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View of An Assessment of Corporate Governance Reforms in the Philippines: 2002 – 2009


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* Assistant Professor of Accounting and Finance, College of Business Administration, University of the Philippines, Diliman, Quezon City. (Email: debbiecbp@yahoo.com).


Debbie C. Wong*

This paper intends to present an update of the various corporate governance reforms in the Philippines since the adoption of the 2002 Code of Corporate Governance issued by the Philippine Securities and Exchange Commission (SEC). A comparison of these reforms against the Sarbanes-Oxley Act in the United States is also shown. The paper ends by discussing the various assessments conducted by various local and international organizations and how these corporate governance reforms in the Philippines compare with those in our Asian neighbors.

Corporate governance has been a global buzzword in the public and private sectors for more than a decade now. Renewed interest on corporate governance was in full swing especially after the 1997-98 Asian financial crisis and after a spate of international corporate failures and scandals in the early 2000 that rocked some of the more developed and solid economies in the world. Leading the corporate scandals is the high-profile Enron fiasco that robbed many of their investment and retirement money. Against this dwindling public confidence backdrop, corporate governance initiatives and reforms, which aim to restore market integrity and to regain lost trust of investors, were rekindled all around the world. The Philippines, specifically its various regulatory bodies, has implemented many of the reforms recommended by the Organization for Economic Cooperation and Development (OECD), the World Bank (WB), the International Finance Corporation (IFC), the Asian Development Bank (ADB), the Center for International Private Enterprises (CIPE), the International Corporate Governance Network and the Asian Corporate Governance Association to mention a few.

Keywords: Corporate governance, agency problem, separation of ownership and control, OECD Principles


In early December 2008, the Legacy Group of Companies, which primarily composed of rural banks and pre-need companies, ceased operations without

notifying the SEC. The group – allegedly involved in questionable activities including pyramiding (Dela Peña, 2008; Lucas, 2008;

Dalangin-Fernandez, 2009), double-your-

Philippine Management Review 2009, Vol. 16, pp. 24- 57.


money schemes (Lucas, 2008; Fernandez, 2009; Fernandez & Marasigan, 2009) and using of fictitious loans to siphon money from the banks1 – invoked Section 119 of the Corporation Code and filed for voluntary dissolution claiming that continuing the operation is no longer viable and will result in more losses to the greater prejudice of all its stockholders. The depositors and clients of the rural banks were lured to place their hard earned money with the rural banks’

“double-your-money” schemes. The closure of the rural banks is aggravated by the payment of the Philippine Deposit Insurance Corporation (PDIC) to 95 percent of Legacy’s depositors who were advised to split up deposits in excess of the PDIC’s maximum insurable amount of Php250,000 to avail of the deposit insurance protection.

Further investigation by Bangko Sentral ng Pilipinas (BSP) revealed massive diversion of funds by said banks using fictitious loans.

Many of the bank borrowers admitted to having signed blank documents in consideration of commission fees ranging from Php10,000 to Php15,000 for supposed loans. Falsified documents that had been used to support alleged loans were also discovered. While BSP filed cases against officers and employees of rural banks under the group, no charge against Legacy founder and owner, Celso de los Angeles, was filed due to lack of evidence linking the founder- owner to the alleged scams. The Senate and the House of Representatives had questioned why the SEC and BSP failed to protect the public against companies that solicit funds in trust such as banks and pre-need companies.

BSP pointed out that the Legacy Group of rural banks invoked deposit secrecy on the examiners of the BSP. This case not only proves that loopholes in our legal and regulatory framework still exist, but it also shows that the inability of our regulatory bodies in performing their duties can have very costly repercussions to the public.2 Not only do the victims suffer monetary losses

but taxpayers’ money will also be used to pay off these victims.

Global Governance Reform Initiatives

Corporate governance reforms have come a long way since the 1997-98 Asian financial crisis and the series of international corporate failures and scandals in the early 2000 that gravely shook investors’

confidence around the world. Are they adequate? At the forefront, actively promoting good corporate governance practices is the Organization for Economic Cooperation and Development (OECD), an international organization assisting governments in tackling social, economic and governance challenges in the globalized economy with the end goal of securing economic stability and growth for world markets. Though most of its thirty (30) members are mostly from the developed countries, it has organized many roundtable dialogues with various non-OECD countries notably in Asia, Latin America, and Russia.

It recognizes the fact that with the current global economic set up, one local crisis may and can have impact on the financial system worldwide.

The OECD Principles of Corporate Governance or simply known as the “OECD Principles” is the leading authority on corporate governance. It was originally issued in 1999 in response to the Asian financial crisis. Through a process of open consultations and dialogues with many non- OECD countries and taking into account developments since 1999, the OECD Principles was revised in 2003 and the new version issued in 2004. Many countries have since adopted the OECD Principles and patterned their national codes of corporate governance on it. However, the first original advocacy of corporate governance came about in the United Kingdom in late 1992.

As early as 1990s, United Kingdom already had its share of corporate and accounting scandals. The Financial Reporting Council,




the London Stock Exchange and the accounting profession of the U.K. worked together to publish the Cadbury report, which featured how Boards should carry out their

“fiduciary” responsibilities to better ensure the reliability of company accounts. The Cadbury report provided a Code of Best Practice as instrument for guiding a director’s behavior.

The OECD principles focuses on six key areas of corporate governance. Table 1 summarizes the main areas of OECD Principles with short explanatory annotation.

Central to the success of the OECD Principles is that they are principles-based and non-prescriptive so that they retain their relevance in varying legal, economic and social contexts (OECD, 2004).

Table 1

Key Areas of the OECD Principles

I. Ensuring the basis for an effective corporate governance framework

The corporate governance framework should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities.

II. The rights of shareholders and key ownership functions

The corporate governance framework should protect and facilitate the exercise of shareholders’ rights.

