Global Problem of Corporate Governance:
The Philippines’ Response

By Rene B. Benitez and Juan Carlos del Rosario

Corporate governance has greatly evolved in importance as well as style since the stock market boom during the 1990s. In a market where the economy was in an up-trend, corporate governance hardly affected the value of a company. However, when the market collapsed, the importance of good governance became clear. Companies with efficient boards of directors can better thrive during difficult times. In fact, based on Business Week’s inaugural ranking of the best and worst boards in 1996, the stocks of companies with the best boards outperformed those with the worst boards by two to one. However, as the economy slowed in 2000, companies with the best boards retained much more of their value at 51.7% compared with -12.7% for the worst board companies.(1)

With the recent eruption of the Enron case, corporate governance issues were revisited the world over. As the list of flailing large corporations, such as Tyco and WorldCom, grows, corporations are looking at how they can make their respective boards of directors more effective. For instance, Computer Associates International, Inc. (CA) recruited the Securities and Exchange Commission’s (SEC) former top accountant for its audit committee and prohibited directors from selling stock until they leave. In addition to having a tarnished reputation for having paid US$1.1 billion to top executives four years ago, CA is currently undergoing investigation for its accounting practices.(2)

Sanjay Kumar, CA’s CEO, plans to save the company by improving its relationship with customers, investors and employees. He has set-up a 650-person customer-care organization and launched annual customer-satisfaction surveys, tying pay of 500 senior executives to the results. Furthermore, the company’s accounting policies was slightly changed to allow the depreciation of software-license revenues to occur over the life of the contract compared to having recognized earnings when the deal was concluded. Finally, changes on the board of directors shall include expansion from eight to eleven members as well as retiring several veteran members and adding seven new independent directors. A lead outside director shall also be appointed and term limits shall also be set in place.(3)

Similarly, Ericsson is facing problems in its operations as well as its ownership structure. Ericsson’s revenues for this year are expected to be 40% less than the US$24 billion two years ago. In order to remedy these problems, Ericsson’s CEO, Kurt Hellstrom, shall engage in outsourcing activities for its manufacturing and research and development operations as well as the company’s software labs. Ericsson has also entered into a joint venture with Sony Corp. to produce a new line of mobile handsets that will offer both Ericsson’s technology and its links to wireless networks as well as Sony’s talents in consumer electronics and marketing. Hellstrom plans to repackage the company image into “a wireless specialist that depends on service more than manufacturing, on know how more than metal”, shifting the value from hardware to software and services. Finally, Ericsson may face problems recruiting investors in the future with its current ownership structure. Investor and Idustrivarden are two of the company’s major shareholders and they control close to 78% of the votes at the company with only 11% of the equity. They have majority votes through special A shares that have 1,000 times the votes of ordinary B shares. A reduction in voting ratio from 1,000:1 to 10:1 between the A and B shares are being considered. This would reduce the two major shareholders’ votes to 30%.(4)

Other corporations across the U.S., such as Apple Computer, Inc. and Qwest Communications International, have prohibited outside auditors from performing non-audit work for their companies. At Xerox Corp., three out of eight directors are sitting on too many boards and two members of their audit committee had attendance problems last year. At American International Group (AIG), the CEO, Maurice R. Greenberg, sits at the board of a private company that got US$77 million of AIG’s business last year.(5)

Similarly in Europe, three major corporations involved in their respective financial scandals have affirmed the need for corporate governance reforms. One of which is Vivendi, which has acquisitions in Seagram, Canal Plus,, and Vizzavi. Vivendi, which was originally formed as a water company under the name Compagnie General des Eaux, has been accused of trying to hide US$1.5 billion worth of losses. Its share price dropped by 40% when it was revealed that Andersen was also responsible for the company’s accounts.(6)

Other European companies with scandalous affairs include ABB, an engineering firm and Elan, a pharmaceutical company that recently diversified into biotechnology. ABB was forced to shift to “generally accepted accounting principles” in October 2001 after which, it was revealed that 28% of its reported operating income was in fact from one-off sales. Furthermore, the company’s ex-chairman, Percy Barnevik, gave himself a severance package of US$78 million without board approval while another board member received a pension of US$160 million. Elan, on the other hand, was involved in dubious accounting techniques and was responsible for a 16% drop in the Irish ISEQ market index. The company entered into agreements with 50 “Qualified Special Purpose Entities”, allowing Elan to sell future royalties in return for cash to inflate revenues. The U.S. SEC subpoenaed Credit Suisse and Morgan Stanley for their involvement in the special purpose entities scheme. Its Chairman and CEO, Donal Geaney, gave himself a salary and bonus amounting to US$2.99 million.(7)

