In 1997, we were hit by what was known as the Asian Financial Crisis. During this period, there was a property slump, several bank and financial institution failures, numerous business bankruptcies and an overall decline in several Asian economies.
Studies by the Asian Development Bank (ADB) about the causes of the crises support the hypothesis that weaknesses in economic and financial fundamentals in the affected countries triggered the crisis.
Another significant finding of the studies was that poor corporate governance contributed to the Asian Financial Crisis. The ADB supported the view that poor corporate governance contributed to the build-up of vulnerabilities that eventually led to the crisis.
The Asian Financial Crisis was then followed by several major corporate scandals in the United States such as the cases of Enron, WorldCom, Tyco, Arthur Andersen & Co., which to a great extent was a result of poor corporate governance.
Corporate governance, as defined by the Securities and Exchange Commission (SEC), is “the system of stewardship and control to guide organizations in fulfilling their long-term economic, moral, legal and social obligations towards their stakeholders.
It is a system of direction, feedback and control using regulations, performance standards and ethical guidelines to hold the Board and senior management accountable for ensuring ethical behavior – reconciling long-term customer satisfaction with shareholder value – to the benefit of all stakeholders and society.
Its purpose is to maximize the organization’s long-term success, creating sustainable value for its shareholders, stakeholders and the nation.”
The problem of poor corporate governance then was also recognized in the Philippines. In 2002, a business news article in a major daily carried a report entitled “Poor governance tagged as business’ No. 1 concern.” A major business group had then tagged the lack of good corporate governance in both the public and private sectors as their most serious concern.
This call for good corporate governance was answered in the United States by the passage of the Sarbanes-Oxley Act of 2002 which was intended to protect investors and hoped to prevent the recurrence of the corporate scandals of the past. In Asia, several countries enacted their own corporate governance codes to protect investors, prevent future corporate scandals and crises, and to improve competitiveness. Singapore, Hong Kong, India, Japan, Thailand and Korea were among the first to come up with their codes of corporate governance.
The very first Philippine government institution to formally respond to the call for good corporate governance was the Bangko Sentral ng Pilipinas (BSP) which issued Circular 283 in 2001, a de facto Code of Governance covering banks and non-bank financial institutions. Several corporate governance circulars followed till it came out with its latest in August 2017, Circular 970, the Enhanced Corporate Governance Guidelines for BSP-Supervised Financial Institutions.
The SEC came out with its first corporate governance code for publicly listed companies in 2002, which was amended in 2009. In November 2016, it issued its latest Code of Corporate Governance for Publicly-Listed Companies.
The Insurance Commission likewise issued its own Code of Corporate Governance for Insurance Companies and Intermediaries which was amended in 2005.
Unknown to many, the Energy Regulatory Commission came out with a program to promote good corporate governance in distribution utilities in 2004. It rolled out this program to the various distribution utilities and electric cooperatives in the country during this period.
For government corporations, the Governance Commission for Government-Owned or Controlled Corporations through Memorandum Circular 2012-07 came out with its Code of Corporate Governance for GOCC in 2012.
Noteworthy for the Philippines is that the institutions mandating the adoption of good corporate governance did not only issue the codes but likewise required training for the directors and officers of the covered entities. The SEC for that matter requires the annual training of directors and officers of publicly-listed companies.
There is no real empirical data to determine how the issuance of corporate governance codes, the training required and the enforcement of the provisions thereof have prevented corporate scandals and failures on one hand and improved corporate performance on the other. However, those in the business sector are aware that major business failures since the codes were issued in 2001 and 2002 have been few and far between. The focused drive to instill good corporate governance in banks, publicly-listed companies and insurance companies have not only given the country a good image but also, we can safely assume, improved their performance and ultimately contributed to the country’s competitiveness.