Conglomerates and inclusive growth

The View From Taft
Benito L. Teehankee
April 06, 2017

Last week, I gave a talk for the Center for Philippine Futuristics Studies and Management on the role of conglomerates in inclusive growth in the Philippines. It was an opportunity to have a serious discussion about the role of the most powerful business form in the country. The topic was particularly relevant given the ongoing revision of the 1980 Corporation Code.

It wasn’t an easy topic to discuss. The ability of conglomerates to create wealth is well-known. Most, if not all, of the richest Filipinos in the Forbes 2017 list amassed their wealth through conglomerates. So, if anything, conglomerates are better known for concentrating wealth rather than spreading it around. Can conglomerates be agents of inclusive growth?  I believe so, but only under very specific conditions.

The basic building block of a conglomerate is, of course, a corporation. A corporation has the legal personality to enter into contracts, own property, hire employees, sell shares, and sue, among others. Moreover, it has the power to merge and consolidate with other corporations. The power to own the majority of shares of other corporations or to merge or consolidate with them gives rise to conglomerates. Conglomerates, therefore, concentrate the economic capital under the control of a parent corporation while greatly multiplying its powers.  

Importantly, with so much economic power, a conglomerate also gains political power. The Constitution states “the Philippines is a democratic and republican State. Sovereignty resides in the people and all government authority emanates from them.” And yet, a conglomerate, as a network of legal “persons,” has substantial political power. To be sure, corporations are banned from supporting political candidates. But a corporation can still influence public policy and regulation through other direct or indirect means: petition to the government, advocacy through associations, legal suit against regulators, and public relations communications. In this sense, obviously, most individual persons cannot match the political power of a conglomerate.

Given these enormous powers, a conglomerate can do a lot for inclusive growth. A strong conglomerate can produce enormous value for shareholders while uplifting the lives of countless people. With its resources and advanced technologies, it can deliver socially beneficial products and services efficiently to broad sectors of the population. The country became a leader in mobile communications in this way.

Conglomerates can use its cultural communications and media capabilities to shape positive social norms among people. A local power distributor promotes wise electricity use among its customers. Conglomerates can create decent jobs that will help people build their lives and those of their families. Conglomerates can connect small local businesses to international value chains and markets in order to help spread economic benefits to the poor and marginalized sectors of our society.

The beneficial effects above, however, depend crucially on enlightened and prudent conglomerate directors and managers. In short, good corporate governance. Principle 16 of the new SEC Code of Corporate Governance calls on publicly listed corporations to “ensure that its interactions serve its environment and stakeholders in a positive and progressive manner that is fully supportive of [the latter’s] comprehensive and balanced development.”

Without enlightened governance, conglomerates can tend to behave in ways which promote exclusive, not inclusive, growth. When corporate directors and managers favor customers and shareholders over other stakeholders when making strategic and operational decisions, there is a tendency towards unfair labor practices, environmental degradation, service/product quality/safety issues, delayed supplier payments, tax evasion, anti-competitive practices, etc. Worse, there is also a tendency to evade responsibility for such wrongdoing under cover of legalistic technicalities.

The net result of unchecked conglomerate malpractice is systematic wealth transfer -- some use the term expropriation -- from other stakeholders to the controlling shareholders of corporations. For home grown conglomerates, the controlling shareholders are usually a few individuals or families.

Let me be clear that the above “exclusive” practices are tendencies brought about by economic size and a lack of mindfulness among conglomerate leaders. They are not avowed, standard or legitimate practices. Hence, proactive government regulation can nudge a wayward conglomerate back to the inclusive track. The ongoing revision of the Corporation Code is a rare opportunity for citizens, through government, to exercise sovereignty over the Philippine conglomerate and thereby make sure that conglomerate directors  and managers always adopt inclusive practices. Then, perhaps, the wealth-concentrating conglomerate will be a thing of the past.

Dr. Benito L. Teehankee is full professor of management and organization at De La Salle University and vice-chair of the Corporate Social Responsibility Committee of the Management Association of the Philippines (MAP).