Corporate Governance and its Role in Developing Capital Markets
By: David Del Rosario
Following the collapse of global economies in 2008, a great deal of emphasis has been placed to further develop and deepen the capital markets. Certainly, the aftermath of a recession leaves economies stunned and struggling to find lifelines for financial stability. And as the size and frequency of financial meltdowns begin to pile-up, so does the significance of developing capital markets.
Much has been said about the appropriate solutions for this proverbial concern. But at this point, attempting to provide another recipe for market up-trends would just add to the long list of solutions experts have already provided. Instead, we propose to look at corporate governance, one of the most important yet overlooked drivers for capital market development.
Corporate governance, as defined by many familiar with the matter, is the set of structures, policies and laws used by a corporation to regulate its way of doing business. An institution high on good governance has its core values centred on integrity and efficiency. By prioritizing the importance of timely and accurate disclosures, as well as ethically sound practices, a company ensures management quality for its investors. As such, a commitment between a firm’s Board of directors, top management and shareholders is formed; thereby translating to a culture of transparency, accountability and control within the organization.
There are a handful of benefits that may be derived from this type of set-up, but undoubtedly the most striking aspect of corporate governance is its positive influence on investor confidence and shareholder value.
Investors, whether they are aware of it or not, will always park their funds in companies or assets that they trust. After all, an investment will only draw the interest of potential investors if its perceived value is attractive. And apart from stable earnings and performance, an investment’s fundamental value may greatly be influenced by the quality of management it employs. When a company observes strict standards of ethics and professionalism, it ensures compliance with control measures, accountability within the firm, and execution of business decisions in-line with its short, medium and long-term goals. As a result, a sense of quality in terms of leadership is maintained and the company’s underlying value benefits.
In fact, there have been numerous studies done to argue the constructive effect corporate governance has on price movements and share price appreciation. Although concrete proof is hard to come by with regard to the relationship of corporate governance and returns; theoretically speaking, they fit. One of the reports conducted by the University of Wisconsin in 2009 entitled GMI Ratings and Corporate Performance 2003-2008 (Spellman and Watson, January 2009), showed that institutions that were well-governed clearly outperformed their peers in both bull and bear markets, as investors preferred more reputable investments. In addition, a study done by McKinsey & Company in 2002 entitled ‘Global Investor Opinion Survey’ showed that 80% of their respondents were willing to pay a premium for corporations that practiced good governance. The underlying rationale found in these studies highlighted the significant role corporate governance played as one of the primary drivers for positive shareholder value. With prospective investment decisions, investors will feel more comfortable turning bullish on an institution that practices responsible corporate governance. The reason being is that the initial feelings of uncertainty and doubt will more than likely be compensated by the sense of security and longevity a well-governed company provides.
Moreover, adherence to good governance standards will also benefit capital markets by promoting equality between investing entities. In applying the same principles and core values to a country’s capital market system, proper leadership and regulation will be observed. According to Marvin V. Fausto, Chief Investment Officer of BDO Trust Banking Group, “Corporate governance allows for a level playing field amongst institutional and individual investors. It gives investors reason to trust the capital markets more and graduate from traditional investments.” By doing so, investors are given an equal starting point with regard to investment decisions, thereby boosting appeal of more sophisticated investments.
That said, the role of corporate governance in developing capital markets must not be overlooked. For without transparent markets, investor confidence will likely be compromised and equality amongst investors will fade. This lethal combination will not bode well for budding capital markets like the Philippines, as the reluctance of investors to buy into respective stock, bond and currency markets will greatly affect their development. In addition, the attractiveness of Philippine markets towards foreign investors will likely suffer as well. Without a level playing field, opportunities for foreign inflows are sparse. Thus, a recovery in financial markets, both locally and globally, will only be sustainable if good corporate governance is practiced. And an improvement herein will only be feasible if corporate governance is used.
With this in mind, what then can we do to promote corporate governance in the Philippines? As executives, employees, regulators, investors and business owners alike, what can we contribute in promoting the development of capital markets through good corporate governance?
For one, we can start within our respective organizations by making sure that compliance measures are met, disclosures are released on time, integrity is valued, and accountability within management and directors is practiced. Mr. Fausto believes that “having good corporate governance at every institution’s core, whether it be government or private, will enhance awareness amongst investors and lift the bar of better standards moving forward.”
In addition, according to Paul Joseph Garcia, Chief Executive Officer of ING Investment Management (Philippines), “Corporate governance, being an essential element in developing capital markets, cascades from the top down. One of the primary reasons for the Philippines lagging behind its peers is the inconsistency of local corporate governance standards. With the elections coming up, we are presented with the opportunity to introduce significant changes. Reform begins as we elect the right leaders who will strengthen regulatory bodies and introduce improvements in the regulation of market practices. Indeed, well-managed regulatory bodies that prioritize the implementation and execution of corporate governance standards are essential to the improvement of respective markets.”
As investors, we are ultimately searching for an investment with optimum returns and the least amount of risk. But as we all know, that is nearly impossible to achieve under normal conditions. Instead, we have to be prepared to take-on greater risks in order to reap the rewards of our investments.
Taking from the cue of Mr. Garcia, the same can be said for the direction of our country. As investors and as citizens of the Philippines, let’s not be afraid to make bold decisions. We should promote corporate governance as it likewise promotes honesty and integrity within our businesses and capital markets. We should be stewards of change and elect officials who will bring about effective leadership. Although we will never have the chance to alter what has passed, we still have the chance to improve what will become.