S o , What is a We ll-Go ve rne d Co mpany?

Re x C. Drilo n II
President, Institute of Corporate Directors (ICD) Trustee &Fellow, Institute for Solidarity in Asia (ISA) Consultant & Former COO, Ortigas & Company 6 May 2011

Outline
• Introduction • How the outside world rates PH in corporate governance • How Philippines Inc. is faring using ICD’s CG Scorecard • So, What is a Well-Governed Company • Conclusion

Rex C. Drilon II
• Director and C-level executive since 1978 (FMMC Group, Philippine Fuji Xerox, J ardine Sugar, Ayala Land, Ortigas & Co., Priority Management) • Recently retired Chief Operating Officer of Ortigas & Company, Limited Partnership • President, Trustee, Faculty & Fellow, ICD • Trustee, Fellow & Faculty, ISA • Member: MAP, ILEDF • Product of UP, UE and UA&P • Author, “Patriots on the Street” • rex@drilon.com • Cellno (917) 841-5570

What they said about us

The World Bank / IMF • WB-IMF assessment: Concentration of business ownership in the Philippines. – – – – Market power Ownership of Banks Constraints to growth Inequitable treatment of minority shareholders • Unfair competitive advantage for big players • Exploitation of smaller but more numerous stakeholders • Funding not sustainable • WB-IMF Recommendations: Philippine business has to re fo rm itself • The key: Co rpo rate Go ve rnanc e .

The ACGA-CLSA Report of September 2010 .

2007 Source: Asian Corporate Governance Association Rank 1 2 3 4 5 6 7 8 9 10 11 Marke t S ing apo re Ho ng ko ng Japan Taiwan Thailand Malays ia India China Ko re a Indo ne s ia Philippine s 2007 65 67 52 54 47 49 56 45 49 37 41 2010 67 65 57 55 55 52 49 49 45 40 37 Chang e +2 -2 +5 +1 +8 +3 -7 +4 -4 +3 -4 Gap fro m WCB (80) -13 -15 -23 -25 -25 -28 -31 -31 -35 -40 -43 .CG Watc h Marke t S c o re s 2010 v.

Marke t Cate g o ry S c o re s S o urc e : As ian Co rpo rate Go ve rnanc e As s o c iatio n Rank Marke t 2010 CG Rule s & Enfo rc e Prac tic e s me nt Po litic al & IGAAP Re g ulato ry CG Culture 1 2 3 4 5 6 7 8 9 S ing apo re Ho ng ko ng Japan Taiwan Thailand Malays ia India China Ko re a 67 65 57 55 55 52 49 49 45 65 59 45 50 56 49 46 47 43 60 63 53 47 42 38 36 36 28 69 67 62 56 54 60 54 56 44 88 80 75 78 73 80 63 75 78 53 54 53 46 49 32 43 30 33 .

• Corporate Governance Rules The ACGA/CLS A-APM S e pte mbe r 2010 Re po rt o n PH Are as fo r Impro ve me nt in CG – Only 2 or 20% independent directors – Number of directorships of board members – Disclosure of executive compensation • Enforcement – Regulators’ enforcement of rules – Some firms ignoring SEC/PSE – TRO against SEC in enforcing rule reducing brokers to only 20% of PSE Board – PCGG Inaction • Accounting & Auditing – Sanctions on erring external auditors .

• Political and Regulatory Environment – Issuance of TROs is a problem – Inadequate resources for the SEC – Notable exception: BSP The ACGA/CLS A-APM S e pte mbe r 2010 Re po rt o n PH Are as fo r Impro ve me nt in CG • Corporate Governance Culture – – – – – – Waiver of pre-emptive rights Corruption Political interference Toothless regulators Dialogue with shareholders Lack of enthusiasm for the Maharlika Board .

What we say .

