Managing Corporate Governance: Legal/Regulatory Environment and Corporate Governance Practices in the Philippines

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

3. 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

4. 4/17 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 * Prof’ls Manage Assets 2 3 (Efficiently) * Corporate Growth 3 2 = Country Growth * Compliance * Internal Control RVR-AIM Center for Corporate Responsibility Asian Institute of Management

5. 5/17 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

6. 6/17 • DRIVERS: • Market Players • Information • Complete, Accurate & Timely • Policies • Corporate & Government • Enforcement • “Level Playing Field” • Self-Discipline • Internal Controls, Risk Mgt. EXTERNAL Environment • Corporate Governance • in the Philippine Context INTERNAL Corporate Strategy & Structure C. V. Starr Chair in Corporate Governance in Asia

7. 7/17 II. The Philippines: Business & Legal Environment 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. 8/17 II. The Philippines: Business & Legal Environment 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

9. 9/17 II. The Philippines:Business & Legal Environment BUT ENFORCEMENT IS WEAK. Relatively Weak Institutions (regulatory agencies and market institutions) + Poor Judicial Process = Low Level of Governance in PRACTICE RVR-AIM Center for Corporate Responsibility Asian Institute of Management

10. 10/17 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 P&L & 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 C. V. Starr Chair in Corporate Governance in Asia

11. 11/17 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 Boy’s 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.

12. 12/17 II. The Philippines: WEAKNESSES (Based on OECD Principles) 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) RVR-AIM Center for Corporate Responsibility Asian Institute of Management

13. 13/17 III. The Philippine Situation:Key Developments (up to 2002) • 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.

14. 14/17 IV. Managing Corporate Governance:What can be learned from the experience? 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

15. 15/17 IV. Managing Corporate Governance:What can be learned from the experience? 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

16. 16/17 IV. Managing Corporate Governance:What can be learned from the experience? 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. 17/17 V. Managing Corporate Governance:RECAPITULATION 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