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May 2015
Acknowledgment
This thesis has been a long journey for the researchers, and it would not have been
accomplished successfully without the help of all who lent their hand in this endeavor.
First and foremost, the researchers would like to thank God Almighty for providing the
strength and the will to continue despite the hurdles and shortcomings encountered.
The researchers also extend their deepest gratitude to their advisers, for sharing their
To Dr. Mary Rosaleen Agaton, thesis adviser, for teaching and reminding the
researchers what they needed to accomplish for the completion of the thesis;
To Dr. Luciana Urquiola, English adviser, for giving useful information, advice and
To Atty. Angela Francesca Din, technical adviser, for the constant morale boost
and choosing to stay as the technical aviser of the researchers despite the inconvenience
it entails; and
To Ms. Mary Jane Castilla, thesis statistician, for teaching the researchers
procedures needed to conduct this study, for helping the researchers understand the
complex statistical results, and most importantly, for the patience, understanding, and
Special thanks to Mr. Luis Chua and Mr. Hilario Tan for lending their expertise regarding
technical accounting matters, and for giving insight that has greatly assisted the theoretical
foundation of the study. Gratitude is also extended to AEV and PDLT for taking time to respond
to the interview, which served as corroborating information in formulating the conclusion of the
study.
Thanks also to the panelists, for giving this thesis an opportunity to be reviewed and
improved further.
To everyone not mentioned but has contributed directly or indirectly in the completion of
the study, thank you very much for making this possible.
This thesis is a fruit of persistence and hardwork, and having the opportunity to experience
CERTIFICATE OF ORIGINALITY
We, hereby declare that this submission is our own work and that, to the best of our
knowledge and belief, it contains no material previously published or written by another person
nor material which to a substantial extent has been accepted for the award of any other degree or
diploma of a university or other institute of higher learning, except where due acknowledgement
We also declare that the intellectual content of this thesis/dissertation is the product
of our work, even though we may have received the assistance from others on style, presentation
_________________________ _________________________
_________________________ _________________________
Mark James C. Tayson Dyan Merz S. Tolentino
_________________________
Rhona Carla M. Torres
Noted:
__________________________________________
Dr. Mary Rosaleen Agaton
_________________________
Date
University of Santo Tomas
Alfredo M. Velayo College of Accountancy
APPROVAL SHEET
The thesis entitled
___________________________________________
Dr. Mary Rosaleen Agaton
PANEL OF EXAMINERS
Approved by the College of Accountancy Thesis Committee on Oral Examination with a grade of
____ on May____, 2015.
_________________________________ __________________________________
Atty. Elizabeth V. Inoturan Asst. Prof. Nestor M. Noble, MBA
_________________________________ __________________________________
Mr. Noel E. Estrella, MBA Asst. Prof. Luciana L. Urquiola, Ph.D.
______________________________________________
ASSOC. PROF. PATRICIA M. EMPLEO, MBA, CPA
DEAN
Abstract
As proven by financial collapses in the past, one of the most important factors affecting
financial performance is corporate governance. For this reason, this thesis looks into the state of
corporate governance in the Philippines and its effect on return on equity, one of the primary
financial performance indicators. Studied are 150 publicly listed companies in the Philippines for
reporting years 2012 and 2013. Corporate governance is quantified by measuring companies'
while return on equity is obtained from the companies' financial statements. These two factors
are then correlated to ascertain their relationship. The result shows that there is a significant small
positive correlation between corporate governance and return on equity. This knowledge has the
potential of influencing both companies and regulatory agencies to enforce stronger corporate
Introduction
For the Philippines, the path towards economic integration of the Association of Southeast
Asian Nations (ASEAN) comes with both opportunities and challenges. On one hand, it allows
the nation to achieve its fullest potentials through the free flow of goods and services (Aldaba et
al, 2013). On the other hand, it threatens the stability of local industries by directly pitting them
against stronger ones from countries like Singapore and Malaysia ("ASEAN economic community
blueprint", 2008). Whether the country, as well as the entire region, will thrive relies heavily upon
the ability of each industry to compete (Mitton, 2002). Given this increased importance of
Philippine companies' financial performance, there is a need to learn more about the factors that
In 2012, Malik writes how one of the important factors to consider for economies to prosper
is good corporate governance (CG). This has proven itself true in the past, from the 1997 Asian
financial crisis (Ponnu&Ramthandin, 2008) to the collapse of Enron in 2001 (Heath & Norman,
2004). More recently, lack of oversight also contributed to the bankruptcy of Lehman Brothers
in 2008 (Trumbull, 2010). It is thus crucial for the Philippines to ensure that CG measures exist
and are enforced for its industries to survive (Saldaa, 2000). As Morales writes in 2013, there is
much room for improvement given that the Philippines is still behind its Asian neighbors in terms
message that CG is consistent with the goal of maximizing profit. For this reason, the researchers
intend to show the extent by which CG affects financial performance. Given that these two factors
are wide in scope, the researchers further limit them into more specific areas. For the purposes
2
of this study, CG is limited to compliance with the Philippine Stock Exchange Corporate
that serve as recommendations to Philippine publicly listed companies (PLCs), based on both
international standards and the needs of the local environment ("CG guidelines for companies
listed on the Philippine Stock Exchange", n.d.). The researchers believe that compliance with the
guidebook is the most appropriate area of CG to be examined in this specific study, given that it
Meanwhile, financial performance is limited to the companys return on equity (RoE). RoE is
believed to be a holistic measurement of how efficient the allocation of capital is, supported by
the fact that it does not only determine the generated return of the company from the equity, but
also shows the success of the management in running the company (Moore, 2004).
The researchers intend to study the said topic to aid both investors and management. By
enhancing the knowledge of investors with regards to the extent by which compliance with the
PSE-CG guidebook affects RoE, they can make wiser investment decisions, i.e., investing on
companies that comply more. Moreover, the researchers aim to further encourage management
to adopt and enforce stronger CG measures by appealing to their profit incentives. For instance,
knowing that companies that comply more with CG guidelines are more profitable could influence
management to improve their board structure by ensuring that its Chairman and CEO positions
are held by different and unrelated individuals. Also, the overall goal of improving the CG of
Research Questions
1. Describe the compliance with PSE-CG guidebook of the PLCs in the Philippines for the
a. 2012
b. 2013
2. Describe the RoE of the PLCs in the Philippines for the following reporting years:
a. 2012
b. 2013
3. Identify the relationship that exists between the compliance with PSE-CG guidebook and
RoE of the PLCs in the Philippines for the following reporting years:
a. 2012
b. 2013
Theoretical Framework
Three theories prove to be relevant in this study the stakeholder theory, the stewardship
Introduced by Freeman in 1984, the stakeholder theory states that while companies have
a lot of stakeholders, its shareholders are the most important ones. Thus, management must put
their needs above all. This is coupled with the idea that since they are the company's owners, a
4
fiduciary responsibility exists to maximize shareholder value. The theory stresses the importance
of knowing what relationship exists between compliance with the PSE-CG guidebook and RoE.
Proving that a positive relationship exists between these two factors would mean that compliance
with the PSE-CG guidebook is necessary to reach the primary goal of maximizing shareholder
value.
In the stewardship theory, Donaldson and Davis (1991) argue that the interests of
management and shareholders are consistent with each other. Improving financial performance
returns on investment. Following the theory's logic, management striving to comply with the PSE-
CG guidebook could mean upholding both their self-interests and the shareholders' interests.
