Mr. Francis Lim, Chair Evelyn Singson, Ms. Cherry Bernaldo, Mr. Parungao, Mr. Teehankee, other distinguished guests, inductees and friends.
Your association is a very important component of a healthy capital market, and a healthy capital market is very important to the growth of any economy because it is the capital market that allows for the efficient recycling of capital. In the case of the Philippines, even though we have a an old stock market, it is still relatively in its infancy. There are many other components of a healthy capital market, but the stock exchange in the context of the Philippines plays an outsized role right now because of its relative size. And our fixed income exchange, although bigger in volume, is trading mostly government securities. So from a standpoint of value handled from the private sector perspective, the stock exchange plays a bigger role.
One of my favourite themes in the Aquino administration is that of confidence. When people entrust their hard-earned money to buy a stock, it is an act of confidence. At the start of the Aquino administration, the market capitalization of PSE was around P5 trillion and has more than doubled in its peak. I brought this magazine, the leading business news magazine in the country, and its headline is “The Power of Number One” that is the power of confidence. I think if you summarize the story of how the Philippines got into the virtuous cycle, away from the vicious cycle that we’ve been in for a long time. It was the confidence that was brought in by President Aquino that generated the belief that good governance was coming. But obviously, this is not the complete story because the journey towards a better Philippines with better governance is going to be a long journey that needs to be nurtured and cannot be taken for granted.
This is the reason why I said that an organisation like this, that is also at its infancy, is very important. When private companies go public, they go public with a promise of how well they will do in the future. A promise that they will respect and uphold their responsibilities to their shareholders. And when the shareholder buys into that promise, it is an exercise in confidence on their part. The more confident they are about the company, or the person, or the country, the more they would like to be part of that story. That is why, if you look at the market, the PE of companies differ. You have companies that have PEs higher than the average. The big component of that differential is the confidence premium or the confidence discount.
The role of the board of directors in governance is very important. It is something that we’re still trying to understand and learn. In countries where there are strong families, first generation entrepreneurs, very strong personalities, sometimes the role of the board could drown in that persona. But if we are going to be more integrated with regional or global capital markets, we have to learn to see through that so that we can establish the role of the board. Since the board is the primary entity that is responsible for oversight of a publicly listed corporation, that is what the investors look into. And within the board, there are various groups like the representatives of majority owners whose interest is to protect the controlling shareholders’ stake. Increasingly, in a more diverse market, the minority becomes more important. In the case of the company’s index, the average is approximately at 14%. Although in the whole market, the range is quite wide with companies at around 10% and others at more than the average. So when you have situations where the minority is a major component of the ownership, the board must correspondingly reflect that ownership stake. In the case of the Philippines, the requirement is for the board to have two independent directors. In other markets that are considered more advanced or mature, it is required that the representation of independent directors in the board reflect the ownership of the company. And therefore if the minority is 40%, then the number of independent directors must also be 40%. We are not yet there. As I said, we are at the infancy of this journey towards a strong, stable, mature capital market.
That is why your group is an important advocacy group, your theme is really quite appropriate for people to have faith and confidence in the system, they must be empowered and properly represented. Now, when you refer to independent directors, they must really be independent in appearance and substance because it is important that they have the ability to protect your interests and bring your interests in the discussions of the board.
If you look at the history of corporate failures, a lot of the problems are related to self-dealings of majority stakeholders or related-party transactions, where the listed companies’ interests is the key motive for the transaction. And that’s when an independent director must step in and earn his keep. That is why we issued a department order, but it is a department order doesn’t really have teeth because the SEC and the insurance commission are independent regulatory bodies. We just thought of putting forward a strawman of how an independent director should be described, qualifications of independent directors, the compensation of independent directors. I think this helps us in pointing ourselves in the right direction of this journey that I have been trying to describe. It is actually up to the SEC to take features of the department order for I do not have power to impose this upon the SEC contrary to what a lot of people think. That is why it is important that these regulatory agencies be nurtured? we are working hard to improve their pay so that they will be able to keep and attract good people, we are trying hard to give them fiscal independence and autonomy so that they can be isolated from politics by strengthening them.
We have seen how the BSP has matured into a very good regulatory agency. In fact, all five governors of the new central bank of the Philippines has been awarded the Management Man of the Philippines Award and this serves as a testament to the fact that the BSP is something that we could emulate. It shows us that government agencies could be world class, if we empower it and give it the tools to become one. And that is what we are working on with the SEC and the IC because they are the triumvirate that is very important in this process of building a healthy, strong, efficient, capital market.
