Shareholder activism and corporate governance

Shareholder activism and corporate governance (June 3, 2008)

By Ben Teehankee

Managing For Society column, The Manila Times

The ongoing Meralco proxy fight between the Lopez-led management and Winston Garcia representing GSIS can be a good thing. Ever willing to be a spectator to a controversy and a good boxing match, Filipinos are interested in how the confrontation will work out. I certainly hope that, as the controversy unravels, more Filipinos will become aware of the important role that corporations, especially the big ones, play in our daily lives. More critically, I hope that citizens can begin to ask questions like: Are corporations truly partners of the national government in national development and the spreading of the benefits of capitalism as envisioned by the Corporation Code? Are corporations merely the cash machines of shareholders, particularly the wealthiest families of the country? Are corporations being managed in the best long-term interest of the corporation and its stakeholders? These are the fundamental questions of corporate governance.

Already, the issues which the Meralco case has surfaced should keep many business schools and the public busy for months to come. The initial attempt by Meralco to invoke a purely legal defense of their practices did not deflect questions that go into the ethical aspects of the company’s governance. Legal compliance is one thing but good corporate governance calls for higher moral considerations. How much profit is justified for a public utility, especially during difficult times for consumers? How should a public utility manage its costs knowing that these affect the prices they pass on to consumers? How high should executive compensation be? How much of the profits should be shared with shareholders as dividends? How much transparency in records should be practiced by the company, especially for inquisitive directors?

To be fair to Meralco, these questions should be answered by all other entities in the power supply chain. They all affect the price of electricity in the country and should be equally concerned about doing what’s right for the consuming public while being sustainable as corporate entities. I don’t think that it serves public enlightenment to single out only one company. I’m as willing as anyone to give the benefit of the doubt to the directors and executives of Meralco, seasoned and professional as I presume they all are. But the questions above must be answered and their answers will be revealing in showing the governance mindset at Meralco and, perhaps, in other corporations as well.

Of course, the involvement of a large government institutional investor such as GSIS adds an additional flavor to the whole controversy. Institutional investors speak with a loud voice in any country with shareholder capitalism in place. But because of their size, they have to be unusually careful in using their influence, mindful always of the good of the corporation and its stakeholders. The personality, media style and Malacañang links of Winston Garcia are guaranteed to get everyone’s attention but it would be prudent for him to use his considerable clout as a shareholder activist very carefully in pushing proper reforms at Meralco. One can have good intentions but still overdo things. For example, would a radical change in management at Meralco really improve things for consumers or lead to greater instability in the company and, thereafter, deteriorating service? Should Garcia pursue more constructive dialogue within the board and resort less to using the sound-bite-hungry media, given the complexity of the corporate governance issues involved?

Ultimately, the Meralco proxy fight involves issues bigger than the Lopezes, Garcia or even Malacañang. The directors of the company should use their collective judgment in steering the company towards fulfilling what should be its mission: to be a sustainable power distributor in the service of the development needs of the Filipino people.