong Yes (but very short) Yes Yes
India None None None
Indonesia None None None
Japan None None None
Korea None None None
Malaysia None Yes Yes
Philippines None None None
Singapore None Yes Yes
Taiwan None None None
Thailand None None None
Source: ACGA research
Table 3
A Dense Jungle in 2009
Financial reporting guidelines dominated dramatized the need for vigilance over
most of the corporate governance circulars financial reporting practices (Agustin, 2002-
issued by the SEC. This confirms findings 2003). How these fraudulent financial
that the main thrust of corporate governance reporting practices escaped the attention of
reforms in the Philippines is on improving the external auditors raised the ire of the
and strengthening of accounting and auditing investing public and cast very serious doubts
standards (Echanis, 2006; International on the independence of external auditors
Financial Law Review, 2004). Moreover, the from their clients. Instead of lending
SEC amended SRC Rule 68, the Special credibility to the fairness of the financial
Accounting Rules, to conform to statements prepared by companies, these
International Accounting Standards (IAS). external auditors have become mere rubber
Effective 2005, most publicly-listed stamps of companies. To ensure fair
companies in the country are IAS-compliant. reporting and raise the level of audit rigor to
Another major SEC thrust is the accreditation protect investors, SEC has been issuing
of auditing firms and external auditors. various guidelines on financial reporting and
Guidelines to on accreditation and reportorial accreditation of external audit firms and
requirements are there to regulate the quality auditors.
of work done by the accounting and auditing While SEC has made leap and bounds
profession. progress in terms of laws and regulations to
The rationale behind SECs focus on enhance corporate governance, there are two
financial reporting and external auditor major areas that direly need improvement in
accreditation guidelines is that many the Philippines namely, in the enforcement of
investment decisions are financial in nature. compliance and in the imposition of higher
Prospective investors, as well as shareholders sanctions and penalties for violators.
and stakeholders, rely primarily on financial As per SEC Memorandum Circular Nos.
statements issued by the firms to make 8 and 13 Series of 2009, the scales of fines
critical decisions. SEC recognizes the for various violations are listed. To give the
importance of adopting globally accepted reader an idea of the severity or magnitude of
accounting and auditing standards to prop up the fines imposed, below is a condensed table
investments in the country. Moreover, a showing how an audit firm handling Group A
number of highly publicized corporate companies will be penalized for each
scandals involving fraudulent reporting have pertinent violations:
Likewise, reporting companies that do not statements, are also penalized with fines.
comply with the financial reporting The scales of fines are given in SEC
requirements of the SEC, specifically Memorandum Circular No. 8, Series of 2009.
material misstatements in financial For a first offender, the fine for a Php10
34 AN ASSESSMENT OF CORPORATE GOVERNANCE REFORMS IN THE PHILIPPINES: 2002-2009
million or above misstatement in the referred to this as traditionally the weak spot
financial statement is only 1/10 of 1 percent in Asian regulatory regimes (Moir, 2006a).
of the amount misstated or an amount given Both the BSP and the IC were also keen
in the table (maximum is Php4,000), contributors to the good governance cause.
whichever is higher. 1/10 of 1 percent of BSP published the Manual of Regulations for
Php10 million misstatement translates only to Banks (MORB) and the Handbook on
Php10,000. In the same way, the penalties Corporate Governance for Banks. Both
and fines imposed by the PSE on publicly- agencies also issued their own Circulars on
listed companies are considered very corporate governance principles and leading
minimal also. Non-compliance with practices.
structured disclosure requirements as The PSE, which was conferred the status
prescribed under Section 17 to 17.15 of the of a self-regulatory organization (SRO), is
Disclosure Rules will result in the imposition implementing its own rules and imposing
of a maximum penalty per year/per violation penalties on erring trading participants and
of only P500,000 for a publicly-listed listed companies.3 This is in compliance
company with total assets of P1.0 billion and with the International Organization of
above. In the World Bank ROSC study in Securities Commissions (IOSCO) Objectives
2006, it was recommended that the scales of and Principles of Securities Regulation
fines be set high enough to deter any mandate of making appropriate use of SROs
violations. Not only will the imposition of to exercise some direct oversight
higher fines and penalties deter violations but responsibility for their respective areas of
it can enable the regulatory bodies to hire and competence.
employ the best human and capital resources In line with SECs thrust toward
to effectively perform their functions. upholding good corporate governance, PSE
The above arguments are validated by has also stepped up its role in instigating
findings reported by Cheung (2006) that ways and means to instill awareness and
some Asian countries have difficulties in promote corporate governance among
enforcing their laws due to a lack of publicly listed companies. Many of the
resources and high levels of corruption. In initiatives pursued by PSE are on ensuring
fact, according to OECDs report in 2006, the adequate disclosures.