Lastly, the agency theory, first proposed by Stephen Ross and Barry Mitnick in the early
1970s, states that shareholders and management acting as agents usually have a conflict of
interest in terms of the direction the corporation should take. The conflict persists especially
considering the characteristic of humans as self-interested individuals (Daily, Dalton & Canella,
2003). This agency problem may be solved through a variety of ways, one of which is incentive
alignment (Javed & Iqbal, 2006). The study aims to align these incentives by showing that
compliance with the PSE-CG guidebook benefit not only shareholders, but their agents as well
Conceptual Framework
Illustrated inside the circles are the two core elements of this research compliance with
On the leftmost part of the conceptual framework, the list of guidelines that compose the
PSE-CG guidebook is found. The percentage of compliance with these guidelines will be the value
assigned to compliance with the PSE-CG guidebook. This is depicted by the black lines
connecting the list of guidelines and the green circle where Compliance with the PSE-CG
guidebook is written.
The researchers seek the value of both elements for reporting years 2012 and 2013. As
shown by the red arrows, the study looks into the extent of effect of compliance with the PSE-CG
It is crucial for investors to have knowledge regarding the factors that significantly affect
financial performance if they are to make informed decisions with favorable outcomes. By showing
how and to what extent compliance with PSE-CG guidebook affects RoE, this study aids in that
decision making process. This is especially true considering RoE as a direct measure of the value
to the stockholder. In light of this new knowledge, the investors may also use their power to
influence more compliance with PSE-CG guidebook, or even the adoption of better CG measures.
Moreover, by emphasizing the effects of compliance with PSE-CG guidebook to RoE, this
study gives useful information to companies about how they can further increase their profitability.
This allows them to reevaluate and improve their existing CG policies and their enforcement.
Better CG measures caused by both company initiative and investor influence provides
substantial benefits to the country as well as to its trading partners. More than preventing
collapses from happening again, improvements in this area can also boost economic growth
This research looks into the extent by which compliance with PSE-CG guidebook affect
RoE. While CG is big in scope and may involve many different ways of measuring it, the
researchers limit this study into CG in terms of compliance with PSE-CG guidebook. Thus, only
the guidelines listed on PSE-CG guidebookare considered. These guidelines are as follows:
Guideline 5: Ensures the integrity of financial reports as well as its external auditing function
Guideline 6: Respects and protects the rights of its shareholders particularly those that
transparency regime
Guideline 8: Respects and protects the rights and interests of employees, community,
Guideline 9: Does not engage in abusive related-party transactions and insider trading
Guideline 10: Develops and nurtures a culture of ethics, compliance and enforcement
The study does not reflect all the other factors that may also be a part of CG. Similarly,
analyses regarding the companies' financial performance are limited to their RoE only.
The study was based on data gathered in October 2014. Furthermore, the study reflects
the CG and RoE for reporting years 2012 and 2013 of 150 out of the 257 PLCs in the Philippines
at that time.
The decision to limit the study into two reporting years only is brought by the fact that
financial statements and other data available in the PSE website only cover reporting years 2012
and 2013. Data for other years will necessitate collaborating with all 150 PLCs, the sample size
of this study. Most of these companies have restrictions on the financial data it can disclose. While
it may be preferable to study the relationship of compliance with PSE-CG guidebook and RoE for
more than two years, it is not practical to exhaust all the other means available in obtaining
financial statements for reporting years prior 2012 given the excessive costs and limited time for
8
thesis completion. This decision is supported by similar studies. For instance, a study
by Heenetigala in 2011 about CG practices and financial performance of companies in Sri Lanka
has "availability of data" as its standard for selecting its scope and limitations. The same thing is
true for a similar study by Uwuigbe (2011) about Nigerian banks, where "easy accessibility" to
Hypothesis
H0: Compliance with PSE-CG guidebook has no effect on RoE of the PLCs in the
a. 2012
b. 2013
H1: Compliance with PSE-CG guidebook has a positive effect on RoE of the PLCs in the
a. 2012
b. 2013
H2: Compliance with PSE-CG guidebook has a negative effect on RoE of the PLCs in the
a. 2012
b. 2013
9
Assumptions
Definition of Terms
Terms used in the study are conceptually and operationally defined for better
Corporate governance (CG) the system by which corporations are managed and controlled
(Shailer, 2004) created to help the entity reach its goals, as well as to protect the rights of internal
Financial performance the measure of profitability of an entity for a specified period of time
(Heenetigala, 2011)
Philippine Stock Exchange (PSE) the only securities market in the Philippines (NASDAQ,
2015)
survey created by the PSE to assess the level of adherence of PLCs to CG practices written on
serve as recommendations to Philippine PLCs, based on both international standards and the
10
needs of the local environment ("CG guidelines for companies listed on the Philippine Stock
Exchange", n.d.)
Publicly listed companies (PLCs) a company that has undergone an initial public offering
(IPO) and whose securities are offered for sale for the general
&Thakor, 1997)
Return on equity (RoE) the ratio of net income to total shareholders equity, reflecting asset
management, debt management, and profitability of the entity (Petty et al., 2012)
11
The recent years have seen a renewed interest in the CG practices of companies. This is
evidenced by the increase in institutional shareholder activism on issues that relate to CG, as
discussed by Amico in 2014. Issues such as management oversight and security, executive
compensation, and management disclosures and board composition have received increased
regulators have also been imposed in regions of Europe, North America and multiple emerging
markets.
Corporate Governance
Because of the rise of public interest regarding CG, it is necessary to realize what CG is
and why it is important. According to Shailer (2004), CG is the system by which corporations are
managed and controlled. This is done in order to help the entity reach its goals, as well as to
protect the rights of internal and external stakeholders (Baker, 2010). CG encompasses the rights
responsibilities of the board, and disclosure and transparency (Asian Development Bank, 2014).
The same factors, found in the ASEAN Corporate Governance Scorecard, are used in this study.
Scorecard (Strenger, 2004) also discusses which factors form part of CG. Seven relevant criteria
are chosen, namely, CG commitment, shareholders and general meeting, cooperation between
non-executive independent board structure to well represent the shareholders or owners of the
company. Second is the establishment of strict audit and financial controls to ensure financial
oversight and timely compliance of reports. Third is executive compensations that are linked to
the company's performance. Fourth is assurance of the rights of shareholders through one vote
per share. Last is having just enough anti-takeover mechanisms to protect the company from
possible takeovers.
Lastly, Corporate Governance Quotient also points to what the components of CG really
are, as discussed by Barrett, Perrin, Schlaudecker and Todd in 2004. Eight core categories are
included - board structure and composition, audit issues, charter and bylaw provisions, laws of
the state of incorporation, executive and director compensation, qualitative factors, director and
to McGee (2009), not subscribing to good CG principles makes investors hesitant to invest. This
is especially true with disclosure. If investors cannot predict how the company operates, the
probability of them investing is low. This idea is echoed by Puffer and MacCarthy (2003) in their
study about Russia as one of the riskiest countries for investment. According to the study, this
situation is mostly due to the country's problems of nondisclosure and non-transparency. IU and
Batten (2001) also discusses how disclosure leads to transparency, which leads to knowledge
and the ability to protect oneself from harm - an important factor in creating informed market
participants.