III. The equitable treatment of shareholders

The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.

IV. The role of stakeholders in corporate governance

The corporate governance framework should recognize the rights of stakeholders established by law or through mutual agreements and encourage active cooperation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.

V. Disclosure and transparency

The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.

VI. The responsibilities of the board

The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.

Source: OECD Observer Policy Brief August 2004.

According to OECD, good corporate governance is, first and foremost, to be grounded on a clear and dynamic legal and

regulatory framework. Integral to an effective corporate governance framework is the need for laws and regulations to be both


enforceable and backed by effective enforcement agencies (OECD, 2004).

Unfortunately, though significant reforms and many new corporate governance rules have since been adopted, the danger of complying in form rather than in substance can seriously undermine the effectiveness of these reforms (International Financial Law Review, 2004).

Another salient aspect of the OECD Principles is the establishment of an effective system of checks and balances between

boards and management. To avoid possible abuses, professional managers should be effectively monitored by the board. The board is in turn accountable to the shareholders, who should be able to exercise their fundamental ownership rights, including appointing and removing board members.

Lastly, to effectively use ownership rights to monitor and influence the board requires basic standards of disclosure and transparency.


Business theories, practices and principles have been evolving through time as the business environment changes. From a simple “proprietor” business setup, where the owner runs the business, modern corporations have grown so complex not only in its operations but also in its organizational structure and objectives. This complexity leads to the separation of ownership and control, with managers gaining and owners-shareholders losing control. At the heart of the separation of ownership and control is the agency problem, which dominates the corporate governance research. Moreover, as resources become scarce and companies compete intensely for capital, the firm’s objective elevates from simply generating short-term economic profit to maximizing shareholders’ value, which is the ultimate goal of corporate governance.

While the debates persist on about shareholder value maximization versus short- term economic profit, another dimension of the issue becomes more apparent, resulting in the analysis of how the conflicting objectives of individual participants associated with firms might be aligned so as to yield the hypothesized focus on profit maximization (Cheffins, 2004). This dimension is referred to as the separation of ownership and control.

The “corporate revolution” in the United

States between 1880 and 1930 put professional managers at the forefront as closely held companies that dominated most industries gave way to large, publicly traded corporations (Cheffins & Bank, 2009). This led to the separation of ownership from control, which is a prevalent characteristic of most modern corporations, particularly public corporations (Bainbridge, 2008-2009).

Adolf Berle and Gardiner Means in their 1932 book “The Modern Corporation and Private Property” first introduced such phenomenon, which later will be considered as the fundamental and core problem of corporate governance (Dent, 2005). From an economic perspective, this “conflict of interest” can be better understood using the agency theory, which treats the shareholders as the principal and management as the agent. Agency theory assumes that individuals are rational and maximize their utility, resulting in conflicting interests among managers, shareholders and other corporate constituents (Szilagyi & Batten, 2004). At the very least, information asymmetry exists between owners and managers that is exploited by management (Bedo & Acs, 2007). When corporations lack shareholders who hold sufficiently sizeable stakes to exercise influence over the board of directors and the executives,




“agency costs” generated by inattentive or self-serving managers become a major potential concern (Cheffins & Bank, 2009).

Under the diffused ownership corporate setting, it is believed that a series of market- oriented constraints are there to properly align to a substantial extent the interests of those running the companies with the interests of those owning the shares (Fischel, 1982; Fama & Jensen, 1983a; Cheffins, 2004). Cheffins (2004) aptly presented the

“series of market-oriented constraints” when he explained that “…if a company’s executives fail to maximize shareholder value, net earnings will suffer and the share price will decline. This, in turn, will have unpleasant consequences for management.

Those in charge can expect to face intrusive scrutiny by skeptical market participants if the company seeks to raise capital and might well take a reputational “hit” in the labor market for executive talent. Moreover, the executives will have to worry about their job security because a ‘boardroom coup’, a hostile takeover bid and even bankruptcy might be on the cards. The upshot is that the market does much to address the managerial incentive problems created by a separation of ownership and control (p. 593).”

The evils brought about by the separation of ownership and control, have created grave and serious stigma in the minds of the public than the potential benefits it brings especially when stocks crashed amid an epidemic of corporate scandals (Dent, 2005). While Jensen and Meckling (1976) accurately pointed out that issues associated with the separation of ownership and control are associated with the general problem of agency, Shleifer and Vishny (1997) further refined the definition of “control” to include not only management but also large investors with controlling interest. They claimed that the interests of controlling shareholders often do not coincide with that of the minority investors. Claessens, Djankov and Lang (2000) also found that concentrated ownership or control structure, which is

predominant in the East Asian corporations, could lead to suppression of minority rights.

La Porta, Lopez-de-Silanes, Shleifer and Vishny (2000) mentioned about the expropriation risk (the use of profits by

“insiders” to benefit or enrich themselves) faced by the “outsiders” (minority shareholders and creditors). In general, public corporations are rife with asymmetries of information and interests among the various constituents (Bainbridge, 2008).

Given all these potential abuses that

“insiders” can do to harm “outsiders”, a clamor for some semblance of investors protection began to take the form of corporate governance reforms. The intervention of regulatory agencies or lawmakers in the development of corporate governance mechanism is said to be necessary (Echanis, 2006).

Despite the disadvantages brought about by the separation of ownership and control, there are potential benefits to be derived from such an “arrangement”. Hessen (1983) appropriately captured the essence of the

“potential benefits” when he wrote that investors supply capital because they are willing to entrust to the managerial skills of others. Fama and Jensen acknowledged the benefits arising from a division of labor in a public company set up when they wrote

“since decision skills are not a necessary consequence of wealth or willingness to bear risk, the specialization of decision management and residual risk bearing allowed by the unrestricted common stock enhances the adaptability of a complex organization to changes in the economic environment (Fama & Jensen, 1983b).”

