The Shareholders' Rights Duties and Responsibilities Towards Good Governance

Speech of SharePHIL Chair Evelyn Singson at the FINEX Forum on "Moving Ahead with Good Governance"

September 30, 2015

Good afternoon.

On behalf of the Shareholders’ Association of the Philippines, more commonly referred to as SharePHIL, I wish to thank the Financial Executives Institute of the Philippines for inviting us to your session on “Moving Ahead with Good Governance”.

I am proud to be part of the presenters in this Conference, joining our good friends from ICD and ADB and of course my fellow SharePHIL member, JJ Moreno.  It is a tribute to our four year old organization that our advocacy of protecting the rights and interests of shareholders, especially those of the minority, has become an integral part of good governance.

SharePHIL Inspired by SIAS

SharePHIL was inspired by the Securities Investors Association of Singapore (SIAS), an organization of retail investors whose success can be measured by its 71,000 strong membership.  SIAS now is a recognized investors’ body that has taken an active role in educating retail investors on how to invest their money and has been proactive in resolving issues between issuers and investors, and in settling inter-corporate disputes peacefully, not in an adversarial manner as it did when it first started.  Its mantra is “disputes are best settled in the boardroom rather than the courtroom”.  Today, SIAS prides itself   as the largest investors’ group in all of Asia.

While SIAS is 16 years old and SharePHIL is only going 4, we dream of becoming like SIAS one day.  But we are careful to take small steps and our strategy is nowhere adversarial.  We wish to win the confidence of the market,  both the PLCs, the PSEC and the minority investors.  We have a three-pronged strategy:

    1. educate the shareholders on their rights and obligations
    2. work with the PLCs to improve investor relations
    3. cooperate with the PSE and regulatory agencies to amend or improve the regulatory environment to empower the minority.

We are lucky to have as our President, Francis Ed. Lim, the former President of the Philippine Stock Exchange, who, during his term, introduced many reforms to improve the governance of the exchange but he left with many of his reform agenda still unfinished.  Our Board and our members, are witness to the frustration and helplessness of many minority shareholders in pursuing their just cause against companies or its controlling interests.  From here springs the passion of leveling the playing field, giving small shareholders a fair and even chance to enjoy the fruits of good governance.

For whose interest does SharePHIL work for?  Are they for shareholders who own 10 or 100 shares in Companies listed in the Exchange?  The answer is “Yes”!  But we also represent all shareholders who do not exercise control and management of corporations.  These could include big institutional investment funds like retirement plans, trust funds and foreign investment funds who remain minority investors even if they pour in huge amounts of money into our PLCs.  In many companies, the controlling interest and management could own much less that 50% of capital while the unorganized minority actually owns the majority of the company’s shares.

Why does SharePHIL bother with the interest of the minority shareholders?  They have been a quiet bunch – why not leave them alone?  The answer is --- “We can’t!”

Why Does the Scorecard Matter?

No longer can we stand alone as a country and take the parochial view that by our own standards, we are doing well.  Different world organizations have collectively pursued the agenda of introducing measures that rate countries, institutions and corporations based on widely accepted standards and pass judgment on how well these are met.  Not only will the Philippines be measured against countries in the ASEAN.   We must compete for investments against all countries, developed or developing.

The forthcoming ASEAN integration will open the Philippines to free trade with other ASEAN economies.  To the world, we will be viewed as the ASEAN economic bloc,  but still,  individual countries will be scrutinized relative to the others.   We have to compete for international capital and these capitalists listen to the opinions and ratings of credible institutions like the OECD, the ADB, the ACGA and respected credit rating agencies.

In the rating of the ASEAN Governance Scorecard in 2014, the Philippines was 4th of six ASEAN countries.  Much improvement in scores was attained by the Philippines but not enough push it to the ranks of Thailand, Singapore and Malaysia.

Out of the five categories measured by the ACGA, SharePHIL is most concerned with two:  the Right of Shareholders and the Equitable Treatment of Stockholders.  In 2013, our score on right of shareholders even declined, when other categories improved.  In 2014, a dramatic increase occurred in our scores because of the impressive rise in the score in one category --- rights of stockholders.  In explanation to this, the organization of a minority shareholder group whose advocacy is to give a voice to the otherwise silent minority was cited as one of the reasons.  We at SharePHIL are humbled by this attribution and much inspired to pursue our motto:  “FAITH” to the investor, where FAITH is the acronym for Fairness, Accountability, Independence, Transparency and Honor.

Lest I be misunderstood, the country scores are an aggrupation of the ratings of all the companies included in the survey.   The averages conceal the fact that a number of our PLCs got high scores and will be included among the Top 50 ASEAN companies to receive the Good Governance Awards, in a ceremony to be held in Manila.

If more or all of our PLCs adopt good governance as a core value our country’s scorecard rating will definitely improve.  Understandably,  the pursuit of profit ranks high in the list of priorities but if this is accompanied by good governance, our companies’ and country’s investment grade, credibility and sustainability have no way to go but up.

Rights of Ownership

Every peso invested in the capital of a corporation should be treated equally and fairly.  But, this tenet applies appropriately to minority shareholders who have no control over the affairs of the company since the controlling shareholders do not need this protection.

The Annual Shareholders’ meeting is the only time that a shareholder is able to participate in the affairs of the Corporation.  The AGGS requires that this right be honored and companies should comply strictly with the rules and inform the shareholder of the date and place of the meeting, at least 28 days before the meeting.

