The Philippines central bank governor, Rafael Buenaventura, gave the keynote address at a conference held in Manila last week on corporate governance. The eighth open conference on “Co-operation for Responsible Citizenship and Corporate Governance” was organized by the Philippine Institute of Corporate Directors.
Here Buenaventura talks to FinanceAsia about recent initiatives from the Philippines.
Can you tell us the basic principles behind what you're trying to achieve?
Buenaventura: We really want to be at the forefront of a drive to improve corporate governance for both the financial and corporate sector. But given that we have a very small stock market, our disclosure requirements are not always that effective. So we have been trying to attack the situation from a different standpoint. Above all, we want to make the public aware that transparency and corporate governance needs to be improved.
In countries where capital markets are well developed, companies will raise bonds and equity and the market will discipline them. But in the Philippines, most companies rely on banks for funding and so it is the banks, which need to regulate them.
How has the BSP been involved?
Well most credit should go to Dr Estanislao, who is president of the Institute of Company Directors. Also I should mention the World Bank and the East Asian Network, which is supported by the World Bank. This network is trying to establish corporate governance standards for Asia that will fall broadly in line with international standards. The ICD also enlisted the BSP's help at least three years ago now with the aim of improving transparency in the banking sector.
And what did this entail?
One of the first initiatives we came up with was designing a programme to acquaint directors with their fiduciary responsibilities. This is especially important in the Philippines, given that many banks are family-owned or controlled by a conglomerate. About six years ago, the General Banking Act was passed and this stipulates that there have to be two independent outside directors on every board.
We have made it mandatory for all bank directors to attend the seminar. As a result, there's now a much better awareness of risk management. Our efforts are beginning to pay off. It's a slow process but we're getting there.
We want to instill the idea that corporate governance is something everyone has to learn to live with. And indeed those banks, which have the best disclosure, were the ones which best withstood the financial crisis.
But most important of all, we have to make sure that the youth are aware of corporate governance. These kinds of issues have to become second nature to them, so that when they become directors one day in the future they will apply good principles not bad. That's the whole idea behind this conference.
And what about for corporates?
Well here we tried to get the SEC involved. But the main problem isn't so much the listed companies, as the private ones. The major listed companies like Ayala Corp and San Miguel are doing well because they tap the overseas markets and have a much greater awareness and sensitivity of corporate governance.
Are there any areas where you think corporate governance is quite far advanced in the Philippines?
There have been a few people attending from Malaysia and Indonesia who've said that in certain areas the Philippines is probably ahead of them. I would say this would be the level of disclosure required for NPL's. Banks have to provide a lot of detail about their percentage of NPL's and level of provisioning. Now that the SPV act has been put in place, they also have to give greater detail about which NPL's have been written off. Depositors now have a better idea of how stable the banking system is.
What will be the next step?
Down the road we also want banks to disclose their portfolio mix, so that we can see what industries they're exposed to. But all this has to be done slowly.
There are other issues such as disclosure of directors' salaries, but culturally it's a lot more difficult to accept. But at least, we've now broken salaries down into senior management groupings, so people are more aware of the broad levels.
We also still need to reform the judiciary, especially those judges involved in special courts. And we need much better control processes. At the moment it's too spotty and one area where we're definitely weak.
One area of criticism has always been audit standards in the Philippines. Apparently only 1% of companies are audited properly and an SEC accountant said in March that 51 out of 131 listed companies were violating major accounting standards.
Well in the banking system we introduced list of accredited audit firms, which banks could use. Then last year, we introduced a new requirement that partners at these firms had to be rotated on a regular basis too.
We've also made sure that audit committees have two independent members and that they report to the board of directors, not just management. Risk management committees also have to report to the board as well. In the past, individual directors who wanted to find out this kind of information could probably have done so if they'd gone out of their way, but the information wasn't readily available.
Other recent reforms include the anti-money laundering law, which is up to international standards.
Where the stock exchange is concerned, there were too many different accounting practices, with some companies switching to US GAAP. Now all companies use the same international standard.
What benefit do you think could be derived from adopting a pan-Asian framework for corporate governance?
The good thing about having a basic framework is that it can be applied across the whole of Asia and puts pressure on countries like us. I think we'll start having some kind of scorecard so that countries can compare and contrast themselves against each other. Then as time goes on, we can keep adding new things and improving on what already exists.
We have to keep at it. Keep pushing the message, not just to the 1,000 people at the conference today, but 100,000 people and more. Corporate governance should become part of the curriculum at business schools so that it becomes ingrained at an early age.
What's most important is that directors take their job seriously and act responsibly. We need to make sure that outside directors are aware that they're not just acting on behalf of the stakeholders, but also the depositors and other creditors.
