Last June 18, the Shareholders’ Association of the Philippines (SharePHIL), a young organization devoted to minority shareholder protection, held its first summit at the Dusit Hotel in Makati City.
To our surprise, the success of the summit—from the number of sponsors to the number of participants—was beyond our expectations. We exceeded our target audience of 150 participants by more than 50 percent. We had to redo the layout of the ballroom at the last minute to accommodate the overflow of participants.
For the audience, it was an afternoon well spent as the summit had a lot of giveaways, content-wise. Here are some governance takeaways from the summit which, although rearranged by topic, are reproduced verbatim.
Manuel V. Pangilinan shared the following:
Case for good corporate governance
“I’m a student of history, and I’ve seen this lesson taught time and again: Fraud and greed trigger corporate and market collapse. It began early enough. The Medici Bank failed in 1494—a quarter century before Magellan landed in Cebu—caused by the family’s shameless and extravagant lifestyle. Subsequent decades and centuries delivered multitude of examples of fortunes made then squandered.
“Business is finally alive to the hard issues involving governance, following the collapse of global corporations like Enron, Arthur Andersen, Vivendi and, most recently, Lehman Brothers. The demise of these companies lies more in their failure in governance, rather than weakness in regulation. Troubled companies too big to fail were finally allowed to crash.
Where does it begin?
“But you may ask, where does governance begin? Who plays a key role in instituting it? It all begins with your board of directors—particularly its chair—and with your CEO.
“Because good governance and good performance are intimately linked, CEOs must not only be stewards of the business—they must also be the moral compass of the company establishing the ethical temper at the top, and setting the agenda for proper practices.
“The CEO must integrate governance and compliance functions into his business plans and goals—establishing compliance goals as a corporate-wide priority, engaging his board of directors, and convincing his employees to adopt ethical practices.
“Yes, governance demands competence with integrity—one without the other won’t work. For what is the point of being the most honest CEO on this planet, if I cannot explain to shareholders why no profits were produced? Conversely, will the market accept record profitability attained through less than honest means?
Separating the roles of chair, CEO
“First Pacific separates the position of chair from that of CEO, in part to comply with Sarbox [Sarbanes-Oxley Act] but more so, because the separation makes commercial and governance sense.
“We strive to keep our board informed, empowered and involved. Heretofore, effective governance by a board has been relatively rare—directors being, more often than not, internal folk, or friendlies, or high-powered but nameplate individuals engaged in low-level board participation. Boards must realize that the responsibility for good governance is theirs in the first instance. Active and working board committees also help the proactive and effective performance of the board.
“There’s a public outcry for transparency—ironic in this age of Twitter and Facebook, you’d think the world has become a place without secrets. We have some ways to go—with too many bad things continuing to happen behind the proverbial closed doors.
“The ability to relate and openly communicate is important to us. We strive to be candid in providing timely information to our shareholders and to our public, emphasizing the good news and bad news needed to appraise performance.
“This is precisely where the governance tires start hitting the dirt road—how your board and CEO can encourage the painful truth-telling, where the norm is fudging and bobbing and weaving.
“I recall that when the accident at our tailings ponds in Philex Mining happened in August 2012, we shut down the mine within the hour, and advised the government, our regulators, shareholders, and the public first hour in the morning the following day.
Shareholder activism
“The voice of shareholders in the management and boards of listed companies is less than what it ought to be. Shareholders need to be more vocal and active and communicate with the company not just once a year in annual meetings, but on a regular basis through the company’s website and other social portals like Facebook and Twitter. Or just write or e-mail us.
“Indeed, good governance plays a decisive role in differentiating ‘world-class’ companies from those that are not. Present day financial markets determine which companies are good, and which are not. Equity markets will price your shares impartially. Debt markets will price your loans objectively. If you want market acceptance, then you must perform well, and do it honestly. It’s as simple as that. You will see the result in your share price. You will see it in the interest rates you pay,” Pangilinan said.
National competitiveness
On the Philippines’ case, United Kingdom Ambassador to the Philippines Asif Ahmad had this to say:
“We have already heard from my friend Manny Pangilinan. He has spoken about attracting foreign investment to the Philippines and relations with minority shareholders. Let me add my voice to the opportunities and challenges a foreign investor faces here. I speak from two perspectives. I was a banker in London for 18 years before I became a diplomat. In my career in banking, I was responsible for making foreign investment decisions. That led to setting up banking operations in Hong Kong, Singapore, New York and Switzerland.
“In the 1990s, I could not have made a positive recommendation for investors to come to the Philippines. At that time, many country managers based in Manila set out the business case for investment, citing the potential of the country. That potential was slow in coming and there were some backward steps too.
“Today, the picture is entirely different. The day-to-day politics here is of course very lively. But democracy is now firmly established. A single six-year term for a president means that the administration can implement its policy objectives. We recognize the focus on transparency and good governance. The dark ages of martial law are past. Shareholders in business no longer live with the threat of sequestration by the executive and their cronies,” Ahmad remarked.
For foreign investors, governance practices are an issue. They affect—favorably or unfavorably—investment decisions of foreign businessmen. So important is good corporate governance that countries have been rated based on it.
As SharePHIL chairperson Evelyn R. Singson said in her welcome speech:
“It was a few years later when good governance practices of corporations and institutions became an issue for international institutional investors. Organizations representing different investment funds and multinationals started rating countries on various measures which define good governance and used these measures in determining what countries they [would] direct their investments to. It was a big disappointment, or rather a serious embarrassment, that the Philippines rated one of the lowest among the Asian countries covered by their rating. Among the metrics where the Philippines was rated lowest was on the ‘protection of minority shareholders,’ and the perceived absence of this protection dragged down our country score to a shameful low.”
Peza Director General Lilia de Lima also spoke about the culture of good governance, transparency, no graft and corruption and no red tape, but only red carpet service at the Philippine Economic Zone Authority.
As a result, the World Bank and International Finance Corp. cited “only PEZA for best practice among economic zones worldwide.” The institutions said that, “under Peza, the Philippines has shown dramatic improvements in investment climate.”
The end result is that Peza is now “a shining example of successful regulatory reform improving overall investment climate in the country.”
According to De Lima’s philosophy of governance, the government’s role “must be as an enabler, not a competitor to business.”
Government, she said, “should not be in business…. Leave business to businessmen and businesswomen.”
(The author, formerly president and chief executive officer of the Philippine Stock Exchange, is now president of Shareholders’ Association of the Philippines. He is also a senior partner of the Angara Abello Concepcion Regala & Cruz Law Offices and a professor in the Ateneo Law School. The views expressed in this column are solely his and should in no way be attributed to the institutions he is presently affiliated with. He may be contacted at francis.ed.lim@gmail.com.)