13
Disclosure and transparency not only helps companies in getting investors, but also
contributes in creating more efficient equity markets (Yu, 2011). This could be achieved through
information related to stock price. Informed investors are needed to avoid sub-optimum growth
Another reason why knowledge about CG is of importance is the fact that a lot of market
failures in the past, both domestically and internationally, have been caused by poor CG. The
Asian Crisis of 1997 is brought about by the mismanagement of resources through poor investing
and risky financing decisions (Saldaa, 2000). Even after the crisis, same problems from poor
CG still ensued. For example, Clayton Holdings failed to monitor minimal standards of almost
54% of their loans in 2007 and caused them $63 billion debt (Bryce, 2012). Similarly, Olympus
2012). It did not only damage the reputation of both companies, but it also caused a large sum of
losses and collapse for Lehman Brothers. Monte de Piedad and Savings Bank, on the other hand,
incurred 1.8 billion Philippine pesos of bad loans to public utility operators and drivers, had
anomalous loans and irregularities not reflected in the audit reports, and had not maintained bank
ledgers properly. This in turn led to their operations being suspended (Echanis, 2006).
Because CG is important for companies to reach their goals, efforts have been directed
to quantify it. This is necessary in order to be able to assess its effects even better. The ASEAN
Corporate Governance Scorecard quantifies CG on a compliance basis and assigns weight to the
five CG areas - rights of shareholders for 10%, equitable treatment of shareholders for 15%, role
14
of stakeholders for 10%, disclosure and transparency for 25%, and responsibilities of the board
The MICG-Uitm-RAM-Biz Aid Technologies Corporate Governance Rating has also been
used to quantify CG by Fombrun in 2006. This measurement uses a five-point likert scale, with
375 as the highest possible score. The eight principal CG attributes and their corresponding
weight are strategic planning and performance management (total raw score of 30, weight of 5%),
board, committee and management (total raw score of 85, weight of 15%), risk management and
internal control (total raw score of 40, weight of 15%), ownership structure and concentration (total
raw score of 35, weight of 15%), accountability and transparency (total raw score of 85, weight of
20%), shareholders and investor relations (total raw score of 40, weight of 15%), business ethics
and responsibility (total raw score of 30, weight of 10%), and intellectual capital (total raw score
of 30; weighing 5%). However, this method is specifically designed for Malaysian Public Entities.
The studies mentioned earlier discussing which components form part of CG are also
useful in the search for ways to quantify CG. The Corporate Governance Quotient, which is
included with the proxy analysis service supplied by the RiskMetrcis/ISS for their institutional
investor clients, calculated CG ratings based on 61 variables across eight core categories
(Barrett, Perrin, Schlaudecker & Todd, 2004). Meanwhile, the German Corporate Governance
Scorecard (Strenger, 2004) also measures CG. The first part contains five pages dedicated for
individual scoring process, while the second part contains the summary page giving the user a
review of the partial scores achieved for each criterion, as well as the total score. The scorecard
Other methods used are the Corporate Library founded in 1999 by Nell Minow and Robert
A.G. Monks, the GMI Metric founded in 2000 by Governance Metrics International, and
Return on Equity
The most compelling reason to enforcing strong CG measures is its effect on financial
performance, one indicator of which is RoE. Return on equity is a profitability ratio that measures
how effectively total shareholders equity turns into income. Profitability ratios show the ultimate
dividing net income with total shareholders equity. A more comprehensive formula, the DuPont
Many researchers point to RoE as one of the best indicators of financial performance. In
2010, Brooks states that RoE reflects the operating efficiency, financial leverage, and asset
allocation of capital is. It does not only determine the generated return of the company from the
equity, but also shows the success of the management in running the company (Moore, 2004).
Similar Studies
Ponnu and Ramthandin (2008). The study seeks to find the relationship between the two factors
of the top 100 PLCs in Malaysia for the years 2005 and 2006. CG disclosures are interpreted
through the use of a governance rating customized for the Malaysian setting called the MICG-
16
performance is measured through RoE and stock price performance, both of which can be found
on the companies' annual reports. To find the link between CG and financial performance,
correlation analysis is used. Final results of the study depict a positive relationship between CG
Another study conducted in Pakistan by Javed and Iqbal (2006) correlates CG and firm
performance of 50 firms for the years 2003, 2004 and 2005. A complex multifactor CG rating
encompassed into three sub-indexes with eight factors each. Weights are assigned by the
researchers with the aid of financial experts. Furthermore, firm performance is measured by the
total amount of assets, debt-to-total asset ratio, and average sales growth. Tobin Q is used as
valuation measure to correlate CG with firm performance. The results of the study document a
Yu (2011) also conducted a study investigating the relationship between stock price
informativeness, a factor that drives financial performance indicated by stock price, and CG. Firm-
level data from 22 developed countries were used in measuring firm-specific stock return variation
and future earnings response coefficients. Results indicate that these financial performance
factors increases with the quality of a firms CG. The study used Gov7, an index developed in line
with Aggarwal et al. (2009) that measures the companys overall CG quality; takeover index,
patterned on RiskMetrics database, which covers antitakeover defenses of a firm; audit index,
which practically covers disclosure and transparency quality; and board index, which reflects the
composition of the board. Results indicate that these financial performance factors increases with
Meanwhile, a sample of 398 firms from Indonesia, Korea, Malaysia, Thailand, and the
Philippines revealed that CG had a strong impact on the financial performance during the East
Asian financial crisis of 1997-1998. Stock returns for one year is used, and CG is measured by
determining if it is listed in American Depository Receipt, and if it is audited by one of the Big Six
international accounting firms. This study of Mitton (2002) showed a significant positive
association between better stock price performance, and higher disclosure quality, higher outside
A similar study is also conducted by Uwuigbe (2011) that aims to affirm the correlation of
a company's financial health with regards to its CG policies. A sample of 21 Nigerian banks listed
in the Nigerian Stock Exchange was utilized for the years 2006-2008. Using Return of Equity and
Return on Assets as the defining factors of Financial Performance, the study correlated the
variables with CG represented by board size, board composition and directors' equity holdings.
The study resulted in (1) board size and (2) proportionality of independent directors being
negatively related to financial performance. Meanwhile, the rate of director's equity interest and
Research Design
with PSE-CG guidebook on RoE. Quantitative research design uses numerical data and
mathematical means to prove the hypotheses of the study (Harwell, 2011). Furthermore, the
correlational research design is used to determine the kind and extent of relationship that exists
between the two variables ("Survey and correlational research designs", n.d.).
Study Locale
The study locale is the University of Santo Tomas Alfredo M. Velayo College of
The study population consists of all 257 PLCs in the Philippines as of December 31,
2013. The list of these PLCs is found on Appendix A, confirmed by a formal certification from
PSE found on Appendix B. Meanwhile, the cut-off date of December 31, 2013 is deemed
necessary, as the data considered in this study comprise of conditions existing during reporting
years 2012 and 2013.The decision to limit the study into two reporting years only is supported by
The sample size of this study is 150 PLCs,with the desired reliability of .95 and maximum
error of .05. In arriving at this sample size, the stratified random sampling technique is used. This
sampling technique divides the population into strata, that is, groups with shared characteristics,
from which samples are then selected randomly (Stratified random sampling, n.d.).
