Part 1
Governance and corruption have once again taken center stage in today’s media. The war against corruption by the current administration has expanded into the corporate realm when the elected President recently named a business tycoon of a publicly listed corporation as being an “oligarch” with “questionable dealings.”
Defining governance and its ramifications
While every layman has an intuition on the subject, few have a deep understanding and grasp of the concept of governance and its ramifications in the strategic management of firms. Corporate governance is generally referred to as to set of regulatory mechanisms and systems in the proper and effective direction and control of corporations.
The OECD, which has spearheaded broad efforts to institutionalize governance in the wake of the Asian financial crisis and the Enron collapse and Andersen scandals in the US, has come up with principles that have defined the regulatory frameworks and practices in most countries around the world.
Business historians and observers alike are quick to recognize that weak governance frameworks have led to the downfall of many corporations around the world, including that of the infamous Uniwide Holdings here in the country.
Aside from protecting investors, the OECD pointed out that corporate governance “supports economic efficiency, sustainable growth and financial stability” while contributing to the growth of the capital markets that help spur, in turn, the expansion of companies as engines of economic growth.
Acting in its best self-interests
The principles of corporate governance have been derived from the classic agency theory propounded by Berle and Means (1932) who predicted that management (termed “agent”) would act in its best self-interests in the conduct of its duties and tasks in managing a corporation. This is often to the detriment of the share owners (termed “principals”) which have put up the capital in the firm. In effect, the theory predicts corporate “corruption” (also called the agency problem) by insiders who exercise control over the firm and its assets and resources.
Hence, numerous scholars and researchers have put forward the concept of instituting mechanisms for the proper and ethical management of corporations. Government regulators assent to the need for a coherent framework, whether rules-based or guidelines-based, which should be put in place to reduce expropriation of corporate resources for private gain and entrenchment by insiders that eventually weaken firms over the long-term.
Defining SEC’s role
In the Philippines, the onus of formulating these guidelines and monitoring corporate compliance falls on the Securities and Exchange Commission and the Philippine Stock Exchange, which oversees the domestic stock market.
Behavioral finance and economics scholars have principally focused their studies of governance mechanisms on two key factors: ownership structure and board-level governance, as measured by the number of independent directors and oversight over the key functions of director nomination and elections, internal audit (checks-and-balance) and compensation.
The SEC has adopted a mixed approach comprising of the original rules-based mandatory compliance using the aforementioned board mechanisms for all PLCs.
Because of increasing complexities in the world of business, it likewise established under the revised Code of Corporate Governance (2009) a set of guidelines-based discretionary compliance on numerous board-level governance that includes expansion of non-executive outsiders in the board, duality (separation of the chairman position and CEO), ownership rights (cash and stock dividends), risk management systems, and increased board independence.
The Code also adopted the OECD governance principle of “transparency,” which consists of corporate disclosure regime where listed firms provide required periodic financial statements, information and proxy statements, and other material disclosure regulatory filings.
Expanding the information concept
For my dissertation, I expanded the information concept of governance to include (a) investor communications mechanisms of corporate websites, investor information websites and annual reports and (b) discretionary investor relations mechanisms of investor briefings and press announcements. Veteran investors in the local bourse will readily validate the role of information in the share price performance of listed firms, as the market reacts to information “signals” that transmit quality of governance and underlying firm fundamentals. In the dual-factor framework, discretionary communications and IR activities provide these concrete information signals.
To gain an evidence-based understanding of the state of Philippine corporate governance, I conducted a broad-based study to explore the governance compliance and practices of Philippine publicly listed corporations (PLC) that was completed in February 2016.
The study, based on a cross-sectional survey, revealed interesting findings that showed strengths and shortcomings of Philippine corporate governance. (The findings will be reported next week in the second part of this article.)
Original URL Link: http://thestandard.com.ph/business/business-columns/green-light/215235/the-state-of-corporate-governance-in-the-philippines.html#.V86FuTYW_XU.twitter
Part 2
By Claro G. Gañac | 11 September 2016 | Manila Standard
My dissertation looked into corporate governance performance involving power and information metrics of 156 companies, comprising 60 percent of the 265 publicly listed companies as of Dec. 31, 2015. The dataset was collected from cross-sectional information from the PSE annual corporate governance reports filings and the PSE Edge website.
