I tell people that all those recognitions properly belong to my boss because I’ve done this twice, two different results, and the only difference is the boss. The work in the public sector requires you to operate not just in the field of economy and business but also in the political space. It is important that you have the trust and confidence of your boss and that your boss has the political capital. Fortunately for me, this time around, i have a boss that not only has political capital but walks the talk as well.
We have been faced with difficult decisions between what is popular but not fiscally responsible and doing the unpopular thing, which is the right thing to do for the sake of the fiscal health of the country. The latest, of course, is the SSS pension issue. I’m sure that a lot of you are people who understand the actuarial issues or accounting, and that there is no such thing as free lunch. If we need something, we have to come up with ways on how we’re going to pay for it. But the President is not here to make popular decisions, but the right decisions for the country.
The call for lower income taxes where we want to have competitive tax rates, but we cannot have piece-meal adjustments in the tax structure so we must do it in a comprehensive basis. That is why I think governance is a really big part of the success of the Philippines in the past 6 years where our average growth rate is the highest we’ve had in over forty years.
Governance, I think, has been the missing element in the country that i think has put us in a virtuous cycle. The same is true with corporations, I’m sure you look at the market everyday, especially nowadays with the volatility we’re facing, because of China, the oil price, and many other things. And yet, different companies behave and act differently in this volatility. Even in good times, there are companies in the same industry with practically the same business model where the multiple is different. I think, with everything being equal, we can assume that a big part of the premium that will reward you with a higher multiple, will be the governance premium. The confidence that the investing public has in a company’s system of governance that they will actually deliver their promises and execute their strategy. Because in reality, strategy can be copied, you can explain it and you can mount it, but the execution cannot be copied. So I would like to be a Jollibee, we know their strategy, but only they are able to execute it the way the customers want it and public expects it. This is the role that the Institute of Corporate Directors is playing in the sidelines, but in a very important capacity ever since it was incorporated in 1999.
I was just telling former Secretary Estanislao that I was fortunate enough to be part of the incorporating group back when i was till chairman of SGV back in 1999. Now, the OECD mentions different components of corporate governance, but there is one i would really want to spend time on today: the responsibility of the board members. An article from the WSJ’s issue last weekend entitled, “How many board seats make sense?” This is a real issue because there is a limit to one’s capacity. I faced this as a managing partner of SGV then. How many accounts can a partner handle to do the job properly? Of course, theres a limit to time because we only have 24 hours in a day along with a limit to one’s capacity. In this particular case, the company Hasbro, basically said that for them, it has to be 5 board seats. Because the role of the board member should not be taken lightly because they are responsible of taking care of the stakeholders, they hold management accountable, they set strategies. They’re to there to just collect the check in the binder. Your role is to do your homework and to really help set the course for the company. As i mentioned earlier, execution is crucial, but more than execution, we need strategy. I mentioned that strategy could be copied and is only 1% of success, but moving in a volatile global economy, there are changes in the environment where one is required to change that 1%. And to perceive these changes, where there aren’t visible signs yet, you need a certain level of expertise in the board in order to somehow predict these changes. That is why the composition of the board is also very important because we need experts there, not just the friends of the CEO or those who do not make trouble.
In today’s world where technology is increasingly becoming a major factor in the way business is done, you will need a technology expert on board. In fact, the technology experts of today have a limited lifecycle because technology is moving rapidly. That is why have banks who have outsourced their IT department. There is no way to hire someone who can keep pace with the changes in technology. So even if you have a technology expert, you need to refresh these experts to make sure that you are getting the right inputs. Like, for example, experts in the environment where climate change is increasingly playing an important role. In business, those of us who look at the agricultural sector would need keen understanding of how El Nino and La Nina will be affecting all of this.
I was listening to the head of Kimberly Clarke some months ago, and he was sharing his experience that in Korea, 90% of their diaper sales are done through the internet. In China, from practically nothing, it’s almost 40%. Anecdotally, my wife buys it from Lazada. So if your board is not conversant on an aspect of some of these things, then you will not be fulfilling the role of the board in helping chart the course of the company. This is where not only the qualifications of the board member is important, this is where the certain status of board members are also important. I am referring to the importance of the independent directors. In some jurisdictions, they actually require majority independent directors. The reason for independent directors is, when you become public, you have a fiduciary responsibility. In fact, you need to protect the minority who entrusted their hard-earned money with you. And in the course of doing business, especially in emerging markets where the number of players are still limited, there will be a lot of cases where there will be a lot of related-party issues. For example, you’ll have valuation issues if you merge two related parties. Then what will the proper value be for that? Because you if you underpay, the minority will lose. If you overpay, someone will lose. Therefore, all of these tricky issues need to be managed, like how do you compensate the CEO, the members of the C-suit and the key people? This is an ongoing discussion, even in Wall Street. Because main street has been revolving and saying, “We are paying for the excesses of Wall Street,” in terms of the risks they’re paying and the suffering the people of Main Street has to take, as a result. That is why Im focusing on this issue and your role of your organisation, not only in training corporate directors because in this world, education is non-stop. When you get your college diploma, your master or your doctorate, you’re only as good as them. But a few years down the road, you will be dated.
