S o , What is a We ll-Go ve rne d Co mpany?

Re x C. Drilo n II
President, Institute of Corporate Directors (ICD) Trustee &Fellow, Institute for Solidarity in Asia (ISA) Consultant & Former COO, Ortigas & Company 6 May 2011

Outline
Introduction How the outside world rates PH in corporate governance How Philippines Inc. is faring using ICDs CG Scorecard So, What is a Well-Governed Company Conclusion

Rex C. Drilon II
Director and C-level executive since 1978 (FMMC Group, Philippine Fuji Xerox, J ardine Sugar, Ayala Land, Ortigas & Co., Priority Management) Recently retired Chief Operating Officer of Ortigas & Company, Limited Partnership President, Trustee, Faculty & Fellow, ICD Trustee, Fellow & Faculty, ISA Member: MAP, ILEDF Product of UP, UE and UA&P Author, Patriots on the Street [email protected] Cellno (917) 841-5570

What they said about us

The World Bank / IMF

WB-IMF assessment: Concentration of business ownership in the Philippines.
Market power Ownership of Banks Constraints to growth Inequitable treatment of minority shareholders

Unfair competitive advantage for big players Exploitation of smaller but more numerous stakeholders Funding not sustainable WB-IMF Recommendations: Philippine business has to re fo rm itself The key: Co rpo rate Go ve rnanc e

The ACGA-CLSA Report of September 2010

CG Watc h Marke t S c o re s 2010 v. 2007

Source: Asian Corporate Governance Association
Rank 1 2 3 4 5 6 7 8 9 10 11 Marke t S ing apo re Ho ng ko ng Japan Taiwan Thailand Malays ia India China Ko re a Indo ne s ia Philippine s 2007 65 67 52 54 47 49 56 45 49 37 41 2010 67 65 57 55 55 52 49 49 45 40 37 Chang e +2 -2 +5 +1 +8 +3 -7 +4 -4 +3 -4 Gap fro m WCB (80) -13 -15 -23 -25 -25 -28 -31 -31 -35 -40 -43

Marke t Cate g o ry S c o re s
S o urc e : As ian Co rpo rate Go ve rnanc e As s o c iatio n
Rank Marke t 2010
CG Rule s & Enfo rc e Prac tic e s me nt Po litic al & IGAAP Re g ulato ry CG Culture

1 2 3 4 5 6 7 8 9

S ing apo re Ho ng ko ng Japan Taiwan Thailand Malays ia India China Ko re a

67 65 57 55 55 52 49 49 45

65 59 45 50 56 49 46 47 43

60 63 53 47 42 38 36 36 28

69 67 62 56 54 60 54 56 44

88 80 75 78 73 80 63 75 78

53 54 53 46 49 32 43 30 33

 Corporate Governance Rules

The ACGA/CLS A-APM S e pte mbe r 2010 Re po rt o n PH Are as fo r Impro ve me nt in CG

Only 2 or 20% independent directors Number of directorships of board members Disclosure of executive compensation

Enforcement
Regulators enforcement of rules Some firms ignoring SEC/PSE TRO against SEC in enforcing rule reducing brokers to only 20% of PSE Board PCGG Inaction

Accounting & Auditing

Sanctions on erring external auditors

 Political and Regulatory Environment

Issuance of TROs is a problem Inadequate resources for the SEC Notable exception: BSP

The ACGA/CLS A-APM S e pte mbe r 2010 Re po rt o n PH Are as fo r Impro ve me nt in CG

Corporate Governance Culture

Waiver of pre-emptive rights Corruption Political interference Toothless regulators Dialogue with shareholders Lack of enthusiasm for the Maharlika Board

What we say

Reforms on the way

Maharlika Board Bankruptcy Law Corporate Governance Reforms 2010 Competition Bill (Anti-Trust Legislation) 2010 Review of Investments Incentives Law Spin off of the Market Regulation Department of the PSE Minority Shareholders Association Good Governance Association of the Philippines Institute of Corporate Directors 2009 Revision of the Corporate Governance Code by the SEC Compensation reform bill for GOCCs and GFIs EO 24 on GOCC/GFI Compensation Others
MAP Best Annual Report Awards PSE Guidelines on Good Corporate Governance ICD Outstanding Corporate Governance Awards

The ICD CG Scorecard

Annual ICD Corporate Governance Awards on May 25. Basis is OECDs 5 CG Principles
Rights of shareholders (20%) Equitable treatment of shareholders (20%) Role of the other stakeholders (10%) Disclosures and Transparency (25%) Board Responsibilities (25%)

5-year trends

36 companies scoring 90% and above

16 companies scoring 95% & above

20 companies scoring 90% - 94%

S O, WHAT IS A WELL-GOVERNED COMPANY?

