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Ladies and Gentlemen, good afternoon. I am honored to
have been invited here to speak before such a distinguished
group of leaders from the business community, academia,
government, civil society, and the diplomatic corps.
Private sector business, led by corporations, are the main
driver of our economic growth. And good corporate
governance is indispensable if our corporations are to
continue to contribute positively to our economy. For this
reason, I am pleased that we are here today to talk about
improving corporate governance.
We are only too aware of the magnitude of the challenges
the Philippine economy faces today.
We know that we have lagged behind our neighbors for
decades on a number of indicators. Since 1990, our GDP
growth has averaged no more than 3.8%- compared to 5%
in Indonesia and Thailand, 6.3% in India, and 7.5% in
Vietnam. There have been positive developments in recent
years- and the numbers for 2010 are good so far- but we
are still far from where we need to be.
We know that on average, investment contributes only 14%
of GDP. This isn’t just much lower than the other countries I
mentioned, which invest from 25-40% of their GDP. It’s also
way too low to provide the kind of growth and employment
our people need and deserve.
Corollary to this, we know that we receive far less foreign
direct investment than our neighbors- Thailand, Indonesia,
and Vietnam receive multiples of what the Philippines has
been receiving, not to speak of China.
We know we have a reputation for corruption. Transparency
International ranks the Philippines 139th out of 180 countries
in its most recent survey of perceived levels of corruption.
Worst of all, we know that these measures of
underperformance, while academic for those of us in this
room, translate to genuine human suffering. We know that
the WB estimates that 1 out of 4 people live on less than P
60 / day. Let’s put that in perspective: 1 out of 4 people in
our country live on less than it costs to park your car here
for several hours. And one million Filipinos leave every year
to work abroad.
We in the government will do everything we can to make
these statistics a thing of the past. With the recent elections
and the inaguaration of a new administration, we have
opened a new page in this country’s history. The new
administration is committed to creating the environment
necessary for sustained economic growth and improved
livelihood for all Filipinos.
And to accomplish this, we need world-class corporate
governance. World-class corporate governance will help
bring our investment rate from the unacceptably low 14% of
GDP figure I cited earlier to the higher rates we need to
achieve if our economy is to grow fast enough to lift more
people out of poverty on a sustainable basis.
Let me outline four reasons for this.
First, good corporate governance practices increases a
company’s access to external financing, thus making it
easier for a company to invest. Investors are more willing
to invest in a company if they are assured that there will be
a level playing field and that their interests will be protected.
Investor confidence and market integrity leads to larger
investments, higher growth, and greater employment
creation.
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In a survey undertaken by McKinsey and Company in 2002,
investors stated that they put corporate governance on par
with financial indicators when evaluating investment
decisions. The survey further found that an overwhelming
majority of investors are prepared to pay a premium for
companies with high governance standards. For Asia, that
premium was at 20 to 25 percent.
Moreover, good corporate governance increases investors'
optimism in the company's future cash flow and growth
prospects. The rate of return expected by investors is
correspondingly lower, leading to a lower cost of equity to
the firm. Lower cost of equity will lead to higher
investments. That means more growth, and more jobs.
Second, companies that adhere to good corporate
governance have better operational performance and higher
returns in the long run. Well governed companies allocate
resources better, run their businesses better, and will make
more money. Well governed companies will also be better
corporate citizens, and are in a better position to detect and
prevent sub-optimal, fradulent, and unethical conduct by
their employees. Again- this means more growth, more jobs.
Third, good corporate governance reduces the risk of
financial crises, which can have enormous economic and
social costs. Indeed, it was the 1997 financial crisis that
first highlighted the weaknesses in the corporate governance
structure of countries such as Thailand, Indonesia, and
Malaysia. The ill effects of the crisis included failed
businesses, high unemployment, and increased poverty. In
the wake of that crisis, the Asian Development Bank
commissioned a study to determine the causes of the crisis
and to develop recommendations for avoiding a recurrence.
One of the main recommendations to come out of the study
was corporate governance reform. In the Philippines, the
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SEC, the Bangko Sentral, and the Insurance Commission
responded by issuing a number of rules and regulations
designed to promote good corporate governance.
The recent global financial crisis brought renewed worldwide
attention to corporate governance, and the Philippines has
been somewhat spared the worst of the crisis due in part to
our less sophisticated banks and capital markets. But that
makes it even more, not less timely, to focus on enhancing
corporate governance. Why wait for another financial crisis
when we can strengthen our defenses now?
Fourth- good corporate governance is the right thing to do.
It’s honest. It’s ethical. It builds trust. It gains confidence. It
keeps confidence. Investors like that. Customers like that.
Employees like that. People like that. Well governed, well
run companies attract investment. More investment means
more growth. And more jobs.
