Under the aegis of “Building a Stronger Corporate Governance Framework,” the Securities and Exchange Commission (SEC), under Chairperson Teresita Herbosa, formally promulgated the Philippine Corporate Governance Blueprint 2015 that embodied the SEC’s corporate governance (CG) roadmap for the next five years that would see the adoption of a new Code of CG, and pursue amendments to the Corporation Code of the Philippines that “shall raise CG standards to a level at par with global standards and ultimately, contribute to the development of the Philippine capital market. Moreover, the CG Blueprint clearly shows SEC’s objective to have all corporations recognize and accept the globally recognized best practices, which, presently, is formally adopted mainly for PLCs.”
The 2015 CG Blueprint took into consideration the then recently released “G20/OECD Principles of Corporate Governance,” which provides “an articulation of the global CG principles as the framework for further strengthening the CG regime in the Philippines.” Further, it put forward “specific and concrete guidelines for all Philippine corporation to adopt, taking into account the Philippine context and the recommended global and ASEAN best practices found in the ASEAN Corporate Governance Scorecard (ACGS) … [which] provides for a methodology to assess the CG performance of publicly listed companies (PLCs) in the six participating ASEAN countries namely: The Philippines, Indonesia, Malaysia, Singapore, Thailand, and Vietnam.”
The 2015 CG Blueprint identified the strategic priorities and recommended courses of action within a five-year implementation plan to further strengthen the CG framework for all Philippine corporations in order to achieve, among other objectives, the following: a.) To nurture sustainable transformative corporate performance, which not only optimizes shareholder value but, more importantly, stakeholder value; b.) To deepen the relationship of trust and collaboration among Philippine corporations, stakeholders, and regulators working towards inclusive national economic progress and social equity transcending favorable business outcomes; and, c.) To improve the functioning of the Philippine financial market and facilitate inclusive national development.
‘COMPLY OR EXPLAIN’ OPERATIVE PRINCIPLE IN CG REFORMS
The 2015 CG Blueprint provides that broad CG guidelines and recommended best-practices are expected to be observed under the “comply or explain” operative principle, whereby Philippine publicly held companies are to comply with the CG practices to be set out in the 2016 Code of CG: “If they do not comply with the same, an explanation for the non-compliance shall be given, which shall be disclosed to the SEC in a report that shall be available to the public, including the company’s shareholders and other stakeholders.” It cites Sir Christopher Hogg in giving the “Rationale for the Comply or Explain Approach,” thus:
It leaves decisions about the appropriateness of a company’s governance arrangements in the hands of its management and shareholders. In most cases, the primary purpose of good governance is to protect the long-term interests of the company and its owners, so it is right that, collectively, they should decide how to achieve that objective. In certain companies or sectors there may also be public interest considerations, in which case the arguments for a more traditional approach to regulation may be stronger.
While it encourages companies to follow accepted best practices, it recognizes that in certain circumstances it may be appropriate for them to achieve good governance by other means. To be effective, good governance needs to be implemented in a way that fits the culture and organization of the individual company; these can vary enormously between companies depending on factors, such as size, ownership structure, and the complexity of the business model. In general, one size does not fit all.
By allowing a degree of flexibility, it enables codes to set more demanding standards. It can be more aspirational than legislation. Regulation tends to be written in terms of the minimum necessary requirements in order not to impose unjustified or disproportionate burdens on those being regulated. In contrast, a “comply or explain” code can set out market-leading practices and encourage the rest to aspire to the standards of the best.
The code can also be more easily adapted than regulation to take account of developments in best practices and encourage good practices relating to “softer” issues for which it would be inappropriate to prescribe minimum requirements into law, such as training and support of directors.
THE CODE OF CG FOR PLCs
In November 2016, the SEC promulgated the Code of CG for Publicly-Listed Companies, which replaced the 2014 Revised CG Code, as well as other supporting memoranda, as they applied to publicly listed companies (PLCs), with the avowed purpose “to raise the CG standards of Philippine corporations to a level at par with its regional and global counterparts,” and affirming that the OECD Principles of CG and the ASEAN CG Scorecards were used as key reference materials in drafting the Code.
A key feature of the CG Code for PLCs is the adoption of the “comply or explain approach” which combines the voluntary compliance with mandatory disclosure: “Companies do not have to comply with the Code, but they must state in their annual CG reports whether they comply with the Code provisions, identify any areas of non-compliance, and explain the reasons for non-compliance.”