ICD should start looking at helping companies have that balance in their board by setting benchmarks of successful entities that have properly balanced their board and that has put the right checks and balances in the board. I know that in most cases, the role of Chair and CEOs are separate. But there are still many who insist that a Chair and CEO should be one person.
We are all human, we need a mirror. We need someone to tell us, not with our own eyes, how they see things. The importance of executive sessions is something we should highlight, where we ask the management to step out and let the non-execuitive directors to sit down to talk about sensitive issues. That is what a well-functioning board that has independence looks like. This is what we need, especially in today’s world where things change so rapidly that you could suddenly lose your market. I remember the time when we were walking like doctors with pagers on our belt, that was the ‘in-thing’ back then. And where are those companies that made these pagers now?
I even heard the futurists talk about the end of shopping malls. Well, that is bad development for our wives, but we could see that the shopping habits of people are changing. They are buying more and more online. So if you’re a board of director of a shopping company, then you have to be able to talk about this new trend. There will still be a role for malls, but it will change towards the direction of turning into more of an entertainment place where people eat and experience things first-hand that cannot be experienced through the digital world.
In the world of banking, in Sweden, they’re staring to talk about the phasing- out of cash. And Sweden was the first one to introduce paper money and they’re also taking the lead in this development. So, what happens now?
I would love a cashless world, there will be less corruption, there will be less under-the-table transactions, it’ll be easier to collect taxes. That will change the way business is done, what will happen to all those ATMs? The reason why I’m telling you this is to share the fact that to sit on a board is not to be part of a social club. That is why I issued a Department Order, which is not mandatory because I don’t really have the power Secretary of Finance over the SEC to tell them wheat to do, nor the Insurance Commission and GOCCs. But I just put it out there as a straw man, as a basis for people to think and reflect on our rules and regulations, how we regulate boards, how we choose independent directors, how we compensate them, and how long can an independent director really stay independent. Again, going back to my own experience, after all the problems in ENRON and other accounting scandals, there was a rule that auditors can only audit a company for 5 years. Because a key component of auditing is objectivity and independence. Therefore, would that same concept apply to independent directors? How long can you stay independent?
I strongly believe that if IDs do their job well, it will reduce problems that companies will face. You want your management to take ownership and responsibility of the company, but that same focus will make them blinded to some aspects of corporate governance.
The next question is, how do you compensate them? Being a director can be a profession, especially for those who have the right experience and have reached a certain level of expertise. It must be a fixed compensation that allows you to devote a proper amount of time. It cannot be one that is subject to incentives and stock options because you will risk losing the concept of independence.
My other question is this: the frequency of meetings. because I’m seeing a trend of reducing meetings down to every two months or quarterly. Is this the right direction? There are many issues in this area, actually, that I hope the ICD will take a lead in discussing and getting inputs so we can put up best practices. I know that you give awards, so through those awards, we could set benchmarks of best practices of corporate governance. The criteria for these awards should be designed in such a way that you really look into every aspect of good governance.
In the last five years, I’ve started my speeches by saying that we’ve had a good run so far but we there is so much more we have to do.We need to continue this not just in government but in capital markets as well. We need to continue to attract capital, both fixed and equity, into the Philippines. And if we do not take care of the governance component and we have another scandal like the BW scandal, it’ll be very hard to regain trust and confidence and it’ll take another cycle, another generation, to get back on a virtuous cycle. That is why this hard-earned confidence that we’ve generated in the past six years, must be protected at both the public and corporate level. If we do so, the fundamentals of the country are all going well on our side, with: our upcoming demographic sweet spot, being in the right location, being part of ASEAN, good macroeconomic fundamentals, banks that are better regulated now than it was many years ago, natural endowments, and the youngest population in Asia. And with a young population paired with a rising income, we’ll be creating the engine of growth which is the middle class. Therefore, it is up to us to realise this demographic dividend and growth potential. And the only we could do that is through governance. Good governance in both the public and the private sector.
Thank you.
