September 04, 2016 at 10:45 pm
Claro G. Gañac
Governance and corruption have once again taken center stage in today’s media. The war against corruption by the current administration has expanded into the corporate realm when the elected President recently named a business tycoon of a publicly listed corporation as being an “oligarch” with “questionable dealings.”
Defining governance and its ramifications
While every layman has an intuition on the subject, few have a deep understanding and grasp of the concept of governance and its ramifications in the strategic management of firms. Corporate governance is generally referred to as to set of regulatory mechanisms and systems in the proper and effective direction and control of corporations.
The OECD, which has spearheaded broad efforts to institutionalize governance in the wake of the Asian financial crisis and the Enron collapse and Andersen scandals in the US, has come up with principles that have defined the regulatory frameworks and practices in most countries around the world.
Business historians and observers alike are quick to recognize that weak governance frameworks have led to the downfall of many corporations around the world, including that of the infamous Uniwide Holdings here in the country.
Aside from protecting investors, the OECD pointed out that corporate governance “supports economic efficiency, sustainable growth and financial stability” while contributing to the growth of the capital markets that help spur, in turn, the expansion of companies as engines of economic growth.
Acting in its best self-interests
The principles of corporate governance have been derived from the classic agency theory propounded by Berle and Means (1932) who predicted that management (termed “agent”) 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 (termed “principals”) which have put up the capital in the firm. In effect, the theory predicts corporate “corruption” (also called the agency problem) by insiders who exercise control over the firm and its assets and resources.
Hence, numerous scholars and researchers have put forward the concept of instituting mechanisms for the proper and ethical management of corporations. Government regulators assent to the need for a coherent framework, whether rules-based or guidelines-based, which should be put in place to reduce expropriation of corporate resources for private gain and entrenchment by insiders that eventually weaken firms over the long-term.
Defining SEC’s role
In the Philippines, the onus of formulating these guidelines and monitoring corporate compliance falls on the Securities and Exchange Commission and the Philippine Stock Exchange, which oversees the domestic stock market.
Behavioral finance and economics scholars have principally focused their studies of governance mechanisms on two key factors: ownership structure and board-level governance, as measured by the number of independent directors and oversight over the key functions of director nomination and elections, internal audit (checks-and-balance) and compensation.
The SEC has adopted a mixed approach comprising of the original rules-based mandatory compliance using the aforementioned board mechanisms for all PLCs.
Because of increasing complexities in the world of business, it likewise established under the revised Code of Corporate Governance (2009) a set of guidelines-based discretionary compliance on numerous board-level governance that includes expansion of non-executive outsiders in the board, duality (separation of the chairman position and CEO), ownership rights (cash and stock dividends), risk management systems, and increased board independence.
The Code also adopted the OECD governance principle of “transparency,” which consists of corporate disclosure regime where listed firms provide required periodic financial statements, information and proxy statements, and other material disclosure regulatory filings.
Expanding the information concept
For my dissertation, I expanded the information concept of governance to include (a) investor communications mechanisms of corporate websites, investor information websites and annual reports and (b) discretionary investor relations mechanisms of investor briefings and press announcements. Veteran investors in the local bourse will readily validate the role of information in the share price performance of listed firms, as the market reacts to information “signals” that transmit quality of governance and underlying firm fundamentals. In the dual-factor framework, discretionary communications and IR activities provide these concrete information signals.
To gain an evidence-based understanding of the state of Philippine corporate governance, I conducted a broad-based study to explore the governance compliance and practices of Philippine publicly listed corporations (PLC) that was completed in February 2016.
The study, based on a cross-sectional survey, revealed interesting findings that showed strengths and shortcomings of Philippine corporate governance. (The findings will be reported next week in the second part of this article.)
Dr. Gañac is an assistant professorial lecturer in the Ramon Del Rosario College of Business of the De La Salle University. He joined the academe in 2012 after a career in corporate communications, corporate marketing, corporate social responsibility and investor relations that spanned more than 30 years. The two-part article was a part of his doctoral dissertation on the subject of Corporate Governance in the Philippines.
The views expressed above are the author’s and do not necessarily reflect the official position of De La Salle University, its faculty, and its administrators.