Corporate governance faulted

RP ranked last in list of 11 Asian countries

THE PHILIPPINES has been placed at the bottom of a list of 11 Asian countries in terms of corporate governance, with a Hong Kong-based brokerage and a regional nonprofit group highlighting weakened domestic securities law enforcement.

The CG Watch 2010 report by the Asian Corporate Governance Association and CLSA Asia-Pacific Markets castigated Philippine regulators, noting that firms such as port operator International Container Terminal Services, Inc. (ICTSI) and conglomerate San Miguel Corp. were allowed get away with depriving minority shareholders of preemptive rights through changes to bylaws.

San Miguel was also rapped for inadequate disclosures and “less impressive” reporting practices compared with “better blue chips” Ayala Corp., the SM group, and Philippine Long Distance Telephone Co. (PLDT).

San Miguel and ICTSI officials were not immediately available for comment yesterday.

The report also found “loose conditions” for the appointment of independent directors supposed to look out for small shareholders, as regular directors and “emeritus” or “ex-officio” board members can become independents after cooling-off periods of just two years and one year, respectively. The regional practice is to appoint at least three independent directors while Philippine firms only have two at the most, the report added.

Foreign investors seem to have “thrown in the towel” as shown by lower foreign participation in the stock market, the report claimed, while the Philippines has the lowest level of foreign direct investments among the 11 markets.

The country, tagged with India and South Korea as the region’s “worst performers,” fared poorly in all corporate governance (CG) indicators except in the adoption of tougher accounting rules.

“The most disappointing market in CG Watch 2010 is the Philippines, which achieved what it has long threatened since we began this survey — last place, with its score dropping from 41% in 2007 to 37%,” the report said.

CLSA Asia Pacific published similar accounts in 2004 and 2005 but only the 2007 and 2010 reports are comparable in methodology. Analysts were asked to answer 90 questions covering five categories with different weights.

The Philippines’ score of 37% lagged Indonesia’s 40% and South Korea’s 45%, and was way behind top performers Singapore (67%) and Hong Kong (65%).

The Philippines landed at the bottom of three of the five categories: CG rules and practices, enforcement, and “corporate governance culture.”

“There is little evidence that the Securities and Exchange Commission (SEC) or the Philippine Stock Exchange (PSE) have made much progress in improving regulatory oversight of the markets,” the report said, noting that the SEC was rendered toothless early this year when a court stopped its bid to force brokers to sell down ownership of the PSE.

But in terms of accounting and auditing, and political and regulatory framework, the Philippines secured scores of 75% and 37%, respectively, better than Indonesia’s 67% and 22%.

“Perhaps the best that can be said about the Philippines is that it has a new political administration that wants to eradicate corruption and raise governance standards generally,” the report said.

The Institute of Corporate Directors said many firms were paying lip service to corporate governance.

“Most of our corporations, market participants and regulators (including the PSE) seem to have spent much of their efforts on their ‘CG rhetoric’ to a point that they themselves believe in their own propaganda and spins,” Jonathan Juan D.C. Moreno, president and chief executive of the institute, said in an e-mail.

“This survey proves that the international investment community can easily see through the rhetoric,” Mr. Moreno added.

The CLSA report said that in other markets, large capitalization companies lead reforms in good corporate governance. “But in the Philippines, some seem to be regressing rather than improving.”

Gerard M. Lukban, SEC secretary, said the local corporate governance code was adequate and was in fact strengthened last year. “We put up a framework on good structures in running the corporation like the attendance and qualification of independent directors to safeguard minority [stakeholders] and improve full disclosure for investors,” he said yesterday.

Val Antonio B. Suarez, PSE president and chief executive, downplayed the report and noted that investors have rewarded the bourse with a bull run.

“Whatever may be the results of these [survey] consultations, it would appear to have changed as investors have overwhelmingly given their stamp of approval on the Philippines by rewarding the markets now,” he said in an e-mail.

But he also said: “We are taking the report as a wake-up call. The PSE, for its part continues to undertake initiatives to boost corporate governance,” among them “the establishment of a Maharlika Board to further motivate companies to undertake higher standards of corporate governance.”

The report, however, noted there was “lack of enthusiasm” on the Maharlika Board, noting that companies “seem to enjoy the status quo.”

CG Watch 2010 said average scores for Philippine firms stayed above the regional bar despite low scores in accountability and responsibility, rescued by antipollution and corporate social responsibility initiatives. The most “respectable” were identified as Manila Water Co., Aboitiz Power Corp., and Energy Development Corp.

Mediaquest Holdings, Inc., a unit of the Beneficial Trust Fund of PLDT, has a minority stake in BusinessWorld. — from a report by Neil Jerome C. Morales, Businessworld