Using the Philippine Social Survey Council as basis, a sample size of 151 PLCs
representing different sectors is determined. However, this sample size is reduced to 150 due to
the unavailability of data of the only PLC representing the ETF Sector. The number of samples
Table 3.1
N
Financials Sector 18
Industrial Sector 39
Holding Firms Sector 24
Property Sector 23
Services Sector 31
Mining and Oil Sector 15
ETF Sector 0
Total 150
The random sampling tool in Microsoft Excelis used to arrive at the list of PLCs selected
Research Instrumentation
Before testing their correlation, both compliance with PSE-CG guidebook and RoE of each
In measuring compliance with the guidebook, the PSE-CG survey is used. The survey lists
the guidelines presented in the guidebook, as well as more specific CG measures under each
guideline. Every year, companies are required to supply a binary response to this survey, that is,
a yes or a no, reflecting their compliance with a total of 75 CG measures provided. Furthermore,
this survey is duly signed by an independent director and a President/CEO of the company,
contributing to its reliability. This survey, as well as a scoring guide, can be found on Appendix
D. The percentage of "Yes" answers is the quantitative value assigned to compliance with the
guidebook. A study by Black, Jang, and Kim (2003) utilizes a similar method. With Korean public
companies as population, the authors looked into the effect to firm value of the number of
Meanwhile, each companys RoE is simply obtained from their financial statements. As
previously mentioned, RoE is computed by dividing net income over shareholders equity. For this
study, the amounts of net income considered in computing RoE are the companies audited net
income after tax and equity. For companies with a parent-subsidiary relationship, amounts
considered are those appearing in their separate financial statements, as it is a better reflection
of their own separate operations. For companies with fiscal years that do not end with December
31, the RoE considered is their RoE for the period ending at their respective fiscal year-ends. For
instance, the 2012 RoE of a company with a fiscal year that begins on April 1, 2012 and ends on
April 1, 2013 is their RoE during that period. The researchers did not convert these amounts to
the RoE that would have been reported had such companies elected to align their accounting
21
period with the regular calendar year, given that the difference would be immaterial. It would be
observed that the RoEs of companies barely change across successive accounting periods, as
shown in Table 4.2 of Chapter 4. Thus, the costs of converting these amounts would outweigh
the benefits. Another reason for this treatment is to have a consistent data gathering procedure
among all companies studied, where RoE is taken from the Annual Reports submitted to the PSE.
The researchers sent an e-mail to Ms. Martha H. Vinzons from PSE's Public and Investors
department to ask for the official list of PLCs as of December 31, 2013. Upon payment of data
fee for a total of Php240, a list of these PLCs grouped into sectors, as well as a formal certification,
was given to the researchers.Using Microsoft Excel 2007, a sample size of 151 PLCs was
selected from the total population of 257 PLCs based on the recommendations of the Philippine
Data regarding each companys compliance with PSE-CG guidebook and their respective
RoE was then gathered from the official PSE website (http://pse.com.ph) for the reporting year
2012, and from the newly launched PSE disclosure website (http://edge.pse.com.ph) called the
Electronic Disclosure Generation Technology (PSE-EDGE) for the reporting year 2013.
Specifically, the researchers downloaded each companys accomplished PSE-CG survey, from
which their level of compliance with the PSE-CG guidebook will be known, and their Annual
The researchers were able to obtain data for all the PLCs that are part of the list of samples
except one the First Metro Philippine Equity Exchange Traded Fund Inc., the only company
representing the ETF sector. This led to the reduction of the sample size from 151 to 150.
The researchers proceeded to counting the Yes answers of each company to the CG
measures listed in the PSE-CG survey. Partial compliance was not counted because the PSE-
CG guidebook requires full compliance with the guidelines.The count was verified by a member
of the group who was not assigned to do the first count. The percentage of Yes answers over a
Each companys RoE is then obtained from their Annual Reports. Negative RoE was
replaced by zero, given that theoretically, there is no such thing as negative RoE according to
an accounting expert, Mr. Luis Chua (personal communication, January 23, 2015). This treatment
is also supported by Hoques study in 2006, which demonstrated that an inclusion of negative
RoE risks the whole credibility of it as a measure of performance. For this reason, recent studies
based on market performance have also excluded negative RoE and replaced them with zero. As
in the case with the PSE-CG survey, the RoE appearing in each companys Annual Report is
A list of the percentage of Yes answers to the PSE-CG survey and the RoE of each
company was submitted to the groups statistician to test for correlation. Initially, the data resulted
to a small negative correlation for the reporting year 2012 and a small positive correlation for the
reporting year 2013. The result for the reporting year 2012 is inconsistent with the review of related
literature, prompting the statistician to advise the researchers to check the accuracy of the data
gathered. Upon checking, the researchers learned that the reason for the inconsistency was the
submission of the wrong file, where some of the companies data have not been encoded yet.
23
After submitting the correct file, both reporting years resulted to a small positive correlation
between the two variables studied, which is consistent with the review of related literature.
Finally, interviews were made to support the results and analyses presented in this study.
First, the researchers sent interview questionnaires to some PLCs through e-mail.
Representatives from two companies replied the Philippine Long Distance Telephone (PLDT)
Company and the Aboitiz Equity Ventures, Inc. (AEV). Also conducted was an interview with Mr.
Hilario Tan, who has over 25 years of experience working in the areas of compliance and CG.
Lastly, the researchers sent an e-mail to the CG department of the PSE to obtain their opinion
regarding the verbal interpretation of the mean of the percentage of compliance with the PSE-CG
compliance with the PSE-CG guidebook. To do this, the total number of Yes answers to the CG
measures listed in the PSE-CG survey is first obtained using simple addition. The percentage of
Yes answers over the maximum possible number of Yes answers is then computed. Percentage
allows the expression of ratios in terms of whole numbers(Bringhurst, 1997). The following
formula is used:
The weighted mean of each companys compliance percentage, as well as the weighted
mean of each companys RoE for research question number 2, is then computed. Weighted mean
is a measure of central tendency; it represents the average of a given data (MacMillan, Preston,
Formula for Weighted Mean (MacMillan, Preston, Wolfe, & Yu, 2007)
questions 1 and 2. Used as a measure of the dispersion or variation in a distribution, the standard
deviation statistic is equal to the square root of the arithmetic mean of the squares of the
deviations from the arithmetic mean (MacMillan, Preston, Wolfe, & Yu, 2007). In this study, it is
used to determine the representative value of each companys results. Its formula is found below:
Where
Formula for Standard Deviation Statistic (MacMillan, Preston, Wolfe, & Yu, 2007)
25
Research question number 2 also requires the computation of each companys RoE.
Return on equity is the ratio of net income to total shareholders equity, reflecting asset
management, debt management, and profitability of the entity (Petty et al., 2012). It is computed
as follows:
To answer research question number 3, each company's PSE-CG survey percentage and
their RoE are tested for correlation using the formula for Pearson Correlation. This is in line with
the method used in Ponnu's (2008) study about the relationship between CG and RoE of PLCs
between random variables X and Y(Kreinovich, Ngyuyen, & Wu, 2013). This formula is illustrated
below:
This chapter presents the results of the study about the relationship of CG and RoE of the
PLCs in the Philippines for 2012 and 2013. The tables of the data gathered used for interpretation
and analysis are presented in the sequence based on the statement of the problems in Chapter
1.
Table 4.1
CG 2012 CG 2013
M 0.91 0.91
SD 0.09 0.08
VI High High
As seen in Table 4.1, the overall percentage of compliance of selected PLCs with the
PSE-CG guidebook is high for both reporting years 2012 (M = 0.91, SD = 0.09) and 2013 (M =
0.91, SD = 0.08). The verbal interpretation shown is according to the CG office of the PSE, as
shown in their e-mail response found on Appendix E. This means that most Philippine PLCs
comply with most of the guidelines presented in the PSE-CG guidebook. This positive result can
be attributed to the various ways the PSE incentivizes compliance with the guidebook. Though
penalties are not imposed for non-compliance, PLCs are required to explain the reason for such
failure ("CG guidelines for companies listed on the Philippine Stock Exchange", n.d.).In addition,
the PSE Bell Awards is held to recognize PLCs that show excellence in CG. One of the primary
criteria used by the panel of judges in determining the list of awardees is their compliance with
Furthermore, the researchers looked into the CG measures with the lowest level of
compliance, as seen in Table 4.1.1. Given their importance, these areas need special attention
27
to further increase the overall level of compliance. The researchers also examined the possible
Table 4.1.1
Least Complied PSE-CG Guidebook Measures for the Reporting Years 2012 and 2013
Frequency
PSE-CG Guidebook Measures 2012 2013
2.3 Have at least thirty percent (30%) of its directors as independent
58 56
directors.
