Corporate governance issues haunt PSE

By Judith Balea,

Posted at Oct 29 2009 04:09 PM | Updated as of Jan 26 2010 04:06 AM

MANILA – While the Philippine Stock Exchange (PSE) has grand visions of playing a role in guiding listed firms into corporate governance stature and aims to pioneer in Asia a listings board that highlights the "blue chips of blue chips," recent incidents at the bourse show it is having trouble keeping its own house in order. 

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Key management officials have left the exchange almost one after the other in the past 8 months. Coffee shop talks have been rife that even PSE president and chief executive officer Francis Lim’s supposedly secured tenure is on the line—a persistent rumor that has gone through the cycles and has been growing louder in recent weeks.

It didn’t help that in July, an encounter between a board director and a mid-level executive in a public place fueled an already gloomy disposition of some staff.

Meantime, the Securities and Exchange Commission (SEC), the corporate regulator that oversees the PSE, has not been consistent. It stayed back when PSE elevated some exchange- and investor-related concerns, but intervened when there were listed companies that defied PSE’s rules.

While some issues besetting the exchange involve personality differences, some are symptoms that the same problems that led to the infamous BW Resources scandal almost a decade ago have not been completely addressed despite the passing of the Revised Securities Regulation Code (SRC) in 2000.

The recent goings-on at PSE show how its dual and conflicting roles—as a self-regulatory organization (SRO) and a revenue-generating corporation—have dragged the exchange from fulfilling efforts to live by strict corporate governance standards.

Board-management face-off

So far, 4 officials have left the exchange in a span of 8 months.

Last month, Joseph San Pedro, vice president and head of the Market Regulation Division (MRD), agreed to have his working contract bought out after a disagreement with some brokers. Prior to his departure was the sudden resignation of Conchita Manabat, a stalwart in the local auditing industry, who cut short her stint as head of the bourse's Market Integrity Board (MIB).

The MIB, an autonomous regulatory body under the PSE board, was created as the semi-cure of the post-BW scandal lesson that there should at least be a filter between the PSE board, where some directors are also brokers, and the MRD, which has the line function of policing the activities of brokers and listed companies.

The MIB affirms and could reverse or modify decisions made by the MRD. The MIB's decisions, in turn, can be overturned by majority of the PSE board and be appealed before the SEC.

Sources said results of a recent MRD-led audit—which found 55 of all 66 brokerage firms in violation of the SRC and PSE rules and regulations, and was published online—caught the ire of some board directors who held key positions in some of these firms. One of them was Ismael Cruz, PSE director and president of IGC Securities Inc., a brokerage firm.

The audit results became the backdrop of an incident at the PSE Makati branch’s Brokers’ Lounge in July. Cruz reportedly berated PSE assistant vice president Jinky Alora, head of the Trading Participants Regulation Department, a division under the MRD. The incident reportedly occurred in full view of the restaurant’s patrons. (READ: PSE board member, officer face off)

Then 82 PSE employees who sided with Alora wrote a manifesto to the board denouncing Cruz's "unbecoming conduct" as a broker-director. In turn, Cruz reportedly wrote the PSE's Human Resource Department, asking for the names of the signatories and threatening to file libel charges against them.

In a phone interview with, Cruz said "This manifesto is a form of mob rule. It's very unprofessional.” Cruz is appealing the MRD’s and MIB’s decisions before the SEC, which is expected to come up with its own ruling in 2 weeks.

Disclosure rules

It was not the first time that the PSE board and management got tangled in a dispute that reportedly led to the departure of some officials.

Last March, Pete Malabanan, who headed the PSE’s Disclosure Department, retired. Roy Joseph Rafols, PSE’s chief operating officer and concurrent head of the Issuer Regulation Division, also left when the board decided not to renew his contract in September.

Rafols and Malabanan headed units responsible for going after listed companies violating disclosure rules—a key regulatory function of the exchange considering that it aims to ensure that investors have a fair and equal access to market-moving information from the listed companies.