Companies in the Philippines have come a long way in
improving their corporate governance practices. Just 10
years ago, "corporate governance" was not even part of the
vocabulary of most companies. Now, as we have just seen
from the AIM report on the 100 largest publicly listed
companies, more and more companies are implementing
globally recognized best practices. But the country still has
a long way to go.
Admittedly, there are features in the corporate landscape in
the Philippines, common to other countries in Asia, that can
make adherence to good corporate governance practices a
particular challenge.
1. Ownership in the Philippine corporate sector is highly
concentrated, and family affiliations are still very
important. While there’s nothing inherently wrong with
this, it does mean we- and the investing public- should
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be mindful of potential conflicts of interest between
controlling and minority shareholders.
2. On many measures, our capital markets- whether
equity or debt- aren’t as developed as they are in other
jurisdictions. Our investor base is still quite narrow, and
our trading volumes still quite low. This means there is
still significant scope for the demand for good corporate
governance to increase.
3. Minority shareholders’ rights aren’t as well developed
as they are in more developed jurisdictions. The issue
often isn’t the lack of legal protection, as in laws, but
rather weak enforcement of laws, weak regulatory
agencies, and weak judicial institutions.
4. We have significant room to improve in terms of
transparency and the quality of disclosure in our listed
companies.
Addressing these challenges is a joint responsibility of the
private sector and the government. Events such as this are
an encouraging sign that the private sector is taking the lead
in promoting better corporate governance, and the
government supports such endeavours wholeheartedly. On
the government’s part, much of the feedback, advice, and to
be frank, complaints we’ve been hearing revolve around the
need to more effectively enforce already existing regulations
and laws. We’re hearing that the enforcement powers of the
Securities and Exchange Commission need to be
strengthened, and that companies and corporate officers
found to be in violation of their obligations must be
adequately penalized. We’re hearing that the judicial system
needs to work much harder to convince aggrieved investorsthe victims of poor corporate governance in the first
instance- that they have recourse to the law if they feel their
rights have been violated. We’re certainly open to hearing
your opinions on other things the government should be
paying attention to.
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To create integrity in the market, however, the government
cannot do it alone. Investors and the securities firms which
profit from the capital markets need to do their share. Board
directors have a particularly weighty responsibility to
oversee what happens in their companies, and by their
example, set a tone for the entire company. Other
professionals- auditors, accountants and lawyers, or
example- should follow strict standards and guidelines for
promoting good corporate governance. Their role is to
provide an independent assessment of a company’s
compliance with laws and regulations, and they can be
effective bulwarks against questionable business practices.
We hope that the AIM study of corporate governance trends
will make specific recommendations, highlighting what needs
to be done and by whom, so that we have a common
blueprint to work from.
So far I’ve been talking about corporate governance in the
private sector. Let me now speak for a few minutes about
the public corporate sector. Corporate governance concerns
in the public sector may not be your primary focus here
today. But as citizens and stakeholders in this country, you
have a stake in them too.
Government-owned corporations face even greater
governance challenges than listed companies. Government
owned corporations have multiple, and often competing
mandates, of which maximizing shareholder value- or
profits- is only one, sometimes not even the most important
one. In some cases, it is simply impossible for government
owned corporations to make money. In not all, but many
cases, government-owned corporations have been used as
instruments of policy and patronage. Appointments to
executive and board positions have often been made on the
basis of politics rather than competence. In many instances,
corporate boards do not act in the best interests of the
government- in some instances, there have even been well6
publicized conflicts between government-appointed boards
and the government itself. The government itself- as
shareholder of these companies- doesn’t always speak with
one voice. Transparency- or more accurately, the lack of
transparency- is an even greater issue in the public sector
than in the private sector. The most palpable impact of this
for us at the Department of Finance has been a build-up in
debt which will eventually have to be paid by government- a
build up you may not see if you were paying attention just
to national government fiscal aggregates and not the fine
print. But there are other things to be concerned aboutsuch as high amounts of financial risk, poor quality of public
services, and corruption.
Changing a situation which has taken decades to get to this
will not be easy, but we plan to work very hard at it. We are
developing tools which will enable us to objectively evaluate
the performance of GOCCs, their management, and their
boards. We intend to write, execute, and enforce
agreements between the government and GOCC board
members which will commit them to faithfully execute their
mandates to promote the government’s interests, with a
particular focus on the financial health of their respective
companies, and spell out sanctions for those who fail to
meet these responsibilities. We are reviewing the operations
and finances of the largest GOCCs, company by company, to
come up with realistic financial and operational targets for
the short- and medium-term. We will seek consensus among
the various government agencies involved on the way
forward, so we can work together toward common goals. If
you’ve heard this all before, and are cynical about it, you
have every right to be. It’s up to us to win your confidence
and trust, but it’s up to you to give us your support and
ideas.
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