Walk the talk: Private firms like SM make sure that they implement and comply with corporate governance policies they crafted. Photo courtesy of SM Prime

When Cesar Purisima accepted a Cabinet post a few years ago, he was shocked with what he saw in the public sector. Purisima, who was appointed as trade secretary in 2004 and as finance secretary in 2005, had come from the private sector, one of the country's biggest auditing firms, Sycip, Gorres & Velayo. Purisima was surprised to see how different things were in government. He particularly noticed how the private sector moved faster with its operations and was also more transparent. Purisima eventually left government and helped form the INCITEGov, a civil society group pushing for reforms in government.

The differences between the private sector and government were stark and telling, according to Corazon Guidote, who has worked in both – from the way the two sectors operate to the way each views transparency and accountability.

The private sector works better because its ultimate goal is to grow its business and make it more profitable, says Guidote, SM Investments Corp. (SMIC) Vice President for Investor Relations. SMIC is the holding company of the SM Group, the conglomerate owned by the Sy family, one of the oldest and among the wealthiest Filipino-Chinese families in the country.

Guidote says it is easier for businesses to be more accountable and transparent with funds and transactions because they are the ones who own the money. That is not the case in government, she said.

Guidote has experience of working in both sectors having served as the founding executive director of the Bangko Sentral ng Pilipinas (BSP) Investor Relations Office from 2001 to 2005 before she joined SMIC.

"In the private sector, members of the board are shareholders. In SM, for instance, our majority shareholders really own the company and so it is in their personal interest to make sure that the company is run well," Guidote says.

By contrast, she says, government is not so accountable unless the taxpayers can successfully lobby through the courts or the media to be more transparent.

"In government, there are so many departments. People don't handle their own resources so it's easy for them to just take this for granted," Guidote says.

Corporate governance

Jesus Estanislao, chairman of the Institute of Corporate Directors (ICD) agrees there is stronger pressure from shareholders for the private sector to be more accountable.

"Private businesses have stakeholders who demand reporting that follows international reporting systems and formats. There are investors and regulators whose demand for information needs to be satisfied regularly,” he says.

ICD is a non-governmental Philippine organization that conducts trainings and advocacy work for corporate governance and corporate social responsibility and is the founder of an extensive network of similar organizations in the region. Both Estanislao and Guidote believe that ironically there is much the public sector in the Philippines could learn from corporate governance and new business issues like social responsibility.

Guidote says the answer in part is by putting in place stringent rules and ensuring full compliance with them along with all regulatory requirements.

The first and foremost measure that a private corporation trading in the Philippines is obliged to produce is a manual of corporate governance. The requirement comes direct from the Securities and Exchange Commission -- the country's corporate watchdog –which provides its own model manual for companies to adopt and use on its website if they do not have their own already.

The manual has clearly worked sections on the responsibilities of corporations –including stockholder’s rights, transparency and disclosure, accountability and audit, evaluation systems and administrative sanction. It lays down the company's blueprint for compliance and identifies the responsibilities of the Board of Directors and management in relation to good corporate governance. Here, the company lists down its policies on disclosure and transparency and mandates the conduct of communication and training programs on corporate governance.

It is through rigorous implementation of the manual and the SEC Code of Corporate Governance (Resolution 135) that private companies become more transparent and accountable. There are various provisions in the Code that require them to report on the operations of the company, its projects, expenses, investments and future plans with compliance closely monitored by the SEC.

According to an SEC lawyer who declined to be named, violations to such rules would mean penalties that can run into thousands of pesos depending on the business sector that the company is in.

In a separate interview, SEC chairman Fe Barin says that a corporation's Board of Directors -- the policy-making body of any company -- is primarily responsible for the governance of the corporation. As such, the board needs to be structured so that it provides an "independent check" on management.

This is essentially missing in government where there is no distinction between who constitutes the Board and who is the management.

The SEC requires the board to be composed of at least five but not more than fifteen members elected by shareholders. Public companies -- those listed in the Philippine Stock Exchange and sell shares to public investors -- shall have at least two independent directors or those independent directors that constitute at least twenty percent of the members of the board.

Barin says that listed or not listed, all companies are encouraged to have independent directors to ensure a reliable and fair decision-making process.

SMIC's Guidote stresses however, that it is not enough to have a well-crafted Code of Corporate Governance. She said it is important for the Board of Directors and Management to follow this “bible” without fail. In short, she says, it is critical to ensure full implementation and compliance.

"At the end of the day, no matter how many laws or rules you come up with if there's no political will, it means nothing. There should be political will to do things right because this cascades down to the rank and file," Guidote says.

