Good afternoon everyone. Miss Jacquelyn Williams-Bridgers of the USAID, our chair of the SEC Madam Tess Herbosa, Commissioners of SEC, Former Defense Secretary Rene de Villa, and of course our favorite, “Dr. Boom,” Dr. Villegas.
The topic this afternoon is something that’s very close to my heart. It’s also something that has made a big difference in our country. When you look back at the past 50 years of the Philippines, the primary reason why we have underperformed is the lack of good governance, both in the public – maybe primarily in the public – but also in the private sector.
Dr. Villegas will probably tell you that when he was a young man, the Philippines was among the top countries of the region. In fact, the World Bank at one point identified the Philippines and Myanmar as the most promising countries of the region. In 1965, our economy was twice the size of Korea and Taiwan combined. Fast forward to 2010, we were known for a long time already as the ‘Sick Man of Asia’. Sometimes when you go to Hong Kong, people will ask “How come the Philippines is so poor and yet the Filipinos we see are so rich?” because they keep shopping in Hong Kong.
Governance is at the heart of the success that we’ve had in the past 5 years. As you know, the president ran on an agenda of better governance. Sabi niya, “Kung walang corrupt, walang mahirap – if there is no corruption, there will be less poverty”, and he’s walked his talk. This has allowed us to get into the virtuous cycle of confidence. Before we were in an opposite cycle which was a vicious one. So what is the virtuous cycle of confidence? When he ran for office and he walked his talk, the markets suddenly started to believe and the markets started to recognize the true potential and situation of the country. This therefore started to allow us to borrow at lower rates which gave the governments more fiscal space to invest in more productive expenditure such as social services, infrastructure, and other needed expenses of the country rather than just the interest.
At one point, interest was over 30% of the budget. Now, it’s a little under 15% and it’s going down. Corporates – many of you are with corporations. When the Philippines was upgraded, your sovereign ceiling also improved because the ceiling is always the country. So when our interest costs decreased, your interest costs also decreased. And therefore, when you look at projects, your required return is lower and since you have more confidence in the country, you actually look further out into the future. In fact, about a year or two when the president’s administration started, you could see in the newspaper companies talking about their increased commitment to capital in the future. That got us deeper into this virtuous cycle of confidence. These added investments meant added employees. And the employees themselves – i remember when I was a young man out of college in the late 70s, to buy a car – the cars were much cheaper then – the monthly amortization was over P20,000.00 because the interest rate then for a car loan was, I think, around 25%. A car’s not affordable for people who are just starting their careers. So with the improved confidence in the country, employees – young employees – suddenly find it affordable to buy durables such as cars and condominiums. Why? Because the interest rates are very low and the terms are longer and therefore the amortization is much lower. So with this, the consumption of the emerging middle class in the country is now becoming an engine for growth. Again, getting us deeper into this virtuous cycle of confidence. But this thing about confidence is a commodity that is very important but can easily be lost.
I can share with you with my own personal experience: Tonette and I were with SGV – Tonette started much earlier than me – but we were both with SGV. And at that time when I was in SGV, it was really Andersen, it was part of a global organization. And at one point, as mentioned by Peter, I ran assurance practice for the Asia Pacific Region. I was one of the two Asian representatives to the global board, and this was when the ENRON problem hit Andersen.
Within a matter of 5 months of the discovery of the problem, a firm that had over a hundred thousand employees, revenues of over $25 billion, number one in the world, started collapsing because various stakeholder groups lost confidence. Clients, people, regulators, everyone lost confidence. The currency of an organization like that is confidence, and the currency of a country like ours is confidence also. And that’s built on many things, but governance is at the heart of this, both public and private. And that is why I started this talk by saying that the topic is very close to my heart because I saw firsthand something that is seemingly indestructible – something that was built over a hundred years – something that built many careers, something that was doing very well. In fact, when you look at Andersen, it was a great organization. 99% of it was great except for the Houston office that handled the ENRON account. In fact, probably the Houston office was a good office except for the team that handled ENRON. And that is why in good governance, we have to embed it. It cannot be checked in quality because you inspect it. It has to be embedded in the culture. It has to be embedded in the way you do things. It has to be built-in quality. Because checking cannot be 100%. The only way you can make sure that it is actually working is if you really incorporate it in the way you do business as an integral part of your culture.