The ownership structure of Philippine PLCs remains highly concentrated in the hands of certain business or family interests. The average total public ownership (i.e. outsiders or non-block holder and management) of PLCs was just 36 percent of the total outstanding shares. Nevertheless, a few of the older companies (e.g. PLDT, SMC, AC) have actually higher public ownership levels.
Compulsory vs. discretionary governance
The study found that compliance to governance processes for both power and information practices has been determined by whether the governance factor was compulsory or not. There was high overall compliance (over 95 percent of all PLCs) for mandatory mechanisms, notably minimum two independent directors and board oversight under power governance, as well as required disclosures under information governance.
However, discretionary (i.e. voluntary) power governance—board size and activity, duality, risk management systems, corporate governance committee structure, ownership rights and greater board independence (in the oversight committees)—has been comparatively weaker.
Ownership and board structure
The average number of independent board directors only totaled 2.45, just above the requisite of two directors, while non-executive directors averaged 4.12 members. The average board size is 9.32; the proportion of independent and non-executive directors to total board size clearly shows that “outsiders” comprise the minority in the board. Coupled with the ownership concentration ratio, the evidence shows that PLCs remain dominated by controlling groups.
Furthermore, the average number of independent directors in board audit and nominations committees constituted the minority (less than two) in PLCs covered in the study. Both functions are vital to shareholder supervision over the board. In developed countries, independent directors are mandated to be the majority in audit committees.
The average number of board meetings is almost eight times a year. A more active board—one that monitors corporate performance regularly and is involved in key processes—is believed to result in a higher number. However, there is no accepted norm for board activity.
Only half of PLCs are duality compliant. When analyzed, the duality compliance levels displayed significant differences among the six industry groups. More than 90 percent of the banks and financial companies reported being duality compliant, followed by more than 70 percent and 65 percent of property and service companies, respectively.
Meanwhile, only half of the holding companies have adopted the duality concept and this came as a surprise because most of the large conglomerates (which are considered to be composed of “enlightened” management) fall under this category. Majority of the industrial (60.53 percent) continued to practice unified chairmanship and CEO.
Control mechanisms (considered discretionary governance best practice) has been adopted by just over 50 percent of subject PLCs, showing that the adoption of risk management structures and systems to protect the financial assets of companies remains weak.
The exercise of ownership rights, i.e. cash and stock dividends that represent rewards for investors, is considered less than satisfactory. Only 47 percent pay out cash dividends, in spite of the fact that most of the PLCs are profitable enterprises; only 10 percent rewarded their shareholders with stock dividends in 2014.
In information governance, the same pattern of high compliance is evident for required information disclosures (financial statements, information statements, etc.). Compliance with discretionary communications and investor relations mechanisms was below satisfactory. Less than half of PLCs issued press announcements, while only above 20 percent organized investor briefings.
Statistical analyses showed that governance compliance is weakest among the small-cap (market cap of under P10 billion) companies and those in the services and oil and mining sectors. Higher compliance levels were displayed by banks/financial and holding companies (for industry class) and by large-cap companies (for firm size). Governance compliance among firms in the industrial and property sectors were within satisfactory (but below exemplary) levels.
The findings suggest that governance behavior and compliance are influenced to a large extent by firm resources. Hence, market regulators may consider financial incentives, such as tax reductions, to provide incentives for PLC segments that are lagging in governance performance.
Dr. Gañac is an assistant professorial lecturer at the Ramon Del Rosario College of Business of the De La Salle University. He joined the academe in 2012 after a career in corporate communications, corporate marketing, corporate social responsibility and investor relations that spanned more than 30 years.
The two-part article was a part of his doctoral dissertation on the subject of Corporate Governance in the Philippines.
The views expressed above are the author’s and do not necessarily reflect the official position of De La Salle University, its faculty, and its administrators.
Dr. Gañac is an assistant professorial lecturer in the Ramon Del Rosario College of Business of the De La Salle University. He joined the academe in 2012 after a career in corporate communications, corporate marketing, corporate social responsibility and investor relations that spanned more than 30 years. The two-part article was a part of his doctoral dissertation on the subject of Corporate Governance in the Philippines.
The views expressed above are the author’s and do not necessarily reflect the official position of De La Salle University, its faculty, and its administrators.
