Good governance for higher growth

There is a healthy trend in the Philippines and the whole of the ASEAN region for private business to adopt good governance practices.  This move is facilitated by the introduction of the ASEAN Corporate Governance Scorecard (ACGS) which measures the performance of the business enterprises, especially Publicly Listed Companies (PLCs), in the areas of facilitating the rights and the equitable treatment of shareholders, how they relate to their different stakeholders, ensuring transparency and accountability through timely disclosures of material information, and how the board guides the company strategically, monitors the management, and ensures the board’s accountability to the company and the shareholders.

The scorecard is made up of 184 questions based on publicly available disclosures contained in the websites of the companies concerned.  It aims to raise the corporate governance standards and practices of each participating country and to make well-governed publicly listed companies attractive to investors. This last objective is especially crucial in the Philippines which has the lowest investment to GDP ratio in East Asia.

Despite some initial success in motivating Philippine business to adopt good governance practices in their respective organizations,  the Philippines seems to be a laggard in this area when compared to its Asia Pacific peers.  Just recently, the Philippines placed second-lowest among the 12 Asia Pacific markets in the 2023 Corporate Governance (CG) Watch by Asian Corporate Governance Association and CSLA Ltd.  The biennial report measures market scores of 12 Asia Pacific economies based on 108 questions across seven categories.  The Philippines scored  37.6 percent, 1.4 percentage points lower than the average market score of 39 percent.

It only ranked higher than Indonesia.  It is possible, though, that the various criteria measured by the 108 questions might have veered too much towards the so-called E and S components of the ESG framework, including a  good number of what may still be controversial issues such as reproductive health, LGTB rights and other criteria which do not have universal acceptance in Philippine society for cultural or religious reasons.

I suspect that this is the same reason why Indonesia, in which same-sex acts are punishable by law, ranks the lowest.  It is important to define good corporate governance practices in a narrower sense as defined by the ASEAN  Corporate Governance Scorecard (ACGS).

To interest many more Philippine business enterprises, whether publicly listed or not, in introducing good corporate governance practices, let me enumerate here some recommended practices under the auspices of the ACGS.  First and foremost are the rights of shareholders.

The corporate governance framework should protect and facilitate the exercise of shareholders’ rights.  All the shareholders should be notified of the required annual shareholders’ meeting (ASM) at least 21 days before the event.  The shareholders should be able to nominate candidates to the board and, subject to certain qualifications, place items on the agenda of the ASM.

The notice of the ASM should include the following:  a) rationale and explanation for each item requiring shareholders’ approval; b) profile of candidates to the board with at least the age, academic qualifications, date of first appointment, relative experience, and  directorship in other listed companies; c) identity of the external auditor seeking appointment; and d) proxy documents of those shareholders who are unable to attend the ASM.

As regards the conduct of the ASM, all directors should be present; the company should vote by poll; there should be an independent party appointed to count and/or validate the votes; shareholders should be given the opportunity to ask questions or raise concerns.  Questions and answer should be duly recorded in the minutes. After the ASM, the result should be published within one business day after the event and disclosure of voting results should include the number of approving, dissenting and abstaining votes.

Other recommended practices as regards the rights of shareholders are:  a) Dividends should be paid in a timely manner.  Cash dividends should be paid within 30 days after declaration and approval Scrip dividends should be paid within 60 days; b) The company should have a program encouraging the engagement of shareholders beyond attending the ASM; and c) In case of merger and acquisition, the company  should appoint an independent party to evaluate the fairness of the transaction price.

It is important for the corporate governance framework to assure the equitable treatment of all shareholders, including minority and foreign shareholders.  To manage conflicts of interest, the following practices should be adopted:  a) The company should observe the principle of ‘one common share one vote”; b) A clear policy prohibiting any director, officer, or employee benefiting from inside information not available to the general public; c) Disclosure of dealing or transactions in company shares on the part of the director, officer, or employee within 3 business days; d) Summary of trading transactions of directors and key officers on company shares are disclosed in the company website and/or annual reports.

Conflicts of interests may also arise in so-called Related Party Transactions (RPTs).  There should be a clear policy on the review and approval of RPTs.

The company should have a committee with no executive director member that will review material RPTs.  In addition to the usual committees (e.g. Audit, Risk, Sustainability, Nomination, etc) the company may also constitute an RPT Committee.  Details of RPTs should be disclosed, i.e., name, relationship, nature and value.  All RPTs should be conducted in a fair and at arm’s length basis.

It should also be kept in mind that shareholders are not the only ones that have a stake in the existence and operations of a given corporation, whether publicly listed or not.  The usual list of corporate stakeholders include, in addition to the shareholders, the consumers of the product or service produced by the business enterprise, the rank-and-file workers, the managers, the creditors, the immediate community in which it operates and the public at large represented by the State.  Thus, the company must have a clear-cut policy as regards promoting the welfare of each of these stakeholders:  a) consumers’ and customers’ welfare; b) suppliers and contractors selection procedures; c) environmentally friendly value chain; d) positive interaction with communities  directly impacted by the operations of the business; e) anti-corruption programs and procedures to promote the common good of society; f) safeguarding the rights of creditors; and g) a separate CSR (Corporate Social Responsibility) report/section.

After the welfare of the consumers, the highest priority should be given to the good of the rank-and-file employees under the principle that “those who have less in life must be given more in corporate policy.”

Mechanisms for employee participation should be permitted to develop. In this regard, the best model of which I am aware is the long-time institution at the Philippine pharmaceutical firm UNILAB called the Employers-Employees Council.  Whether or not it adopts this model, every company must articulate clearly the employee-related policies and disclose relevant information affecting its employees, especially as regards health, safety, and over-all welfare; training and development (i.e. investment in upskilling, reskilling and retooling the workers); and reward and compensation policy for promoting the long-term performance of the company beyond short-term financial measures.

Because no management is perfect, there should also be a policy on “whistleblowing” which should include procedures for complains by employees and other stakeholders concerning possible illegal and unethical behavior within the business organization.  This policy should include the protection of reporters from retaliation.  Contact details should be easily available in the company’s website and/or annual report.  (To be continued.) — Dr. Bernardo Villegas