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Corporate Governance in the Philippines

Introduction

The main purpose of this research is to offer a general overview of corporate governance

in the Philippine setting. It indicates how corporate governance helps increase the accountability

of every company and avoid massive disasters before they occur. A combination of people, rules,

processes and procedures is what it takes to manage the business of a company. This is how

corporate governance is defined. Corporate governance broadly refers to the system of rules,

practices and processes by which a firm is directed and controlled. It is concerned with holding

the balance between economic and social goals and between individual and communal goals. In

simple words, it is the extent to which companies are run in an open and honest manner.

According to Sir Adrian Cadbury a pioneer in practice of corporate governance, the governance

framework is there to encourage the efficient use of resources and equally to require

accountability for the stewardship of those resources. The aim is to align as nearly as possible the

interests of individuals, corporations and society. The goal of every corporation includes

promoting transparency and accountability and fulfilling the expectations of all the stakeholders.

To achieve these goals, corporate governance is an effective tool. Board of Directors and

Management has essential roles in attaining good corporate governance. Although they hold

close ties to one another, their duties and responsibilities are distinctly

different. The main role of board directors is to oversee the management and governance of the

company and to monitor senior management’s performance. On the other hand, the management

or the Chief Executive Officer is responsible for the executive leadership and operational

management of the Company. In every decision that they make, they must consider how it will

affect their employees, customers, suppliers, communities and shareholders.

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History of Corporate Governance in the Philippines

Long before the collapse of Enron and WorldCom, the Philippines had its own share of

corporate scandals like BW Resources Corporation, whose share prices hit record highs and then

collapsed in 1999. These scandals brought down the stock market’s image and weakened private

investor confidence. The scandals have their roots in management’s desire to project a false

picture of performance, with the aim of driving up the value of the corporation in a competitive

global market. A complete set of financial statement give the shareholders and creditors an

overview of financial performance, results and condition of particular business.

In 1997, a failure of corporate governance in five Asian countries including the

Philippines had happened. It also termed as “The Asian Crisis”. The controlling shareholders

mismanaged the resources of all shareholders through their poor investing and risky financing

decisions. The larger framework of corporate governance was weak and to the extent that early

warning signals did not generate counter measures to control poor management decisions

(Baltazar, “Corporate Governance in the Philippines”).

One reason also why these local tragic stories of stockholders and creditors who fell

victim to creative accounting used by companies that were in reality under deep financial trouble

happened because of the weaknesses inherent in the local Philippine Stock Exchange (PSE) and

Securities and Exchange Commission (SEC). Investors look up to SEC for assistance in getting a

clearer picture of the status of companies when SEC can’t even take action on conflicts involving

pre-need companies that are supposed to be directly regulated by them.

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For the corporate management to be more accountable, and for the auditors to be more

rigorous, corporate governance is needed. But good governance requires fair legal frameworks

that should be enforce impartially. So, the Philippine Securities and Exchange Commission

(SEC) as a principal player in matters of corporate governance then issued Memorandum

Circular 2, Series of 2002, otherwise known as the Code of Corporate Governance , under

resolution no. 135 dater April 4, 2002. The code is now effective and must be followed under

pain of penalty.

The Code aims to promote corporate governance reforms that will raise investor

confidence and trust, develop the capital market and help achieve high sustained growth for the

corporate sector and the economy. The code applies to: (1) corporations whose securities are

registered or listed, (2) corporations who are grantees of permits/licenses and secondary

franchises from the Commission, (3) public companies and (4) branches or subsidiaries of

foreign corporations operating in the Philippines whose securities are registered or listed.

Pursuant to its mandate under the Securities Regulation Code and the Corporation Code,

the Securities and Exchange Commission, in a meeting held on June 18, 2009, approved the

promulgation of this Revised Code of Corporate Governance which shall apply to registered

corporations and to branches or subsidiaries of foreign corporations operating in the Philippines

that: (a) sell equity and/or debt securities to the public that are required to be registered with the

Commission, or (b) have assets in excess of Fifty Million Pesos and at least two hundred(200)

stockholders who own at least one hundred(100) shares each of equity securities are listed on an

Exchange or (d) are grantees of secondary licenses from the Commission. The government,

acting in the public interest, regulates companies to prevent malpractice and to promote the

development of markets.
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Salient Features, Structure and Standards of Corporate Governance in the Philippines

It is imperative that a leader of a business accepts the responsibility for each decision

made regarding the performance of the entire organization. Once a leader designs a code of

conduct and ethics, they must adhere to it and enable the entire organization to observe the codes

while promoting the key characteristics of good corporate governance. Some of salient features

of corporate governance are; discipline, transparency, independence, accountability,

responsibility, fairness, and social responsibility.