2.6 Have its Chairman and CEO positions held separately by individuals
84 75
who are not related to each other.
4.4 Have a unit at the management level, headed by a Risk
79 86
Management Officer (RMO).
With n = 150, only 58 (38.67%) and 56 (37.33%) PLCs complied with PSE-CG measure
no. 2.3, to have at least thirty percent (30%) of its directors as independent directors, for reporting
years 2012 and 2013, respectively. This makes it the CG measure with the lowest level of
Independent director is defined by the PSE as a person who, apart from his fees and
shareholdings, is independent of management and free from any business or other relationship
which could, or could reasonably be perceived to, materially interfere with his exercise of
independent judgment in carrying out his responsibilities as a director (Bautista, 2002). Their
independence is further assured by qualifications such as not being, and not being a relative of,
a major stockholder of the company, not having been employed in any executive capacity by the
same PLC within the last five years, etc. According to Stein and Plaza (2011), independent
directors are important,being objective actors that guarantee the protection of shareholder
interests, especially of those belonging to the minority (Jensen & Meckling, 1976).
28
A common reason given by companies with less than 30% independent directors such as
DMCI Holdings, Inc. (DMC), Petron Corporation (PCOR) and Universal Robina Corporation
(URC) is that they comply with Securities and Exchange Commission (SEC) memorandum
circular no. 6 series of 2009 to have at least two independent directors, or at least twenty percent
(20%) of its board size, whichever is lesser. This is also a regulation already incorporated in the
companys by-laws. Meanwhile, some of the companies which did not comply with the guideline
Container Terminal Services, Inc. (ICT).These explanations by non-complying PLCs are found on
their accomplished PSE-CG surveys, the relevant parts of which are found on Appendix F.1.
CG measure no. 2.6, to have its Chairman and CEO positions held separately by
individuals who are not related to each other, has been complied with by only 84 (56.00%) and
75 (50.00%) PLCs for the reporting years 2012 and 2013, respectively. The separation is
important to prevent the risks that could exist when one person has a monopoly of power over
the organization (DGA, 2004). This is explained by Jensen (1993) in his Presidential Address to
the American Finance Association. Given that the Chairman is in charge of hiring, firing,
evaluating, and compensating the CEO, separation is necessary to prevent him from prioritizing
As seen in Appendix F.2, companies such as Aboitiz Equity Ventures, Inc. (AEV) and
Robinsons Land Corporation (RLC) report in their accomplished PSE-CG surveys that their
Chairman and CEO are held by separate related individuals. Family-owned corporations usually
have this kind of setting (H. Tan, personal communication, January 23, 2015). Other companies
such as Bloomberry Resorts Corporation (BLOOM) and First Gen Corporation (FGEN) have its
Chairman and CEO held by only one individual who is also the controlling shareholder.
29
Schmid and Zimmerman (2008) lists a variety of reasons for non-compliance with this CG
measure. For instance, information costs could arise from such separation. Specifically, critical
information which is beneficial for both CEO and Chairman may not always be transferred
between the two, leading to a less than optimum performance. Assigning the same person with
the Chairman and CEO positions can also reduce rivalry between the two, as well as incentivizing
good performance by the CEO through the possibility of being elected Chairman as well.
Lastly, only 79 (52.67%) and 86 (57.33%) PLCs complied with CG measure no. 4.4, to
have a unit at the management level, headed by a Risk Management Officer (RMO), for reporting
years 2012 and 2013, respectively. The importance of this CG measure is affirmed by OECD
(2014), stating that one of the insufficiencies leading to financial crisis is the failure of risk
management adjusting corporate strategy to respond to the new risks that arise. This is a task
RMOs are assigned to fulfill. However, companies do away with this CG measure due to the
widespread belief that the assurance of risk prevention by RMOs is low. Companies such as
Megaworld Corporation (MEG), Empire East Land Holdings, Inc. (ELI), and Puregold Price Club,
Inc. (PGOLD) have their risk management functions performed by the companys internal audit
unit, while Basic Energy Corporation (BSC) already hired a part-time risk management consultant
for this function. Information is taken from each companys accomplished PSE-CG surveys and
Table 4.2
Return on Equity of Selected Publicly Listed Companies in the Philippines
As seen in Table 4.2, the RoE of selected PLCs is consistent for reporting years 2012 (M
= 0.11, SD = 0.11) and 2013 (M = 0.10, SD = 0.10). This insignificant change in RoE also means
that the quantitative factors affecting it barely changed throughout the two-year period. Based on
the DuPont analysis, these factors include Net Profit Margin, Asset Turnover, and Financial
Leverage.
Net Profit Margin measures the overall performance of a company and provides the net
earnings of a company after deducting all expenses, including interest and taxes (Herciu, Ogrean,
& Belascu, 2011). It also reflects the managements strategy in pricing by showing how much net
earnings is generated from a single peso of an asset. Meanwhile, Asset Turnover measures how
much sales is generated from each peso of an asset (Nanavati, 2013). It reflects the productivity
of a companys assets for the period, as well as the degree of required capital to generate a peso
of sales volume. Lastly, Financial Leverage pertains to the extent of debt in a companys capital
structure. A high level of financial leverage means that the company is relying more on debt rather
than stocks in financing its operations (Nanavati, 2013). The higher the financial leverage, the
Table 4.3.1
Correlation between PSE-CG guidebook and RoE in 2012
Return on Equity
Corporate Governance Pearson Correlation .246**
Sig. (2-tailed) .002
Note:**Correlation is significant at the 0.01 level (2-tailed)
Table 4.3.2
Correlation between compliance with PSE-CG guidebook and RoE in 2013
Return on Equity
Corporate Governance Pearson Correlation .281**
Sig. (2-tailed) .001
Note:**Correlation is significant at the 0.01 level (2-tailed)
In table 4.3.1, the factor correlation analysis reveals that CG has a small positive linear
correlation with RoE (r= .246, p < .01) in 2012. For 2013, CG also has a small positive linear
correlation with RoE (r= .281, p < .01), as shown in table 4.3.2. Both results are statistically
significant. This result concurs with several studies where CG positively correlates with financial
performance. These studies include the ones by Ponnu and Ramthandin (2008) in Malaysia,
Javed and Iqbal (2006) in Pakistan, and Yu (2011), all of which are already discussed in the
Interviews held by the researchers also affirm this positive result. Both representatives
from the Philippine Long Distance Telephone (PLDT) Company and Aboitiz Equity Ventures
(AEV) state that good CG brings about business advantages by building reputation. By being
known as a trustworthy company by suppliers and customers alike, the assurance of long-term
relationships is increased. This, in turn, brings more revenues for distribution to shareholders or
as investment for bigger business opportunities. Both companies were awarded in the 2013 PSE
Another advantage stated by PLDT is the effect of good CG to a companys credit rating.
According to them, one of the primary considerations of credit rating agencies in determining
credit worthiness is the companys CG. If these agencies release a good credit score, companies
would find capital borrowing easier. This means that they would have more money for profitable
investments, or would incur less costs due to borrowing. Naturally, these have a direct effect on
Lastly, PLDT also believes good CG can lead to avoidance of conflicts that would interfere
with how business are run. When conflicts are avoided, management has more time dealing with
the concerns that bring profit to the company, instead of trying to resolve those conflicts.