I tell people that all those recognitions properly belong to my boss because I’ve done this twice, two different results, and the only difference is the boss. The work in the public sector requires you to operate not just in the field of economy and business but also in the political space. It is important that you have the trust and confidence of your boss and that your boss has the political capital. Fortunately for me, this time around, i have a boss that not only has political capital but walks the talk as well.
We have been faced with difficult decisions between what is popular but not fiscally responsible and doing the unpopular thing, which is the right thing to do for the sake of the fiscal health of the country. The latest, of course, is the SSS pension issue. I’m sure that a lot of you are people who understand the actuarial issues or accounting, and that there is no such thing as free lunch. If we need something, we have to come up with ways on how we’re going to pay for it. But the President is not here to make popular decisions, but the right decisions for the country.
The call for lower income taxes where we want to have competitive tax rates, but we cannot have piece-meal adjustments in the tax structure so we must do it in a comprehensive basis. That is why I think governance is a really big part of the success of the Philippines in the past 6 years where our average growth rate is the highest we’ve had in over forty years.
Governance, I think, has been the missing element in the country that i think has put us in a virtuous cycle. The same is true with corporations, I’m sure you look at the market everyday, especially nowadays with the volatility we’re facing, because of China, the oil price, and many other things. And yet, different companies behave and act differently in this volatility. Even in good times, there are companies in the same industry with practically the same business model where the multiple is different. I think, with everything being equal, we can assume that a big part of the premium that will reward you with a higher multiple, will be the governance premium. The confidence that the investing public has in a company’s system of governance that they will actually deliver their promises and execute their strategy. Because in reality, strategy can be copied, you can explain it and you can mount it, but the execution cannot be copied. So I would like to be a Jollibee, we know their strategy, but only they are able to execute it the way the customers want it and public expects it. This is the role that the Institute of Corporate Directors is playing in the sidelines, but in a very important capacity ever since it was incorporated in 1999.
I was just telling former Secretary Estanislao that I was fortunate enough to be part of the incorporating group back when i was till chairman of SGV back in 1999. Now, the OECD mentions different components of corporate governance, but there is one i would really want to spend time on today: the responsibility of the board members. An article from the WSJ’s issue last weekend entitled, “How many board seats make sense?” This is a real issue because there is a limit to one’s capacity. I faced this as a managing partner of SGV then. How many accounts can a partner handle to do the job properly? Of course, theres a limit to time because we only have 24 hours in a day along with a limit to one’s capacity. In this particular case, the company Hasbro, basically said that for them, it has to be 5 board seats. Because the role of the board member should not be taken lightly because they are responsible of taking care of the stakeholders, they hold management accountable, they set strategies. They’re to there to just collect the check in the binder. Your role is to do your homework and to really help set the course for the company. As i mentioned earlier, execution is crucial, but more than execution, we need strategy. I mentioned that strategy could be copied and is only 1% of success, but moving in a volatile global economy, there are changes in the environment where one is required to change that 1%. And to perceive these changes, where there aren’t visible signs yet, you need a certain level of expertise in the board in order to somehow predict these changes. That is why the composition of the board is also very important because we need experts there, not just the friends of the CEO or those who do not make trouble.
In today’s world where technology is increasingly becoming a major factor in the way business is done, you will need a technology expert on board. In fact, the technology experts of today have a limited lifecycle because technology is moving rapidly. That is why have banks who have outsourced their IT department. There is no way to hire someone who can keep pace with the changes in technology. So even if you have a technology expert, you need to refresh these experts to make sure that you are getting the right inputs. Like, for example, experts in the environment where climate change is increasingly playing an important role. In business, those of us who look at the agricultural sector would need keen understanding of how El Nino and La Nina will be affecting all of this.
I was listening to the head of Kimberly Clarke some months ago, and he was sharing his experience that in Korea, 90% of their diaper sales are done through the internet. In China, from practically nothing, it’s almost 40%. Anecdotally, my wife buys it from Lazada. So if your board is not conversant on an aspect of some of these things, then you will not be fulfilling the role of the board in helping chart the course of the company. This is where not only the qualifications of the board member is important, this is where the certain status of board members are also important. I am referring to the importance of the independent directors. In some jurisdictions, they actually require majority independent directors. The reason for independent directors is, when you become public, you have a fiduciary responsibility. In fact, you need to protect the minority who entrusted their hard-earned money with you. And in the course of doing business, especially in emerging markets where the number of players are still limited, there will be a lot of cases where there will be a lot of related-party issues. For example, you’ll have valuation issues if you merge two related parties. Then what will the proper value be for that? Because you if you underpay, the minority will lose. If you overpay, someone will lose. Therefore, all of these tricky issues need to be managed, like how do you compensate the CEO, the members of the C-suit and the key people? This is an ongoing discussion, even in Wall Street. Because main street has been revolving and saying, “We are paying for the excesses of Wall Street,” in terms of the risks they’re paying and the suffering the people of Main Street has to take, as a result. That is why Im focusing on this issue and your role of your organisation, not only in training corporate directors because in this world, education is non-stop. When you get your college diploma, your master or your doctorate, you’re only as good as them. But a few years down the road, you will be dated.
