Stronger corporate PH rising from ashes of BW scandal

The steep rise and fall of BW Resources Corp.’s stock prices may now be a thing of the past, but 10 years after the charging of the culprits, the biggest stock scandal in the country remains a telling reminder of the importance of good corporate governance.

Market participants say the losses suffered by many small investors from BW stock price manipulation and insider trading, and the resulting loss of market confidence then, have helped shape the way companies are directed and controlled at present.

“More than 10 years after BW, I think corporate governance has improved quite a lot,” said Augusto Cosio, president of First Metro Asset Management Inc.

“There were no monitoring tools in place then, and the market was not very big; it was like the whole market was trading only one stock. Nowadays, even if you see a very good volume or a wild price fluctuation, it’s not concentrated on one stock,” Cosio said.

The BW scandal centered on the sharp price swing in the company’s stock price in October 1999. At one point, BW was the most actively traded company in the local bourse, eclipsing even blue- chip and perennially active Philippine Long Distance Telephone Co. Its stock price rocketed to P107, a 52-fold rise from its level at the start of that year, before plunging to P26.50, triggering the suspicion of regulators. In March 2002, BW majority shareholder Dante Tan and his co-accused were charged of stock manipulation and insider trading.

The corporate governance in effect in the country today may well be the product of the companies’ efforts to build confidence, or the outcome of the demands of the increasingly involved investing public who are wary of another BW scandal, analysts said. Either way, regulators are taking notice.

“Corporate governance is an emerging economic trend in the Philippines,” said Antonio Garcia Jr., president of Capital Markets Integrity Corp.,  an independent entity spun off from the market regulation unit of the Philippine Stock Exchange.

“Although the quality of corporate governance in the country may not be as advanced and well-developed compared to those of other markets, there is a marked improvement in how industries perceive corporate governance. More and more companies are becoming aware of the importance of observing good corporate governance practices as they see the value it brings to the economy by increasing investor interest and confidence in the market,” Garcia said in an e-mail.

The quality of corporate governance is measured in various ways. CLSA Asia Pacific Markets, in collaboration with Hong Kong-based independent organization Asian Corporate Governance Association, last month came out with its latest CG Watch report, which was based on five core areas: discipline, transparency, independence, responsibility and fairness.

In its report, CLSA said the Philippines’ overall score improved by four points this year from its 2010 survey, although it was identical to the country’s score in its 2007 survey.

“Basically, the Philippines is only back to where it was,” the report said. “Hardly a cause for unbridled optimism in its own right perhaps, but there are signs that the Aquino administration is making progress on much-needed governance reforms, including tackling government corruption and improving transparency and accountability.”

Revised rules

The key question in the minds of many in the market is whether the improvement in corporate governance in the Philippines is sustainable.

Concerted efforts among government regulators, companies and organizations are boosting reforms which, in turn, lift optimism that there will be improvements in governance.

In 2009, the Securities and Exchange Commission issued the Revised Code of Corporate Governance, which provided for the creation of an audit committee “to ensure accurate and transparent financial disclosures and the observance of risk controls.” In June this year, it issued the guidelines for the self-assessment of the audit committees’ performance.

The SEC is requiring the submission of detailed audited financial statements to include the timeframe, use and purpose of appropriated retained earnings or justification for non-distribution of dividends. It is also studying the scope and degree of its coverage, as well as who and how many corporate officers will be required to disclose their salaries and bonuses.

Greater awareness

Other changes are incorporated in the revised implementing rules and regulations of the Securities Regulation Code, such as the requirement for the registration of commercial papers and accreditation of credit rating agencies, and improved rules to prevent price manipulation via publication of false or misleading information to the investing public.

For certain companies, some of the requirements of good governance are already institutionalized.

“I think there’s greater awareness especially since the government is also promoting good governance in the public sector,” said Cora Guidote, head of investor relations office at SM Investments. “But I think observation of good corporate governance is still concentrated on the large corporations. There are many requirements involved and compliance is hard for smaller companies because it requires more resources.”

Moreover, even among larger companies, full disclosure doesn’t always come easy. Guidote noted that some corporations disclose only the remuneration of their board on a collective basis, as individual disclosure may entail security risk.

Still, the general view is that unlike in the past, minor transgressions can be monitored and corrected while fraud can now be detected long before it is exposed.

Aside from the reforms initiated or implemented by the SEC, trading watchdog CMIC is pushing for further strengthening of the trading rules by redefining the offenses and providing for appropriate penalties for violators.

Recently, the CMIC had monitored unusual trading of shares of agricultural product distributor Calata Corp., prompting it to issue sanction letters to four trading participants. Among the common violations noted was a breach of the “know-your-customer,” rule requiring brokers to check on the capability of their clients to engage in stock trades. There was a suspicion that the clients were mere dummies of the real perpetrators of the suspected Calata stock manipulation.

The CMIC—which has a self-regulatory organization status and is empowered by the SEC to “police” erring brokers—can impose sanctions, mostly monetary, ranging from P30,000 to P260,000.

Brokers are aware that being under the radar of regulators is the price they have to pay to restore investor confidence.

“BW almost wiped us out. To maintain the confidence of investors, you have to show that you are complying with regulation,” said a local broker. The broker cautioned, though, against overregulation as this could stifle the business.

The broker also added that the existing regulation is too focused on the trading participants while the customers behind questionable trades often get away scot-free.

New breed of investors

While revised regulations and tighter monitoring have helped issuers and trading participants to shape up, changes in the market dynamics are also behind the improved governance.

In the past, only foreign brokers and a handful of local ones had the capability to sustain well-equipped research units. Nowadays, many local brokers produce their own research and conduct their own company due diligence, forcing listed firms to be more transparent and accessible.

“I guess a lot of companies now feel that corporate governance is one important aspect of corporate life,” said First Metro’s Cosio. “Given that there are so many analysts, both foreign and locals, knocking at their doors and asking questions, companies are careful not to give inconsistent answers, or there would be doubt on the accuracy of their disclosures.”

Moreover, the presence of institutional players spells a lot of difference.

“There are a lot more institutional portfolios that are participating.  If you go back 10 years ago or 12 years ago or 15 years ago, you had only a handful of institutions. Now you have a more robust institutional investing community as well as more mature individual investors,  so it creates a virtuous circle of sort,” Cosio said.

The SEC said it continued to oversee regular compliance of broker-dealer firms with securities laws. Its market regulation department is studying new practices and methods, here and abroad, that may result in new violations of securities laws, or facilitate their commission.

“The SEC will certainly not be the wife who is the last to know when it comes to these matters,” SEC Chair Teresita Herbosa said in a recent speech.

“While the SEC, although undermanned and under-resourced, will not shirk from monitoring, random or otherwise, and conducting audits, both regular and special, the responsibility of being a good, law-abiding citizen is primarily the issuer’s, which responsibility is likewise expected from all other market participants,” she added.