what is a well governed company

8/3/2019 What is a Well Governed Company

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So, What is a Well-Governe dSo, What is a Well-Gove rnedCompany?Company?

Rex C. Drilon II

President, Institute of Corporate Directors (ICD)Trustee &Fellow, Institute for Solidarity in Asia (ISA)Consultant & Former COO, Ortigas & Company

6 May 2011


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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


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Rex C. Drilon II

Director and C-level executive since 1978 (FMMCGroup, Philippine Fuji Xerox, J ardine Sugar, AyalaLand, 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


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What they said about us


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The World Bank / IMF

WB-IMF assessment: Concentration of businessownership 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 businesshas to reform itself

The key: Corporate Governanc e


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The ACGA-CLSA Report of

September 2010


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CG Watch Market Scores 2010 v.

2007Source: Asian Corporate Governance Association

Rank Market 2007 2010 Change Gap fromWCB (80)

1 Singapore 65 67 +2 -13

2 Hongkong 67 65 -2 -15

3 Japan 52 57 +5 -23

4 Taiwan 54 55 +1 -25

5 Thailand 47 55 +8 -25

6 Malays ia 49 52 +3 -28

7 India 56 49 -7 -31

8 China 45 49 +4 -31

9 Korea 49 45 -4 -35

10 Indones ia 37 40 +3 -40

11 Philippines 41 37 -4 -43


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Market Category ScoresSource: As ian Corporate Governance As s ociation

Rank Market 2010 CG Rules &Practices

Enforce-ment

Political &Regulatory

IGAAP CG Culture

1 Singapore 67 65 60 69 88 53

2 Hongkong 65 59 63 67 80 54

3 Japan 57 45 53 62 75 53

4 Taiwan 55 50 47 56 78 46

5 Thailand 55 56 42 54 73 49

6 Malays ia 52 49 38 60 80 32

7 India 49 46 36 54 63 43

8 China 49 47 36 56 75 30

9 Korea 45 43 28 44 78 33


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The ACGA/CLSA-APM September 2010

Repo rt on PH Areas for Improveme nt

in CG Corporate Governance Rules 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/PSETRO against SEC in enforcing rule reducing brokers

to only 20% of PSE Board PCGG Inaction

Accounting & Auditing Sanctions on erring external auditors


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The ACGA/CLSA-APM September 2010

Repo rt on PH Areas for Improveme nt

in CG Political and Regulatory Environment Issuance of TROs is a problem Inadequate resources for the SEC Notable exception: BSP

Corporate Governance Culture Waiver of pre-emptive rights Corruption Political interferenceToothless regulators

Dialogue with shareholders Lack of enthusiasm for the Maharlika Board


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What we say


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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


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The ICD CG Scorecard

Annual ICD Corporate GovernanceAwards 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


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36 companies scoring 90% and above36 companies scoring 90% and above

20 companies20 companiesscoring 90% - 94%scoring 90% - 94% 16 companies16 companiesscoring 95% & abovescoring 95% & above


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SO, WHAT IS A

WELL-GOVERNED

COMPANY?The 10 Corporate Governance Guidelines forPublicly-Listed Companies according to the

Philippine Stock Exchange (PSE)


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The PSE Guidelines

Issued in May 2010

Review of OECD Principles and CGPractices in 40 countries

Inputs from ICD and other IODs in theregion

Vetted among global CG experts referredby the Global Corporate GovernanceForum (GCGF) of the WB/IFC


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Self EvaluationNo. Criteria Current

RealityCan Be SQ

1 Sound business strategy

2 Well-structured, functioning Board

3 Robust internal control system

4 Enterprise risk management

5 Integrity of financial reports

6 Shareholder rights protection, especially minorityor non-controlling group

7 Global standard disclosure and transparency

8 Respect and protection of other stakeholdersrights (employees, community, environment etc

9 Does not engage in abusive Related PartyTransactions and insider trading

10 Culture of ethics, compliance and enforcement


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100 Scale

Distinguished 100

Excellent 90

Very Good 80

Adequate 70

Marginal 60

Inefficient 50

Inadequate 40

Ineffective 30

Inept 20

In Reverse 10

#1 D l d t


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#1: Develops and executes asound

business strategy Shareholder return is optimized through a

sound and well-executed strategy Best practice recommendations

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

#2 E t bli h ll t t d


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#2. Establishes a well-structuredand

functioning Board. A well-functioning board creates value for theenterprise.

Best practice recommendations

Board composed of directors of provencompetence and integrity

Chairman ensures that the board functions in aneffective and collegial manner

Have at least 3 or 30%, whichever is higher, of itsdirectors as independent directors

Written board policy manuals and guidelines

Have audit, risk, nomination and governance

committees

2 bli h ll d


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#2. Establishes a well-structuredand

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 thatensures all shareholders are given theopportunity to nominate and elect directorsindividually based on the number of shares voted.

A formal board and director developmentprogram

Have no arrangements / agreements thatconstrains the directors ability to voteindependently


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#3. Maintains a robust internal auditand control system

Internal audit and controls enhanceoperational 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 atthe Board level.

A comprehensive enterprise-wide complianceprogram that is annually reviewed.

Institutionalize quality service programs for theinternal audit function.


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#3. Maintains a robust internal auditand 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 inplace and working effectively.

Score


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#4. Recognizes and manages

enterprise risks An enterprise-wide Risk Management system

should be in place and properly functioning in atransparent 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 inaccordance with, internationally recognizedframework such as but not limited to, COSO (The

Committee of Sponsoring Organizations of theTreadwa Commission) I and II.


