SEC takes clear stand on behalf of stakeholders

The View from Taft


June 11, 2014

When the Securities and Exchange Commission (SEC) issued the Revised Code of Corporate Governance in 2009 removing all references to the interests of stakeholders, I felt that the country had plunged back into the economic dark ages. The revision stated the “it is the Board’s responsibility to foster the long-term success of the corporation, and to sustain its competitiveness and profitability in a manner consistent with its corporate objectives and the best interests of its stockholders.”

I, along with others, appealed to the Commission to go beyond this narrow stockholder orientation and to widen the circle of beneficiaries of corporate activity to be considered by the Board. No dice. The Commission reasoned that its hands were tied by existing laws. Hmm, that’s odd, I thought. The Philippine Constitution explicitly mandates that all economic agents, including corporations, shall contribute to the common good. Not only that, the fundamental law also specifies “the duty of the State to promote distributive justice and to intervene when the common good so demands.”

And here we are. Five years after the release of the stockholder-centered Code, our economy is a showcase of economic growth, so much so that we recently, and quite proudly, hosted the World Economic Forum on East Asia. And yet Wayne Arnold, of The Wall Street Journal, as he hosted the Forum’s session on Rethinking Economic Growth, pointed out that income inequality was a problem all across Southeast Asia and in “the Philippines, the country where we’re in right now, is the worst of them all.”

In 2009, it seemed to me that the principle of the common good -- mentioned seven times in the Constitution -- was not a central idea in our government’s approach to corporate governance. Thus, the persistent inequality in our country despite such impressive economic growth is not surprising but, in fact, expected. If the State sits by while the lion’s share of economic value goes to a minority through the powerful wealth extracting powers of large corporations, what other result can there be? Vested interests have always been powerful while public institutions meant to protect the public interest have tended to be weak. As a consequence, self-rated poverty, as measured by Social Weather Stations, has hovered around 50 percent of families since 2004. The official poverty rate can’t break the 20 percent barrier despite our commitment to the United Nations Millennium Development Goals to do so by 2015.

Fortunately, change is always possible in a democracy and it has come. Last May 6, the SEC issued Memorandum Circular No. 9 amending the Code of Corporate Governance to, once again, remind corporate directors to give stakeholders their due: “It is the Board’s responsibility to foster the long-term success of the corporation, and to sustain its competitiveness and profitability in a manner consistent with its corporate objectives and the best interests of its stockholders and other stakeholders.” The Code revision goes further by naming the corporation’s main stakeholders “which include, among others, customers, employees, suppliers, financiers, government and community in which it operates.” This wonderfully explicit phrasing effectively builds a platform for corporate conscience in the country.

How did this change in the Code happen? I think at least three things helped. First, a change in leadership in the SEC and the composition of the commissioners led to a change in mindset – from a legalistic and minimalist stance to a more proactive and publicly protective stance. Institutional change only happens with leadership.

Second, The ASEAN Corporate Governance Scorecard Country Reports and Assessments 2012–2013 prepared by the ASEAN Capital Markets Forum and Asian Development Bank the Philippines listed Thailand (67.7 percent) and Malaysia (62.3 percent) as scoring highest on the corporate governance scorecard while the Philippines obtained a score of only 48.9 percent. Why the low score? Philippine publicly listed corporations were rated the lowest on "Role of Stakeholders" with an average score of 28.0 percent.

Third, the Shareholders Association of the Philippines (SharePHIL) advocated for the change. SharePHIL is a relatively new organization led by Evelyn Singson and Francis Lim. The organization’s mission is “to be a major player in promoting domestic capital market development through advocacy, education and enlightenment of shareholders. “ Importantly, many of the top corporations are represented in SharePHIL. Thus, it cannot be viewed as hostile to big business in any sense. The organization, however, believes that corporations that are more fair to all will be good for the country and its capital markets.

The SEC has set the tone for inclusive corporate governance. Let’s see how the corporations respond.