Furthermore, it helps promote goal congruence by making sure that each member of the company
are working with each other, instead of against each other to protect their own interests.
Though statistically significant, the result of the study shows that the correlation is small.
The interviews conducted by the researchers provide insight on why that is so. In an interview
with PLDT, they say that while they believe good CG has an effect on RoE, the extent is limited.
This is true given that RoE is also affected by many other risks and factors, such as business
strategy, execution, research and product development, risk management, etc. This is echoed
by a representative from Aboitiz Equity Ventures (AEV), who says that RoE is not a primary
consideration for their implementation of CG measures, although they believe that good RoE may
Another reason can be inferred from an interview with Mr. Hilario Tan. A recurring
statement made in the interview is how weak the state of CG is in the Philippines. This is
consistent with what Morales writes in 2013 when he compared the state of CG in the Philippines
with its neighboring countries. While the results of the study show that the level of compliance of
PLCs with the PSE-CG guidebook is high, this is not reflective of the entire state of CG in the
33
Philippines, given that the former is only a small part of the latter. The researchers believe that
this is a possible reason for the small correlation. Specifically, the fact that significant CG
measures are not yet part of the PSE-CG guidebook may be the reason why RoE is not affected
Mr. Tan draws attention to a number of CG deficits of the Philippines, such as the lack of
sufficient laws to protect minority shareholders. For instance, most minority shareholders in the
board of directors are appointed by the majority. This is counterproductive to the goal of protecting
minority shareholders since according to him, the majority usually appoints shareholders who will
look independent, when in fact they are not. Furthermore, he also points to the lack of efforts to
assure that companies work towards the goal of minimization of related parties in the board of
The researchers believe that the reason for this deficits mentioned by Mr. Tan is twofold.
The first is the absence of teeth in the implementation and enforcement of CG policies that could
immensely improve the state of CG in the Philippines. Positive reinforcement, such as the creation
of the PSE Bell Awards previously mentioned, is used to incentivize compliance with the PSE-CG
guidebook, but negative reinforcement, which could prove to be more effective, is not. According
to the PSE website, non-compliance with the PSE-CG guidebook will not result to penalties being
imposed to companies. The second reason could be the lack of initiative from companies.
According to Mr. Tan, most companies do not have CG departments, which can significantly
This chapter presents the summary of the research paper, the conclusions derived and
the recommendations generated from the results of this study. This study is about the relationship
of compliance with PSE-CG guidebook and RoE of selected PLCs in the Philippines for the
Corporate Governance
The data from which results were summarized in this chapter were gathered by using the
PSE-CG survey. This resulted to a weighted mean of 0.91 with a standard deviation of 0.09 in
2012, and a weighted mean of 0.91 with a standard deviation of 0.08 in 2013. Translated to its
verbal interpretation, the results show a high percentage of compliance based on the opinion of
The least complied CG measures include having at least thirty percent (30%) of its
directors as independent directors, having its Chairman and CEO positions held separately by
individuals who are not related to each other, and having a unit at the management level, headed
Return on Equity
RoE is computed by dividing the companys net income with its shareholders equity,
which are found on the companys Annual Reports. This resulted to a weighted mean of 0.11 with
a standard deviation of 0.10 for both reporting years 2012 and 2013.
35
relationship between compliance with the PSE-CG guidebook and RoE. The factor correlation
analysis shows that CG has a small positive linear correlation with RoE(r= .246, p < .01) that is
statistically significant. This implies that in effect, as compliance with PSE- CG guidebook
improves, the companys RoE increases. The same is true for 2013 (r= .281, p < .01).
Conclusion
Based on the study and its results, the researchers find that there is a positive correlation
between compliance with PSE-CG guidebook and RoE, as confirmed by the results of the
Pearson product-moment correlation coefficient model. The review of related literature and the
interviews conducted by the researchers also concur with the said results.
Though statistically significant, the correlation between the two factors is small. With the
interviews conducted, the researchers find two main reasons for the small correlation. The first is
from PLDT, stating that a lot of factors affecting RoE water down the effects CG has on it. Another
reason is inferred from an interview with Mr. Hilario Tan, who speaks of the deficits in CG in the
Philippines. The researchers believe that the since policies that could significantly improve CG
are excluded from the PSE-CG guidebook, its effect on RoE is decreased.
Recommendations
In order to increase the positive linear correlation of compliance with PSE-CG guidebook
and RoE, the researchers urge regulatory bodies to improve the implementation and enforcement
of CG policies in the Philippines. According to the interviews and review of related literature made
36
in this study, the state of CG in the country is weak compared to its neighbors. The researchers
believe that improving the kinds of CG measures that are enforced would increase its effect on
RoE, as well as other financial performance measures. This could be done by considering the
introduction or increase in the penalties imposed for non-compliance instead of giving mere
For further study, the researchers recommend the use of other ways to measure CG that
are more encompassing of its elements. Specifically, the use of the data from the ASEAN
the ASEAN Capital Markets Forum in order to obtain comparative information regarding the CG
practice of six ASEAN member countries, namely, Indonesia, Malaysia, Philippines, Singapore,
Thailand and Vietnam (Asian Development Bank, 2014). This information would be released in
November 2015, which is also the reason why this study was unable to use such method.
37
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Market
Code Company
Capitalization
Financials Sector
Banks
ASIA Asiatrust Development Bank, Inc. 728,092,575.00
AUB Asia United Bank Corporation 22,033,098,516.00
BDO BDO Unibank, Inc. 245,648,047,500.80
BPI Bank of the Philippine Islands 302,290,274,705.00
CHIB China Banking Corporation 84,232,037,822.00
CSB Citystate Savings Bank, Inc. 1,162,784,668.04
EIBA Export and Industry Bank, Inc. 4,923,830,641.60
EIBB Export and Industry Bank, Inc.
EW East West Banking Corporation 27,420,353,523.00
MBT Metropolitan Bank & Trust Company 207,369,720,536.30
PBB Philippine Business Bank 7,536,168,130.00
PBC Philippine Bank of Communications 20,370,389,740.00
PNB Philippine National Bank 93,685,475,880.00
PSB Philippine Savings Bank 33,635,348,740.00
PTC Philippine Trust Company 82,000,000,000.00
RCB Rizal Commercial Banking Corporation 54,215,492,115.00
SECB Security Bank Corporation 69,687,172,969.60
UBP Union Bank of the Philippines 80,819,224,920.00
Other Financial Institutions
AGF AG Finance, Incorporated 811,654,406.20
BKD Bankard, Inc. 2,980,524,300.00
BLFI BDO Leasing and Finance, Inc. 4,324,950,624.00
COL COL Financial Group, Inc. 7,873,320,000.00
FAF First Abacus Financial Holdings Corporation 930,696,000.00
FFI Filipino Fund, Inc. 357,702,750.00
I I-Remit, Inc. 1,754,427,308.92
MAKE Maybank ATR KimEng Financial Corporation 19,359,285,200.76
MED Medco Holdings, Inc. 143,500,000.00
MFC Manulife Financial Corporation 1,428,805,776,675.00
NRCP National Reinsurance Corporation of the Philippines 2,888,103,616.00
PSE The Philippine Stock Exchange, Inc. 21,981,141,000.00
SLF Sun Life Financial Inc. 827,838,960,480.00
V Vantage Equities, Inc. 5,186,484,098.51
Industrial Sector
Electricity, Energy, Power & Water
45
Maximum Percentage
Score
Total 75 100
59
Appendix E: Interviews
Good day!
