Point of Law

PH ratings on shareholder protection

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Exactly a week ago, I spoke before the 10th Annual Corporate Governance Workshop jointly sponsored by Management Association of the Philippines (MAP) and Financial Executives Institute of the Philippines (FINEX).

The theme of the workshop was “Moving Beyond the Basics: Upgrading Corporate Governance Compliance and Practices, and Preparing for the 2015 Asean Integration.”

The topic assigned to me was “Emphasizing Protection of Shareholders’ Rights,” something close to my heart even before I became president of the Philippine Stock Exchange (PSE) in 2004.

I mentioned two relevant reports in the course of my presentation.

The first is the Global Competitiveness Index (GCI) report, which measures the competitiveness of countries around the world based on different criteria. It is published annually by the World Economic Forum (WEF). The WEF is best known for its annual meeting in Davos, a mountain resort in Switzerland. The meeting brings together some 2,500 top business and political leaders, intellectuals and journalists to discuss the most pressing issues facing the world.

In the 2008 GCI report, we ranked 54th in terms of protecting minority shareholders’ rights. After five years, however, our rank deteriorated to 57th place. Even newcomers Brunei and Cambodia outperformed us, based on the 2013 report. Brunei improved from 93rd to 36th place while Cambodia went up from 106th to 88th place over the same five-year period.

The second report is the Corporate Governance Watch (CG Watch), jointly produced by the Asian Corporate Governance Association (ACGA) and Credit Lyonnais Securities Asia Asia-Pacific Markets (CLSA). This report covers the broader area of corporate governance (CG), which includes protection of shareholders’ rights.

The report covers 11 Asian economies: China, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand.

We placed 10th of 11 countries in 2007; we deteriorated further to last place in 2010.

The factors that contributed to our decline included: Regulators set a bar below the regional best practices; key personnel of the PSE associated with reform have left; the Securities and Exchange Commission (SEC) was not sufficiently resourced; and some listed companies appeared to be regressing in their CG practices.

In 2012, we regained our second-to-last position of 11 countries.

The contributing factors were: Commitment by President Aquino to good public governance; appointment of a new SEC chairman who “appears to mean business”; shifting oversight for the SEC from the Department of Trade and Industry to the Department of Finance; spin-off of the surveillance and enforcement division into a separate company under the Capital Market Integrity Corp. (CMIC); reinstatement of PSE’s minimum public float rules; and, emergence of CG-oriented civil society organizations.

Due to our penchant for backtracking, it did not come as a surprise that ACGA-CLSA raised the question: Can we sustain the improvement?

We can do it.

Our performance in the past definitely proves this. For example, the California Public Employees Retirement Fund (CalPERS), which is the largest investment fund in the United States and second-largest in the world, invests its funds in markets all over the globe. As part of its due diligence, it commissions a study on various economies to help it decide where to invest in. The study is known as the Permissible Public Equity Markets Investments Analysis prepared by Wilshire Consulting for CalPERS.

The study includes a segment that reflects the adequacy of shareholders’ rights in each market. A score of 1.0 (lowest) to 3.0 (highest) is assigned. High scores reflect strong regulations regarding shareholders’ rights.

In the 2007 CalPERS report, four Asean economies were included in the study—Indonesia, Malaysia, Philippines and Thailand. Singapore was not included because the study focused on emerging economies.

The Philippines outranked its Asean counterparts in terms of protecting shareholders’ rights. The Philippines scored 3.0 while the other Asean countries rated 2.3. Also, we learn from the WEF and ACGA-CLSA reports—which both show improvement over the prior years—that we can improve our ranking. In fact, we can even outrank our Asean neighbors, as shown by the CalPERS report.

To achieve this, our regulators and the private sector should work together, always mindful that the markets will see through pure rhetoric and will not accept anything less than real commitment to reform. We have to demonstrate that corporate governance is more than box-ticking, and genuinely embrace it as part of our corporate culture.

The question is: Do we have the political will to do it? Why not take the cue from President Aquino who has amply demonstrated commitment to good governance? Or, are we satisfied with the status quo and remain as cellar dwellers in the CG world?

The choice is ours to make. Better still, is there any choice for us?

(The author, former president and CEO of the Philippine Stock Exchange, is now co-managing partner and head of corporate and special projects department of Angara Concepcion Regala & Cruz Law Offices. The opinions expressed in this column are solely his own. He can be contacted at felim@accralaw.com.)

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