含羞草社区

In a global economic landscape where company transparency, accountability and sustainability are gaining significant attention from local and foreign investors, both private and public companies making investment decisions are faced with the increasing pressure of raising their overall corporate governance standards as part of their strategic planning.

Starting in the early 2000s, different jurisdictions have adopted their corporate governance codes to codify corporate governance principles and best practices, and to regulate the governance of primarily publicly listed companies.

In the Philippines, the Revised Corporation Code has introduced provisions to improve corporate governance practices, such as the appointment of independent directors and enhancing financial reporting and disclosure transparency.

The Philippine Securities and Exchange Commission (SEC) has released several issuances that aim to further strengthen good corporate governance in the private sector. The most recent and controlling issuances are:

1. SEC Memorandum Circular No. 6, series of 2009, or the Revised Code of Corporate Governance; and
2. SEC Memorandum Circular No. 19, series of 2016, or the Code of Corporate Governance for Publicly Listed Companies.

These were intended to raise the bar on good corporate governance. The Revised Code of Corporate Governance is generally applicable to public companies and companies with secondary licences from the SEC, while the Code of Corporate Governance for Publicly Listed Companies covers companies that are listed on the Philippine Stock Exchange.

Other regulators such as the Philippine Central Bank, or the Bangko Sentral ng Pilipinas (BSP) and the Insurance Commission (IC) have also issued their own regulations to strengthen the corporate governance in their respective supervised institutions.

In general, regulations on corporate governance in the Philippines mandatorily apply to publicly listed companies or holders of secondary licenses from the SEC, BSP and IC. Other private companies may, of course, voluntarily adopt the principles and rules that are included in the available issuances and embody institutional best practice.

Good corporate governance

In the Philippines, corporate governance is generally defined as the framework of rules, systems and processes that govern the performance of a corporation’s board of directors and the management of their respective duties and responsibilities to the stockholders.

But what does “good corporate governance” mean?

There are several factors or components which may be considered as an indication of good corporate governance. Below are some of the key factors to consider:

1. Existence of internal governance frameworks. There is no “one size fits all” framework when it comes to corporate governance, and the adoption of corporate governance principles and best practices would ultimately depend on the size, risk profile, nature and complexity of a company’s operations. The existence of an internal governance framework shows a company’s commitment to at least be guided by a set of principles to ensure:
   1. competency, commitment and independence of the board of directors,
   2. board of directors who are well-informed about their roles and responsibilities,
   3. effective internal control and risk management systems, and
   4. accountability to shareholders and other stakeholders, among others.
2. Regular board evaluation and training of directors. It is important for directors to stay up to date with relevant developments in the laws, rules and regulations that are applicable to the company’s industry. Under Philippine corporate governance regulations, first-time directors are suggested to have an eight-hour orientation programme and to attend an annual continuing training programme for at least four hours. This aims to promote effective board performance and continuing qualification of the directors in carrying out their duties and responsibilities.
3. Company transparency and disclosure. Transparency is one of core principles of good corporate governance. A company with clear policies and procedures on financial and non-financial disclosures to regulators and other shareholders shows accountability to its stakeholders. This, in turn, ensures the company’s stakeholders are well-informed and have confidence in the decision-making processes.
4. Promotion of shareholder rights. Another key factor in determining whether a company adheres to good corporate governance is the establishment of policies to provide a mechanism on the protection and enforcement of the rights of its stakeholders. Especially when the rights of stakeholders are not covered by legislation or administrative issuances, a company’s voluntary act to adopt and implement policies and programmes in dealing with stakeholders shows its commitment to promoting and protecting the rights of its stakeholders.

Why corporate governance matters

Corporate governance is important because it guides a company’s approach to different aspects of its business. Corporate governance shapes policies and programmes within an organisation which, in turn, influences the individual and collective behaviours of the board of directors, management, employees and other stakeholders. This is essential for effective decision-making and better performance as an organisation.

Improved decision-making increases the trust and confidence of stakeholders including shareholders, employees, customers, suppliers, investors, creditors, government agencies, regulators, competitors and the community as a whole. Various independent studies confirm that corporate governance has an effect on improving a company’s reputation.

Furthermore, adopting effective corporate governance mitigates financial risks because it establishes a system where an organisation can understand its level of risk tolerance, and can proactively determine how to avoid, manage or mitigate those risks.

A reputable company is highly likely to be a successful company. Consumers and third-party partners are attracted to reputable brands and organisations known for high governance standards. Being able to show compliance with governance standards also attracts investors who are getting stricter in reviewing a company’s corporate governance practices.

Reforms and raising the bar

Locally, while there are available guidelines in place, these do not provide guidance suitable or appropriate for private companies or companies that do not have secondary licences from regulators. In addition, implementation and enforcement of corporate governance principles continue to be major challenges in the Philippines.

The private and public sectors must remain open to reforms to raise the bar in corporate governance in the Philippines.

Companies, whether regulated or not, must have the initiative to champion best practices in good corporate governance. While short-term objectives and profits should be considered, they must not be the focus.

Long-term value creation must also be an objective of companies and must be embedded within the organisation. Regulated and listed companies must go beyond compliance through submission of written reports, as they should also actually implement these governance principles in their business operations.

Long-term value creation must also be an objective of companies and must be embedded within the organisation. Regulated and listed companies must go beyond compliance through submission of written reports, as they should also actually implement these governance principles in their business operations.

On the other hand, while not mandatory, private and non-listed companies should assess how they can adopt the established corporate governance principles, recommendations and best practices.

Regulators have a responsibility to ensure proper standards and practices are in place, developed and being applied by the organisations within their regulatory purview. They may consider the issuance of a manual or code that comprehensively covers corporate governance best practices for private companies, which could include incentives for market players to follow the issuance.

They may also consider creating and adopting clear objectives and reporting principles that will not only cover financial inputs and outputs but also non-financial objectives and social impacts of the companies.

The SEC, BSP and IC must continue to receive feedback from stakeholders to ensure a more comprehensive and accurate view of the current and developing corporate governance landscape in the Philippines.

While studies see a trend in increasing adoption of corporate governance principles by companies in the Philippines, and efforts are being established and promoted by different stakeholders, the ever-evolving economic environment created by global challenges requires a continuous development of existing corporate governance practices. So much more needs to be done in working towards a more mature corporate governance environment in the Philippines.