The 10 Corporate Governance Guidelines for Publicly-Listed Companies according to the Philippine Stock Exchange (PSE)

The PSE Guidelines

Issued in May 2010 Review of OECD Principles and CG Practices in 40 countries Inputs from ICD and other IODs in the region Vetted among global CG experts referred by the Global Corporate Governance Forum (GCGF) of the WB/IFC

No . 1 2 3 4 5 6 7 8 9 10

Self Evaluation
Crite ria Sound business strategy Well-structured, functioning Board Robust internal control system Enterprise risk management Integrity of financial reports Shareholder rights protection, especially minority or non-controlling group Global standard disclosure and transparency Respect and protection of other stakeholders rights (employees, community, environment etc Does not engage in abusive Related Party Transactions and insider trading Culture of ethics, compliance and enforcement

Curre nt Re ality

Can Be

SQ

100 Scale
Distinguished Excellent Very Good Adequate Marginal 100 90 80 70 60 Inefficient Inadequate Ineffective Inept In Reverse 50 40 30 20 10

 Shareholder return is optimized through a sound and well-executed strategy Best practice recommendations

# Develops and executes a 1: sound business strategy

Clearly defined vision, mission and core values Well developed business strategy A strategy execution process that facilitates effective performance management and is attuned to the companys business environment, management style and culture Board continually engaged in discussions of strategic business issues

Score

 A well-functioning board creates value for the enterprise. Best practice recommendations
Board composed of directors of proven competence and integrity Chairman ensures that the board functions in an effective and collegial manner Have at least 3 or 30%, whichever is higher, of its directors as independent directors Written board policy manuals and guidelines Have audit, risk, nomination and governance committees

# Establishes a well-structured 2. and functioning Board.

# Establishes a well-structured 2. and functioning Board.

Best practice recommendations, contd
Have a separate Chairman and CEO who are not related to each other Have a nomination and election process that ensures all shareholders are given the opportunity to nominate and elect directors individually based on the number of shares voted. A formal board and director development program Have no arrangements / agreements that constrains the directors ability to vote independently

# Maintains a robust internal audit 3. and control system

Internal audit and controls enhance operational effectiveness, deter fraud, safeguard company assets, and ensure compliance. Best practice recommendations
Establish the internal audit function as a separate unit in the company which would be overseen at the Board level. A comprehensive enterprise-wide compliance program that is annually reviewed. Institutionalize quality service programs for the internal audit function.

# Maintains a robust internal audit 3. and control system

Best practice recommendations, contd
A mechanism that allows employees, suppliers and other stakeholders to raise valid issues. CEO and Chief Audit Executive attest in writing, at least annually, that a sound internal audit, control and compliance system is in place and working effectively.

Score

# Recognizes and manages 4. enterprise risks

An enterprise-wide Risk Management system should be in place and properly functioning in a transparent manner. Best practice recommendations
Board oversee the companys risk management function. Formal risk management policy that guides the companys risk management and compliance processes and procedures. Design and undertake its Enterprise Risk Management (ERM) activities on the basis of, or in accordance with, internationally recognized framework such as but not limited to, COSO (The Committee of Sponsoring Organizations of the Treadway Commission) I and II.

# Recognizes and manages 4. enterprise risks

Best practice recommendations, contd
A unit at the management level, headed by a Risk Management Officer (RMO) Disclose sufficient information about its risk management procedures and processes as well as the key risks the company is currently facing including how these are being managed. Seek external technical support in risk management when such competence is not available internally.

Score

# Ensures the integrity of its financial 5. reports and external auditing function
Financial reports must represent a fair and true condition of the company. Best practice recommendations.
Board audit committee approve all non-audit services conducted by the external auditor. The Committee should ensure that the non-audit fees don not outweigh the fees earned from the external audit. Ensure that the external audit is credible, competent, and should have the ability to understand complex related party transactions, its counterparties, and valuations of such transactions. Ensure that the external auditor has adequate quality control procedures.

# Ensures the integrity of its financial 5. reports and external auditing function
Best practice recommendations contd
Disclose relevant information on the external auditors. Ensures that the external audit firm is selected on the basis of a fair and transparent tender process. Audit Committee to conduct regular meetings and dialogues with the external audit team without anyone from management present. Financial reports attested to by the CEO and CFO. A policy of rotating the lead audit partner every five years.

# Respects and protects the rights of 6. its shareholders, particularly those that belong to the minority
The exercise of shareholders basic political, economic and governance rights should be facilitated in an equitable and timely manner. Best practice recommendations
Adopt the principle of one share, one vote. Ensure that all shareholder voting mechanisms such as supermajority or majority of minority requirements to protect minority shareholders against actions of controlling shareholders

# Respects and protects the rights of 6. its shareholders, particularly those that belong to the minority
Best practice recommendations
Provide all shareholders with the notice and agenda of the annual general meeting (AGM) at least thirty (30) days before a regular meeting and twenty (20) days before a special meeting. Allow shareholders to call a special shareholders meeting, submit a proposal for consideration at the AGM or the special meeting, and ensure the attendance of the external auditor and other relevant individuals to answer shareholder questions in such meetings.

