New directions in corporate governance

New directions in corporate governance

By Ben Teehankee

February 2, 2010

I’ve been seeing important and surprising developments in the corporate governance environment lately. But before I discuss a couple of these, let’s recall that it’s been almost a decade since the collapse of Enron, the US-based energy company, in December 2001. This was followed by the bankruptcy of several large companies in the US and Europe which triggered global corporate governance regulatory reforms, including the Sarbanes-Oxley Act in the US in 2002. The reforms generally centered on improving the quality of corporate disclosures since Enron and similarly troubled companies grossly misrepresented their financial soundness.

But even prior to Enron, local regulators were already at work to improve corporate governance among Philippine companies. Inspired by the Organization for Economic Cooperation and Development’s (OECD) influential Principles of Corporate Governance released in 1999 and made more urgent by the BW Resources insider trading scandal of 2000, the SEC’s Code of Corporate Governance was finalized in 2002. The Code was quite forward-looking since it not only covered the concerns of stockholders for transparency but also reminded corporate directors that they must consider the interests of other groups that are affected by the corporation’s operations – its stakeholders. It defined corporate governance as a “system whereby shareholders, creditors and other stakeholders of a corporation ensure that management enhances the value of the corporation as it competes in an increasingly global market place”. The Insurance Commission’s parallel Code covering insurance companies and intermediaries went further by defining stakeholders to include “company owners, officers and employees, policyholders, suppliers, creditors and the community”.

Imagine my surprise, therefore, when the SEC released a revised Code last July 2009 which made no reference to stakeholders. The new Code defined corporate governance as “the framework of rules, systems and processes in the corporation that governs the performance by the Board of Directors and Management of their respective duties and responsibilities to the stockholders”. The SEC’s departure from the original OECD framework is striking. When I wrote the SEC to inquire about the change, Commissioner Palabrica explained that “the definition of stakeholders in the Revised Code of Corporate Governance is consistent with the Corporation Code, Securities Regulation Code and other laws that the SEC is mandated to enforce”. The Commission’s view is understandable from the conservative legal perspective but worries me anyway. By delimiting director duties and responsibilities to stockholders, the new Code lowers the boards’ fiduciary duties to other groups and does not encourage prudence for the common good among corporate board members.

As this was happening, an initiative that promotes both stockholder and stakeholder welfare emerged from the private sector. The Philippine Stock Exchange is proposing a set of more stringent corporate goverance requirements for corporations interested in listing in its Maharlika Board (MB). JJ Moreno, the PSE’s VP & Head for its Corporate Governance Office, explained that while the MB was inspired by the Brazilian Novo Mercado, it is based on local needs for better corporate governance practice. The MB pushes the envelope on transparency requirements to levels that would be a major stretch for even the most progressive corporations. The MB will require more independent directors playing a more active role, a higher minimum free float of 30 per cent, among others. In contrast to the SEC’s new Code, the proposed MB rules define corporate governance as “essentially about providing sustained long-term value creation to the corporation’s shareholders while giving due regard to the rights and interests of its stakeholders”.

My worries notwithstanding, a situation where the SEC requires a legal floor while the PSE encourages companies to aspire for a premium board may work out just fine. There is an advantage in companies doing the right thing for stockholders and stakeholders alike because it’s the excellent thing to do, and not just because it’s legally required.

The author is the Sen. Benigno Aquino Jr. associate professor of business and governance at the Ramon V. del Rosario Sr. Graduate School of Business of De La Salle University. He may be emailed at