spot_img
27.6 C
Philippines
Friday, March 29, 2024

The state of corporate governance in the Philippines

- Advertisement -

Part 2

My dissertation looked into corporate governance performance involving power and information metrics of 156 companies, comprising 60 percent of the 265 publicly listed companies as of Dec. 31, 2015. The dataset was collected from cross-sectional information from the PSE annual corporate governance reports filings and the PSE Edge website.

The ownership structure of Philippine PLCs remains highly concentrated in the hands of certain business or family interests. The average total public ownership (i.e. outsiders or non-block holder and management) of PLCs was just 36 percent of the total outstanding shares. Nevertheless, a few of the older companies (e.g. PLDT, SMC, AC) have actually higher public ownership levels.

Compulsory vs. discretionary governance

The study found that compliance to governance processes for both power and information practices has been determined by whether the governance factor was compulsory or not. There was high overall compliance (over 95 percent of all PLCs) for mandatory mechanisms, notably minimum two independent directors and board oversight under power governance, as well as required disclosures under information governance.

- Advertisement -

However, discretionary (i.e. voluntary) power governance—board size and activity, duality, risk management systems, corporate governance committee structure, ownership rights and greater board independence (in the oversight committees)—has been comparatively weaker.

Ownership and board structure

The average number of independent board directors only totaled 2.45, just above the requisite of two directors, while non-executive directors averaged 4.12 members. The average board size is 9.32; the proportion of independent and non-executive directors to total board size clearly shows that “outsiders” comprise the minority in the board. Coupled with the ownership concentration ratio, the evidence shows that PLCs remain dominated by controlling groups.

Furthermore, the average number of independent directors in board audit and nominations committees constituted the minority (less than two) in PLCs covered in the study. Both functions are vital to shareholder supervision over the board. In developed countries, independent directors are mandated to be the majority in audit committees.

The average number of board meetings is almost eight times a year. A more active board—one that monitors corporate performance regularly and is involved in key processes—is believed to result in a higher number. However, there is no accepted norm for board activity.

Only half of PLCs are duality compliant. When analyzed, the duality compliance levels displayed significant differences among the six industry groups. More than 90 percent of the banks and financial companies reported being duality compliant, followed by more than 70 percent and 65 percent of property and service companies, respectively.

Meanwhile, only half of the holding companies have adopted the duality concept and this came as a surprise because most of the large conglomerates (which are considered to be composed of “enlightened” management) fall under this category. Majority of the industrial (60.53 percent) continued to practice unified chairmanship and CEO.

Control mechanisms (considered discretionary governance best practice) has been adopted by just over 50 percent of subject PLCs, showing that the adoption of risk management structures and systems to protect the financial assets of companies remains weak.

The exercise of ownership rights, i.e. cash and stock dividends that represent rewards for investors, is considered less than satisfactory. Only 47 percent pay out cash dividends, in spite of the fact that most of the PLCs are profitable enterprises; only 10 percent rewarded their shareholders with stock dividends in 2014.

In information governance, the same pattern of high compliance is evident for required information disclosures (financial statements, information statements, etc.). Compliance with discretionary communications and investor relations mechanisms was below satisfactory. Less than half of PLCs issued press announcements, while only above 20 percent organized investor briefings. 

Statistical analyses showed that governance compliance is weakest among the small-cap  (market cap of under P10 billion) companies and those in the services and oil and mining sectors. Higher compliance levels were displayed by banks/financial and holding companies (for industry class) and by large-cap companies (for firm size). Governance compliance among firms in the industrial and property sectors were within satisfactory (but below exemplary) levels.

The findings suggest that governance behavior and compliance are influenced to a large extent by firm resources. Hence, market regulators may consider financial incentives, such as tax reductions, to provide incentives for PLC segments that are lagging in governance performance.

Dr. Gañac is an assistant professorial lecturer at the Ramon Del Rosario College of Business of the De La Salle University. He joined the academe in 2012 after a career in corporate communications, corporate marketing, corporate social responsibility and investor relations that spanned more than 30 years.

The two-part article was a part of his doctoral dissertation on the subject of Corporate Governance in the Philippines.

The views expressed above are the author’s and do not necessarily reflect the official position of De La Salle University, its faculty, and its administrators.

- Advertisement -

LATEST NEWS

Popular Articles