Demsetz (1983) also assented, saying that

“specialization of business activity into…ownership of the corporation and…managerial control…raises the utility level achievable by those with funds to invest and those with managerial skills to sell” (p.

383). The chief economic virtue of the public corporation is not that it permits the aggregation of large capital pools, but rather


that it provides a hierarchical decision- making structure well-suited to the problem of operating a large business enterprise with numerous employees, managers, shareholders, creditors, and other inputs (Bainbridge, 2008). “Arrow aptly captured this: Under conditions of widely dispersed information and the need for speed in decisions, authoritative control at the tactical level is essential for success” (Bainbridge, 2008-2009, p. 31). From the given arguments, it can be inferred that the inherent weaknesses caused by the separation of ownership and control in modern corporate setting are unavoidable and must be accepted and dealt with.

Given the dominance of large, publicly- traded companies in the contemporary business landscape of almost all nations worldwide, issues and problems related to the separation of ownership and control or agency problem cannot be ignored. Renewed interest on corporate governance, which is seen as the cure to the spate of corporate scandals and fiascos of the recent decade, has flourished. Developed as well as emerging markets are creating and adopting corporate governance reforms left and right.

Shareholders are demanding that their

“interest” be protected from unscrupulous managers or they will be forced to move their resources/wealth elsewhere. Apparently, the agency problem dominates the corporate governance research as correctly observed by Jensen and Meckling (1976). Echanis (2006) even defined corporate governance as the structure and process by which the public corporations control agency problems. Both developed and emerging markets have been adopting the OECD Principles, which has become the leading authority on corporate governance. The OECD Principles aims precisely to eliminate the agency problems that are rampant in the corporate setting by advocating core values like fairness, transparency, responsibility and accountability.

In the aftermath of some high profile financial scandals such as Enron (2001), WorldCom (2002) and Global Crossing (2002) that assaulted one of the more solid economies in the world, the United States signed the Sarbanes-Oxley Act (SOX) into law in 2002. While some consider that the Sarbanes-Oxley Act has brought the most extensive reforms to the U.S. financial markets since the enactment of the Securities Act of 1933 and the Securities Exchange Act of 1934 (Cheung, 2006), still some think that it merely improves the financial reporting (Echanis, 2006; Dent, 2005). Its goals are said to be modest, being limited primarily to deterring and catching illegal acts (Dent, 2005). According to Dent, the Sarbanes- Oxley Act is not the solution to the corporate governance problem.

Moreover, while some of the market- oriented mechanisms such as monitoring by outside directors, performance-oriented compensation and the market for corporate control can help align the interest of management and shareholders, the wholesale destruction of shareholder value in major publicly traded U.S. financial corporations during the recent market turmoil (e.g., AIG, Bear Stearns, Citigroup and Lehman Brothers) illustrate that major gaps in managerial accountability remain (Cheffins

& Bank, 2009). Dent (2005) even went a step further and claimed that prior reforms did not cure the ills of corporate governance and there is little reason to think that the recent spate of reforms will be any more effective. Unless reforms hit the separation of ownership and control issue squarely, no reform can really succeed (Dent, 2005).

Notwithstanding the gloomy views on the

“cures” that corporate governance reforms can bring, the various benefits of good governance cannot be discounted. IFC reported that “good governance won’t just keep your companies out of trouble. Well- governed companies often draw huge investment premiums, get access to cheaper debt, and outperform their peers.”




(International Finance Corporation, 2005).

In a 2002 McKinsey survey, it was found that institutional investors were willing to pay as much as 22 percent premium in well- governed companies in Asia. For emerging economies in Asia, regulatory reforms focused on enhancing the property rights of investors, notably by improving the corporate governance framework by maintaining the competitiveness of capital markets, providing legal protection for investors (better property rights) and enhancing the role of outside shareholders within the individual country, are said to be critical factors leading to long- term sustainable growth (Szilagyi & Batten, 2004). Asian Corporate Governance Network’s concluding remark in its presentation to Moody’s crowd in June 2009 articulately depicts the prospects of corporate governance work saying that “corporate governance reform is a dynamic and

continuous process…reform efforts are never perfect or complete, but without them investor confidence and trust would not return. The corporate governance regimes in Asia have improved since 1997, but there is still a lot of work to do” (Allen, 2009a, p.

19). Holmstrom and Kaplan likewise concur to this line of reasoning when they wrote:

“Despite the alleged flaws in its governance system, the U.S. economy has performed very well, both on an absolute basis and particularly relative to other countries…the broad evidence is not consistent with a failed U.S. system. If anything, it suggests a system that is well above average” (in Bainbridge, 2008-2009, p. 34). Corporate governance problems are quite complex, owing to differing cultural, social and political factors across economies (Macey &

O’Hara, 2001); it will indeed take some time for a tenable solution to be reached.


To present the corporate governance reforms adopted in the Philippines and how these fare vis-à-vis international standards, the following activities were undertaken:

1. Determine the various reforms undertaken by the various regulatory agencies in the Philippines and compare these reforms against those of other

selected Asian neighbors;

2. Compare the various reforms undertaken in the Philippines with the provisions of the Sarbanes-Oxley Act; and

3. Survey the assessments of various local and international bodies on the corporate governance reforms done in the Philippines.


Regulatory Bodies

The SEC is the government agency having overall jurisdiction, supervision and control over all domestic private corporations. It also supervises and regulates investment companies, investment houses, stock brokerages and pre-need plan

companies. Moreover, it ensures that self- regulatory organization (SRO) like the Philippine Stock Exchange performs its functions as a SRO in accordance with SEC- approved SRO rules and the Securities Regulation Code. With the promulgation of the Securities Regulation Code (Republic Act No. 8799), SEC’s power is further


strengthened. Appendix 1 provides a complete list of the powers and functions of the SEC as enumerated under Section 5 of the Securities Regulation Code (Republic Act No. 8799).

