A national embarrassment waiting to happen

Sometime in 2015, the Philippines will host the first-ever awarding ceremonies for the winners in the Asean Corporate Governance Scorecard. Top publicly-listed companies (PLCs) in the Asean will be recognized based on their compliance with international best practices, following the OECD corporate governance principles.

The scorecard will provide foreign investors and fund managers comparable information that they can use in making investment decisions. It is premised on the fact that good corporate governance puts premium on the share price of a listed company and the contrary negatively affects investor confidence which, in turn, results in lower investment in listed companies.

The scorecard, which is a project of the Asean Capital Markets Forum (ACMF) as part of the Asean integration in 2015, is envisioned to brand and promote the Asean as a new and attractive asset class to foreign investors.

The scorecard covers five areas: rights of shareholders (10 percent), equitable treatment of shareholders (15 percent), role of stakeholders (10 percent), disclosure and transparency (25 percent) and responsibilities of the board (40 percent).

Several questions in each of the five areas have to be answered by the PLCs in the Asean region.

There are two levels for judging PLCs in the participating Asean countries. Level 1 consists of items that are indicative of the laws, rules, regulations and requirements of each Asean member country and basic expectations of the OECD principles. Level 2 consists of bonus items reflecting other emerging good corporate governance practices and penalty items reflecting actions and events that are indicative of poor corporate governance. Level 2 gives extra points to PLCs which go beyond minimum standards and penalizes companies with poor governance practices.

The assessment is based on the PLCs’ publicly available information such as annual reports, corporate websites, notices and circulars. Only information that is publicly available and easily accessible and understood is used in the assessment. The assessment is first made by the appointed domestic ranking bodies (DRBs) in each of the participating countries, followed by peer review by the other DRBs. The review is then followed by a reconciliation process before the ranking is finalized.

There appears to be a big problem for Philippine PLCs. If the latest Country   Reports and Assessments (2013-14) is any indication, none of our PLCs will receive an award. Out of the maximum attainable score of 142 points that a listed Asean company can receive under the ACGS, the highest score that our PLCs obtained is 82.10 compared to Indonesia (82.28), Malaysia (104.12), Singapore (105.0) and Thailand (104.18). There are definitely more than 50 PLCs in the other participating countries that have scored higher than 82.28. This makes it extremely difficult for Philippine PLCs to outscore them, unless they drastically improve their corporate governance practices in a span of less than one year.

Indeed, other Asean PLCs have made significant strides in a period of one year in preparation for the first awarding ceremonies. Unlike Philippine PLCs whose maximum score went down in 2013 from their 2012 score, the maximum score for Indonesian PLCs improved to 82.28 in 2013 from 75.36 in 2012; Malaysia to 104.12 from 93.90; and Thailand to 104.18 from an average of 96 in 2012. Of course, there is no need to highlight Singapore which has been recognized globally for its CG practices; and understandably, only newcomer Vietnam trails behind us.

Special mention must be made of Indonesian PLCs, which have overtaken our PLCs by improving their scores from 75.36 in 2012 to 82.28 in 2013. Our PLCs, on the other hand, went down in score from 87.12 in 2012 to 82.10 in 2013. In other words, Indonesian PLCs outscored our PLCs by about 17 percent in a span of one year.

I was just wondering if the situation would have been different if the PSE did not junk the Maharlika Board rules, which were largely based on OECD corporate governance principles, after we left the PSE in 2010.

In any event, hope is not all lost. According to Dr. Estanislao of the Institute of Corporate Directors (ICD), some of our PLCs may still make it to the elite group. This, of course, assumes that they continue to step up their CG practices more aggressively and meaningfully than their Asean counterparts. In this regard, there are several “low-hanging” fruits the ACGS recommends that our PLCS immediately adopt and publicly disclose; for example: (1) pay dividends within thirty days from their declaration, (2) appoint an independent party to count the votes during stockholders’ meetings, (3) provide rationale and explanations for each item of the agenda that requires shareholder approval, (4) report dealings of their directors and principal officers on their company’s shares within three business days, (5) dividend policy for their shareholders, (6) training and other development programs for their employees, (7) approval policy and process for related party transactions, (8) proof of media and analyst briefings, (9) make a majority of the nomination and remuneration committee composed of independent directors, (10) have a minimum quorum of at least two-thirds for board decisions, (11) when their vision and mission was last reviewed and (12) whistle-blowing policy.

The ICD, supported by the Shareholders’ Association of the Philippines (SharePHIL), will be holding a workshop on Nov. 28 for all stakeholders as a last-ditch effort to stave off the potential embarrassment. Our PLCs are advised to attend the workshop.

The question is: will our regulators and PLCs aggressively and sincerely step up their efforts to help save the situation for our country?   It will be the height of embarrassment and truly unpatriotic if they fail to do so.

(The author, former president of the Philippine Stock Exchange, is now a senior partner of the Angara Abello Concepcion Regala & Cruz Law Offices and the president of the Shareholders’ Association of the Philippines. The views in this column are exclusively his, and should not be attributed in any way to the institutions with which he is currently affiliated. He may be contacted through [email protected].)