Disclosure rules are quite straightforward. Listed firms are compelled to inform the exchange—sometimes as fast as 10 minutes after an event or decision—details as simple as who are the key officials a firm hired, to more complicated ones like plans and execution of mergers and acquisitions. The exchange would then promptly post the correspondences on its website so investors and analysts can factor these in their pencil pushing, which could then result in decisions to buy, sell or hold on to the firms' stocks.

Malabanan and Rafols had brushes with PSE directors last January when they threatened to sanction diversified conglomerate San Miguel Corp. for failing to disclose more information about a deal involving its purchase of an indirect majority stake in Petron Corp.

The disclosure and the issuer regulation units wrote a show-cause letter to San Miguel, asking for a copy of its contract with Petron, which in turn insisted it was bound by a confidentiality agreement. The following day, however, PSE President and CEO Francis Lim told reporters that the exchange had abandoned its demand for a copy of the agreement, and that the show-cause letter was overridden by the PSE’s board of directors.

Weeks before, Lim was rumored to be facing the possibility of being axed for failing to keep his lieutenants in tow with the leanings of majority of the board members in the case of San Miguel. Lim had denied this. The rumors died after Lim was re-elected to another 2-year term during the PSE’s stockholders meeting last May.

Recently, talks have been rife again that Lim may go the way of San Pedro, whose contract was bought out, in the aftermath of the Cruz-Alora episode at the Brokers’ Lounge. Lim has yet to confirm this.

Conflicts of interest

These board-management disputes reflect the exchange’s struggle for enhanced corporate governance, and raise the question as to whether previous reforms have been able to fully address conflict-of-interest concerns that threaten the exchange’s ability to self-police.

Conflict of interest occurs when an individual or organization is involved in multiple interests, one of which could possibly corrupt the motivation to fulfill the other.

In the case of San Miguel, what appeared to be PSE’s leniency in imposing rules, sanctions and penalties illustrates how it is caught in an inherent dilemma of balancing promoting investments and maximizing profits, and protecting investors by imposing high regulatory standards on listed companies. For example, a trading suspension on actively traded shares of big companies like San Miguel would mean less revenue for PSE since it earns huge fees from trading activities, apart from listings and public offerings.

The case of Cruz as a broker-director, meanwhile, is a more complicated one.

As a broker, when his company was found to be in violation of certain rules, he said he had the right to file an appeal, and argue his case to the fullest extent under the law. He added that talking to an officer of the MRD to air out his side could pass up as doing such.

However, as a director, he is subject to higher standards enshrined in the exchange’s Code of Ethical Behavior for Directors. His encounter with the MRD officer, add to that the written letter to the HR Department about the employees’ manifesto, were intimidating and have caused fear among employees, one source intimately familiar with the goings-on at PSE said.

Furthermore, taking into account Cruz’s claim that the manifesto was a “mob rule” and “very unprofessional”, the normal course of business was to bring the matter to the board, which in turn will decide as a collegial body with oversight duties over management on what actions to take. Such actions are normally coursed through the president or CEO. Thus, for Cruz to go directly to HR in his own capacity was “crossing-the-line," the source noted.

The corporate regulator

Where is the SEC in all these?

Specifically for disclosure-related issues, the corporate regulator had intervened in at least 2 cases involving listed firms, San Miguel and Benguet Corporation. They failed to meet disclosure rules.

Last August, San Miguel failed to meet a deadline in submitting its quarterly financial status report that, according to PSE’s disclosure rules, should have merited a trading suspension. However, SEC instructed the exchange to delay the deadline, in effect sparing the rod on San Miguel. (READ: PSE, SEC spare rod for San Miguel)

In the case of Benguet Corp, the SEC again intervened. Last October 27, trading of Benguet shares was supposed to be suspended for a month since the mining firm failed to disclose notices of default from its creditors—a material information since the firm’s key mining properties, which were used as collateral for the P1.2 billion loan balance, could likely be foreclosed.