Helping the SEC are the Philippine Stock Exchange (PSE), the Bangko Sentral ng Pilipinas (BSP) and the Office of the Insurance Commission (IC). Each is in charge of a particular financial market sector and each has autonomy to issue its own circular memoranda and IRRs as long as they are not contrary to any existing laws. The PSE is a self-regulatory organization (SRO) that provides a marketplace where investors, listed companies and other market participants can trade securities. It oversees all publicly-listed companies. The BSP has supervision over the operations of banks and exercises such regulatory powers over the operations of finance companies and non- bank financial institutions performing quasi- banking functions. The IC, on the other hand, is an agency under the Department of Finance which supervises and regulates the operations of life and non-life companies, mutual benefit associations and trusts for charitable uses.

Regulatory Framework

Though the Philippines is spared from major catastrophic scandals like the Enron and severe financial crisis like the US sub- prime mortgage meltdown, many sectors in the country have joined the corporate governance bandwagon. Even before the Bush administration in the United States passed the Sarbanes-Oxley Act of 2002, paving the way to upgrade Philippine corporate governance practices are the enactment of some important legislations.

Among them are: the Securities Regulation Code (SRC) of 2001 (Republic Act No.

8799) and the General Banking Act (GAB) of 2000 (Republic Act 8790). The SRC revised previous laws governing the regulation of securities in the Philippines and

reorganized and empowered the SEC.

According to the World Bank Corporate Governance Country Assessment on Philippines in May 2006, among the SRC’s important new provisions are: (a) the institutional strengthening of the SEC and the strengthening of its prosecution and enforcement powers; (b) the clarification of the scope of insider trading and market manipulation, protection of minority investors through the requirement of a mandatory tender offer; and (c) the delegation of certain regulatory powers to self-regulatory organizations (SROs) such as the PSE. The GAB, on the other hand, prescribed the “fit and proper rule” that required bank directors to undergo training in corporate governance practices before the Monetary Board (MB) confirms their appointment as directors. The SEC has less stringent rule and requires training of directors only if such requirement is stated in the Manual of Corporate Governance of the said company.

Various laws and regulations have been passed to protect the interest of the investing public. The Securities Regulation Code and the Corporation Code of the Philippines are two of the many laws under the purview of SEC that are geared toward the attainment of such goal. While lawmakers acknowledge the need to pass laws, rules and regulations to uphold and protect the basic rights of an investor, investors, on their part, should know their rights and should exercise them to enjoy the protection and full extent of the benefits of these rights. After all, the investor is the most effective regulator. No one has the same drive and priority as the investor when it comes to protecting his investment. Appendix 2 shows a list of the laws that SEC has regulatory and administrative jurisdiction with a brief description of each law.

Central to SEC’s corporate governance thrust is the issuance of Memorandum Circular No. 2, Series of 2002, otherwise known as the Code of Corporate Governance




and the Manual of Corporate Governance.

Both are aimed to provide guidance to companies in the formulation of their governance rules and practices. In fact, many Asian countries started to adopt a code of corporate governance in the early 2000 as

compliance to recommendations by international organizations like the OECD and World Bank. Below are two tables showing the drastic change in landscape of best practices in 1997 and in 2009.

Table 2

A Barren Landscape of Best Practices in 1997

Country/Market Was there an official code of best


Did the idea of the

“independent director” exist?

Did the idea of the audit committee


China None None None

Hong Kong Yes (but very short) Yes Yes

India None None None

Indonesia None None None

Japan None None None

Korea None None None

Malaysia None Yes Yes

Philippines None None None

Singapore None Yes Yes

Taiwan None None None

Thailand None None None

Source: ACGA research

Table 3

A Dense Jungle in 2009

Country/Market Date of main code(s) Are “independent directors” required?

Are audit committee required?

China 2002/2005 Yes Yes

Hong Kong 1993/2004 Yes Yes

India 1999/2005/2007 Yes Yes

Indonesia 2001/2006 Yes Yes

Japan 2003/2004 Optional Optional

Korea 1999/2003 Yes Yes (for large firms)

Malaysia 2001/2007 Yes Yes

Philippines 2002/2009 Yes Yes

Singapore 2001/2005 Yes Yes

Taiwan 2002/2006 Yes (certain firms) Yes (certain firms)

Thailand 1999/2006 Yes Yes

Source: ACGA research


Financial reporting guidelines dominated most of the corporate governance circulars issued by the SEC. This confirms findings that the main thrust of corporate governance reforms in the Philippines is on improving and strengthening of accounting and auditing standards (Echanis, 2006; International Financial Law Review, 2004). Moreover, the SEC amended SRC Rule 68, the Special Accounting Rules, to conform to International Accounting Standards (IAS).

Effective 2005, most publicly-listed companies in the country are IAS-compliant.

Another major SEC thrust is the accreditation of auditing firms and external auditors.

Guidelines to on accreditation and reportorial requirements are there to regulate the quality of work done by the accounting and auditing profession.

The rationale behind SEC’s focus on financial reporting and external auditor accreditation guidelines is that many investment decisions are financial in nature.

Prospective investors, as well as shareholders and stakeholders, rely primarily on financial statements issued by the firms to make critical decisions. SEC recognizes the importance of adopting globally accepted accounting and auditing standards to prop up investments in the country. Moreover, a number of highly publicized corporate scandals involving fraudulent reporting have

dramatized the need for vigilance over financial reporting practices (Agustin, 2002- 2003). How these fraudulent financial reporting practices escaped the attention of the external auditors raised the ire of the investing public and cast very serious doubts on the “independence” of external auditors from their clients. Instead of lending credibility to the fairness of the financial statements prepared by companies, these external auditors have become mere rubber stamps of companies. To ensure fair reporting and raise the level of audit rigor to protect investors, SEC has been issuing various guidelines on financial reporting and accreditation of external audit firms and auditors.