Philippine regulatory bodies are not well
staffed and well funded compared to our Local Organizations Promoting Corporate
Asian neighbors. Cayanan (2007) pointed Governance Best Practices
out that the prevalence of non-compliance to
financial reporting rules stems from The SEC, BSP, IC and PSE are not the
inadequate sanctions and investor apathy. He only institutions actively involved in the
noted that no one has yet been imprisoned promotion of good governance in the
for not complying with financial reporting country. Also doing its part is the Institute of
standards in the Philippines. Moir (2006a) Corporate Directors (ICD), a World Bank-
also wrote that the tone and quality of funded non-profit organization. The ICD is
regulatory frameworks differ greatly across instrumental in institutionalizing the
Asia, as the crucial element of enforcement. Corporate Governance Scorecard (CGSC) for
ACGA and Credit Lyonnais Securities Asia publicly listed companies in 2005. The 2009
(CLSA) reported that while reporting Corporate Governance Scorecard for
standards are improving and companies are Publicly-Listed Companies was developed
responding to demands for quicker by ICD in collaboration with the SEC, the
information, enforcement of these regulations PSE and the Ateneo Law School. This can
are often lacking. The ACGA-CLSA report be accessed through the ICD website. The
DEBBIE C. WONG 35
SEC initially required publicly-listed This Code supplements and complements the
companies to voluntarily submit the CGSC, Securities Regulation Code and the
but beginning 2009 as per SEC Corporation Code. It is patterned after the
Memorandum Circular No. 12, this was OECD Principles. But while the OECD
made mandatory with penalties specified in Principles seem to focus equally on all the
SEC Memo Circular No. 5 Series of 2009. six main areas, the bulk of the Code is
Aside from creating the Corporate devoted in the discussion of board
Governance Scorecard, ICD is also a SEC- governance. Just like Thailand and
and BSP-accredited training provider on Malaysia, the Code covers only five areas
corporate governance. and omits OECDs first key principle of
The Philippine Institute of Certified creating the basis for an effective corporate
Public Accountants (PICPA), the national governance framework, which is a clear and
organization of CPAs, working with the dynamic legal and regulatory framework
Board of Accountancy (BOA) and the with laws and regulations that are both
Professional Regulation Commission (PRC), enforceable and backed by effective
also undertook various initiatives in enforcement agencies. Only the Indonesias
promoting good governance. Among them Code of Good Corporate Governance is able
are: the establishment of a Quality Assurance to touch briefly on the first OECD key area.
Board, tasked to ensure the quality of The Codes main focus is on board
Philippine CPAs and to monitor and support governance. It considers the Board of
pending legislation regarding the Directors or simply the Board to be primarily
accountancy profession and the creation of a responsible for the governance of the
Quality Review Committee, tasked to ensure corporation. The main role of the Board is to
the quality of work by external auditors. To act as an independent check on management.
date, only the Quality Control Review In order to effectively exercise its monitoring
Committee has not been constituted although and oversight functions over management, it
a model for quality control review has been is essential that a number of board members
prepared. With the approval of the New should be independent from management.
Accountancy Law (Republic Act No. 9298), Some of the points discussed under board
PICPA is tasked with the strict enforcement governance take off from the Corporation
of continuing professional education for Code of the Philippines. However, many
CPAs. items are added to make the contents of the
Code more aligned to the current and
The Philippine Code of Corporate evolving corporate governance practices.
Governance Table 4 provides a comparison between the
Corporation Code and Code of Corporate
The Philippine Code of Corporate Governance on corporate governance.
Governance (Code) was issued by the SEC.
