Part Two
SEVEN years ago in March, Japan was hit by a 9.0-magnitude earthquake, sending a 45-foot tsunami that ravaged its coastlines, including a nuclear reactor operated by Tokyo Electric Power Co (Tepco).
Tepco later on fell, after it reported billions of dollars of net loss, one of Japan’s biggest loss ever reported, as a result of the tragedy.
The power firm could not have predicted the earthquake and its devastating impact on the community. But what caused Tepco’s spectacular fall from grace was its lack of preparation for the impact of the disaster on the company. Tepco’s board did not include independent members. There were no risk experts at the top of a company that operates a very critical business, such as a nuclear power plant.
The Tepco experience has now become this millennium’s most recent example for corporate governance advocates of how not to do things—as accounting scandals such as those of Enron and Lehman Brothers have become stale.
The Code of Corporate Governance for Publicly Listed Companies did just that for the Philippines.
On January 3 the International Finance Corp. (IFC), a member of the World Bank Group, and the Securities and Exchange Commission (SEC) announced a new corporate governance code for publicly listed companies, “which aims to improve the functioning of boards, strengthen shareholder protection, and promote full disclosure in financial and non-financial reporting.”
In a statement that day, the IFC said the new code “provides guidance for Philippine publicly listed companies to adopt best governance practices, which will improve their competitiveness and ability to attract foreign investment.”
Principles
A CHUNK of the code delved on the board of directors’ governance responsibilities. Seven out of the 16 principles outlined the board’s governance responsibilities, some of which may have stirred sensibilities of the people currently serving as board members.
For instance, the new code recommended the adoption of “an effective succession planning program for the directors, key officers and management to ensure growth and continued increase in the shareholders’ value.”
“This should include adopting a policy on the retirement age for directors and key officers as part of the management succession and promote dynamism in the corporation,” it added.
In a separate memorandum issued in March last year, the SEC has issued term limits for independent directors, allowing them to serve only for five years starting in 2012 through 2017, and a two-year cooling-off period shall start to kick in. He can serve for four more years after the cooling-off period.
The said memo mainly recommends that board members should only serve up to nine years, after which he or she is barred for reelection for the same position in the same company.
In the Philippines the SEC mandates that the board shall be composed of at least five, but not more than 15, members elected by shareholders.
Public companies shall have at least two independent directors or such independent directors shall constitute at least 20 percent of the members of such board, whichever is lesser.
It is a common practice in the Philippines, however, that a director of one company can also serve in another. It has also become a practice that even a former SEC chairman served in many of the listed firms’ board as independent director.
Previously, there were also talks at the SEC of placing age limit of 80 years old on board members. This provision, however, could hurt people, like former Prime Minister Cesar Virata, who is now 86, and Washington Sycip, now 96. Both Virata and Sycip also hold positions in boards of several companies.
Balance
IN a recent interview, Jose Pardo, who served and advised several Philippine Presidents since the 1980s, said there should be balance in every reform.
“Doing too much of the right thing is not always the right thing to do,” Pardo said. “I keep on saying that when you do the reform over and over, reforming is sometimes, it becomes counter-productive.”
Pardo said he remained quiet before “because I would be affected.”
“I am not affected now—I’m on the age of retirement—but in five years time I will be.” He added that the Philippines “cannot just blindly adopt practice in the West and make it respond in a third world.”
“Think global; act local,” said Pardo, who is the chairman of the Philippine Stock Exchange, banks and several other companies and educational institutions.
The code, which the SEC admitted follows the Organisation for Economic Cooperation and Development principles, wants to end all the practices Pardo insinuated, because it is frowned upon in other markets.
Compliance
AN official of the SEC who requested anonymity said “the code is now a ‘comply or explain’ basis.”
“Technically, companies’ board can serve more than nine years, they just need the justification and seek approval of their shareholders during the annual stockholders’ meeting,” the official said. “We want this to be less regulated. If they will be penalized, let the market do that. The companies are now accountable to their shareholders.”
The official added this is practiced in more mature markets.
The new code also recommends that the positions of chairman of the board and CEO should be held by separate individuals and each should have clearly defined responsibilities. It is a common practice in the country that the two positions are just being performed by just one person, as many companies in the Philippines are
family owned.
The code explained that it needed to recommend such an action “to avoid conflicts or a split board.” The code said it also recommends the separation of the positions to foster an appropriate balance of power, increased accountability and better capacity for independent decision-making.
“This type of organizational structure facilitates effective decision-
making and good governance,” according to the Code, a copy of which was provided to the BusinessMirror by the IFC. “In addition, the division of responsibilities and accountabilities between the chairman and CEO is clearly defined and delineated and disclosed in the Board Charter.”
The said separation of the positions of chairman and CEO could see many organizations, such as the Institute of Corporate Directors, celebrating. But the main question remains: Is it doable in a country like the Philippines where many companies are still dominated by few wealthy families? To be concluded
Image credits: Nonoy Lacza