While SEC has made leap and bounds progress in terms of laws and regulations to enhance corporate governance, there are two major areas that direly need improvement in the Philippines namely, in the enforcement of compliance and in the imposition of higher sanctions and penalties for violators.

As per SEC Memorandum Circular Nos.

8 and 13 Series of 2009, the scales of fines for various violations are listed. To give the reader an idea of the severity or magnitude of the fines imposed, below is a condensed table showing how an audit firm handling Group A companies will be penalized for each pertinent violations:

First Offense

Second Offense

Third Offense Violation of reportorial and

representation obligation Php25,000 Php50,000 Php100,000 Violation of the independence

requirements Php25,000 Php50,000 Php100,000 Violation of accreditation

requirements Php100,000 Php200,000 Php400,000

Likewise, reporting companies that do not comply with the financial reporting requirements of the SEC, specifically material misstatements in financial

statements, are also penalized with fines.

The scales of fines are given in SEC Memorandum Circular No. 8, Series of 2009.

For a first offender, the fine for a Php10




million or above misstatement in the financial statement is only 1/10 of 1 percent of the amount misstated or an amount given in the table (maximum is Php4,000), whichever is higher. 1/10 of 1 percent of Php10 million misstatement translates only to Php10,000. In the same way, the penalties and fines imposed by the PSE on publicly- listed companies are considered very minimal also. Non-compliance with structured disclosure requirements as prescribed under Section 17 to 17.15 of the Disclosure Rules will result in the imposition of a maximum penalty per year/per violation of only P500,000 for a publicly-listed company with total assets of P1.0 billion and above. In the World Bank ROSC study in 2006, it was recommended that the scales of fines be set high enough to deter any violations. Not only will the imposition of higher fines and penalties deter violations but it can enable the regulatory bodies to hire and employ the best human and capital resources to effectively perform their functions.

The above arguments are validated by findings reported by Cheung (2006) that some Asian countries have difficulties in enforcing their laws due to a lack of resources and high levels of corruption. In fact, according to OECD’s report in 2006, the Philippine regulatory bodies are not well staffed and well funded compared to our Asian neighbors. Cayanan (2007) pointed out that the prevalence of non-compliance to financial reporting rules stems from inadequate sanctions and investor apathy. He noted that “no one has yet been imprisoned for not complying with financial reporting standards” in the Philippines. Moir (2006a) also wrote that the tone and quality of regulatory frameworks differ greatly across Asia, as the crucial element of enforcement.

ACGA and Credit Lyonnais Securities Asia (CLSA) reported that while reporting standards are improving and companies are responding to demands for quicker information, enforcement of these regulations are often lacking. The ACGA-CLSA report

referred to this as “traditionally the weak spot in Asian regulatory regimes” (Moir, 2006a).

Both the BSP and the IC were also keen contributors to the good governance cause.

BSP published the Manual of Regulations for Banks (MORB) and the Handbook on Corporate Governance for Banks. Both agencies also issued their own Circulars on corporate governance principles and leading practices.

The PSE, which was conferred the status of a self-regulatory organization (SRO), is implementing its own rules and imposing penalties on erring trading participants and listed companies.3 This is in compliance with the International Organization of Securities Commissions (IOSCO) Objectives and Principles of Securities Regulation mandate of making appropriate use of SROs to exercise some direct oversight responsibility for their respective areas of competence.

In line with SEC’s thrust toward upholding good corporate governance, PSE has also stepped up its role in instigating ways and means to instill awareness and promote corporate governance among publicly listed companies. Many of the initiatives pursued by PSE are on ensuring adequate disclosures.

Local Organizations Promoting Corporate Governance Best Practices

The SEC, BSP, IC and PSE are not the only institutions actively involved in the promotion of good governance in the country. Also doing its part is the Institute of Corporate Directors (ICD), a World Bank- funded non-profit organization. The ICD is instrumental in institutionalizing the Corporate Governance Scorecard (CGSC) for publicly listed companies in 2005. The 2009 Corporate Governance Scorecard for Publicly-Listed Companies was developed by ICD in collaboration with the SEC, the PSE and the Ateneo Law School. This can be accessed through the ICD website. The


SEC initially required publicly-listed companies to voluntarily submit the CGSC, but beginning 2009 as per SEC Memorandum Circular No. 12, this was made mandatory with penalties specified in SEC Memo Circular No. 5 Series of 2009.

Aside from creating the Corporate Governance Scorecard, ICD is also a SEC- and BSP-accredited training provider on corporate governance.

The Philippine Institute of Certified Public Accountants (PICPA), the national organization of CPAs, working with the Board of Accountancy (BOA) and the Professional Regulation Commission (PRC), also undertook various initiatives in promoting good governance. Among them are: the establishment of a Quality Assurance Board, tasked to ensure the quality of Philippine CPAs and to monitor and support pending legislation regarding the accountancy profession and the creation of a Quality Review Committee, tasked to ensure the quality of work by external auditors. To date, only the Quality Control Review Committee has not been constituted although a model for quality control review has been prepared. With the approval of the New Accountancy Law (Republic Act No. 9298), PICPA is tasked with the strict enforcement of continuing professional education for CPAs.

The Philippine Code of Corporate Governance

The Philippine Code of Corporate Governance (Code) was issued by the SEC.

This Code supplements and complements the Securities Regulation Code and the Corporation Code. It is patterned after the OECD Principles. But while the OECD Principles seem to focus equally on all the six main areas, the bulk of the Code is devoted in the discussion of board governance. Just like Thailand and Malaysia, the Code covers only five areas and omits OECD’s first key principle of creating the basis for an effective corporate governance framework, which is a clear and dynamic legal and regulatory framework with laws and regulations that are both enforceable and backed by effective enforcement agencies. Only the Indonesia’s Code of Good Corporate Governance is able to touch briefly on the first OECD key area.