Discipline is a commitment by a company’s senior management to adhere to behavior

that is universally recognized and accepted to be correct and proper. Jim Rohn an America’s

foremost business philosopher quoted: “Discipline is the bridge between goals and

accomplishment”. To be successful in anything takes a lot of self-discipline. You will need to

stay focused on the objective and not get distracted. Discipline encompasses a company’s

awareness of, and commitment to, the underlying principles of good governance, particularly at

senior management level. Employees must understand their task and know the objective of the

company. Corporate policies are only as effective as their implementation. A company’s

management can spend years developing a strategy to push into new markets, but if it can’t

mobilize its workforce to implement the strategy, the initiative will fail. Management must

always evaluate employee’s behavior and remind them the importance of discipline.

Acknowledging employees good performance will motivate them to do their task properly and

will help build commitment. When a person is committed, he/she becomes productive, more

energetic, and loyal. As a result, it will benefit the company. Good corporate governance requires

having the discipline and commitment to implement policies, resolutions and strategies. Another
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salient feature of corporate governance is Transparency. It is the ease with which an outsider is

able to make meaningful analysis of a company’s actions, its economic fundamentals and the

non-financial aspects pertinent to that business. It measure how good management is at making

necessary information available in a candid, accurate and timely manner – not only the audit data

but also general reports and press releases. It reflects whether or not investors obtain a true

picture of what is happening inside the company. Managers sometimes keep their own counsel,

limiting the information that filters down to employees. But corporate transparency helps unify

an organization: When employees understand management’s strategies and are allowed to

monitor the company’s financial performance, they understand their roles within the company.

As to decision making, independence is a vital salient feature of corporate governance. It is the

extent to which mechanisms have been put in place and decisions made are free from the

influence or control of another. Potential conflicts of interest will affect the level of

independence of the parties involved. These mechanisms range from the composition of the

board, to appointments to committees of the board, and external parties such as the auditors. The

decisions made, and internal processes established, should be objective and not allow for undue

influences. Lack of independence within an organization will greatly affect operational activities

and financial performance. Individuals or groups in a company, who make decisions and take

actions on specific issues, need to be accountable for their decisions and actions. This is when

Accountability takes part. Mechanisms must exist and be effective to allow for accountability.

These provide investors with the means to query and assess the actions of the board and its

committees. With regard to management, responsibility pertains to behavior that allows for

corrective action and for penalizing mismanagement. Responsible management would, when

necessary, put in place what it would take to set the company on the right path. While the board
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is accountable to the company, it must act responsively to and with responsibility towards all

stakeholders of the company.

To actively promote corporate governance reforms aimed to raise investor confidence and trust,

develop a capital market and help achieve sustained growth for the corporate sector and the

economy of the Philippines, the Securities Exchange and Commission in its Resolution No. 135,

Series of 2002, dated April 04 2002, approve the promulgation and implementation of the Code

of Corporate Governance, Memorandum Circular No. 02, Series of 2002. After a few years, the

SEC issued SEC Memorandum Circular No. 6 Series of 2009, referred to as the revised

code of corporate governance. This revised version of the Code is merely an update of the

original version. Some sections were modified to better phrase some provisions. These

revisions are considered minor as the true essence and spirit of the original Code remains intact

(Wong, 2009)

In November 2016, the Securities and Exchange Commission (SEC) issued a new

Corporate Governance Code for Public listed Companies, which introduced changes to further

strengthen the core principles of fairness, accountability and transparency. For covered

companies that are not listed in an exchange, the provisions of the 2009 Revised Corporation

Governance Code are still effective.

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Major Defects of Corporate Governance in the Philippines

Corporations are separate legal entities, wholly distinct from their shareholders.

Shareholders elect the board of directors which in turn, manages the business. Usually the board

employs officers and managers to run the daily operations of the corporation. However, in small

corporations, all of these shareholders, board, officers and managers may be one and the same.

The related governance requirements have several defects of Corporate Governance in the

Philippines. Corporations also governed by statutes by federal and state statutes. One major

reason business owners form corporations is to limit the owners' liability to the amount of their

investments. Another reason founders form corporations is because corporations are permitted to

raise capital by selling stock to investors and have a long legal and case history to support this.

With this corporate structure come certain requirements. Corporate governance defects in some

firms in the Philippine financial services sector are decision processes, violation of regulations,

weaknesses of regulatory agencies and financial reporting standards.