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#4. Recognizes and manages

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 wellas 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 notavailable internally.

Score


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#5. Ensures the integrity of its financialreports and external auditing function

Financial reports must represent a fair and truecondition of the company.

Best practice recommendations.

Board audit committee approve all non-auditservices conducted by the external auditor. TheCommittee should ensure that the non-audit feesdon not outweigh the fees earned from the externalaudit.

Ensure that the external audit is credible,competent, and should have the ability tounderstand complex related party transactions, itscounterparties, and valuations of such transactions.

Ensure that the external auditor has adequate

quality control procedures.


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#5. Ensures the integrity of its financial

reports and external auditing function Best practice recommendations contd

Disclose relevant information on the externalauditors.

Ensures that the external audit firm is selectedon the basis of a fair and transparent tenderprocess.

Audit Committee to conduct regular meetingsand dialogues with the external audit teamwithout anyone from management present.

Financial reports attested to by the CEO andCFO.

A policy of rotating the lead audit partner every

five years.


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#6. Respects and protects the rights ofits shareholders, particularly those that

belong to the minority

The exercise of shareholders basic political,economic and governance rights should befacilitated in an equitable and timely manner.

Best practice recommendations

Adopt the principle of one share, one vote.

Ensure that all shareholder voting mechanisms suchas supermajority or majority of minorityrequirements to protect minority shareholders againstactions of controlling shareholders


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#6. Respects and protects the rights ofits shareholders, particularly those that

belong to the minority Best practice recommendations

Provide all shareholders with the notice andagenda of the annual general meeting (AGM) atleast thirty (30) days before a regular meetingand twenty (20) days before a special meeting.

Allow shareholders to call a special shareholdersmeeting, submit a proposal for consideration at

the AGM or the special meeting, and ensure theattendance of the external auditor and otherrelevant individuals to answer shareholderquestions in such meetings.

Score

d d i l


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#7. Adopts and implements aninternationally 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, aswell as other disclosure requirements under existing lawsand regulations.

Disclose the existence, justification, and details onshareholders agreements, voting trust agreements,confidentiality agreements, and such other agreements

that may impact on the control, ownership, and strategicdirection 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 crossguarantees, as well as the nature of the companys other

#7 Ad t d i l t


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#7. Adopts and implements aninternationally accepted disclosure and

transparency regime Best practice recommendations, contd

Disclose annual and quarterly consolidated reports, cash flowstatements and special audit revisions. Consolidated financialstatements shall be published within ninety (90) days from the end ofthe financial years, while interim reports shall be published within forty-five (45) days from the end of the reporting period.

Disclose to shareholders and the Exchange any changes to itscorporate governance manual and practices, and the extent to whichsuch practices conform to the SEC and PSE CG Guidelines.

Publish and/or deliver to its shareholders in a timely fashion allinformation and materials relevant to corporate actions that requireshareholder approval.

Disclose the trading of the corporations shares by directors, officers (or

persons performing similar functions) and controlling shareholders. Thisshall also include the disclosure of the companys purchase of its sharesfrom the market (e.g. share buy-back program).

Disclose in its annual report the principal risks to minority shareholdersassociated with the identity of the companys controlling shareholders;the degree of ownership concentration; cross-holdings among companyaffiliates; and any imbalances between the controlling shareholders

voting power and overall equity position in the company


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#8. Respects and protects the rights andinterests of its employees, community,environment, and other stakeholders

Corporations should manage the social, environmentaland 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 andinterests 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 mechanismsuch as an employee stock option plan (ESOP) or any suchscheme that awards and incentivizes employees, at the sametime aligns their interests with those of the shareholders.


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#8. Respects and protects the rights andinterests 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 itsdealing with its suppliers, customers, creditors,analysts, market intermediaries and other marketparticipants.

Score


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#9. Does not engage in abusive related-partytransactions (RPT) and insider trading

Abusive related party transactions and insider tradingundermine the trust and confidence on the company aswell as prejudices non-controlling shareholdersinterests.

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 thatare considered de minimis or transactions that need to bereported or announced , those that need to be disclosed, andthose that need prior shareholder approval. The aggregateamount of RPT within any twelve (12) month period should beconsidered for purposes of applying the thresholds for disclosure

and approval.


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#9. Does not engage in abusive related-partytransactions (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 partytransactions in shareholders meeting.

Have its independent directors or audit committee play animportant role in reviewing significant RPTs.

Be transparent and consistent in reporting its RPTs. A summaryof such transactions shall be published in the companys annualreport.

Have a clear policy in dealing with material non-publicinformation by company insiders.

Have a clear policy and practice of full and timely disclosure toshareholders of all material transactions with affiliates of thecontrolling shareholders, directors or management.

Score


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

Corporate and employee actions should be conductedaccording to the highest ethical and professional standardsat 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 otherstakeholders on the conduct expected from company personnel.

Have a formal comprehensive compliance program covering compliancewith laws and relevant regulations. The program should include appropriate

training and awareness initiatives to facilitate understanding, acceptanceand compliance with the said issuances.

Not seek exemption from the application of a law, rule and regulationespecially 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 specificsteps being taken to finally comply with the applicable law, rule or

regulation.


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#10. Develops and nurtures a culture of ethics,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 compliancewith all relevant laws, rules and regulations, as well as allregulatory 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, wouldbe settled in a fair and expeditious manner.

Score


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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

The Philippine Brand

what is a well governed company

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