On the eleventh hour—in the afternoon of October 26—the SEC, which received a letter from Benguet, instructed the exchange not to proceed with the trading halt. (READ: SEC bars PSE from halting trade of Benguet shares and SEC’s reply: SEC defends putting off Benguet suspension

In 2000, the Revised SRC, which was passed after the BW scandal, granted the PSE a Self-Regulatory Organization (SRO) status. This allows the exchange to rule on issues related to brokers and listed companies on its own.

But while the SEC intervened in matters that the PSE could decide on its own, it also cited the exchange's SRO status when it took a hands-off position on some issues.

For example, when Alora wrote the SEC about Cruz’s actions at the Brokers Lounge, the SEC tossed back the complaint to the exchange, citing that the case is under the purview of the MIB.

BW Resources

Various conflict-of-interest concerns crop up, time and again, and cast doubt about the ability of the PSE to police its own ranks as part of its highest mandate to protect public investors.

These were what the SRC was seeking to address when it was passed after the BW Resources case, probably the worst of all corporate governance scandals and the most devastating scam that left the PSE on the brink of collapse.

An exhaustive investigation into the scandal back then concluded that owners of BW Resources and some brokers were manipulating the gaming company’s stock price, which skyrocketed to over P100 per share from just less than P1 over a one-year period. Investigation showed fraudulent matched orders and wash sales in which the seller and buyer were one and the same person.

Brokers back then owned 100% of the stock exchange. After the passing of the SRC—which required that the PSE be made public, that brokers’ ownership be diluted, and majority of its board of directors and management be non-brokers—brokers' ownership of the exchange has been reduced to about 38%.

This is still a long way from the 20% broker ownership that the SRC mandated. The SEC has been granting the exchange "exemptive relief," a legal lingo for allowing PSE to be exempted from the SRC provision on broker ownership. The SEC also slaps the exchange a P500 a-day fine.

Brokers currently have 6 of the 15 seats in the PSE board. Some brokers have also clinched several official positions in the exchange, including the posts for corporate secretary and treasurer. While the SRC bans brokers from holding management positions, the SEC has again provided exemptive relief on this SRC provision to the PSE. (READ: PSE appointments raise conflict-of-interest concerns)

What to do?

Since controversies continue to hound the exchange, what other reforms could possibly be done?

Conflict-of-interest inherent in bourses


The inherent dilemma of the Philippine Stock Exchange (PSE) to strike a balance between promoting investments and imposing strict regulation is something that is common to all stock exchanges, based on a study by the Organization of Economic Cooperation and Development (OECD).

The OECD study underlined that exchanges face potential conflicts of interest in “the maintenance of a proper balance between an exchange’s public interest obligations and its commercial interests, and the potential misuse of regulatory powers for commercial purposes.”
Read more

A long-term solution to the conflict of interest issues at the exchange is the eventual separation of the PSE’s regulatory role over the brokers (currently handled by the MRD and MIB) and its profit-making function (READ: Conflict of interest inherent in bourses), a well-placed and progressive-thinking official of the local bourse told The official requested not to be named.

A proposed initial step was the creation of a third party—the Council of Elders—that was initially intended to deliberate and make recommendations to the board on the complaint against Cruz. (Cruz’s behavior as a broker is under the purview of the MIB. But as a director, it’s under the board.)

The exchange was planning to tap retired Senior Associate Supreme Court Justice Jose Vitug, former PSE president Ernest Leung, and former SEC commissioner Monico Jacob as members of the Council.

The Council was designed to eventually propose that the regulatory role of the PSE be spun off into another organization, itself with an SRO status.

As of writing, this plan has not gained ground.

Meantime, another official is leaving the PSE early next year. PSE corporate governance head Jonathan Juan Moreno will no longer be renewing his contract. - Text and graphics by Judith Balea,