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Improvement in Corporate Governance in the Philippines

The Securities and Exchange Commission has issued a new corporate governance code

for publicly listed companies that includes rules setting a nine-year term limit for independent

directors, mandates protection for whistle-blowers and incorporates anticorruption measures. The

code revision is part of the SEC’s partnership with International Finance Corp. (IFC) and is

aimed at enhancing the country’s regulatory framework and investment climate. The new code

which took effect on Jan. 1, 2017, aims to improve the functioning of boards, strengthen

shareholder protection and promote full disclosure in financial and non-financial reporting. All

publicly listed companies are required to submit a new Manual on Corporate Governance to the

SEC on or before May 31, 2017. By providing guidance to adopt best governance practices,

Philippine publicly listed companies are seen to improve their competitiveness and ability to

attract foreign investment. ( Abadilla, “New corporate governance code out”)

The new code will increase the responsibilities of the board and ensure the competence

and commitment of its directors. It adopts a “comply or explain” approach that combines

voluntary compliance with mandatory disclosure. Companies do not have to fully comply with

the code, but they must state in their annual corporate governance reports whether they comply

with the code provisions, identify any area of non-compliance and explain the reasons for non-

compliance.

“The new code is intended to raise the corporate governance standards of Philippine

publicly listed corporations to a level at par with its regional and global counterparts,” said SEC
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Chair Teresita J. Herbosa. “The adoption of the ‘comply or explain’ approach is hoped to

address the perceived overregulation of the SEC.”

“Our global experience has shown that corporate governance codes set a benchmark and

encourage companies to adopt effective governance practices,” said Jane Yuan Xu, IFC

Philippines country manager. “Improved corporate governance will make Philippine companies

more competitive and enhance their ability to attract foreign capital, leading to the development

of a vibrant and sustainable private sector.”

Under the code, independent directors of any publicly listed company should serve for a

maximum cumulative term of nine years, after which, the independent director should be

perpetually barred from reelection as such. However, they may continue to qualify for

nomination and election as a non-independent director. The SEC said service in a board for a

long duration might impair a director’s ability to act independently and objectively. Hence, the

tenure of an independent director is set to a cumulative term of nine years. The reckoning period

will be 2012, in connection with another circular dated 2011. The new code requires the board to

establish a suitable framework for whistleblowing that “allows employees to freely communicate

their concerns about illegal or unethical practices.” The board is mandated to “set the tone and

make a stand against corrupt practices by adopting an anticorruption policy and program in its

Code of Conduct.” The code recommends that the positions of chair of the board and chief

executive officer be held by separate individuals and each should have clearly defined

responsibilities. This is to avoid conflict or a split board and to foster a balance of power,

increased accountability and better capacity for independent decision-making.

A new Corporate Governance Code was implemented in year 2017. It contains revised

regulations for companies listed in the Philippine Stock Exchange, including enhanced
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responsibilities for the Board of Directors, suggestions on keeping directors independent for

more objective decision making, heightened risk management functions, among others. The

Corporate Governance Code works under the “comply or explain”, which combines voluntary

compliance with mandatory disclosure. “Companies do not have to comply with the Code, but

they must state in their annual corporate governance reports whether they comply with the Code

provisions, identify any areas of noncompliance, and explain the reasons for noncompliance,”

the Code read.

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The World Bank on Corporate Governance in Philippines

The World Bank, both as an international development bank and as an institution,

interested and involved in equitable and sustainable economic development worldwide, was one

of the earliest international organizations to study the issue of corporate governance and suggest

certain guidelines. The World Bank Report on corporate governance recognizes the complexity

of the very concept of corporate governance and focusses on the principles on which it is based.

These principles such as transparency, accountability, fairness and responsibility are universal in

their applications. The way they are put into practice has to be determined by those with the

responsibility for implementing them. What is needed is a combination of statutory and self-

regulation; the mix will vary around the world, but nowhere can statutory regulation alone

promote effective governance. The stronger the partnership between the public and private

sectors, the more soundly based will be their governance structures. Equally, as the report

emphasizes, governance initiatives win most support when driven from the bottom up rather than

from the top down. It could be argued that international investors and capital markets are

bringing about a degree of convergence over governance practices worldwide. But the standards

that they are setting apply primarily to those corporations in which they invest or to which they

lend. These standards set the target but it is one which, at present, is out of reach for the majority

of enterprises across the world. In the past, these standards might have become diffused by a

gradual process of economic osmosis. However, the pace of change today is such that to leave

the raising of governance standards to natural forces might put parts of the world, where funds

could be put to best use, at a competitive disadvantage in attracting them. Adoption of the

report’s proposals offers enterprises everywhere the chance to gain their share of the potentially

available funds for investment.

