Measuring sound corporate governance

We need to be a bit more impatient. After all, we do not want to stay as the second most corrupt country in Asia; and, let us be clear, that we do not want to be the number one on that list.

In corporate governance, we have been talking about reforms for several years now and, yet, the general impression is that we really have not moved much to change our corporate governance practices to make a significant difference.

I have great empathy with those who have already come to know about corporate governance principles and best practices, and yet remain in a fog as to the concrete practical steps we should take to move forward. Thus, the question, "Where do we go from here?"–from the level of principles and concepts about best practices in corporate governance to actual improvements in actual practices in our corporate board rooms–is relevant. It is an urgent call to action.

Before we rush to action, perhaps we should take time to look at a roadmap for making significant progress on the road to reforms in corporate governance practices. That roadmap can highlight the different milestones we need to reach on that road.

Milestones

To be fair, we have already passed the first milestone. We do have a Corporate Governance Code. Appropriate circulars have been issued. And corporate directors have been required–or, at least, strongly encouraged–to undergo an orientation seminar.

This has been the first essential step. Our regulators have been instrumental in getting us through that step.

Then, there is the second milestone. This underscores the role of independent directors, particularly in board committees, several of which have been mandated. In the banking sector, three such board committees have been required–auditing, governance, and risk management. In audit and/or governance or in all three, independent directors are supposed to play a critical, predominant role.

In my view, this requirement–again from our regulators–carves a specific niche where independent directors are differentiated by assigning a role that involves mainly oversight and checks and balances that they are expected to perform with due diligence. This sends a clear, powerful signal. No longer is the board to be the mere rubber stamp of management. And this represents a sea change in actual board practice.

The change has just started and, I believe, it can be inexorable, if the process is given further impetus.

Voluntary

That further impetus can be given through the third milestone we now have to reach on the roadmap. This is to reinforce and equip all those corporate directors–particularly those who serve in board committees–with the knowledge of best practices in board committees and, inevitably, in the entire board process.

Corporate directors need to go much deeper into their core governance functions related not only to conformance but, above all to performance as members of a board of directors. These functions include not only monitoring and setting up accountability systems but also–and much more importantly–formulation of strategy and policy in the governance content. These functions are as demanding of high standards of professionalism and ethics as the functions of a lawyer, an accountant, or an executive in management.

Corporate directorships, therefore, needs to be professionalized through a certification program that demands continuing education.

Happily, this step can and should be taken. We, in the Philippines, have tied up with other economies in East Asia to provide a common certification program for professional directors. Note, however, that this is a step that regulators can only encourage. This is not to be mandated. This is where a dividing line is drawn, between those complying only with the letter of what is mandated or required and those willing to move up the road, adapting the spirit behind the law and the regulations the law spawns.

Most of us in the Philippines are still straddling on that dividing line.

Initiatives

The fourth milestone is marked out by two initiatives laced with peer pressure.

The first of these initiatives puts positive pressure on the entire board or at least on the working board, involving those directors open to at least gradual improvements in board practices. Who takes this initiative? Who puts the pressure, no matter how subtly it may be applied? The answer–those corporate directors who have taken it upon themselves to invest time, effort, and other resources to go through a professional directors program.

Inevitably, they suggest strategic planning workshops or an out-of-town corporate retreat. They cause to be organized a board workshop on governance, whose outcomes are upgraded versions of the corporate governance manual, of the corporate code of ethics and social responsibility, and of the corporate or institutional culture (the corporation’s core values as they should be lived). We have seen how far these get a corporation on the road to genuine corporate governance reforms.

The second of these initiatives puts increasing pressure for improvement in board practices through a corporate governance scorecard. This needs to be system-wide, involving, at first, all the important banks, then all the important publicly-listed corporations and eventually all public corporations.

The framework for the scorecard is common for all of East Asia. Thailand has been doing this for three years now. Hong Kong has already completed its first run. We are doing it this year for the Philippine, after first test only for commercial banks done in 2002. Other East Asian economies–significantly, including China–are with us in this common undertaking that allows for comparisons among economies, sectors within economies, and companies in sectors across economies.

How is pressure applied? First, by naming the bets governed companies. Second–and this is really critical–by working closely with the regulators so that, broadly, the same framework for the corporate governance scorecard is used and included in the regular examination they conduct on the banks and companies they regulate. Third, by eventually releasing the overall scores of all public companies. Thailand is already at the brink of doing this.

In the end, pressure is applied through transparency by getting the general public to know where companies actually stand, so that those taking the most grudging steps forward can be "shamed" into speeding up on the road to reforms. In this regard, whether we do this ourselves or not, it will be done. As in most lists giving scores for economies, there are organizations that end up giving up a black eye, as a country or as a company, if we do not move forward or if we move forward too slowly and too grudgingly.

"Reputational agents" is new and somewhat unfamiliar. But the role is familiar and essential to good governance, for it refers to those agents or professionals who play a very important role in the functioning of free and open markets.

The list includes accountants and auditors, compliance officers, financial analysts, business media, bankers, judges in specialized courts, and corporate lawyers.

Reform Agents

In addition to three key agents of reforms–these are the chairman of the board, the corporate secretary, and the auditor (both internal and external), I would add one more–an association of minority stockholders.

There is a need to orient and tap all these agents for speeding up reform actions leading up to genuine improvement in corporate governance practices. Where they need to be organized, we should not lose time in organizing them. The Institute of Corporate Directors has proposed, with the stimulus, encouragement, and support of the regulators, the formation of a corporate governance network in the Philippines. This has to be a network of networks. One can and should be organized for chairmen of the boards; another for corporate secretaries.

Fortunately, internal auditors are already organized and are raring to move on. But what about the judges and corporate lawyers? And the compliance officers? Can we pull in the business media? And the financial analysts? The biggest challenge of all. Can we at last put up a minority shareholders association? Can this be given impetus by the pension funds, in much the same way that pension funds elsewhere have been in the lead for real corporate governance revolutions in other economies?

If at all, considering how minority shareholders are being treated in our economy, we need this so much more in our midst, if we truly have a strategic interest in developing and significantly expanding our capital markets.