Good governance: Differentiating ‘world class’ firms from those that are not

Keynote Speech

Sharephil Conference On Enhancing Share Value And Protecting Minority Shareholders

June 18, 2014 Dusit Hotel, Makati City

Her Majesty’s Ambassador Asif Ahman, Peza Director General Lilia De Lima, Sharephil Chairperson Evelyn Singson, Vice Chair Cherry Bernaldo, President Francis Lim, Sharephil Members, Honored Guests –

Good Afternoon To All Of You. I’m Glad To Be Here With You, And Join The Advocates Of Good Governance.

Introduction To Governance

MANILA, Philippines – There is no reason as important and compelling as the matter of ethics and governance, for us to convene today.

I’m a businessman in a country where one local columnist once described business ethics in the Philippines as an oxymoron. How can this be? Perhaps because ethical behavior is not always rewarded, and unethical behavior is rarely punished. We have yet to learn that those who do the right thing will, in the long run, perform better than those who don’t.

Business is finally alive to the hard issues involving governance, following the collapse of global corporations like Enron, Arthur Andersen, Vivendi and, most recently, Lehman brothers. The demise of these companies lies more in their failure in governance, rather than weakness in regulation. Troubled companies too big to fail were finally allowed to crash.

Closer to home, governance is a relevant topic today with the constant stream of news about politics and corruption. There’s a public outcry for transparency – ironic in this age of Twitter and Facebook – you’d think the world has become a place without secrets. We have some ways to go – with too many bad things continuing to happen behind the proverbial closed doors.

I’m a student of history, and I’ve seen this lesson taught time and again: fraud and greed trigger corporate and market collapse. It began early enough. The Medici Bank failed in 1494 – a quarter century before Magellan landed in Cebu – caused by the family’s shameless and extravagant lifestyle. Subsequent decades and centuries, delivered multitude of examples of fortunes made, then squandered.

Governance as Differentiator

Indeed, good governance plays a decisive role in differentiating “world class” companies from those that are not. Present-day financial markets determine which companies are good, and which are not – equity markets will price your shares impartially. Debt markets will price your loans objectively. if you want market acceptance, then you must perform well, and do it honestly. It’s as simple as that. You will see the result in your share price. You will see it in the interest rates you pay.

Yes, governance demands competence with integrity – one without the other won’t work. For what is the point of being the most honest CEO on this planet, if I cannot explain to shareholders why no profits were produced? Conversely, will the market accept record profitability attained through less than honest means?

The First Pacific Story/Culture

This brings me to why I’m here. I am the Chief Executive of First Pacific. I’m here because we’re good at one or two things – beginning with the values, which form the foundation and culture of our company and our people, values like openness and transparency.

The ability to relate and openly communicate is important to us. We strive to be candid in providing timely information to our shareholders and to our publics, emphasizing the good news – and bad news – needed to appraise performance.

This is precisely where the governance tires start hitting the dirt road – how your board and CEO can encourage the painful truth-telling, where the norm is fudging and bobbing and weaving.

I recall that when the accident at our tailings ponds in Philex Mining happened midnight in August 2012, we shut down the mine within the hour, and advised the government, our regulators, shareholders, and the public – first hour in the morning the following day.

A few months ago, I invited everyone to a very public “Twitter chat”. It was a new, pleasant, and exhilarating experience for me, to be so publicly exposed, and vulnerable. But I approached it with an open mind, and with confidence in our transparency principle. There seemed to me, at that moment, no better way to demonstrate that principle. Most questions and comments posed were friendly, even fun – touching on sports, personal life, my faith, my beliefs. But i was also asked by someone whom I assumed to be an employee of TV5 – “In the midst of CBA negotiations, how do you feel about the threat of a strike?”

I tweeted back in candor: “Sad if it happens. But we should continue talking.”

That, of course, was what TV5 management continued to do – be open with our union leaders with the actual state of the station, and its prospects. In time, all was well – not just the outcome of the CBA, but the value enhanced by being accessible to those we lead, and those we serve.

