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Continuing the discussion on corporate governance

Renan A. Piamonte Renan A. Piamonte

Today is the fourth Corporate Governance forum organized by the Securities and Exchange Commission (SEC) and the Philippine Stock Exchange (PSE) at the PICC. The last forum focused on good governance, anti- corruption, financial crimes and financial disclosures transparency, while the sessions today cover topics that, at first glance, may seem unrelated to corporate governance, such as cybersecurity, bank secrecy and the millennials.

It is refreshing that the SEC consistently keeps alive the discourse on corporate governance. This is very timely, especially since the Philippine SEC has recently assumed the chairmanship of the Asean Corporate.

Governance Initiative, previously held for five years by its Malaysian counterpart. This initiative, with the support of the Asian Development Bank (ADB), has become quite important with capital market watchdogs through its annual assessment and ranking of Asean publicly listed companies and its publication of the Asean Corporate Governance Scorecard (ACGS).

Those who follow SEC pronouncements on corporate governance know that the governance-related rules and regulations issued in recent years are consistent with the learnings brought about by the
ACGS, which in turn is largely based on the Organization for Economic Co-operation and Development (OECD) Principles of Corporate Governance. It is comforting that the country is moving toward international best practices in this area.

Just last month, the ADB and Asean Capital Markets Forum released the latest ACGS pertaining to assessments made in 2015. The ACGS evaluates the top public companies in five governance categories, based on the following weights: 10 percent for rights of the shareholders; 15 percent for equitable treatment of shareholders; 10 percent for role of stakeholders; 25 percent for disclosure and transparency; and 40 percent for responsibilities of the Board of Directors. The two major demands of corporate governance are transparent disclosure and the active role of the Board of Directors; both of these areas are prominent in the ACGS.

In this latest ACGS, the Philippines is one of the most improved in the consolidated performance of our top 100 public companies. In fact, we have the highest increase in mean score for the past four years—from a measly 48.90 back in 2012 to a commendable 73.09 for 2015.

A major contributor to the increase in ratings are the initiatives undertaken by the SEC, which revised corporate governance rules in the Philippines. To illustrate, of the 24-point increase in the country’s score over the past four years, about 16 points came from the last two governance categories: disclosure and transparency, and responsibilities of the Board of Directors. Both of these areas were significantly affected by the SEC’s new pronouncements since the ACGS began.

While this may be a cause for celebration, there are still a lot of things that need to be done to raise the scores in all categories. This is true not just for the Philippines, but even for our larger neighbors. Our latest score of 73.09 is now very close to Malaysia’s 76.91 and Singapore’s 78.14 (Thailand continues to lead the region with 87.53).

If further improving ratings is our goal, we can be assured that the SEC has the strategy to achieve this.

Of the five governance categories, responsibilities of the Board of Directors is the area where a lot of improvements can still be attained. We got only 26.51 points in this category out of the maximum possible rating of 40 in the latest report, which is based on the 2015 assessment. Since then, a lot of improvements were introduced by the SEC, and these are expected to impact our country’s future ACGS performance. To cite an example, the ACGS pointed out that the challenges for the Philippines include the few independent directors on the Board, and a lack of a nine-year term limit for independent directors and unlimited boards that an independent director can simultaneously sit on. All of these are now specifically addressed in the revised code of corporate governance issued less than a year ago. Though the new code is based on a “comply or explain” approach, let us hope that more public companies will opt for “voluntary” compliance rather than justify deviations from best practices.

What else can the SEC do to improve our ratings? One area that the SEC can look into are relatively smaller public companies. One of the concerns in the latest ACGS is that much of the improvement in the Philippines’ score was due to changes happening in the larger public companies, while the rest have yet to show similar improvements.

Highly effective governance systems take a lot of time to develop, and it requires sustained efforts from stakeholders to establish and hone. Now that additional rules are in place, the SEC and other regulators can now move to effective enforcement and compliance checking to ensure that all public companies support a highly robust corporate governance culture.

Renan Piamonte is a Risk Management partner head at P&A Grant Thornton. P&A Grant Thornton is one of the leading audit, tax, advisory and outsourcing firms in the Philippines, with 21 partners and over 850 staff members. For comments,please email Renan.Piamonte@ph.gt.com or pagrantthornton.marketscomm@ph.gt.com. Visit our Website: www.GrantThornton.com.ph; Twitter: pagrantthornton, and FB: P&A Grant Thornton.

 

As published in The Manila Times, dated 22 November 2017