Bribery, account fraud, and embezzlement are common practices in many developing countries- the Philippines is no exception. According to the Corruption Perceptions Index 2011 released by Transparency International, a watchdog on public sector corruption, the Philippines was ranked 129th (1 being the cleanest) among 183 countries in terms of how corrupt a country’s public sector is perceived to be (“Corruption by Country.” Transparency International). One of the most recent examples of such behavior occurred in March of this year when the husband of the former Philippine president, Gloria Macapagal-Arroyo, was arrested on charges of accepting millions of dollars from a Chinese telecommunications company, ZTE Corporation, to push through a $330 million government project, which was originally priced at $130 million. This incidence of bribery is part of a wide-ranging prosecution of alleged corruption during Arroyo’s presidency and is believed to have not been investigated properly because she barred top officials from disclosing further details that might have implicated her (“Arroyo Husband’s Arrest Ordered in Bribery Case.” San Francisco Chronicle. March 13, 2012). This kind of case suggests the abuse of power by not only leaders, but also their family members, due to the overwhelming authority of leaders in the Philippines and other similar markets. In our opinion, it also indicates severe organizational and procedural weaknesses and a lack of transparency and accountability.
While such nationally-recognized corruption has not been reported in the corporate sector, people believe such practices are common there too and that the culture of corruption endemic to Philippine politics has delayed the development of sound corporate governance practices in the market. According to Corporate Governance Watch 2010, a survey conducted by CLSA regarding corporate governance practices in Asia, the Philippines came in last place with a score that dropped from 41% in 2007 to 27% in 2010. It appears that the lack of maturity of the corporate governance regime has lead to a confidence gap that has in turn discouraged foreign investment.
However, necessary reform efforts have begun in both the public and corporate sectors, specifically in the publicly listed company sector, to improve market position and pursue a higher standard of transparency and accountability. In January 2012, Philippine President Aquino approved the Good Governance and Anti-Corruption Plan (the “Plan”) to attack the country’s systematic corruption. The Plan pledges to curb corruption, improve delivery of public services and enhance the business and economic environment by providing the public with greater access to information like government projects, budgets and spending (“Palace Approves Plan on Good Governance.” The Manila Time. January 4, 2012).
Furthermore, with the benefits of recent political changes and inspiration taken from the Brazilian stock market, the Philippine Stock Exchange (the “PSE”) has been restructuring its stock market to attract global investors. Following the lead of the Novo Mercado, a market practice pursuant to which companies listed on BM&F Bovespa, a Brazilian stock exchange, voluntarily adopt corporate governance practices in addition to and more stringent than those required by law, the PSE plans to introduce a similar practice (“Philippine Stock Exchange Launches Project Inspired by the Novo Mercado.” Capital Aberto. May 2010). It is planning to launch the Maharika Board. Similar to the Novo Mercado system, companies to be listed on the Maharika Board will voluntarily abide by more stringent corporate governance practices than the current legal requirements. For example, the board independence requirement will be increased to 30% from the current requirement of two independent directors or 20% of the board, whichever is lower. In addition, directors’ board memberships will be limited to six, and directors’ terms of office cannot exceed five years. More significantly, it will implement a “one share one vote” system to provide equal and fair voting rights among all shareholders. The PSE also stated that the rules aim to ensure the rights of minority shareholders by granting them the right to nominate independent director candidates (“Maharika Board Launch Deferred to 2012.” Philippine Daily Inquirer. October 3, 2012).
Alongside the reforms by the authorities, in June 2012, a minority shareholders’ group, Shareholders’ Association of the Philippines (“SharePhil”), was formed by a group of corporate governance advocates in an effort to promote good corporate governance in the Philippines. One of the main concerns in this market has been the extensive family control of large conglomerates that offer little protection to minority shareholders. It is common to see founding family members continue to be substantial shareholders or fill a majority of board positions. These family-owned business groups, such as the Ayala Group and the Lopez Group, are dominant and have strong influence in the market. According to SharePhil, the Philippines was ranked at the bottom in terms of corporate governance among 11 Southeast Asian countries. To establish protection of minority shareholders and improve Philippine corporate governance practices, SharePhil stated that it will endeavor to promote Philippine market development through advocating the protection and promotion of shareholder rights, duties and responsibilities (“A Shareholders’ Association at Last!” Philippine Daily Inquirer. June 21, 2012).
It’s time for a change in the Philippines. The Philippine economy has been gaining recognition of late as a hidden gem within the Asian economies. We are optimistic that all the developments discussed above will present opportunities to enhance the governance structure of both the political and business arenas. Furthermore, the reforms can work to improve the market’s international profile by gaining trust from global investors and attracting those who want to invest in more transparently-run government and listed companies.
Article by Naoko Ueno
Edited by Hae Eun Jang
Image via iStockphoto.