Reforms on the way • • • • • • • • • • • • • Maharlika Board Bankruptcy Law Corporate Governance Reforms 2010 Competition Bill (Anti-Trust Legislation) 2010 Review of Investments Incentives Law Spin off of the Market Regulation Department of the PSE Minority Shareholders’ Association Good Governance Association of the Philippines Institute of Corporate Directors 2009 Revision of the Corporate Governance Code by the SEC Compensation reform bill for GOCCs and GFIs EO 24 on GOCC/GFI Compensation Others – MAP Best Annual Report Awards – PSE Guidelines on Good Corporate Governance – ICD Outstanding Corporate Governance Awards .

The ICD CG Scorecard • Annual ICD Corporate Governance Awards on May 25. • Basis is OECD’s 5 CG Principles – Rights of shareholders (20%) – Equitable treatment of shareholders (20%) – Role of the other stakeholders (10%) – Disclosures and Transparency (25%) – Board Responsibilities (25%) • 5-year trends .

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36 companies scoring 90% and above 16 companies scoring 95% & above 20 companies scoring 90% .94% .

WHAT IS A WELL-GOVERNED COMPANY? The 10 Corporate Governance Guidelines for Publicly-Listed Companies according to the Philippine Stock Exchange (PSE) .S O.

The PSE Guidelines • Issued in May 2010 • Review of OECD Principles and CG Practices in 40 countries • Inputs from ICD and other IODs in the region • Vetted among global CG experts referred by the Global Corporate Governance Forum (GCGF) of the WB/IFC .

functioning Board Robust internal control system Enterprise risk management Integrity of financial reports Shareholder rights protection. compliance and enforcement Curre nt Re ality Can Be SQ . community.No . especially minority or non-controlling group Global standard disclosure and transparency Respect and protection of other stakeholders’ rights (employees. environment etc Does not engage in abusive Related Party Transactions and insider trading Culture of ethics. 1 2 3 4 5 6 7 8 9 10 Self Evaluation Crite ria Sound business strategy Well-structured.

100 Scale Distinguished Excellent Very Good Adequate Marginal 100 90 80 70 60 Inefficient Inadequate Ineffective Inept In Reverse 50 40 30 20 10 .

• Shareholder return is optimized through a sound and well-executed strategy • Best practice recommendations # Develops and executes a 1: sound business strategy – Clearly defined vision. management style and culture – Board continually engaged in discussions of strategic business issues • Score . mission and core values – Well developed business strategy – A strategy execution process that facilitates effective performance management and is attuned to the company’s business environment.

and functioning Board. . • Best practice recommendations – Board composed of directors of proven competence and integrity – Chairman ensures that the board functions in an effective and collegial manner – Have at least 3 or 30%.• A well-functioning board creates value for the enterprise. nomination and governance committees # Establishes a well-structured 2. whichever is higher. of its directors as independent directors – Written board policy manuals and guidelines – Have audit. risk.

– A formal board and director development program – Have no arrangements / agreements that constrains the directors’ ability to vote independently . cont’d… – Have a separate Chairman and CEO who are not related to each other – Have a nomination and election process that ensures all shareholders are given the opportunity to nominate and elect directors individually based on the number of shares voted.# Establishes a well-structured 2. • Best practice recommendations. and functioning Board.

safeguard company assets. – A comprehensive enterprise-wide compliance program that is annually reviewed. . deter fraud. – Institutionalize quality service programs for the internal audit function. • Best practice recommendations – Establish the internal audit function as a separate unit in the company which would be overseen at the Board level. and ensure compliance. and control system • Internal audit and controls enhance operational effectiveness.# Maintains a robust internal audit 3.

# Maintains a robust internal audit 3. that a sound internal audit. at least annually. suppliers and other stakeholders to raise valid issues. and control system • Best practice recommendations. • Score . cont’d… – A mechanism that allows employees. control and compliance system is in place and working effectively. – CEO and Chief Audit Executive attest in writing.

