MANILA, Philippines - A toothless regulatory environment, undermined in part by political agendas, has pushed Philippine companies to lag behind its Asian counterparts in terms of corporate governance.
According to Corporate Governance Watch 2010 by Hong Kong-based brokerage firm CLSA, “the most disappointing market…is the Philippines, which achieved what it has long threatened since we began this survey - last place, with its score dropping from 41% in 2007 to 27%.”
Available codes and securities laws, in fact, lag behind international and even regional best practices. The worst thing is that “regulators and companies seem unaware of the problem.”
The Philippines’ scores in all categories included in the study in fact fell, with the exception of the accounting and auditing principles. Nonetheless, every market in the survey scored relatively well in this particular category.
The survey specifically took note of International Container Terminal Services and San Miguel Corp. which both “disenfranchised minority shareholders of their rights of pre-emption by changing their bylaws.”
CLSA said that larger-market-cap companies such as these 2 should have improved vis-à-vis its regional counterparts.
SMC, for example, has even regressed.
The survey particularly noted its disclosure, or the lack of it, of price-sensitive information and related-party transactions.
“In July 2010 alone, the [Philippine Stock Exchange] wrote to San Miguel 3 times to clarify material information that had leaked to the press before the firm had informed the market, a sign that the regime for disclosure of price-sensitive information is woefully inadequate,” it said.
This could well be blamed on the dismal effort from regulators to enforce rules. Enforcement fell to 15% from 19% in 2007.
The local bourse made “interesting moves” in 2009, for example, when it criticized brokers who had breached rules.
Still, “many listed firms in the Philippines ignore the [Securities and Exchange Commission] and PSE and continue to flaunt the rules as they regard the regulators as toothless.
SEC, for its part, lacks the necessary resource and power such as those of the Bangko Sentral ng Pilipinas.
Many of its “enforcement actions” revolve around issuing fines, petty compared to more substantive issues.
“In its 2009 annual report, it even boasted, ‘the SEC managed to meet, and in fact exceeded, its financial commitments to the national government.’ It must be the only securities regulator in Asia that would make such a statement.”
It has sometimes become more of a cash cow for the government, CLSA said.
Ironically, it still has to tap from the government funds, albeit insufficient, to operate every year.
Corporate governance a low priority
“We understand that it spends a significant amount of its time securing this much-needed, yet ultimately inadequate budget. This is a great shame, since the SEC could become a force to be reckoned with in the Philippine capital markets if it was afforded a proper budget and allowed to use the money it generates to invest in good people, systems and enforcement,” the survey added.
Sadly, this can be blamed in part on the political environment, it said.
“The Philippines clearly went backwards over the past few years under the previous administration,” it said.
CLSA also took note of the “corporate governance culture,” or the category that broadly looks at what companies, intermediaries, non-profit organization and the media are doing voluntarily to raise standards.
It plunged to 25% from 36% in 2007, the lowest score among the other Asian countries.
“Corruption levels appear to have risen, political interference has increased and, with toothless regulators expected to operate on shoestring budgets, it is perhaps not surprising that some large companies have felt little compunction in dismantling the pre-emption rights of their shareholders,” CLSA noted.
Investments scurrying away
Because of all these, investors “seem to have thrown in the towel.”
Investment institutions have also reported unwillingness among companies to engage in real dialogue with their shareholders…foreign ownership of the local market has been in steady decline in the past few years and foreign direct investment is the lowest of any of the markets in our survey.”
CLSA said it is hard to provide optimism for a country “that has stagnated politically for so long [with the previous administration] mired in corruption scandals and allegations.”
Nonetheless, the new administration may bring in some needed change, it said.
“Perhaps the best that can be said about the Philippines is that it has a new political administration that wants to eradicate corruption and raise governance standards generally,” CLSA said.