As is usual in public-private partnerships, the breakthrough initiatives were led by the private sector, specifically the Institute of Corporate Directors (ICD) and the Institute of Solidarity for Asia (ISA), with the full support of the stakeholders of corporations.

After all, the ones who benefit most from good governance are the shareholders, employees, suppliers, financiers and their social contacts, such as the customers, community and environment.

But the private sector initiatives would not have made much impact without the policy and implementation support from its public sector partners.

Improving credibility

In this case, the Philippine Stock Exchange (PSE) saw the improving credibility of the local listed companies as a mean of generating more interest in its small market, to make it grow and be comparable with the rest of the region.

The regulators, Securities and Exchange Commission (SEC), the Bangko Sentral ng Pilipinas (BSP) and the Insurance Commission rallied around the move for better governance of their constituents.

The competitiveness rating institutions have taken note of the growing interest and improvements in governance, which they reflected in better positions for the country in general.

For instance, the Financial Standards Foundation has upgraded the Philippines to No. 23 out of 81 countries in the fields of compliance with banking, securities, insurance and corporate governance. The same situation was noted by World Competitiveness Yearbook, which is produced by IMD and by the WB Institute.

On the other hand, the World Economic Forum seems to be getting its data from other sources and have not noted any improvements.

This is a topic which the ICD and the ISA will discuss with WEF with the help of their local partner, the Makati Business Club.

This is probably the reason why, during the recent financial crisis brought about by the American housing mortgage/investment fiasco, the Philippine financial institutions were spared.

The solid condition of our institutions was the result of strict, straight-cut requirements of the BSP, which brought about improved client confidence in our banking system.

OECD recognized earlier the leading role of the Philippines in improving awareness and expertise in the field of corporate governance. It is for this reason that it organized the Asian Competitiveness Summit in Manila in 2007.

Its ambition was not merely to comply with regulations of government bodies, but to move on to achieve superior performance of corporations as a result of good governance and become reliable options for global investors interested in emerging markets.

It was also the intention to expand the acceptance of good governance principles even by nonlisted private firms, small and family corporations, even by government agencies.

Now, around 20-30 percent of firms listed on the PSE have achieved satisfactory grades in the annual corporate scorecards conducted by ICD, Ateneo Law School and Institute of Internal Auditors.

What about the government corporations which have been the subject of much adverse publicity recently due to the abuses of their board members and the ineptness of their management?

To be fair, there are some GOCCs, who have taken the straight and narrow paths for the benefit of their stakeholders.

In the same vein, there are family-controlled firms and conglomerates run by the absolute majority blocs who are still carving their paths to mainstream good governance.

Their board members, genuinely interested in achieving breakthrough results in their respective organizations, have been undergoing serious consultations with their more experienced colleagues in the form of board retreats and discussions.

In the last couple of days, the industry giants San Miguel Corporation and International Container Terminal Services Inc. were singled out by Hong Kong-based CG Watch 2010 Report for “lack of transparency, and loose policy conditions which are detrimental to their small shareholders”.

The above groups of companies can take comfort from the fact that there are many opportunities for improvement that are now available, many of which can help them become world-class performers in a reasonably short timeframe.

Dr. David Norton, the inventor of the Balanced Scorecard which was developed in Harvard Business School, was recently in Manila to assist Philippine organizations, both public and private in improving their level of governance with the use of appropriate strategies and with the proper execution of these strategies.

Role models

During the Governance Summit attended by hundreds of CEOs, Dr. Norton noted that these are many solid firms that can be used as models for transformation such as those in the top 20 of the Corporate Governance Scorecard.

Many good practices can be shared by these firms with others who are willing to move up the ladder of excellence to keep up with the global demands.

SEC, BSP and the PSE have been tightening the pertinent regulations to achieve the same objective. The ICD has more than 150 fellows who were selected on the basis of their education and experience on good governance, their values and their advocacy to make Good Governance (GG) principles be the norm by the wider sphere of business and government communities.

We do not suffer from a lack of expertise. What is needed is “political will” of the corporations’ top honchos to undertake change management steps and achieve performance upgrades through GG.

With the new administration under President Aquino, there is no reason to doubt that the pursuit of good governance at both the private and government sectors will continue at a faster rate.

One of the cornerstones of the government projects, which the country has undertaken to pursue with the US Millennium Challenge Corporation, is the adoption of the Performance Governance System (Balanced Scorecard) in six national government agencies and in some LGUs, championed by Dr. Jesus Estanislao of ICD/ISA. To date, some of our LGUs are already considered as among the best in the region.

With the no-nonsense approach against corruption by the President and with the adoption of good governance principles by the Philippine firms, business confidence is being perked up, which should increase investment and make the local bourse comparable in size with the rest of our bigger neighbors.

Good governance

The Ten Tenets of Good Governance as espoused by the international community are really quite straightforward as shown below. The challenge for the boards is in the strict compliance to these tenets and in faithful execution:

1. Develop and execute a sound business strategy

Shareholder return is optimized. In every board meeting, a strategic issue is covered.

2. Establish a well structured and functioning board

Board creates value for the enterprise. Directors with proven competence and integrity, 30 percent of whom are independent.

3. Maintain a robust internal audit and control system

Enhance operational effectiveness, deter fraud, safeguard company assets, and ensure compliance. Report to the Board through the Audit Committee.

4. RESPECT AND PROTECT THE RIGHTS OF SHAREHOLDERS, PARTICULARLY THOSE THAT BELONG TO THE MINORITY.

The governing principle is “One Share, One Vote” with basic political, economic and governance in an equitable, timely and transparent manner.

5. ENSURE THE INTEGRITY OF FINANCIAL REPORTS AS WELL AS EXTERNAL AUDITING FUNCTION

External auditors must be beyond reproach, with transparent fees. Board Audit Committees conduct regular meetings with external auditors without management present.

6. RECOGNIZE AND MANAGE RISKS

Enterprise-wide Risk Management system should be in place and properly functioning.

A board committee should oversee this function in line with international frameworks.

7. ADOPT AND IMPLEMENT AN INTERNATIONALLY-ACCEPTED DISCLOSURE AND TRANSPARENCY REGIME

Material information should be disclosed fully, fairly and accurately. Have written policies to ensure compliance of disclosure rules.

8. RESPECT AND PROTECT THE RIGHTS AND INTERESTS OF EMPLOYEES, COMMUNITY, ENVIRONMENT AND OTHER STAKEHOLDERS

Corporations should manage the social, environmental and governance aspects of their suppliers, creditors, community and environment with annual reviews.

9. DO NOT ENGAGE IN ABUSIVE RELATED-PARTY TRANSACTIONS AND INSIDER TRADING

Have a written policy on transactions with related parties, defining the transactions per accounting standards.

10. DEVELOP AND NURTURE A CULTURE OF ETHICS, COMPLIANCE AND ENFORCEMENT

Adopt a code of ethics that guides corporate and individual behavior for strict compliance. Have a clear policy against offering, paying or receiving bribes. Designate the compliance officer to be responsible for the execution of the activities.

Indeed, the Good Governance Eagle has landed on our country. If managed properly, governance can help address our priority objective; which is generating meaningful employment opportunities to halve poverty in the next few years.

By Cesar B. Bautista
Philippine Daily Inquirer
First Posted 00:18:00 10/04/2010

(The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines. The author is the present private-sector Co-Chair of the National Competitiveness Council and former Secretary of the Department of Trade and Industry. Feedback at map [at] globelines [dot] com [dot] ph. For previous articles, please visit .)