– Formal risk management policy that guides the company’s risk management and compliance processes and procedures. COSO (The Committee of Sponsoring Organizations of the Treadway Commission) I and II.# Recognizes and manages 4. – Design and undertake its Enterprise Risk Management (ERM) activities on the basis of. or in accordance with. enterprise risks • An enterprise-wide Risk Management system should be in place and properly functioning in a transparent manner. internationally recognized framework such as but not limited to. • Best practice recommendations – Board oversee the company’s risk management function. .

– Seek external technical support in risk management when such competence is not available internally. headed by a Risk Management Officer (RMO) – Disclose sufficient information about its risk management procedures and processes as well as the key risks the company is currently facing including how these are being managed. • Score .# Recognizes and manages 4. enterprise risks • Best practice recommendations. cont’d… – A unit at the management level.

# Ensures the integrity of its financial 5. reports and external auditing function • Financial reports must represent a fair and true condition of the company. • Best practice recommendations. its counterparties. – Ensure that the external auditor has adequate quality control procedures. . competent. and valuations of such transactions. – Ensure that the external audit is credible. The Committee should ensure that the non-audit fees don not outweigh the fees earned from the external audit. – Board audit committee approve all non-audit services conducted by the external auditor. and should have the ability to understand complex related party transactions.

– A policy of rotating the lead audit partner every five years. – Financial reports attested to by the CEO and CFO.# Ensures the integrity of its financial 5. reports and external auditing function • Best practice recommendations cont’d… – Disclose relevant information on the external auditors. – Audit Committee to conduct regular meetings and dialogues with the external audit team without anyone from management present. – Ensures that the external audit firm is selected on the basis of a fair and transparent tender process. .

• Best practice recommendations – Adopt the principle of “one share. particularly those that belong to the minority • The exercise of shareholders’ basic political.# Respects and protects the rights of 6. – Ensure that all shareholder voting mechanisms such as supermajority or “majority of minority” requirements to protect minority shareholders against actions of controlling shareholders . one vote”. economic and governance rights should be facilitated in an equitable and timely manner. its shareholders.

particularly those that belong to the minority • Best practice recommendations – Provide all shareholders with the notice and agenda of the annual general meeting (AGM) at least thirty (30) days before a regular meeting and twenty (20) days before a special meeting. – Allow shareholders to call a special shareholders meeting. and ensure the attendance of the external auditor and other relevant individuals to answer shareholder questions in such meetings. submit a proposal for consideration at the AGM or the special meeting. • Score . its shareholders.# Respects and protects the rights of 6.

internationally accepted disclosure and transparency regime • Material information should be disclosed fully. and strategic direction of the company. significant cross-shareholding relationship and cross guarantees. and details on shareholders agreements. justification. timely and accurately. – Disclose the existence. fairly. ownership. voting trust agreements. – Disclose its director and executive compensation policy. as well as the nature of the company’s other . confidentiality agreements.# Adopts and implements an 7. as well as other disclosure requirements under existing laws and regulations. and such other agreements that may impact on the control. • Best practice recommendations – Written policies and procedures designed to ensure compliance with the PSE and SEC disclosure rules. – Disclose names of groups or individuals who hold five percent (5%) or more ownership interest in the company.

cont’d… # Adopts and implements an 7. internationally accepted disclosure and transparency regime – Disclose annual and quarterly consolidated reports. while interim reports shall be published within fortyfive (45) days from the end of the reporting period. the degree of ownership concentration. Consolidated financial statements shall be published within ninety (90) days from the end of the financial years. and the extent to which such practices conform to the SEC and PSE CG Guidelines. cash flow statements and special audit revisions. This shall also include the disclosure of the company’s purchase of its shares from the market (e.g. – Disclose in its annual report the principal risks to minority shareholders associated with the identity of the company’s controlling shareholders. cross-holdings among company affiliates. share buy-back program). – Publish and/or deliver to its shareholders in a timely fashion all information and materials relevant to corporate actions that require shareholder approval. – Disclose the trading of the corporation’s shares by directors. – Disclose to shareholders and the Exchange any changes to its corporate governance manual and practices. and any imbalances between the controlling shareholders’ voting power and overall equity position in the company • .• Best practice recommendations. officers (or persons performing similar functions) and controlling shareholders.