Score

# Adopts and implements an 7. internationally accepted disclosure and transparency regime

Material information should be disclosed fully, fairly, timely and accurately. Best practice recommendations
Written policies and procedures designed to ensure compliance with the PSE and SEC disclosure rules, as well as other disclosure requirements under existing laws and regulations. Disclose the existence, justification, and details on shareholders agreements, voting trust agreements, confidentiality agreements, and such other agreements that may impact on the control, ownership, and strategic direction of the company. Disclose its director and executive compensation policy. Disclose names of groups or individuals who hold five percent (5%) or more ownership interest in the company, significant cross-shareholding relationship and cross guarantees, as well as the nature of the companys other

 Best practice recommendations, contd

# Adopts and implements an 7. internationally accepted disclosure and transparency regime

Disclose annual and quarterly consolidated reports, cash flow statements and special audit revisions. Consolidated financial statements shall be published within ninety (90) days from the end of the financial years, while interim reports shall be published within fortyfive (45) days from the end of the reporting period. Disclose to shareholders and the Exchange any changes to its corporate governance manual and practices, and the extent to which such practices conform to the SEC and PSE CG Guidelines. Publish and/or deliver to its shareholders in a timely fashion all information and materials relevant to corporate actions that require shareholder approval. Disclose the trading of the corporations shares by directors, officers (or persons performing similar functions) and controlling shareholders. This shall also include the disclosure of the companys purchase of its shares from the market (e.g. share buy-back program). Disclose in its annual report the principal risks to minority shareholders associated with the identity of the companys controlling shareholders; the degree of ownership concentration; cross-holdings among company affiliates; and any imbalances between the controlling shareholders voting power and overall equity position in the company

# Respects and protects the rights and 8. interests of its employees, community, environment, and other stakeholders
Corporations should manage the social, environmental and governance aspects of its operations. Best practice recommendations
Establish and disclose a clear policy statement that articulates the companys recognition and protection of the rights and interests of key stakeholders specifically its employees, suppliers and customers, creditors, as well as the community, environment and other key stakeholder groups. Have in place a merit-based performance incentive mechanism such as an employee stock option plan (ESOP) or any such scheme that awards and incentivizes employees, at the same time aligns their interests with those of the shareholders.

# Respects and protects the rights and 8. interests of its employees, community, environment, and other stakeholders
Best practice recommendations, contd
Have in place a workplace development program. Have in place a community involvement program. Have in place an environment-related program. Have clear policies that guide the company in its dealing with its suppliers, customers, creditors, analysts, market intermediaries and other market participants.

Score

# Does not engage in abusive related-party 9. transactions (RPT) and insider trading
Abusive related party transactions and insider trading undermine the trust and confidence on the company as well as prejudices non-controlling shareholders interests. Best Practice recommendations
Develop and disclose a policy governing the companys transactions with related parties. Clearly define the thresholds for disclosure and approval for RPTs and categorize such transactions according to those that are considered de minimis or transactions that need to be reported or announced , those that need to be disclosed, and those that need prior shareholder approval. The aggregate amount of RPT within any twelve (12) month period should be considered for purposes of applying the thresholds for disclosure and approval.

# Does not engage in abusive related-party 9. transactions (RPT) and insider trading
Best Practice recommendations, contd
Establish a voting system whereby a majority of non-related party shareholders approve specific types of related party transactions in shareholders meeting. Have its independent directors or audit committee play an important role in reviewing significant RPTs. Be transparent and consistent in reporting its RPTs. A summary of such transactions shall be published in the companys annual report. Have a clear policy in dealing with material non-public information by company insiders. Have a clear policy and practice of full and timely disclosure to shareholders of all material transactions with affiliates of the controlling shareholders, directors or management.

Score

# Develops and nurtures a culture of ethics, 10. compliance and enforcement.

Corporate and employee actions should be conducted according to the highest ethical and professional standards at all times. Best practice recommendations
Formally adopt a code of ethics and proper conduct that guides individual behaviour and decision making, clarify responsibilities, and inform other stakeholders on the conduct expected from company personnel. Have a formal comprehensive compliance program covering compliance with laws and relevant regulations. The program should include appropriate training and awareness initiatives to facilitate understanding, acceptance and compliance with the said issuances. Not seek exemption from the application of a law, rule and regulation especially when it refers to a corporate governance issue. Should it do so, it has to disclose the reason for such action as well present the specific steps being taken to finally comply with the applicable law, rule or regulation.

# Develops and nurtures a culture of ethics, 10. compliance and enforcement.

Best practice recommendations, contd
Have a clear and stringent policies and procedures on curbing and penalizing company or employee involvement in offering, paying, and receiving bribes. Have a designated officer responsible for ensuring compliance with all relevant laws, rules and regulations, as well as all regulatory requirements. Respect intellectual property rights. Establish and commit itself to an alternative dispute resolution system so that conflicts and difference with counterparties, particularly with shareholders and other key stakeholders, would be settled in a fair and expeditious manner.

Score

Conclusion
Philippines, Inc. has made positive gains in CG More and better-governed companies There are outstanding governance warriors But more work ahead, e.g.
Identified areas for improvement Governance reptiles to reform themselves Country above self GOCCs and GFIs are key, particularly GSIS and SSS Role of the SEC Maharlika Board PSE as model in Corporate Governance

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