36 AN ASSESSMENT OF CORPORATE GOVERNANCE REFORMS IN THE PHILIPPINES: 2002-2009
Table 4
Comparison between Corporation Code and SECs Code of Corporate Governance
on Board Governance
Understanding the Code of Corporate true essence and spirit of the original Code
Governance will be more meaningful when remains intact.
read in tandem with the ICD Corporate
Governance (CG) Scorecard. Though the The Sarbanes-Oxley Act of US and the
CG Scorecard is formulated based on the Philippine Corporate Governance
Code of Corporate Governance, the survey Reforms: A Comparison
questions, description and suggested
information source in each key area provide a Comparing the specific mandates in the
rich source of information for corporations to Sarbanes-Oxley Act with the various
bring their corporate governance practices to regulations and initiatives that our local
the next higher level. regulatory bodies have issued and adopted
In 2009, SEC issued Memorandum provides updates on the state and direction of
Circular No. 6 referred to as the Revised our governance efforts. Table 5 shows an
Code of Corporate Governance. The revised overview of the contents of the Sarbanes-
version of the Code is merely an update of Oxley Act vis--vis reforms taken by our
the original version. Some parts are regulatory agencies. The table is simply
modified to better phrase some provisions. illustrative and informative rather than
These revisions are considered minor as the comprehensive.
Table 5
Sarbanes-Oxley Act vs. Philippine Provisions
From Table 5, it can be concluded that forward and issued in February 2010
the various Philippine provisions are at par Revenue Regulations No. 3-2010. This new
with majority of the items in the Sarbanes- regulation has the same provisions as Title 10
Oxley Act.4 Corporate Tax Return in the Sarbanes-Oxley
Aside from weak enforcement of Act. It requires the president/CEO and CFO
compliance and imposition of small fines and of the company to sign a statement of
penalties, two glaring shortcomings in the managements responsibility for their
Philippine corporate governance reforms are: companys annual income tax returns. The
1) the lack of provision and protection for statement of management responsibility
whistle-blowing in the Philippines; and 2) the prescribed by the BIR does not replace a
absence of serious penalties associated with similarly named document that reporting
fraud. High profile fraud and corruption companies are required to submit to the SEC
scandals at companies worldwide have raised together with their audited financial
the importance of reporting executive statements. Although the substance of the
misbehavior. However, the cultural two statements appears the same, they have
inhibitions and local business structures different goals. While it is BIRs goal to
prevalent in Asia make it tough for these ensure the correct collection of taxes, it is
countries to implement programs to SECs objective to compel companies to
encourage and protect those who speak out submit a fairly accurate picture of their
(Moir, 2006b). Moir (2006b) wrote that financials to the investing public. The fact
though there is general agreement that that an independent or external auditor
whistle-blower legislation should be reviewed and confirmed the adherence to
introduced to protect people from reprisals, it accounting rules does not diminish the
will certainly take some time to surmount responsibility of the company officers over
cultural barriers. their contents. These two statements have
The Philippine Bureau of Internal accountability as their end goal.
Revenue (BIR) likewise recently took a step
activities; and (e) encouraging the ways and means to prevent and
development of advocacy institutions to discourage the commission of any
promote minority shareholders rights. Out of form of abuse, exploitation,
these five recommendations, only two misrepresentation, manipulation and
namely the monitoring of compliance with other fraudulent and illegal acts and
IAS/IFRS and the enhancing PSEs practices in securities transactions by
surveillance system have been complied so all concerned market players. It
far. The other three recommendations are emphasizes the importance of
still in the works. maintaining professionalism within
The SEC and the PSE conduct the ranks of traders and salesmen by
independent test of compliance with instructing them to subordinate their
IAS/IFRS. Other initiatives undertaken by personal interest to that of their
the PSE include the acquisition and customers with respect to all matters
installation of the state-of-the-art Advance pertaining to securities transaction in
Warning and Control System (AWACS) or outside the Exchange.
which has the capacity to track inside traders PSE and Securities Clearing
and stock price manipulators. PSE has also Corporation of the Philippines
intensified the enforcement of the various (SCCP) stepped up efforts to
disclosure rules (10-minute rule, selective improve risk management practices
disclosure rule, black-out rule and IAS- to restore investor confidence with
compliant financial reports). the imposition of the 20 percent
haircut on securities submitted as
10-minute Rule requires that a listed collateral. This will effectively result
company disclose material non- in additional shares being delivered
public information to the public in order to achieve full
within 10 minutes from the collateralization.
occurrence of the event. PSE is set to increase the trading
Black-out Rule disallows insiders band or the cap in the increases and
(e.g., directors and officers) from declines of stock prices from 50-40
trading their companys shares until percent to a 50 percent-cap in both
two full trading days have lapsed instances. The new trading band rule
after the material non-public will be implemented once the new
information is disclosed to the trading system is in place.
public.