“Small watchdogs”

Yet how do companies successfully implement the provisions of its Code of Corporate Governance? Barin says this is where the role of committees within the Board of Directors comes to play.

As required by the SEC, boards should constitute committees in aid of good corporate governance. These committees serve as "small watchdogs" with the end goal being the protecting the money of the corporation and ensuring that everything is done in a wholly transparent manner.

A crucial committee is the Audit Committee which must be composed of at least three board members, preferably with accounting and finance background. One member shall be an independent director while another should have relevant audit experience.

This committee is responsible for providing oversight over senior management activities in managing credit, market, legal, operational and other risks of the corporation. This committee is accountable for identifying red flags or risk exposures to the company according to the SEC.

While the committee is separate from the internal and external auditors of the corporation, it provides oversight on both. Other functions include setting up an internal audit department, appointing the internal auditor, the independent external auditor and monitoring the auditing process of the company.

This committee is also responsible for reviewing the quarterly, half-year and annual financial statements of the corporation and ensuring that these comply with accounting standards.

A second important committee crucial in safeguarding the corporation's finances is the Compensation or Remuneration Committee. As the name suggests, this group is responsible for establishing a formal and transparent procedure for developing policies on executive remuneration and for fixing remuneration packages of corporate officers and directors.

As set down by the SEC, the committee works to ensure that compensation is consistent with the corporation's culture, strategy and control environment.

A third important committee is the Nomination Committee which is tasked to review and evaluate the qualifications of all persons nominated to the board as well as those nominated to other positions requiring appointment by the board. Together, when working properly, these three leading committees serve to ensure corporations practice good corporate governance particularly accountability and transparency.

According to Barin, a dominant theme in all issues related to corporate governance is “disclosure.”

She says that the more transparent the internal workings of the company and cash flows, the harder it is for management and controlling shareholders to misappropriate company assets or mismanage the company.

SEC guidelines clearly state: "The most basic and all encompassing disclosure requirement is that all material information - anything that could potentially affect share price should be publicly disclosed. Such information would include earnings results, acquisition or disposal of assets, board changes, related party transactions, shareholdings of directors and changes to ownership.

“Other information that should always be disclosed includes remuneration including stock options of all directors and senior management corporate strategy and off balance sheet transactions. All disclosed information should be released via the approved stock exchange procedure for company announcements as well as through the annual report."

It is vital for the board to commit at all times to full disclosure of material information dealings says Guidote. The SM Group walks the talk, she said.

Replicating in public offices

The bigger question of course is how to make the Philippine government and the public sector do the same as the private businesses.

"We force certain issues to come out in the public. We don't hide. We try our best. We report our operations to our shareholders," Guidote says.

She also maintained that the Sy family is very disciplined in its finances. "They tie things down to the very minimum. Everything is very spartan and simple. The money is just invested. There is discipline in the use of funds and accountability. We don't borrow if we don't need to," she says.

"On the other hand, in government, it is easy to misappropriate. There is no discipline and the political system is the problem. There is a system of patronage. In the private sector, at the end of the day, we look at our profitability,” Guidote says.

ICD's Estanislao adds that private businesses are clear about their charter statements which include formal articulation of their core values, their missions and their visions. They moreover tend to be forthright about laying out their strategy map which they then subject to a governance scorecard. The scorecard specifies measures to track performance and targets which need to be met at certain specified times and a program of actions they need to pursue in order to meet the targets.

"These are governance practices that also need to be formalized in the public sector," Estanislao says.

He notes however there have been some successful efforts to replicate these measures in public offices, particularly in a number of local government units throughout the country.

Estanislao cites the government of Iloilo City which received top marks for strategy development and execution from the international Palladium consultancy group. The city earlier achieved a distinction in public governance from the Institute for Solidarity in Asia (ISA), a non-government organization that advocates good governance.

Estanislao says the government there won the award because it had been transparent with its revenue generating efforts. It also gauges its performance through a governance scorecard.

In September last year, the city of San Fernando in Pampanga also received an award from ISA for institutionalizing a Public Governance System modeled after the Corporate Governance Program institutionalized by the ICD.

"These cities are not alone. There are now about 30 local government units going through a governance program. Moreover, six national government agencies have also been initiated into the program," Estanislao says. Philippine Public Transparency Reporting Project

(The author is a finance beat reporter of the Philippine Star and a blogger. She is also an associate member of the Philippine Center for Photojournalism and a director of the Economic Journalists Association of the Philippines).