A call to good corporate governance
By Jacqueline K. Tanliao of BPI Asset Management
BusinessWorld | Monday, April 28, 2014
Since the collapse of companies like Long Term capital Management L.P. (LTCM), Enron Corporation, and WorldCom and the deluge of weaknesses exposed by the Global Financial crisis in 2008, more attention has been given to corporate governance.
Corporate governance, as the words imply, refers to the policies, systems, and processes by which companies are directed and controlled. It concerns the relationships among managers, board of directors, shareholders, other stakeholders and regulators. Sound corporate governance helps companies operate more efficiently through the proper delineation of roles, and likewise increases accountability and transparency to investors.
With the economic integration of the association of Southeast Asian nations (ASEAN) drawing closer, corporate governance is likely to take the center stage, especially for publicly listed companies (PLCs) belonging to the 10 member nations.
As background, the ASEAN integration is expected to allow the free flow of goods and services in the region. For example, Philippine investors will have easier access to financial products in Thailand, and vice versa. This is both an advantage and a disadvantage, given the broadening of the competitive space, and gives rise to the need for unifying standards, one of which would be for corporate governance.
To measure corporate governance, the ASEAN capital Markets Forum (ACMF), a group composed of capital market regulators of member nations, and the Asian Development Bank (ADB) developed the ASEAN corporate Governance Scorecard (ACGS). This rating system is a questionnaire benchmarked against the operation for Economic Cooperation and Development’s (OECD) principles of corporate Governance. This will be accomplished by PLCs from one country and reassessed by a peer reviewer from another. The scorecard is divided into five categories, namely: rights of shareholders, equitable treatment of shareholders, disclosure and transparency, role of stakeholders, and responsibilities of the board.
Based on a trial survey conducted by the ADB (ASEAN Corporate Governance Scorecard Country Reports and Assessments 2012-2013, published May 2013), the average corporate governance score of selected Philippine PLCs is 48.9% (the ADB stated in its report that the results of this trial survey are not yet comparable to those of other member nations). Respondents scored above 50% in the first three categories, but their average rating on the last two (28% and 48.9%, respectively) raises concerns.
The role of stakeholders in a corporation is crucial, especially since companies are expected to act as responsible citizens of society. The ADB cited in its report that most companies fail to provide simple, yet relevant information such as contact details, training and development programs, and other employee-related matters. This reflects on the companies’ possible lack of concern for people directly and indirectly related to their course of business. Respondents, likewise, scored sub-50% in responsibilities of the board, mainly on technicalities such as PLC chairs not being independent directors, not disclosing non-executive directors, lack of disclosure in terms of succession, and other similar issues.
It is relevant to note that most areas for improvement cited by the ADB can easily be addressed. For instance, a lot of these have been included in the Securities and Exchange Commission’s (SEC) memorandum released in 2013, which mandates all publicly listed companies to submit a corporate governance report based on the newly adopted ACGS. Moving forward, local PLCs should be able to comply with these requirements and consequently achieve a more favorable rating on the scorecard. Other more challenging areas will be subjected to the ASEAN peer review process, as mandated by the ACMF.
On a local scale, the ADB recommends a comprehensive education and information campaign, specifically in partnership with the SEC and the Philippine Stock Exchange (PSE). In line with the thrust to improve transparency, the PSE launched its online disclosure system in December last year to provide real-time corporate disclosures. While doing such, regulating bodies must be ready to provide PLCs with their trial scores and specific guidelines on what would be needed to improve their ratings. The regulator together with private companies should work together to solve common problem areas. The ADB emphasizes that the scorecard should not be used solely as a compliance or checklist of good corporate governance. Rather, companies should strive to exceed what is required.
The Fund Managers association of the Philippines (FMAP) lauds the initiatives that have been undertaken by local regulators, and recognizes the compliance of the private sector. All told, the full adoption of the ACGS suggests that the larger Philippine PLCs ascribe to good corporate governance practices. However, accomplishing the scorecard alone does not assure success. Further efforts should be made to emphasize and sustain the significance of corporate governance to potential investors. All corporations have their own areas of responsibility to uphold — responsibilities which demand no less accountability, integrity, and transparency than what a nation expects from its own government. Accepting the notion that corporate governance is a necessity, and not an option, will enable Philippine firms to achieve standards that are competitive, not just locally but globally as well.