Selective Disclosure Rule prohibits a Furthermore, the PSE created the Market
listed company from disclosing Integrity Board (MIB), which is composed of
material non-public information to a five members - the Chairperson, the vice-
selected group of persons without chair, an independent director and two non-
simultaneously disclosing to the director trading participants of PSE. It acts
public. as the Exchanges independent body
Audited financial statements of listed exercising control and supervision over the
companies should be IAS-compliant. PSEs Market Regulation Division (MRB).
PSE polices the conduct of traders While the MRB has the line function of
and salesmen in accordance to the policing the activities of traders and listed
Code of Conduct and Professional companies and ensures they adhere to rules
Ethics for Traders and Salesmen. and code of conduct of the PSE and all
This Code commits to the protection related regulatory requirements, the MIB
of the investing public by finding enforces the relevant rules and regulations
44 AN ASSESSMENT OF CORPORATE GOVERNANCE REFORMS IN THE PHILIPPINES: 2002-2009
that PSE has adopted to maintain markets Program (CGIP), which involves the
integrity and minimize risks of the investing development and conduct of various
public. The MIB also initiates policy and corporate governance-related initiatives in
structural changes to better protect the the PSE. CGIP will intensify PSEs presence
investing public, complementing efforts of and profile in the regional corporate
the PSEs Board of Directors and the SEC. governance community. This office is also
In collaboration with SEC and Institute envisioned to provide assistance to listed
of Corporate Directors (ICD), PSE has companies and trading participants on
institutionalized the corporate governance governance issues.
scorecard for publicly listed companies. All To promote the local adoption of world-
listed companies are currently required to class good corporate governance practices,
periodically report to PSE their compliance the PSE has forged a tie up with the
with their respective Manual of Corporate Management Association of the Philippines
Governance and ensure that a portion of their (MAP) in holding the Best Annual Reports
annual reports is devoted on the discussion of (BAR) Awards. The competition began in
their compliance with corporate governance 2002 and aims to promote good corporate
standards. Listed companies are to maintain governance by showcasing companies that
an active website wherein they should upload observe the principles of transparency,
the disclosures made to the SEC and PSE as accountability and fairness, particularly in
well as their corporate governance report. their reporting formats. It also gives
The creation of the Corporate recognition to companies that produce user-
Governance Office in the PSE, funded by the friendly annual reports. Table 6 lists the
UK government, aims to support the BAR winners from 2002 to 2008.6 Cayanan
fundamental functions of corporate (2007) noted that though there was notable
governance, enterprise risk management, improvement in the level of compliance by
strategy management, and corporate social listed Philippine companies with financial
responsibility. It also embarked on a reporting standards, compliance is still far
Corporate Governance Improvement from ideal.
Table 6
BAR Winners from 2002 to 2008
Table 7
CG Watch Survey
Table 8
CG Watch 2007 Category Scores
regulatory/supervisory agencies (Echanis, sector and other relevant market players like
2006) . investors and stakeholders to proposed areas
The White Paper issued by OECD in for improvement and formulate best practices
October 2006 entitled Implementing the to be adopted.
White Paper on Corporate Governance in Though the ACGA noted that there are
Asia also provides valuable source of substantive improvements in Asia in the area
information regarding the status and progress of corporate governance, it also pointed out
in corporate governance reforms in Asia. that regulators in many Asian nations are ill-
This is an update of the 2003 White Paper. equipped in enforcing the laws and
The White Papers are the products of public regulations. Below is a list of ACGAs
dialogues among policy makers, private findings:
Area Improvements
Financial Reporting More detailed disclosure rules; faster reporting;
quarterly reporting; disclosure of material events,
director pay and director dealings.