The CG Code for PLCs does not therefore contain any penalty clause, and through its “comply or explain approach” relies upon the “pressure of the market” to goad PLCs to adopt its governance principles and recommended best practices. One of the outstanding features therefore of the CG Code for PLCs is its underlying belief in the “disciplining power of the market,” thus:
• The Boards of Directors and the Management of publicly listed companies (PLCs), not the SEC, are in a better position to evolve, develop and implement within their particular industry and company culture and structures the CG principles embodied in the Code;
• That “market forces,” i.e., the negative reaction of the public investors who may dump the company’s shares when they see a grievous violation of CG principles and recommendations under the Code, has a more coercive effect on the Boards and Management of PLCs on the manner of implementation of the CG principles embodied in the Code.
The principles-based and market-disciplining features of the CG Code for PLCs provides for the following advantageous features:
a.) Principles-based governance reforms, as contrasted from “rules-based” reforms, are able to capture within its coverage all possible scenarios or situations that would confront the Boards of Directors and Management of PLCs with very little danger of loopholes that can be exploited.
b.) A principles-based system of CG has a greater tendency to change the hearts and minds of Boards and Management since in determining whether to act one way or the other in a corporate transaction, they really need to understand the meaning and coverage of the principle to determine whether the corporate act would be consistent with or contravene the covering principle.
c.) Market-disciplining features of the CG reform would likely have a more personal effect on the exercise of business judgment of directors and senior officers since they may in fact lose their jobs against an investing public that does not approve of their non-compliance with what are recommended to be CG best-practices.
On the other hand, the principles-based and market-disciplining features of the CG Code for PLCs has a few, yet important, downsides.
Firstly, such features operate effectively only in a securities market where the ownership of PLCs are widely dispersed, and there is not a group of shareholders who control the equity and thereby be able to control the majority of the Board of Directors. In widely held public companies, the members of the Board are elected basically on the merits of their agenda presented to the voting investors at large; and are able to retain their positions in the Board over the years by being responsive to the best interests of the investing public.
This is not the case among Philippine PLCs, where most of the listed companies are really family-owned and controlled companies, and where the public float is rather minimal. In effect, the market-disciplining force of the investing public would not be as effective a disciplining force versus the majority and controlling shareholders, who, as the biggest block of equity holders, are expected to run the company to maximize their returns, through the majority members of the Boards whom they are able to elect into office.
Secondly, the market-disciplining feature would be more effective where the Boards and Management of most of the PLCs are professional managers and accountable to a large investing public. The Board composition in our PLC sector, even with system of independent directors introduced by the Securities Regulation Code, are still majority-constituted directors who are elected by the controlling family or group, and often the Chair as head of the Board and/or CEO, as the head of Management, come from the family or group that holds the controlling equity in the company. In effect, the market-disciplining force of the investing public (who constitute the minority shareholders) would not have a robust “coercive influence” against the Board, the majority of whom effectively represent the interest of the controlling family or group.
Thirdly, even in situations where the market-disciplining features have a strong coercive effect on the Board and Management, the legal effect is that only the shareholders of a PLC would have a real voice in goading their Boards and Management to listen to them, and thereby effectively place all other stakeholders in a nominal position to influence actions and actuations of the Boards and Management.
It was under such a CG milieu that in February 2019, the Revised Corporate Code was promulgated that changed the landscape of CG reform movement in the Philippines. It is the varying enforcement rules between the CG Code for PLCs and the Revised Corporation Code that shall cover discussions.
Parenthetically, it should be noted that under the aegis of the Revised Corporation Code, the SEC, under Chairman Emilio B. Aquino, issued in November 2019 the CG Code for Public Companies and Public Issuers, which essentially retained the same framework as the CG Code for PLCs.
This article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or the MAP.
Attorney Cesar L. Villanueva is Chair of the MAP Corporate Governance Committee, Trustee of the Institute of Corporate Directors, was the first Chair of Governance Commission for GOCCs August 2011 to June 2016), was Dean of the Ateneo Law School (April 2004 to September 2011), is the author of the National Book Board Award winning The Law and Practice in Philippine Corporate Governance, and a Founding Partner of Villanueva Gabionza & Dy Law Offices.