A capital market, other than being properly regulated, must create enough liquidity so that price discovery is proper. Most of us are young enough to remember BW Resources Corporation that went from nothing to a 52-fold increase in price. We cannot afford such an occurrence in the current environment because it will destroy not just the confidence in the stock market but in the country as a whole. That is why SharePHIL must be very strong in its advocacy in the board with their members who are also currently independent directors, in campaigning for more representation of independent directors in boards, in talking to regulatory agencies so that they will put in place and enshrine through administrative orders or even laws the characteristics of strong governance. You should also be very vocal in public, especially now in the elections. Engage the candidates on exactly are their views, what they believe Daang Matuwid is or how they’re going to interpret Daang Matuwid. You need to understand, you need to provoke them so that they will share with the public what their views are, particularly how they will bring the Philippine capital markets and stock exchange to the next stage.
I’ve been pushing hard for the stock exchange to link with the other exchanges in ASEAN. There is some pushback? there is fear from people whose businesses depend on the exchange, because they could lose some of their businesses with competition from abroad. Brokers, for example, who have foreign clients may lose their clients to brokers from other countries, since everyone would have access to the Philippine market. But in our march towards a better Philippines, a better stock market, as in any situation there will be winners and losers. Our goal is to make sure that there are more winners than losers, and in this case, the number of minority shareholders is definitely more than those who may lose. The amount that the minority has at stake is more than what these people have at stake. And in policy-making, we must veer towards where there are more winners than losers. We should not forget the losers but help them improve their game so that they can compete.
Right now, only about 1% of our population is invested in the stock market. I believe up to 33% of Singapore’s population invest in the stock market. I’d like to see more of our people engage in investing in the stock market, especially since we’re creating a stronger middle class that is gaining disposable income. All of us who’ve studied finance know that over the long term, equity will always outperform fixed income and other asset classes. And therefore, it is but fair that we give the middle income and even other sectors an opportunity to gain and have a stake in the Philippine economy. That is why SharePHIL, working with SEC and other regulatory agencies, should have a clear vision of what they want the PSE, the fixed income exchange, the capital market, to be in five years, ten years. There is a Capital Market Development Council, which I cochair actually. I’m not sure whether SharePHIL is engaged, but I think it is important that through the SEC and the other members of SharePHIL, you get yourselves involved in the Capital Market Development Council. Because it is this Council that is working on a blueprint on the future steps towards a stronger Philippine Capital Market. I hope that you could expand your membership to more than just this very distinguished core group. I think we have different kinds of members here, we have accountants, we have lawyers, and other professions. The next step, I think, in expanding your influence is to establish relationships with PICPA, IBP, and other entities that you could draw strength from because there is strength in numbers.
The opportunities for engaging the management of the board occur throughout the year, but nothing is more public than the stockholders meetings. I know many of us had the job before of making this as troublefree as possible. In fact, we have scripts. We have nominees to ask the right questions and give the right answers. I’m sure your goal is not to create trouble, your goal is to make sure that more information is shared with the public by asking the right questions and seeking the right answers to these questions. To make sure that indeed you have a board and a management whose interests are aligned with yours. So, the first half of the year is normally that half.
You can also touch base with the group that certifies directors the Institute of Corporate Directors. Again, making it more than just form but really putting substance to it by having a continuous process of recertification and really making your voice heard. I am told there are 260 slots for independent directors for listed companies. Ideally, you should have maybe half or the number, that means you must reach two or three although we recommend five in the department order. Because in my own experience, when you are part of the board of a bank for example, that is so time-consuming. There are so many committees and the transactions that go through it are so numerous that there should be a limit to how many banks or how many companies of that nature you can be part of because if you want to become a really good independent director, you need to spend time and to prepare and not merely walk in and vote for approval of the minutes and get your per diem.
I am here as a sign of support for your organisation? I really believe that there is so much that you can do. You must have a program of action that will enlarge your influence through alliances. Alliances with the bigger organisations, with regulatory agencies, and work towards having a seat in the Capital Market Development Council. I wish you more success. It is in the country’s interests for minority shareholders’ rights to be protected, even banks and insurance companies that aren’t listed require SharePHIL’s participation. Because the fact is, some of those are handling more public money than some listed companies. In insurance companies, there are mutual and non-mutual entities, because it is owned by policy shareholders. Actually, the more shareholders there are, the more diluted the voice. And that is why there must be a formal process to get this voice properly represented and the premiere governance body of corporates which is the board of directors.
Again, congratulations to the founders and leaders of this association. I am sure this will succeed because I see many very influential business leaders of the present, the past, and the future.