Board composition and function Introduction of independent directors, board
committees, director training; higher expectations
placed on directors; higher fees paid to directors.
Shareholder rights Formal rights strengthened; retail activist groups
formed; institutional investors started voting their
shares and taking engagement more seriously.
Accounting/Auditing Local accounting and auditing standards brought
more into line with international standards;
independent regulation of audit profession in some
markets.
Regulatory enforcement Financial regulators still under-equipped but there
has been focus on enforcing listing rules and key
securities laws (e.g. insider trading).
Source: ACGA Presentation Chubb, October 7, 2009.
very costly and it takes a long time. This is out that most companies in Asia are
considered a major hindrance in the corporate predominantly owned by a few wealthy
governance effort of protecting the families. Hence, the need for external
shareholders and minority interest. However, financing becomes minimal. Consequently,
the Philippines is not alone in this as many incentives to adopt good corporate
Asian countries encounter similar governance practices may not be present,
predicament. The OECD study also pointed leading to abuse of the minority shareholders.
What are investors looking for in the are four major areas that would need
coming decade? What are the significant substantial improvements. Below is a table
governance issues in the near future? There that highlights the four key areas:
The International Financial Law Review7 on this theme and Thailand has a bill
(2004) reported the following: under consideration.
3) Only Hong Kong and Taiwan have
1) While four countries (Singapore, brought in rules requiring the main
Malaysia, Indonesia and Thailand) resolutions at annual general
have moved to a two-month deadline meetings to be subject to a vote by
for reporting annual results, others poll rather than a show of hands.
have not. 4) Although Asias largest markets have
2) Only Korea has been bold enough to a national code of best practice based
pass a law allowing fully-fledged largely on international corporate
class actions for securities violations. governance standards, only India,
China and Taiwan allow a variation Malaysia, Philippines and Taiwan
48 AN ASSESSMENT OF CORPORATE GOVERNANCE REFORMS IN THE PHILIPPINES: 2002-2009
The Philippines has not been short of The corporate governance field is quite
reforms or lacking in laws that promote new and dynamic. Corporate governance
corporate governance. However, there are practices even in the most developed
two inherent weaknesses in its legal and countries are far from being perfect. Changes
regulatory framework that critically impede and challenges in the business scenario will
the progress of the various governance continue to dictate how good governance will
initiatives. One of the more prominent evolve in the coming years. Efforts to come
weaknesses is the weak enforcement power up with best practices will be ongoing.
of our regulatory bodies. This is primarily However, without an effective enforcement
due to the lack of funding and qualified system to complement these best practices,
personnel. Likewise, our judiciary system all efforts will be wasted. Cheung (2006)
remains ineffective in protecting the rights of proposed that ensuring the country has a
shareholders and minority interest as it strong legal and regulatory framework and an
continues to be slow in the giving of final impartial judiciary is an important step, as is
resolution and decision on cases. The light empowering regulators to act on violations of
sanctions for non-compliance and the the securities rules. In short, the system is as
absence of serious penalties associated with good as the people comprising it. Moreover,
fraud is another major hindrance. It is aptly the quest for corporate governance best
observed by Cayanan (2007) that no one has practices should not be merely a compliance
yet been imprisoned for not complying with in form but in substance. The desire for
financial reporting standards. Though good corporate governance should come
significant headway has been made in from within each participant and from the
strengthening the accounting and auditing indomitable and unwavering spirit of
standards, the level of compliance to these enforcers to stick not only to the letters of the
standards by listed Philippine companies still laws and regulations but the real essence
needs further improvement. behind the letters as aptly put by an author.
Only then can true governance be attained.
DEBBIE C. WONG 49
NOTES
1
Sources: http://www.abs-cbnnews.com/business/02/08/09/bsp-charges-18-execs-personnel-legacy-group-
rural-banks and http://www.abs-cbnnews.com/nation/02/09/09/legacy-owner-not-included-bsp-raps
2
Given the damage caused by the alleged perpetrator, The Philippine Star reported on February 28, 2010
that the detained legacy scam brains (Celso de los Angeles, et al.) were holding political caucuses in
condominium suite. In the same news article, one congressman expressed extreme disappointment on
how this scam was handled. He was quoted saying, While contemporary American pyramiding culprit
Bernard Madoff is now serving a prison term, De Los Angeles is holding political caucuses in the
comfort of a condominium suite. He questioned why it is taking so long for the Department of Justice
(DOJ) prosecutors to finish the preliminary investigation of the many criminal complaints against Mr. de
los Angeles, including a string of non-bailable syndicated estafa cases and why pending warrants of
arrest against Mr. de los Angeles have not been served.