We are 5th year students from University of Santo Tomas Alfredo M. Velayo College
Selected Publicly Listed Companies in the Philippines for the Reporting Years 2012 and
2013".Your company is a part of our sample size, and in line with this, we would like to ask you a
1. Based on your experience, what is the rationale behind the company's application
Your response will be highly appreciated, as it will be instrumental for the completion of
our study, a necessary requirement for our graduation this May 2015. We hope you can reply by
March 31, 2015 to give us ample time to include the interpretation of your answers in our research.
Many thanks,
Appendix E.2: Transcript of E-mail Interview with the Philippine Long Distance Telephone (PLDT)
Company
Based on your experience, what is the rationale behind the company's application of
CG, when conducted and observed soundly, brings about business advantages that
enhance a companys bottom line. First, a recognized and credible reputation for sound CG has
been found to have a positive correlation to share price. This means that share price rises as a
companys reputation for CG improves. Second, good CG also has an impact on a Companys
credit rating since credit rating agencies also look at CG measures that have been implemented
in order to determine a companys credit worthiness. What this means is that a companys access
accountability and fairness. When observed, these values promote efficient and honest use of
resources, whether financial, human, information or otherwise, which in turn leads to appreciable
monetary gains for the company. It is expected that sound CG encourages the avoidance of
conflicts of interest at all levels of the company which leads to responsible and effective
performance of duties and functions of personnel. It has also been observed that companies that
practice sound CG gain the trust of its suppliers and vendors, are able to retain talent for longer
periods of time, and retain and grow their customer base, all of which lead to indubitable
With regard to CG measures that are required by law or administrative issuance, there is
no discretion given to companies and the only option is to comply. For example, there are rules
committees, required disclosures, required policies (i.e. CG Manual), training, etc. In all of these,
companies must comply. There are however, certain areas of CG where some discretion is given
to companies to determine what are the best measures to adopt and implement. The usual criteria
used to determine how to observe and implement would be the following: ability to contribute to
the development of the right corporate culture, relevant and/or high impact risks, business
opportunities and the ability to create value for shareholders, meeting responsibilities to
It would be difficult to identify a particular factor. All of the factors cited above should be
considered in the light of the companys vision, its objectives as well as its current situation and
then the answer would be yes but only to a certain extent. This is because shareholders are an
important stakeholder group and should be given every opportunity to make a fair return from
their investment. However, it would be difficult to trace which portion of the ROE is due to sound
CG practices. ROE is influenced also by many other factors and risks. A companys CG practices,
in the end, serve to enhance, but not determine ROE. Stated otherwise, a company should attend
62
to equally important aspects of the business in terms of strategy, execution, research and product
Appendix E.3: Transcript of E-mail Interview with the Aboitiz Equity Ventures, Inc. (AEV)
Based on your experience, what is the rationale behind the company's application of
Aboitiz Equity Ventures (AEV) adopts corporate governance principles because it firmly
believes that good governance equates to good business, not just in terms of profit but more
importantly on the company's resulting relationships with its shareholders, customers, and other
business management, and hence adopts a long term view in adopting CG practices. This is in
keeping with AEV's mission "To create long-term value for all its stakeholders".
From these relationships, AEV builds good reputation and trust which are paramount in
the way AEV does its business. These core values have been passed on from generation to
generation of the Aboitiz family and Aboitiz employees which started with Don Ramon Aboitiz, the
The following factors come into play (in no particular order) in adopting CG practices:
2. CG best practices, whether local or foreign. AEV actively benchmarks its practices
with the CG practices of comparable local and foreign companies, and it also
63
3. Regulatory requirements
As with other companies, AEV follows the principle of "tone at the top", meaning that the
AEV Board of Directors, upon their appreciation of the necessity for the company to apply a
particular CG practice, gives its mandate for its adoption. To make this adoption process effective,
the Board is constantly updated of evolving corporate governance practices, both local and
Although it's difficult to pinpoint particular factors which contribute the most in AEV's
adoption of CG practices, as it is more likely a combination of the different factors given above,
we would have to say that AEV's core values are the prime consideration. Otherwise stated, CG
principles which are aligned to the company's core values have a good chance of being adopted.
AEV does not adopt CG principles just for bragging rights, rather the adoption must make
ROE is not a factor we look at when adopting or improving AEV's CG practices, although
Mr. Hilario Tan is a Senior Financial Management professional with over 25 years of
corporate governance, finance and accounting, capital management, and setting up management
reporting systems. He has been the Chief Financial Officer of Abzu Gold Ltd since December
2014, and has been one of its Directors since February 16, 2015. He has worked in various
industries such as Fast Moving Consumer Goods (FMCG), Chemicals Manufacturing, Financial
Services, and Academe. Mr. Tan is an Atlantic Gulf and Pacific Co. Scholarship Awardee from
1991 to 1993; Master Degree holder in Business Management from Asian Institute Management;
third-place in October 1996 CPA Licensure examination; and Magna cum Laude in Bachelor of
Science in Commerce, Major in Accounting from Chang Kai Shek College from 1982 to 1986. All
information are taken from Mr. Tans LinkedIn and Bloomberg profiles.
Why can we not use the instruments used by studies conducted abroad to measure CG in
governance, so you cannot just copy. For example, sa US, marami silang laws to protect minority
shareholders.May mga laws sila for example, yung Sarbanes-Oxley Law wala tayo nun e. And
because of that, kung kinopya mo lang sya, it doesnt follow na kung ano yung magiging result
Wala namang ganoong department sa mga companies e. Even for example, sa board of
directors, may audit committee. Sinong pauupuin mo sa audit committee? Eh karamihan ng part
ng BOD ay anak ng may-ari, wala namang muwang sa accountancy or internal audit or external
audit. So may uupo doong isa, siguro, retired CFO, pero siya lang magsasalita doon kasi siya
lang naman ang nakaka intindi ng accounting side. Ang alam ko na may effect on the corporate
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governance side pagdating sa talagang company, nang mabawasan ang irregularities, is a strong
internal audit team. Yon. Kasi ang internal audit team can focus on financial and operational audit.
Sa PNG, ang kanilang internal audit, ang focus lang nila doon, ay business or operational audit,
hindi financial audit. Kasi ang habol mo doon ay operational effectiveness and efficiency na eh.
Tapos tinitignan mo pa ay business sense, hindi accounting sense. Yun yung advantage doon.
Ang talagang ano diyan, kung titignan mo si SM, ang una niyang CFO, former audit partner
ng SGV na nag-aaudit sa SM, si Shaw. After nya, ang pumalit sakanya, galing ding SGV, tapos
ini-strengthen nila yung accounting side atsaka internal audit side. Si Metrobank din, strong ang
kanyang internal audit team. Ang internal audit team nya, lahat galling sa SGV yun former
auditor nila. Yung mga malalaking companies ngayon na magaganda, ang iniistrengthen nila,
ayun yung internal audit. Kasi yun ang mas malaking impact. Pero ang hindi pa masyadong naii-
analysis.Maraming company weak pa doon. Kasi karamihan ng mga nagiging controller galing ng
audit firm e. Eh sa audit firm ba, ano bang gingagawa mo? Audit ka lang. Kapag lumabas ka,
financial reporting, which is, level na pang-external, not internal. So ang problema usually ng
galing audit, paglabas nya, de kahon siya. Alam niya IFRS. Pero ang importante sa labas,
business sense. Kapag ginawa mo itong activity na ito, or decision na ito, ano ang impact? Ano
ang impact sa cash flow, sa tax, yung dalawa naman madalas, atsaka yung performance
measure.