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Role of Government in Ensuring Corporate Ethics

Ethics form a central position in the duty of the government. Under normal

circumstances, it is the role of the government to ensure a fair society where order and harmony

are present. Society is defined as an organization formed for a particular purpose or activity. A

corporation is an organization, a group of people or a company, therefore it is a society. This

kind of society is authorized to act as a single entity (legally a person) and recognized as such in

law. The area that deals with the way on how it behaves towards, and conducts business with its

internal and external stakeholders, including employees, investors, creditors, customers, and

regulators is referred to as corporate ethics. Behavior of corporation must be ethical in a way that

it benefits both the business and the people and it does not harm others. It must make

considerations so that decisions to be made are in line with the welfare of the society.

Government plays a significant role in establishing and enforcing corporate ethics in

order for the corporations to function well. To get a better understanding of the role of the

government as far as ethics and morality is concerned; more focus should be on the law (Preston

& Bishop 2000). Law is the binding rules of conduct meant to enforce justice and prescribe duty

or obligation, and derived largely from custom or formal enactment by a ruler or legislature.

These laws carry with them the power and authority of the enactor, and associated penalties for

failure or refusal to obey. For the government to perform its function, it relies majorly on the law

because of it is its instrument of power. The government ensures that ethical standards, conducts

of business and good behavior are being practiced by the corporation through establishing firmly

the aspects of corporate ethics into the law. Corporations give importance to laws about

corporate ethics not just because it will benefit their company but for the avoidance of penalties

as well.
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Contemporary Issues in Corporate Governance in the Philippines

A well-managed company will be aware of and respond to social issues, placing a high

priority on ethical standards. A good corporate citizen is increasingly seen as one that is non-

discriminatory, non-exploitative, and responsible with regard to environmental and internal

issues of the business like corruption. Berle and Means (1932) predicted that management 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 which have put up the capital in the firm. In effect,

the theory predicts corporate “corruption” by insiders who exercise control over the firm and its

assets and resources. Corruption, defined here as the misuse of public office for private gain

(Rose-Ackerman 1978). In every corporation, this inherent risk is always present. Corporate

governance standard is a significant factor that determines the level of corruption. If corporate

governance in a particular corporation is not doing its role, the risk of corruption is high. Having

good corporate governance will help improve or avoid issues about corruption. Principles of

good corporate governance such as accountability and transparency not only can improve firms’

operating performance, but can also reduce the level of corruption by imposing more constraints

on both the corrupt officials and the corruptors from the private sector. The accountability of

corporate boards to shareholders reduces the incidence of corruption. An independent and

competent corporate board that truly represents the interest of shareholders can help prevent the

opportunistic behaviors of the managers and/or inside parties. Managers might be tempted to do

bad things because of the benefits that they can get, but if board is independent and accountable,

they will surely find ways to stop that bad doings and to lessen the corruption. Having strong

corporate boards also makes it more credible for managers to not do corruption.
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Works Cited

[1] Cadbury, Adrian. Corporate Social Responsibility and International Development .USA:

Earthscan. Google books. Web. 2 March 2019. https://books.google.com.ph

[2] Baltazar, Wilfredo. Corporate Governance in the Philippines. webmaster@dlsu.edu.ph.

https://www.dlsu.edu.ph/research/centers/cberd/pdf/bus_focus/corporate_governance.pdf

[3] Rohn, Jim. “QOD-086: Jim Rohn – Discipline is the bridge between goals and

accomplishments,”.goalgettingpodcast. http://www.goalgettingpodcast.com

[4] Abadilla, Dorris. New Corporate Governance Code Out. Inquirers.net.

https://business.inquirer.net/222476/new-corporate-governance-
code?utm_expid=.XqNwTug2W6nwDVUSgFJXed.1

[5] Abadilla, Dorris. New Corporate Governance Code Out. Pressreader.

https://www.pressreader.com/

[6] Benre. The State of Corporate Governance in the Phiippines. Manilastandard.net.

http://manilastandard.net/business/business-columns/green-light/215235/the-state-of-corporate-
governance-in-the-philippines.html

Means The State of Corporate Governance in the Phiippines. Manilastandard.net.

http://manilastandard.net/business/business-columns/green-light/215235/the-state-of-corporate-
governance-in-the-philippines.html
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