3
PSEs strategic agenda is to LEVEL UP. Each letter stands for a key area or initiative taken or to be taken
by PSE to further improve its role as a SRO.
L-ist more companies and securities
E-xpand and educate investor base
V-alue and enforce corporate governance standards
E-nhance shareholder value
L-aunch new products and services
U-pgrade market infrastructure and human resources
P-artner with government and other stakeholders
(Source: PSE).
4
A survey conducted by McKinsey & Co. in conjunction with Directorship Search Group and the
Institutional Investors Institute, identified three areas needing improvement and greater transparency in
companies in the U.S.: executive compensation, board accountability and the division of responsibilities
between CEO and chairman (Cheung, 2006). This shows that the Sarbanes-Oxley Act still falls short in
addressing all corporate governance problems.
5
From the 1997 study by Cayanan and Valderama to the 2002 study by Echanis to the 2003 study by
Agustin and to the 2004 study by Cayanan.
6
The Aboitiz- and Ayala-owned companies dominated the roster of BAR winners. Their companies also
dominated the top 20 finalists. Consequently, the Ayala and Aboitiz Group of companies have been
cited as winners of the Special Award for Conglomerate (whose three or more companies made it to the
top 20 finalists) together with SM and Metrobank Group of companies. Aside from the main award,
there are special awards given by MAP, namely: 1) Best in Compliance with Philippine Financial
Reporting Standards (PFRS) among Non-Financial Institutions; 2) Best in Compliance with PFRS among
Financial Institutions; 3) Best in Corporate Governance Disclosure among Non-Financial Institution; 4)
Best in Corporate Governance Disclosure among Financial Institution; 5) Best in Visual Design; 6)
Special Award for Conglomerate; and 7) Most Improved Annual Report for the Past Three Years. From
ten finalists in 2002 to 2004, the number of finalists grew to fifteen in 2005 and twenty in 2006 to 2008.
While Security Bank and PSBank won the Best in Compliance with PFRS among Financial Institutions
in 2007 and 2008, respectively, PSBank is the consistent winner for Best in Corporate Governance
Disclosure among Financial Institutions since 2006.
7
The International Financial Law Review (IFLR) is part of the Euromoney Legal Media Group that
provides analysis and information on developments in financial markets to in-house counsel and
practitioners.
50 AN ASSESSMENT OF CORPORATE GOVERNANCE REFORMS IN THE PHILIPPINES: 2002-2009
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54 AN ASSESSMENT OF CORPORATE GOVERNANCE REFORMS IN THE PHILIPPINES: 2002-2009
Appendix 1
Powers and Functions of the Commission
Section 5 of the Securities Regulation Code (RA 8799)
5.1 The Commission shall act with transparency and shall have the powers and functions provided by this
Code, Presidential Decree No. 902-A, the Corporation Code, the Investment Houses Law, the
Financing Company Act and other existing laws. Pursuant thereto the Commission shall have, among
others, the following powers and functions:
a. Have jurisdiction and supervision over all corporations, partnerships or associations who are
the grantees of primary franchises and/or a license or permit issued by the Government;
b. Formulate policies and recommendations on issues concerning the securities market, advise
Congress and other government agencies on all aspects of the securities market and propose
legislation and amendments thereto;
c. Approve, reject, suspend, revoke or require amendments to registration statements, and
registration and licensing applications;
d. Regulate,, investigate or supervise the activities of persons to ensure compliance;
e. Supervise,, monitor, suspend or take over the activities of exchanges, clearing agencies and
other SROs;
f. Impose sanctions for the violation of laws and the rules, regulations and orders issued
pursuant thereto;
g. Prepare, approve, amend, or repeal rules, regulations and orders, and issue opinions and
provide guidance on and supervise compliance with such rules, regulations and orders;
h. Enlist the aid and support of and/or deputize any and all enforcement agencies of the
Government, civil or military as well as any private institution, corporation, firm,, association
or person in the implementation of its powers and functions under this Code;
i. Issue cease and desist orders to prevent fraud or injury to the investing public;
j. Punish for contempt of the Commission, both direct and indirect, in accordance with the
pertinent provisions of and penalties prescribed by the Rules of Court;
k. Compel the officers of any registered corporation or association to call meetings of
stockholders or members thereof under its supervision;
l. Issue subpoena duces tecum and summon witnesses to appear in any proceedings of the
Commission and in appropriate cases, order the examination, search and seizure of all
documents, papers, files and records, tax returns, and books of accounts of any entity or
person under investigation as may be necessary for the proper disposition of the cases before
it, subject to the provisions of existing laws;
m. Suspend, or revoke, after proper notice and hearing the franchise or certificate of registration
of corporations, partnershi9ps or associations, upon any of the grounds provided by law; and
n. Exercise such other powers as maybe provided by law as well as those which may be implied
from, or which are necessary or incidental to the carrying out of, the express powers granted
the Commission to achieve the objectives and purposes of these laws.