In the Philippines, corporate scandals did not lag behind the global trend in governance mishaps. Well-established companies from sugar mills to banks to gambling enterprises have been facing various cases of bankruptcy and audit issues. Among these include Urban Bank, which was forced to service approximately Php2.5 billion in withdrawals within a span of two weeks brought about by its recent downgrade from a universal bank to a thrift bank as a result of its failure to meet increased capitalization requirements. In a notice to the Philippine Stock Exchange (PSE), the bank reported withdrawals reaching Php4.5 billion in addition to the Php1 billion prior to its closure. The Bangko Sentral ng Pilipinas (BSP) finally ordered that the bank be placed under receivership by the Philippine Deposit Insurance Corporation. Also included in the receivership are Urban Development Bank, a thrift bank subsidiary of Urban Bank. In addition, Urbancorp Investment Corporation declared a suspension of payments and has requested the BSP and the SEC to appoint a rehabilitation receiver for the company.(8) In August 2001, the Export and Industry Bank and Urban Bank merged into Export and Import Bank allowing the resumption of operations in its central office in Makati as well as 25 branches around the country.(9)

Victorias Milling Co. (Vicmico) dealt with audit issues surrounding lost inventory accumulating to 400,000 bags of sugar. The difference from doctored sugar content reports was a result of a deliberate attempt at misrepresentation to make the miller appear more efficient. The firm guaranteed varying amounts for cane per ton knowing that their crops are substandard as part of its marketing ploy to attract enough planters to keep the mill running all year round. Furthermore, SyCip Gorres Velayo & Co. (SGV) admitted that its reports on the firm were based on false figures presented by the company officials.(10)

However, the most devastating of these scandals was that of BW Resources. Dante Tan formed Best World Gaming and Entertainment Corporation (BWGE) in early 1998. At the same time, Greater Asia Resources, a leisure and tourism company headed by Eduardo “Moonie” Lim, changed its name to BW Resources. Tan became the major shareholder of BW Resources in 1999 when it acquired the Sheraton Marina Square complex near Manila Bay. Rumors of a merger between BW Resources and BWGE spread. Within a span of a couple of months, Pagcor announced its intention to operate a casino in Sheraton Marina Square. BW Resources also brought in Stanley Ho, Macau’s casino mogul. The company’s stock price rose from Php2 to Php107 during this time. However, shortly after Ho’s visit to Manila, wherein he faced strong opposition from the Catholic church and was accused of being a part of the triad gangsters, BW Resources’ share prices plunged to below Php30. The SEC and PSE, then, began investigations and uncovered heavy buying by Tan. He then sold shares at a discount to friends and clients. These transactions were reported on the PSE board at prices that were over twice the amount actually paid.(11) Furthermore, half of the daily turnover circulated around 10 brokerage firms. As a result, fines and penalties amounting to Php30.05 million from the infraction of the Securities Regulation Code (SRC), the Corporation Code, and related laws have been enforced. In addition, as of March, the Department of Justice has charged four brokers and five individuals in relation to this case.(12)

Corporate America is responding to this mess through various corporate governance reforms. Boards of directors are firing CEOs left and right.(13) Other changes being implemented by various corporations include reducing the number of company executives included in the board, facilitating executive sessions of outside directors, increasing the meetings of the members, and requiring more time and know-how especially from the audit committee. Evidences of these include headhunters’ reports on greater demand for independent directors as well as a rising trend in training seminars for directors. More changes yet to be seen include the certification of financial statements by CEOs, a ban on loans to officers and directors, and faster reporting of insider trading.(14)

Even the market is contributing to the effort with greater capital being fed to companies that have transparent, easy to understand financial statements. As a result, more than 1,000 companies in the U.S. have restated their previous incomes and are trying to establish more credible financial base lines.(15)

Furthermore, the SEC ordered the CEOs and CFOs of the 1,000 largest U.S. companies to attest personally to the accuracy of their financial statements. In addition, the New York Stock Exchange has put into place new rules on corporate governance that would require majority of board members to be independent and give the right to shareholders to vote on executive compensation.(16)

More importantly, the Bush Administration recently passed the Sarbanes-Oxley Act that would require faster disclosures and directs the SEC to issue rules requiring the disclosure of information previously not asked for. The Act also establishes new rules for the composition and duties of audit committees, new rules affecting other areas of corporate governance with strong emphasis on officer and director compensation as well as stock trading, new crimes and increases in the maximum penalties for existing crimes, provisions affecting securities and other civil litigation as well as SEC administrative enforcement, establishment of the Public Company Accounting Oversight Board, and rules addressing conflicts of interest involving securities analysts.(17)

The European Union (EU) has proposed a code of conduct on the independent auditors, which includes five-year auditor rotation. Member states also endorsed the Market Abuse Directive to harmonize and strengthen rules against insider dealing. It aims to address definitions of insider trading, requiring investment analysts to disclose share ownership, as well as comprehensive public disclosure issues and fair representation of investment research. In July, the British government released a white paper proposing reforms to the Company Law. These changes include harsher penalties for misleading auditors, redefining the roles of the directors, and creating standards for boards in accounting supervision and other disclosure issues. Furthermore, the British government is also reviewing the roles of non-executive directors and is considering the regulation of audit committees.(18)

