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Managing Corporate Governance: Legal/Regulatory

Environment and Corporate Governance Practices in the Philippines

Managing Corporate Governance:

Legal/Regulatory Environment and Corporate

Governance Practices in the Philippines

TABLE of CONTENTS

I. Corporate Governance in the Philippine Context 3-

II. Business & Legal Environment 7-

III. Key Developments (up to 2002) 13

IV. Lessons Learned 14-

V. Recapitulation 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

I. Corporate Governance in the Philippine Context: 2001 Survey

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

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
• 3 rd^ Party “Watchdog”
• Limited # of Directorships

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)

II. The Philippines: Business & Legal Environment

CORPORATE

 Concentrated Ownership  Interlocking Directors  Pyramid Structures  Banks Drive Market

FAMILY FIRMS & BUSINESS GROUPS DOMINATE.

LEGAL & REGULATORY

• Common law origin
• Corporation Code
• Securities Regulations Code
• General Banking Law
• Stock Exchange Listing Requirements

AS IN MANY DEVELOPING COUNTRIES, THERE IS NO SHORTAGE OF LAWS.

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

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.

III. The Philippine Situation: Key Developments (up to 2002)

JUSTICE SYSTEM

• SC Appoints Commercial Court Judges.
• ADB-Funded Training on Law & Governance.

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

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

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

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**