Ang sagot ko ay hindi. Kasi ang RoE ay really affected by business model nung company.
May business na very profitable regardless, may business model na hindi. For example, kapag
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ikaw ay monopoly or oligopoly, monopoly ka like Meralco, or PLDT (but PLDT is now competing
with a substitute which now makes it an oligopoly). Kung nasa monopoly or oligopoly ka, talagang
malaki kita doon, especially kung nagkukunchaba kayo, for example nag-cacartell kayo, for sure
malaki kita nyo, di ba. Kasi ilan lang kayong players. Pagdating naman dun sa competitive
industries, dog eat dog yan talaga, matira matibay. Ang point diyan talaga, ang RoE mo pwede
tumaas, kahit wala kang corporate governance.Kasi eventually ang importante naman sa RoE is
how you make profit. You can increase your RoE even if you do things that are immoral or
unethical. For example, SM ka. Si SM, majority ng tao nya, 80-90% ng tao nya, nasa agency,
hindi nya tao e, di ba. Anytime na gusto nya paalisin, lipat lang, palit lang. Now do you see na
yung kanyang ganoong practices are unethical? Di naman issue sakanila yun, ang issue, legal
ba siya? For as long as makakalusot sila sa government, sa regulatory agency, thats fine with
them. Pero kung titignan mo yung morality nung ginagawa nila, hindi, di ba. Even for example,
So ang sa akin, when you say corporate governance, whose interest are you trying to
protect? Kasi just because na pinoprotectahan ang interest ng minority, it doesnt follow na
tataasang RoE eh. Kasi ang RoE is not a function of corporate governance; it is a function of
effective execution of strategy, and it is a function of your full understanding of your business
Can you elaborate on the clause regarding the protection of minority shareholders?
works. Kasi kung minority shareholder ka, sino nag-appoint sayo? Ang nag-a-appointng minority
shareholder, kung meron man, ay majority pa din e. And majority will not appoint minority
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shareholder who is independent. Mangyayari nyan, they will just appoint somebody who will look
independent when in fact they are not. Kasi kapag ni-nominate kang majority tapos eventually,
kaya ka minority shareholder doon at nasa board ka, kasi ang tumulong sayo malagay doon ay
majority naman eh, hindi yung minority, kasi ang minority, sabog (kalat). Kung titignan mo naman
sa Philippines, for example, ang mga publicly listed, ang naka float lang talaga sa publicly listed,
maliit na percent lang yun. It will not even make you buy two seats at the board. So kung
Can you elaborate on the clause regarding the transparency and frequency of issuing an
Kung gaano ka-transparent. Sa Philippines naman kasi hindi ganoon ka-transparent eh.
Kapag sinab imong transparent, you mean may audited FS, right? Pero how it was treated sa
audit is another issue. Kung gusto mong sabihin na may audited FS, fine, may audited FS. But
the transparency kasi nung financial data, hindi mo yan makikita sa audited FS eh. Nasa details
yun eh. Ang details, walang access doon ang creditor, walang access dyan ang potential
investor. Kasi audited FS lang nakikita mo saka interim. But if you want to see the nitty gritty of
the business, wala yun doon.Nasa management accounting report yun. For example, anong
segment yung kumikita, anong product ang kumikita, hindi mo yun makikita sa FS. Trabaho yun
ng controller or management accountant. Tapos hindi yun accessible sa general public, sa mga
investors. Unless umuupo ka sa mga board meeting, nakikita mo part of it. But even yung nakikita
sa board meeting is high level eh. Hindi mo nakikita kung bakit ganyan yung ano, for example
bakit ganyan yung segment level information, or product level, hindi mo yun makikita sa board
level ng mga information. Yun ang problema doon. Madali kasing sabihin na transparent, pero
Can you elaborate on the clause where related parties in the Board of Directors is not
allowed?
still family-owned. Puro family-owned. Bakit? Kasi sa kanila, ang tingin nila sa kanilang business
is long-term. Multi-generation. Hindi katulad nung iba na kung publicly listed sya na hindi family-
owned, walang titingin dyan sa long term. Meralco is still family-owned. Kapag tinignan mo lahat
yan, family-owned yan. Baka ang tignan mo pa RoE of publicly listed companies na family-
owned. Baka yun ang mas maganda mong tignan.Kasi, sila, ego booster din nila yun eh, parang
oh eto ang legacy ko to the future generations of my family. Kaya sa tingin ko doon ang may
correlation namataas. Siguro ang ipaliwanag mo sa ano, baka ang mas may impact pa sa RoE
yung ownership type ng publicly listed. Dapat i-segregate mo lahat ng family-owned sa not family-
owned. Kasi kung hindi family-owned yan, ang tendency diyan, may self-interest, tapos ang
interest na yan is short term. Ang goal lang nyan ay tumaas ang stocks kasi mayroon siyang
stock options, para pakinabangan na nya. Ang tignan mo diyan, is yung controlling interest ng
company. Is it one family or is it diverse? Kasi kung one family yan, papansinin mo, mas maganda
yung growth nya. Kasi talagang kontrolado yan sa loob, with all the structures.
Is it safe to assume that CG measures are done for compliance purposes only?
Yes. Kumbaga, minimum requirement sya to operate in that kind of business, on that kind
of environment.
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Do investors check the companies compliance with the PSE-CG guidebook before
deciding to invest?
Sa akin kasi, kung yes or no yun, kung qualitative, you have to put weight on certain areas
eh. Kasi hindi lahat ng area equally weighted yan. Like kunwari, ako, tatanungin mo sa corporate
governance, sa akin, ang pinaka-importante is strong internal audit team reporting to the board.
Kapag nag no ka ba doon, is it good or bad? Hindi naman siya necessarily good or bad.
It doesnt follow. Walang morality sa business. Karamihan ngayon sa mga companies amoral sila.
Ang mga amoral na owners, Chinese or Indian. Eh kapag tinignan mo Indian companies, Chinese
companies, ang bilis ng growth nila. Pero no morality involved. Kaya they could live with
corruption. Corrupt ang BIR, corrupt ang customs, they could live with that. So kung kailangang
susucceed sa business. Ganoon din sa audit. Hindi ka mag-susucceed. Kasi kahit naman SGV
ka, may mga kliyente sa SGV, pikit mata pipirma ka eh. Yun yung problema doon.
Good day.
We're a group conducting a thesis entitled, "The Relationship of Compliance with the
Selected Publicly Listed Companies in the Philippines for the Reporting years 2012 and
2013."
of 150 companies with the CG compliance survey conducted by the PSE. Results show that the
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mean (or average) percentage of compliance of publicly listed companies ranges from 0.90 to
0.92 for 2012 and 2013. As someone from PSE, what do you think is the verbal interpretation of
this result (highly compliant, moderately compliant, or not compliant)? In line with this, we came
across the PSE bell awards. May we ask the criteria on how you recognize each company's CG
performance?
Many thanks,
Dyan
As you have clarified, the 90-92% is based on the per sub-guideline self-assessment
made by publicly listed companies. As discussed with you, the 90-92% average would
translate to high compliance based on their self-assessment. Please note, however, that
these answers are subjected to internal review for purposes of the Bell Awards. For the PSE Bell
?ref=bellAwards).
Again, thank you for your email and call. Goodluck in your thesis!
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Thank you,
Gerard
Joseph Gerard Agustine M. Razo | Governance, Risk, and Compliance Associate | Corporate