In the Philippines, various corporations have also made conscious efforts in the improvement of corporate governance. These steps include the appointment of independent directors to the board as well as ensuring the skills, knowledge and expertise of the members are at par with industry standards.(19) Furthermore, the private sector, headed by Jesus Estanislao, established the Institute of Corporate Directors (ICD) after the 1997 financial crash. The purpose of this World Bank-funded non-profit organization is to advocate corporate governance in the Philippines and in Asia.(20)

The Philippine government adopted the Guidelines for Good Corporate Governance Practices endorsed by the Asia-Pacific Economic Cooperation (APEC) last October. These guidelines, drafted by the Pacific Economic Cooperation Council, stresses the importance of fairness, transparency and accountability.(21)

These three principles have been incorporated in the SEC’s Code of Corporate Governance which was issued in April in its Memorandum Circular No. 2. The Code addresses issues dealing with the board of directors, the Audit Committee, the nomination and compensation of committees, the auditors, and the disclosure and transparency of the corporations. In particular, it requires public companies to have at least two independent directors or 20% of the members of the board, whichever is lesser. The Code also requires each corporation to document its corporate governance rules and principles in a manual and submit it to the SEC.(22) Directors who do not attend board meetings regularly, do not disclose the extent of their business interest, and do not meet other requirements may be disqualified or suspended from the board. Companies are also advised to rotate their auditors regularly. Finally, the code mandates the formation of four board committees i.e. the audit and compliance committee, the nomination committee, the compensation committee, and the risk management committee. At least three members of the Audit Committee should be board members. A performance evaluation system on the board as well as top management must also be put into place by the respective corporations.(23)

Another action taken by the SEC involves the amendments made to the SRC Rule 68, the Special Accounting Rules, to conform to International Accounting Standards (IAS). This rule shall be fully compliant with the IAS by 2003. A special rating system called the SEC MILEAGE is also under development. It shall be implemented on listed companies to warn investors of firms that have poor corporate governance. The SEC is also preparing for an IT-driven risk-oriented monitoring device called I-Mode, which shall track corporations’ compliance to laws, policies, and rules and regulations including the Anti-Money Laundering Act of 2001, among others.(24)

The Capital Market Development Council, a public-private sector policy group that includes the SEC and the BSP, launched the Corporate Governance Reform Program for 2002 to 2004. The Program cites various proposals for corporate governance reforms, such as better protection for minority shareholders’ rights, adherence to international auditing standards, and increased transparency and disclosure of public companies.(25)

The Philippine response to the global problem of corporate governance is adequate, but it is yet to be concretized in the Filipino corporations’ everyday functions. In fact, a survey conducted by SGV involving 75 top executives showed that 70% of their companies do not have a code of conduct in place that defines the best practices of good governance. Furthermore, majority of the respondents are not confident that their internal audit functions are effective and efficient for internal controls. Processes involving risk management, succession planning and, investor relations and communication have yet to be improved.(26)

In order to address this problem and improve implementation, regulatory institutions need to be reformed and strengthened and banking and financial sector standards upgraded. The concept of a single regulator must also be considered.(27) Corporations must also move towards increased accountability, transparency, integrity, and higher ethical standards. Disclosure of both financial and non-financial information material to stakeholders must be practiced extensively. Auditing bodies should continuously re-examine and raise standards to internationally accepted levels. Finally, global practices should also be revisited time and again.(28) With the public and private sector each doing their share towards excellence in corporate governance, the Philippines will remain globally competitive and its corporations recognized and respected the world over.


1Lavelle, Louis. The Best and Worst Boards. Business Week. October 7, 2002.
2Lavelle, Louis. The Best and Worst Boards. Business Week. October 7, 2002.
33Kafka, Evan. Under Fire. Business Week. September 30, 2002.
4Reed, Stanley and Reinhardt, Andy. Saving Ericsson. Business Week. November 4, 2002.
5Lavelle, Louis. The Best and Worst Boards. Business Week. October 7, 2002.
13Nussbaum, Bruce. Can Trust Be Rebuilt? Business Week. July 8, 2002.
14Lavelle, Louis. The Best and Worst Boards. Business Week. October 7, 2002.
15Nussbaum, Bruce. Can Trust Be Rebuilt? Business Week. July 8, 2002.
16Nussbaum, Bruce. Can Trust Be Rebuilt? Business Week. July 8, 2002.
17Corporate Governance, Audit Rules and Continuous Disclosure. Company Director. September 2002.
19RP Firms Trek the Hard Road Toward Corporate Governance. Philippine 20Daily Inquirer. September 16, 2002.
21Hanrahan, Chris. A Saintly Banker. Asia-inc. October 2002.
23A Director’s Guide to Corporate Governance in the Philippines. SGV Bulletin 2002.
25Bautista, Lilia. Country Report on the Philippines. Fourth Round Table on Capital Market Reform in Asia. April 9-10, 2002. Tokyo, Japan.
RP Firms Trek the Hard Road Toward Corporate Governance. Philippine 27Daily Inquirer. September 16, 2002.
Bautista, Lilia. Country Report on the Philippines. Fourth Round Table on Capital Market Reform in Asia. April 9-10, 2002. Tokyo, Japan.

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