 I recall that one of our members complained that a PLC sent him a notice of meeting one day before the stated date in a place outside of the corporate headquarters, a private residence in Greenhills, to be specific, at an unholy hour of 6am.  Our conscientious shareholder woke up early and drove to Greenhills.  Upon reaching Greenhills, the Security Guard would not allow him to enter the subdivision since his car has no sticker.  According to him, in the meeting he missed,  important decisions were made, many prejudicial to the minority.

Another situation where the shareholders are deprived of their right to attend meetings is when their shares are lodged with the brokers as a requirement for scriptless trading.  The beneficial owners of the street certificates hardly receive notices of meetings, annual reports or valid proxies to be able to attend meetings.  This practice gives the broker the unbilled power to vote shares he does not own.  There are PSE rules covering these which are seldom followed.  This is one reason why some AGMs are sparsely attended.

Considering that the AGMs are held once a year, shareholders must have enough time to study the items in the Agenda for them to participate actively in the discussions.  Some PLCs conduct meetings with a script where every participant is assigned to read his part, and in most times, the participant who proposes approves and seconds resolutions are not even shareholders.

SharePHIL , as part of our mission, wants to encourage a healthy exchange between the Board and shareholders by actively participating in these meetings ourselves.  We have a Committee on Investor Relations, headed by one of your own, Fred Parungao, whose members are assigned to proxy for SharePHIL in these meetings.  To be legitimate shareholders, SharePHIL bought shares of companies listed in the PSE index.  Our aim is to observe how these meetings are conducted, if they fully disclose and discuss matters of interest to the minority shareholders.  By our participation, we hope to encourage PLCs to be more transparent  and make meetings more interactive.  It is the duty of the shareholders though,  to observe propriety  and decorum and to limit their questions to what are relevant and judicious.   After the AGMs, we share our observations with the PLC, and the receptive ones take heed and take steps to make the conduct of the subsequent meetings more open  and transparent.

Another basic right of a shareholder is the right to vote:  to elect the members of the Board and to vote of matters of major concern to the company.

At present, it is not clear what transactions need minority shareholders’ approval other than those mandated by the Corporation Code.  The practice varies from company to company.  For instance, companies who practice good governance are careful to involve all shareholders in approving major transactions that have a major impact on the condition or the control of the company or third party related interest transactions that give rise to conflict of interest.  However, there are cases where the minority shareholders get to know material transactions and third party related transactions after the fact,  from the notes of the audited FS,  when the minority can no longer do anything about it.

In sometime past, there were rumors that the controlling shareholders of a PLC entered into an undisclosed agreement to sell the company to a third party by, say P1 billion.  The controlling shareholders, instead of selling the shares directly to the third party, passed the sale through a sister company for say P300 million who immediately flipped it for P1 billion.  The minority shareholders were deprived of their due while the controlling shareholders enjoyed  the windfall.

For instances like this, the minority shareholders need independent directors  to represent them.  The SEC mandates two and the DOF through a department order defining in great detail, those who cannot qualify as independent director.  It also recommended term limits for independent directors of 5-2-5 or a total of 10 years with a two year break between terms.  Surprisingly, this DOF order on term limits was met with opposition by nearly all business groups, except for SharePHIL, who publicly supported this.  The ACGA considers imposing a 5-2-4 rule as  best practice and we see no reason why we cannot adopt the same.

One right which the shareholder needs badly is the right to seek redress for violation of his rights.  Present redress procedures are very cumbersome, expensive and prejudicial to small shareholders ever since jurisdiction over intra-corporate disputes was given to the Courts.  We all know how the Courts are in the Philippines operate.  The long delay in the Court proceedings discourage small shareholders from  pursuing their case because of the litigation expense which they to pay themselves,  Meanwhile, the company or the controlling shareholders pass on their legal fees to the Company.

The good news is the proposed Amendment to the Corporation Code will include an “alternative dispute resolution” mechanism as a first step prior to litigation.  This option will unclog the dockets of the Courts and make the settlement of intra corporate issues more expeditious and less costly.

Current Developments

All these developments are happening because we have a progressive SEC who has prioritized the upgrading our own good governance practices.  The forthcoming Corporate Governance Framework developed with inputs from different business organizations, will guide companies in understanding and complying with best practices required to make us competitive against our neighbors, if not the world.  The amendment to the Corporation Code will introduce provisions that will modernize our Code to adjust to the current business environment.  We hope that the Proposed Amendment of the Corporation Code will receive legislative  support.

More companies are also becoming aware of the value of good governance and how it will enhance their their long-term sustainability and access to capital.  There are many good governance awards to which many companies aspire for, an excellent sign that good governance is now a norm that is widely accepted.

In time, minority shareholders can be a productive and potent force in our capital markets.  And this is what SharePHIL aims to achieve.  With trust and understanding,  our small investors can be convinced to channel their hard earned savings to the formal financial markets and not lose these to investment scams.

Should we be successful in educating our mass base of savers that investing their funds in our capital markets is best for them and good for the country, then we can leapfrog and  join the frontrunners in the ASEAN.

If you believe that enlightening the small shareholders is a worthy cause, may I have the privilege of inviting you, members of FINEX, to become members of SharePHIL.  We know you will find our mission noble and fulfilling.

Thank you for sharing your time.  Good day.

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