ICD should start looking at helping companies have that balance in their board by setting benchmarks of successful entities that have properly balanced their board and that has put the right checks and balances in the board. I know that in most cases, the role of Chair and CEOs are separate. But there are still many who insist that a Chair and CEO should be one person.
We are all human, we need a mirror. We need someone to tell us, not with our own eyes, how they see things. The importance of executive sessions is something we should highlight, where we ask the management to step out and let the non-execuitive directors to sit down to talk about sensitive issues. That is what a well-functioning board that has independence looks like. This is what we need, especially in today’s world where things change so rapidly that you could suddenly lose your market. I remember the time when we were walking like doctors with pagers on our belt, that was the ‘in-thing’ back then. And where are those companies that made these pagers now?
I even heard the futurists talk about the end of shopping malls. Well, that is bad development for our wives, but we could see that the shopping habits of people are changing. They are buying more and more online. So if you’re a board of director of a shopping company, then you have to be able to talk about this new trend. There will still be a role for malls, but it will change towards the direction of turning into more of an entertainment place where people eat and experience things first-hand that cannot be experienced through the digital world.
In the world of banking, in Sweden, they’re staring to talk about the phasing- out of cash. And Sweden was the first one to introduce paper money and they’re also taking the lead in this development. So, what happens now?
I would love a cashless world, there will be less corruption, there will be less under-the-table transactions, it’ll be easier to collect taxes. That will change the way business is done, what will happen to all those ATMs? The reason why I’m telling you this is to share the fact that to sit on a board is not to be part of a social club. That is why I issued a Department Order, which is not mandatory because I don’t really have the power Secretary of Finance over the SEC to tell them wheat to do, nor the Insurance Commission and GOCCs. But I just put it out there as a straw man, as a basis for people to think and reflect on our rules and regulations, how we regulate boards, how we choose independent directors, how we compensate them, and how long can an independent director really stay independent. Again, going back to my own experience, after all the problems in ENRON and other accounting scandals, there was a rule that auditors can only audit a company for 5 years. Because a key component of auditing is objectivity and independence. Therefore, would that same concept apply to independent directors? How long can you stay independent?
I strongly believe that if IDs do their job well, it will reduce problems that companies will face. You want your management to take ownership and responsibility of the company, but that same focus will make them blinded to some aspects of corporate governance.
The next question is, how do you compensate them? Being a director can be a profession, especially for those who have the right experience and have reached a certain level of expertise. It must be a fixed compensation that allows you to devote a proper amount of time. It cannot be one that is subject to incentives and stock options because you will risk losing the concept of independence.
My other question is this: the frequency of meetings. because I’m seeing a trend of reducing meetings down to every two months or quarterly. Is this the right direction? There are many issues in this area, actually, that I hope the ICD will take a lead in discussing and getting inputs so we can put up best practices. I know that you give awards, so through those awards, we could set benchmarks of best practices of corporate governance. The criteria for these awards should be designed in such a way that you really look into every aspect of good governance.
In the last five years, I’ve started my speeches by saying that we’ve had a good run so far but we there is so much more we have to do.We need to continue this not just in government but in capital markets as well. We need to continue to attract capital, both fixed and equity, into the Philippines. And if we do not take care of the governance component and we have another scandal like the BW scandal, it’ll be very hard to regain trust and confidence and it’ll take another cycle, another generation, to get back on a virtuous cycle. That is why this hard-earned confidence that we’ve generated in the past six years, must be protected at both the public and corporate level. If we do so, the fundamentals of the country are all going well on our side, with: our upcoming demographic sweet spot, being in the right location, being part of ASEAN, good macroeconomic fundamentals, banks that are better regulated now than it was many years ago, natural endowments, and the youngest population in Asia. And with a young population paired with a rising income, we’ll be creating the engine of growth which is the middle class. Therefore, it is up to us to realise this demographic dividend and growth potential. And the only we could do that is through governance. Good governance in both the public and the private sector.
Thank you.