The Code’s main focus is on board governance. It considers the Board of Directors or simply the Board to be primarily responsible for the governance of the corporation. The main role of the Board is to act as an independent check on management.

In order to effectively exercise its monitoring and oversight functions over management, it is essential that a number of board members should be independent from management.

Some of the points discussed under board governance take off from the Corporation Code of the Philippines. However, many items are added to make the contents of the Code more aligned to the current and evolving corporate governance practices.

Table 4 provides a comparison between the Corporation Code and Code of Corporate Governance on corporate governance.




Table 4

Comparison between Corporation Code and SEC’s Code of Corporate Governance on Board Governance

Corporation Code of the Philippines Code of Corporate Governance 2002 Composition of the Board

Sec. 14 #6 The number of directors or trustees which shall not be less than five (5) nor more than fifteen (15).

Publicly listed companies should have at least two (2) independent directors or such independent directors shall constitute at least twenty percent (20%) of the members of such Board, whichever is lesser.

No provision Board must come up with a balance number of

executive and non-executive directors with clear division of responsibilities.

No provision Non-executive directors should possess sufficient qualifications, stature, and number to function properly.

Multiple Board Seats

No provision Maximum number of directorship that a member

can assume is capped by his ability to perform his duties diligently.

The Chairman and the CEO

Sec. 25 Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time.

It is preferred that chairman and CEO are not to be same person. It is also required that relation between chairman and CEO be disclosed upon their election.

Qualifications of a Director

Sec. 23 Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation.

Aside from the one share ownership, the company may impose additional qualifications as it sees fit like education attainment, business experience, practical understanding of the business.

Disqualifications of a Director

Sec.27 No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years or a violation of the Corporation Code committed within five (5) years prior to the date of his election or appointment shall qualify as director, trustee or officer of any


Sec. 28 Any director or trustee of a corporation may be removed from office by a vote of stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock…Removal may be with or without cause: Provided, that removal without cause may not be used to deprive minority stockholders or members of the right to

representation to which they may be entitled under Section 24 of this Code.

The Code specifies more than one ground for disqualification of directors though Sec. 27 of the Corporation Code is one of them. It also enumerates grounds for temporary disqualifications.

Duties, Functions and Responsibilities of a Director

Sec. 34 Where a director, by virtue of his office, acquires for himself a business opportunity which

The Code states that the Board’s primary duty is to act for the best interest of the corporation. It


Corporation Code of the Philippines Code of Corporate Governance 2002 should belong to the corporation, thereby obtaining

profits to the prejudice of the corporation, he must account to the latter for all such profits by refunding the same, unless his act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock.

This provision shall be applicable, notwithstanding the fact that the director risked his own funds in the venture.

further expounds on the general and specific duties of a director by giving a list.

Board Meetings and Quorum Requirements Sec. 53 Regular meetings of the board of directors or trustees of every corporation shall be held monthly, unless the by-laws provide otherwise.

Special meetings of the board of directors or trustees may be held at any time upon call by the president or as provided in the by-laws.

Directors should regularly attend meetings.

Teleconferencing is now allowed. Independent directors should attend meetings always. Justifiable causes for absence by independent directors are specified.

Remuneration of the Members of the Board and Officers

Sec. 30 In the absence of any provision in the by- laws fixing their compensation, the directors shall not receive any compensation, as such directors except as reasonable per diems: Provided, however, that any such compensation other than per diems may be granted to directors by the vote of stockholders representing at least majority of the outstanding capital stock at a regular or special stockholders’ meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten percent (10%) of the net income before income tax of the corporation during the preceding year.

No compensation amount is specified by the Code.

However, compensation should be attractive enough to attract and keep directors and officers.

Compensation of the CEO and the four highest paid executive officers should be disclosed in the annual report.

Board Committees

Sec. 35 The by-laws of the corporation may create an executive committee, composed of not less than three (3) members of the board, to be appointed by the board. Said committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in the by-laws or on a majority vote of the board, except with respect to: (1) approval of any action for which shareholders’ approval is required; (2) the filling of vacancies in the board;

(3) the amendment or repeal of by-laws or the adoption of new by-laws; (4) the amendment or repeal of any resolution of the board which by its expressed terms is not amendable or repealable; and (5) a distribution of cash dividends to the


Committees should be formed to help the Board in the proper execution of its functions. The Code recommends the constitution of three committees – audit, nomination and compensation – their composition and duties and functions.

No provision

Corporate Secretary

The Code defines the corporate secretary’s qualifications and duties.




Understanding the Code of Corporate Governance will be more meaningful when read in tandem with the ICD Corporate Governance (CG) Scorecard. Though the CG Scorecard is formulated based on the Code of Corporate Governance, the survey questions, description and suggested information source in each key area provide a rich source of information for corporations to bring their corporate governance practices to the next higher level.

In 2009, SEC issued Memorandum Circular No. 6 referred to as the Revised Code of Corporate Governance. The revised version of the Code is merely an update of the original version. Some parts are modified to better phrase some provisions.

These revisions are considered minor as the

true essence and spirit of the original Code remains intact.

The Sarbanes-Oxley Act of US and the Philippine Corporate Governance Reforms: A Comparison

Comparing the specific mandates in the Sarbanes-Oxley Act with the various regulations and initiatives that our local regulatory bodies have issued and adopted provides updates on the state and direction of our governance efforts. Table 5 shows an overview of the contents of the Sarbanes- Oxley Act vis-à-vis reforms taken by our regulatory agencies. The table is simply illustrative and informative rather than comprehensive.

