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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. 2 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 3 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 4 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. 5 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. 7