5.2 The Commissions jurisdiction over all cases enumerated under Section 5 of Presidential Decree No.
902-A is hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial
Court: Provided, that the Supreme Court in the exercise of its authority may designate the Regional
Trial Court branches that shall exercise jurisdiction over these cases. The Commission shall retain
jurisdiction over pending cases involving intra-corporate disputes submitted for final resolution which
should be resolved within one (1) year from the enactment of this Code. The Commission shall retain
jurisdiction over pending suspension of payments/rehabilitation cases filed as of 30June 2000 until
finally disposed.
Appendix 2
Laws and Regulations under SECs Purview
Appendix 3
Salient Findings of the Corporate Governance Study Conducted by AIM
on 100 of the Largest Listed Companies in the Philippines
In each year from 2002 to 2007, the majority of the companies reviewed had eight to eleven
directors.
In each year from 2002 to 2007, women constituted no more than 12% of all directors in the
Top 100 companies.
In 2002, 62.5% of the companies identified their independent directors in their annual reports.
By 2007, the number increased to 96%.
Between 2002 to 2007, companies with two independent directors more than doubled in
number. In 2007, only two companies disclosed having no independent directors.
In 2002 and 2003, more companies reported having a Chairman simultaneously serving as
CEO. Beginning 2004, this pattern reversed, with more companies reporting a separation of
the two roles. By 2007, companies reporting a separation of the two roles more than doubled
that reporting having the same person serving in both capacities.
From 2002 to 2007, the number of companies disclosing the family relationship between their
Chairman and CEO increased from 7 in 2002 to 18 in 2007.
Between 2002 and 2006, most of the companies did not report the frequency of their board
meetings in their annual report. In 2007, only 27 companies disclosed this information.
In 2002, the number of companies that disclosed information about executive compensation
was 35. In 2007, all the 100 companies were disclosing this information. None of the
companies, however, provided a breakdown of the executive compensation. Amounts were
reported in aggregate.
In 2002 and 2003, fewer than 45 companies disclosed information regarding their related
party transactions. By 2007, all the 100 companies disclosed this information albeit in
varying degrees of detail.
By 2007, most of the 100 companies had adopted a corporate governance manual and were
disclosing their corporate governance practices in their annual reports. As of 2007, only 60 of
the 100 companies had implemented a performance evaluation system for directors and top
officers.
In 2002, only 13.6% of the companies disclosed having an audit committee. In 2007, 93%
complied with this requirement.
In 2002, fewer than 5 companies constituted the nomination and compensation committees.
In 2007, majority of the companies complied. More and more top 100 companies also
reported the existence of the risk management and corporate governance committees.
Ownership concentration in Philippine companies remained high as of 2007. High
concentration of ownership bears on corporate governance in that there is a need for
mechanisms to protect the interest of the minority shareholders. Also, when a company does
not rely on the capital markets for financing, there is less incentive to institute measures that
would attract outside investors.
Source: Corporate Governance Trends in the 100 Largest Publicly Listed Companies in the Philippines,
2002 to 2007 by the Hills Program on Governance of the Ramon V.del Rosario, Sr. C.V. Starr
Center for Corporate Governance.