Table 5

Sarbanes-Oxley Act vs. Philippine Provisions

Sarbanes-Oxley Act Reforms Adopted in the Philippines Title 1: Public Company Accounting Oversight

Board (PCAOB)

The PCAOB is tasked to provide independent oversight on public accounting firms. Among its many functions are: registration of auditors, establishment of audit, quality control and independence rules, inspection of registered public accounting firms, and enforcing of specific mandates of the Act with investigation and disciplinary powers.

The oversight of the audit profession rests mainly with the Board of Accountancy (BOA). Though the Revised Accountancy Law of 2004 (Republic Act No. 9298) mandated the creation of the Quality Review Committee to provide oversight on quality of audits done by external auditors/audit firms, its implementation is yet to be seen.

The Philippine Standards on Auditing No. 220 “Quality Control for Audit Work” provides guidance on the quality control policies and procedures that an audit firm should adopt.

Title 2: Auditor Independence

Auditor prohibited to perform non-audit services (such as bookkeeping and other accounting services, financial information system design and implementation, internal audit, etc.) for audit clients

Approval of new auditor

Audit partner rotation policy

This is being covered in the Code of Ethics for CPAs and also in the SEC Memorandum Circulars on Guidelines on Accreditation of Auditing Firms and External Auditors.

As per SEC Memorandum Circular No. 6 Series of 2004, the audit committee of the company is to recommend to the Board the external auditor to be appointed.

This is covered in SEC Memorandum Circular No. 8 Series of 2003. This requirement also forms part of


Sarbanes-Oxley Act Reforms Adopted in the Philippines

Conflict of interest issues

Auditor reporting requirements

the Corporate Governance Self-Rating Form as per SEC Memorandum Circular No. 5 Series of 2003.

This is covered in the Code of Ethics for CPAs.

This is covered in SEC Memorandum Circular No. 13 Series of 2009, which supersedes SEC Memorandum Circular No. 13 Series of 2006 and No. 13 Series of 2003. Material findings related to fraud, error, losses or possible losses should be disclosed to SEC by reporting company. If this disclosure is not made by reporting company, then the external auditor should report this to SEC.

Title 3: Corporate Responsibility

Audit Committee of publicly-listed companies

Corporate responsibility for financial report (CEO and CFO to certify the veracity of the financial statement)

This is covered in the Code of Corporate Governance issued by SEC.

Amended SRC Rule 68 and 68.1 requires that all financial statements filed shall be certified by the chairman of the board. Signing with the Chairman are the CEO and CFO.

Title 4: Enhanced Financial Disclosure The SEC and PSE prescribe the “full disclosure approach”. PSE Revised Disclosure Rule requires that material information should be disclosed to PSE within 10 minutes from the receipt of such


The SRC requires the disclosure of director

information regarding their capacity to hold office and their track record in the company and in other

companies where they hold directorship.

The amended SRC mandates disclosure by any person who is directly or indirectly the beneficial owner of more than 5 percent and beneficial owner of 10 percent or more of the equity security of the company or by a director, officer or stockholder thereof. SEC and PSE also monitor ownership disclosures through the General Information Sheet (GIS) and Statement of Changes of Beneficial Ownership, respectively.

IAS 24/PAS 24 sets the rules on the disclosure of related party transactions.

Details of remuneration of directors and key officers, both individually and in aggregate, should be disclosed in the annual report.

Corporate actions such as issuance of securities, public offering of stocks, material changes in registration statements, merger, decrease of capital stock, dissolution and withdrawal of license of corporations should be published in newspaper of general circulation before they become effective as per SEC Memorandum Circular No. 1 Series of 2008.

Title 5: Analyst Conflict of Interest

This section provides the code of behavior that securities analysts should adopt with the goal of fostering greater public confidence in securities

The amended SRC Rule 30.2 requires disclosure by brokers/dealers and traders regarding conflict of interest with customers.

Amended IRR of SRC Rule 34 requires that




Sarbanes-Oxley Act Reforms Adopted in the Philippines research. It discusses how securities analysts can

protect their objectivity and independence.

broker/dealer, analyst or rating agency which has material interest in a transaction, neither advise nor deal in such transaction. Moreover, SRC Rule 61 and 63 discuss the civil and criminal liability of

brokers/dealers and associated persons who practice insider trading. Administrative penalties are also covered in SEC Memorandum Circular No 6 Series of 2005.

The PSE issued a Code of Conduct and Professional Ethics for Traders and Salesmen.

Title 6: Commission Resources and Authority This section provides the guidelines on how to improve the oversight and disciplinary functions of the Commission via acquisition of additional human and technological assets.

Securities Regulation Code of 2001 reorganized and empowered the SEC. While the SRC exempts the SEC from the Salary Standardization Law and provides for a compensation structure commensurate to that of the BSP, the salary level of the SEC staff hardly compares with that of the BSP staff. SEC has the authority to enforce laws and regulations but it does not have adequate resources in terms of both technical expertise and number of

professionals according to the World Bank study in 2006.

(Source: ROSC Corporate Governance Country Assessment on Philippines May 2006)

Title 7: Studies and Reports

This section aims to fortify SEC’s position on corporate issues via the commissioning of researches.


Title 8: Corporate and Criminal Fraud Accountability

This section specifies criminal penalties for fraud by manipulation, destruction or alteration of financial records or other interference with investigations while providing protection to whistle-blowers.


Title 9: White Collar Crime Penalty

This section supports the increase of criminal penalties associated with white-collar crimes and conspiracies. It recommends stronger sentencing guidelines and cites failure to certify corporate financial reports as criminal offense.

There is no specific rule on protection of whistleblowers.

However, Republic Act No. 6981 provides protection to person who has witnessed or has knowledge on the commission of crime and has testified or is testifying before any form of investigating body.

Title 10: Corporate Tax Return Bureau of Internal Revenue Regulation No. 3-2010 requires the president/CEO and CFO (or holder of equivalent positions) to sign a statement of management’s responsibility for their company’s annual income tax returns.