The PLDT Story

PLDT is another governance case in point.

First Pacific invested in PLDT as long ago as 1998. Our goal from the start was to transform PLDT from a Philippine flagship company into a world-class institution – in financial and operational excellence, and in governance. We recognized early enough that to attain these goals, our governance practices must be at par with the best companies in the world. Given PLDT’s historical antecedents, this task was formidable.

As with most Philippine corporates, PLDT was owned and run like a family business. This made corporate goals hard to distinguish from family interests, to separate personal matters from those of six minority shareholders. Some people thought then that “minority shareholders” was a foreign term mispronounced.

PLDT reached its first governance milestone as early as 2002, beginning with the board’s approval of our manual on corporate governance. It covered, amongst others, policies on board diversity, independent directors, board committees, independent auditors, internal audit, shareholder rights, internal controls, and sanctions for non-compliance. Although PLDT is not a covered institution, our board also adopted the Anti-Money Laundering Manual in 2002.

In 2004, we ratified our Code of business conduct and ethics. As a listed company in the New York Stock Exchange, Sarbanes Oxley set our standards for compliance, fair dealing, information disclosure, and conflicts of interest. The quality and volume of our disclosures locally – and to the NYSE and the US SEC – meet international standards. These disclosures require hard work, and can be maddening sometimes – but that’s the price to pay for being accepted by markets as a well managed company. A corporate governance office was established, and a chief governance officer appointed 10 years ago – the first Philippine corporate to have done so.

Our whistleblowing practice was instituted in 2006, and described in our websites. Confidentiality and protection are assured in that policy.

Finally, to disseminate our governance practices, PLDT implemented a governance communications plan, addressed to our internal and external stakeholders. We have a website dedicated to governance, and an electronic newsletter containing management capsules, success stories, and updates to our employees and shareholders on our governance programs and initiatives. Our investor relations team in each company are available to answer any concern that a shareholder may raise.

This high level of governance which we’ve had at First Pacific was institutionalized at PLDT, and implemented in the other group companies.

Key Players to Governance

But you may ask – where does governance begin? Who plays a key role in instituting it?

It all begins with your board of directors – particularly its chairman – and with your CEO.

The Board Of Directors

First Pacific separates the position of chairman from that of the CEO, in part to comply with SarbOx but more so, because the separation makes commercial and governance sense.

We strive to keep our board informed, empowered, and involved. Heretofore, effective governance by a board has been relatively rare – directors being, more often than not, internal folks, or friendlies, or high-powered but nameplate individuals engaged in low-level board participation. Boards must realize that the responsibility for good governance is theirs in the first instance.

Active and working board committees also help the proactive and effective performance of the board.

The role of the CEO

Let me now turn to the CEO. Because good governance and good performance are intimately linked, CEOs must not only be stewards of the business – they must also be the moral compass of the company – establishing the ethical temper at the top, and setting the agenda for proper practices. The CEO must integrate governance and compliance functions into his business plans and goals – establishing compliance goals as a corporate-wide priority, engaging his board of directors, and convincing his employees to adopt ethical practices.

By the way, CEO stands for Chief Executive Officer, as you know. Not Chief Embezzlement Officer. Likewise, CFO doesn’t mean Chief Fraud Officer.

Conclusion

In closing, may I say that Sharephil’s participation in the AGMs of our listed companies is an altogether welcome development. The voice of shareholders in the management and board of listed companies is less than it ought to be. Shareholders need to be more vocal and active, and communicate with the company not just once a year in annual meetings, but on a regular basis through the company’s website and other social portals like Facebook and Twitter. Or just write or email us.

Finally, a word on integrity. This is built on a trinity of immutable principles – transparency, checks and balances, accountability. Governance rests on markets and competition that are free. It relies on regulators, which align rules with ethical conduct, and mete out sanctions to punish wrongdoing. Most of all, it is built on people – who manage their businesses with competence, and integrity.

Thank you to all of you. I offer my best wishes to Sharephil. Have a terrific afternoon. –Manuel V. Pangilinan (The Philippine Star)