Corporate governance developments
(Conclusion)
The importance of good corporate governance
Good corporate governance won’t just keep your companies out of trouble. Well-governed companies often draw huge investment premiums, get access to cheaper debt, and outperform their peers.
A commitment to good corporate governance (well-defined shareholder rights, a solid internal control environment, high levels of transparency and disclosure, and an empowered board of directors) make a company both more attractive to investors and lenders, and more profitable. Simply put: it pays to promote good corporate governance.
Investors say they highly value corporate governance. This is confirmed by the following surveys conducted by various organizations as published by the Global Corporate Governance Forum (GCGF), an organization sponsored by the World Bank and International Finance Corporation:
1. Well-governed firms in
2. A study of S&P 500 firms by Deutsche Bank showed that companies with strong or improving corporate governance outperformed those with poor or deteriorating governance practices by about 19 percent over a two-year period.
3. A Harvard/Wharton study showed that if an investor purchased shares in US firms with the strongest shareholder rights, and sold shares in the ones with the weakest shareholder rights, that investor would have earned abnormal returns of 8.5 percent per year.
4. In a 2002 McKinsey survey, institutional investors said they would pay premiums to own well-governed companies. Premiums averaged:
• 30 percent in
• 22 percent in
On the macro level, former US SEC Chairman Arthur Levitt said “if a country does not have a reputation for strong corporate governance practices, capital will flow elsewhere. If investors are not confident about the level of disclosure, capital will flow elsewhere. If a country opts for lax accounting and reporting standards, capital will flow elsewhere. All enterprises in that country – regardless of how steadfast a particular company’s practices maybe – suffer the consequences. Markets exist by the grace of investors. And it is today’s more empowered investors that will determine which companies and markets will endure the weight of greater competition.”
Better corporate governance standards make banks and rating agencies see companies in a better light. This means lower borrowing costs for well-governed firms as risk premiums will be lower.
Because of better checks and balances, there is a greater probability of higher operational efficiency as shown by the following studies based again on a publication of GCGF:
1. A study of the 100 largest emerging market companies by Credit Lyonnais Securities Asia (CLSA) in 2001 showed that companies with the best corporate governance in each of a large number of emerging market countries had eight percentage points higher measures of EVA (economic value added) than firms in their country average.
2. A Harvard/Wharton team also found that US-based firms with better governance have faster sales growth and are more profitable than their peers.
3. An ABN/AMRO study showed that Brazilian firms with above-average corporate governance had ROEs that were 45 percent higher and net margins that were 76 percent higher than those with below-average governance practices.
Philippine experience
Seeing the benefits of corporate governance, our regulators – SEC, Bangko Sentral ng Pilipinas, Insurance Commission and Philippine Stock Exchange – have issued regulations to ensure compliance with certain baseline practices. The regulations of two of these agencies – SEC and PSE – are presently under review, in coordination with the private sector to ensure more effective and practical corporate governance regulations. In addition, the private sector, thru the Institute of Corporate Directors, has spearheaded a corporate governance (CG) scorecard to measure how listed companies fare with respect to CG best practices, some of which go beyond the minimum requirements of the regulations.
Over the last three years of the CG scorecard, there has been an improvement in the overall rating. But a lot more work has to be done on some low-scoring companies. On the overall, most companies scored low on one category of the CG Scorecard – Board responsibilities. This category included mainly the following factors:
1. Director and senior management training on CG.
2. Audit committee report on internal control, dealings with auditors, financial statements review and concluding opinion.
3. Risk management policy.
4. Number of independent directors.
There is a consensus in most discussions that the tone at the top is very critical for CG to succeed. Experience has shown that if the chairman and/or the CEO fully support good CG, then his company will implement CG best practices.
In order for us to reap its benefits – higher investor confidence, lower cost of debt and operational efficiencies – we must adopt a corporate governance mindset.
(Roberto G. Manabat is the Chief Executive Officer and Chairman of Manabat Sanagustin & Co., CPAs, a member firm of KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. This article is for general information only and is not intended to be, nor is it a substitute for, informed professional advice. While due care was exercised to ensure the quality of the information contained in this article, readers should carefully evaluate its accuracy, completeness and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances. For comments or inquiries, please email [email protected] or [email protected]).
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