Title 11: Corporate Fraud Accountability This section identifies corporate fraud and tampering as criminal offenses and relates them with specific penalties. It also grants SEC the authority to temporarily freeze unusual transactions.



From Table 5, it can be concluded that the various Philippine provisions are at par with majority of the items in the Sarbanes- Oxley Act.4

Aside from weak enforcement of compliance and imposition of small fines and penalties, two glaring shortcomings in the Philippine corporate governance reforms are:

1) the lack of provision and protection for whistle-blowing in the Philippines; and 2) the absence of serious penalties associated with fraud. High profile fraud and corruption scandals at companies worldwide have raised the importance of reporting executive misbehavior. However, the cultural inhibitions and local business structures prevalent in Asia make it tough for these countries to implement programs to encourage and protect those who speak out (Moir, 2006b). Moir (2006b) wrote that though there is general agreement that whistle-blower legislation should be introduced to protect people from reprisals, it will certainly take some time to surmount cultural barriers.

The Philippine Bureau of Internal Revenue (BIR) likewise recently took a step

forward and issued in February 2010 Revenue Regulations No. 3-2010. This new regulation has the same provisions as Title 10 Corporate Tax Return in the Sarbanes-Oxley Act. It requires the president/CEO and CFO of the company to sign a statement of management’s responsibility for their company’s annual income tax returns. The statement of management responsibility prescribed by the BIR does not replace a similarly named document that reporting companies are required to submit to the SEC together with their audited financial statements. Although the substance of the two statements appears the same, they have different goals. While it is BIR’s goal to ensure the correct collection of taxes, it is SEC’s objective to compel companies to submit a fairly accurate picture of their financials to the investing public. The fact that an independent or external auditor reviewed and confirmed the adherence to accounting rules does not diminish the responsibility of the company officers over their contents. These two statements have accountability as their end goal.


Assessments by Local Organizations

Many studies have been conducted to assess and evaluate the progress of corporate governance reforms in the country. The level of compliance of listed Philippine companies with respect to financial reporting standards is still far from ideal (Cayanan, 2007), though discernible improvements were noted in the series of studies5 made by various faculty of the UP College of Business Administration. While these studies focused on the common financial reporting violations, the 2007 study by Cayanan went beyond the usual premise and determined motivations for listed Philippine companies

from complying with the financial reporting standards. It was found that regulated companies have higher incidence of compliance and companies requiring external financing of any form have a higher motivation to window dress their accounts in order to boost their chance of raising funds and lower their cost of financing.

The CG scorecard project, which the ICD holds every year, contains a ranking of firms with high, low or no corporate governance practices. Basically, the 2008 average scores of listed companies improved from 65 percent in 2007 to 72 percent in 2008. Ayala Land Inc., which garnered the top slot in the 2005 CGSC with a CG Score of 72.91




percent, reported a 30 percent improvement in 2007 with a CG Score of 94.64 percent.

The PSE commissioned Yan-Leung Cheung (School of Business, Hong Kong Baptist University, Hong Kong) to examine the relationship between corporate governance and firm value in the Philippines. The result of this independent study affirms the trend of the ICD CGSC scores, indicating that corporate governance practices improved during 2005 to 2008. The most significant improvement was found during 2006-07.

Moreover, the study shows that firm valuation is directly related to the level of corporate governance and changes in corporate governance practices. It also suggests that Philippine investors are more sensitive to changes in the rights of shareholders, disclosure and transparency and Board governance. These findings may provide our regulatory bodies with valuable insights on what and where to focus. It affirms SEC and PSE’s focus on Board governance as embodied in its Code of Corporate Governance and Manual of Corporate Governance and on disclosure and transparency, respectively, are on the right track. Efforts should be focused on the strengthening of shareholder rights.

Another study, which was recently concluded by the Hills Program on Governance of the Asian Institute of Management (AIM), entitled “Corporate Governance Trends in the 100 Largest Publicly-Listed Companies in the Philippines, 2002 to 2007” assessed the state of corporate governance in the country and re-evaluated the effectiveness of the existing corporate governance rules, regulations and guidelines. The 100 largest companies were selected based on their reported revenues in 2007. Based on disclosures in the annual reports from 2002 to 2007, compliance by most of the 100 largest publicly listed companies with the rules, regulations and guidelines relating to corporate governance appeared to have been minimal. However, there appeared to have been marked

improvements in certain governance practices since 2005. This finding confirms the above two studies conducted by the ICD and commissioned by the PSE. Appendix 3 presents some of the salient findings of the AIM study.

Assessments by International Organizations

Though the Philippines response to the global problem of corporate governance is adequate in terms of the promulgation of rules and regulations, regulatory bodies, however, need to be reformed and strengthened to improve implementation and enforcement of the corporate governance rules and regulations according to the Report on the Observance of Standards and Codes (ROSC) Corporate Governance Country Assessment on Philippines in May 2006 by the World Bank. As stressed by the first OECD key Principles, effective corporate governance is only possible if the laws and regulations are enforceable and backed by effective enforcement agencies. We have the laws and regulations, but we need effective and impartial authorities to execute their functions in order to enforce what the laws and regulations are there to achieve and protect. The World Bank study provided valuable insights on the state of corporate governance in the country and recommended ways to further improve corporate governance reforms. Among the steps suggested to be undertaken were: (a) strengthening the enforcement of the existing laws and regulations by the SEC and PSE, particularly those involving insider trading, tender offer rules and disclosure; (b) improving the protection of minority shareholder rights through better enforcement; (c) strengthening the monitoring of compliance with IAS/IFRS and requiring additional disclosure of internal controls and governance issues by listed firms; (d) enhancing PSE’s surveillance system for monitoring of unusual trading


Table 8 shows the breakdown of the scores  contained in Table 7.
Table 7  CG Watch Survey

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