environment. – Have in place a merit-based performance incentive mechanism such as an employee stock option plan (ESOP) or any such scheme that awards and incentivizes employees. • Best practice recommendations – Establish and disclose a clear policy statement that articulates the company’s recognition and protection of the rights and interests of key stakeholders specifically its employees. as well as the community. at the same time aligns their interests with those of the shareholders. interests of its employees. community. creditors.# Respects and protects the rights and 8. suppliers and customers. environmental and governance aspects of its operations. and other stakeholders • Corporations should manage the social. . environment and other key stakeholder groups.

customers. interests of its employees. community. • Score . Have clear policies that guide the company in its dealing with its suppliers. and other stakeholders • Best practice recommendations. Have in place an environment-related program. cont’d… – – – – Have in place a workplace development program. Have in place a community involvement program. creditors. analysts. market intermediaries and other market participants. environment.# Respects and protects the rights and 8.

• Best Practice recommendations – Develop and disclose a policy governing the company’s transactions with related parties. . transactions (RPT) and insider trading • Abusive related party transactions and insider trading undermine the trust and confidence on the company as well as prejudices non-controlling shareholders’ interests. The aggregate amount of RPT within any twelve (12) month period should be considered for purposes of applying the thresholds for disclosure and approval. – Clearly define the thresholds for disclosure and approval for RPTs and categorize such transactions according to those that are considered de minimis or transactions that need to be reported or announced .# Does not engage in abusive related-party 9. those that need to be disclosed. and those that need prior shareholder approval.

contd… – Establish a voting system whereby a majority of non-related party shareholders approve specific types of related party transactions in shareholders meeting. – Be transparent and consistent in reporting its RPTs. directors or management. • Score . – Have a clear policy in dealing with material non-public information by company insiders. – Have its independent directors or audit committee play an important role in reviewing significant RPTs.# Does not engage in abusive related-party 9. A summary of such transactions shall be published in the company’s annual report. – Have a clear policy and practice of full and timely disclosure to shareholders of all material transactions with affiliates of the controlling shareholders. transactions (RPT) and insider trading • Best Practice recommendations.

. Should it do so. clarify responsibilities. rule or regulation. rule and regulation especially when it refers to a corporate governance issue. and inform other stakeholders on the conduct expected from company personnel. – Not seek exemption from the application of a law. acceptance and compliance with the said issuances. • Corporate and employee actions should be conducted according to the highest ethical and professional standards at all times.# Develops and nurtures a culture of ethics. 10. it has to disclose the reason for such action as well present the specific steps being taken to finally comply with the applicable law. • Best practice recommendations – Formally adopt a code of ethics and proper conduct that guides individual behaviour and decision making. compliance and enforcement. – Have a formal comprehensive compliance program covering compliance with laws and relevant regulations. The program should include appropriate training and awareness initiatives to facilitate understanding.

as well as all regulatory requirements. paying. – Establish and commit itself to an alternative dispute resolution system so that conflicts and difference with counterparties. • Score . cont’d… – Have a clear and stringent policies and procedures on curbing and penalizing company or employee involvement in offering. would be settled in a fair and expeditious manner. – Have a designated officer responsible for ensuring compliance with all relevant laws. and receiving bribes.# Develops and nurtures a culture of ethics. 10. rules and regulations. compliance and enforcement. • Best practice recommendations. particularly with shareholders and other key stakeholders. – Respect intellectual property rights.

particularly GSIS and SSS Role of the SEC Maharlika Board PSE as model in Corporate Governance • The Philippine Brand . – – – – – – – Identified areas for improvement Governance reptiles to reform themselves Country above self GOCCs and GFIs are key. e. has made positive gains in CG More and better-governed companies There are outstanding governance warriors But more work ahead.Conclusion • • • • Philippines.g…. Inc.

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