We’re seeing it again today. A great company like Volkswagen – Volkswagen is such a great company that it is treated in the financial markets as a sub-sovereign. It’s a corporate that could borrow like a country. In fact, the German central bank has substantial investments in Volkswagen because it is such secure and stable company. And yet, I don’t know how far up this mistake was – or the problem was – but it is going to be an existential issue for Volkswagen. It is shaking the very foundation of the company. We saw it in British petroleum, one accident at the gulf of Mexico practically destroyed the company that was one of the world’s largest corporations – and that is why governance is very important.
Now, corporate governance, when you talk about it, is a big concept. What is corporate governance and where does it start, where does it end and how do you embed it?[I would like to greet the Ambassador of SG which is again, an example of great governance, a country that I admire a lot and a country that actually pays its civil servants well.]
So what is corporate governance and who is responsible for corporate governance? It must be owned by everyone, but it must emanate from the top. Just like when President Aquino started this good governance movement for the country, he started at the very top. He started by saying that ’this is what I am, this is what I am for and this is what I’m going to do’ and started walking his talk and people started believing and everyone started following suit. We’re still not there, this is a long journey but we are pointed in the right direction. At the top of corporations are the boards of directors – not even the CEO is at the top of the governance pyramid – it is the board. Because the board represents the shareholders and the stakeholders of the company. So when you’re invited to the board of a corporation, it is a major responsibility. It is not just an opportunity to have a per diem where you walk in there, you get the materials and the check is always there and then you sign it and you’re smiling there. It’s not about that, it is a major responsibility.
And that is why I consulted many of my colleagues and just felt that I have to share my thoughts on boards even though that’s the primary responsibility of other agencies such as the SEC, the BSP, the Insurance Commission. I just felt that somewhere out there, someone should try and put forward a straw man for what could be a best practice for good governance in particular in the role of independent directors. Because I talked about the importance of the board itself, but within the board, there are different types of board members. For me, the one with the even heavier responsibility is that of the independent director. If you are stock exchange listed, if I’m not mistaken I think they require two-thirds independent board members. In fact, the NY stock exchange actually prescribes a salary for independent board members and to be independent, you must not own a share of the company – or maybe one qualifying share. Because what they want is to make sure that your interests are aligned with the interests of the stakeholders that you are protecting – that you are sitting for. And when you talk about public corporations, you have access to capital markets so you get investments form the public. Although here in the Philippines – this is my constant discussion with PSE – the float is still not deep enough. The average float is around 25%. But to be truly public, I think we need to further expand that because a market needs to be deep enough so that there is true price discovery.
Again, we are an evolving market and the PSE has been putting forward reforms in the right direction. So, when you talk of boards, when you attend the meeting, you are not there to just listen to the CEO. In fact, a properly functioning board must be the one to set the agenda. And this is where the role of the chairman will also have to be highlighted. After the ENRON problem and the Servan Oxley law was passed, they started splitting the role of the chairman and the chief executive – and for a good reason. Because the CEO’s interest is really very focused on the day-to-day operations and the results of the operations of a company. And yet, the board is responsible for many other stakeholders. The board is responsible to the investors, to the bankers, to the regulators – to make sure that you pay the right taxes, to the environment, to the community, to the workers and the labor force for creating the right type of environment for working. So the board’s task is quite broad, and that is why in my many discussions with Chair Herbosa, I was saying that I know a lot of Filipino executives who are hardworking, but there must be a limit with the number of board seats one can properly take on. Because even if you worked 24 hours, there’s a limit to how fast you can absorb it and the amount of time it would take for you to actually engage the management. And if there is a limit to how many you can pay, there must be some standards on board compensation. It cannot be like how government people are paid, because it is truly an important task. In fact, a properly functioning board must engage external consultants from time to time. They cannot forever take on the assertions and representations of management. From time to time, they have to check on certain things in operations. For example, the corporate direction and strategy. That’s very important. From time to time, the board must engage with a strategic consultant to give them feedback on how they’re doing, and how they’re seeing developments in the world. That is something the board must do, separate from what the chief executive and senior management is doing.
There are also key positions within the organization that must report directly to the board. For example, the internal auditor of the company must be reporting directly to the board and the committee of the board must be ran by an independent director, not an executive of the company. Nowadays, they also have a risk management committee because there are many risks that companies face. There is also a compliance committee. In the case of the Volkswagen situation, it was a compliance issue and if the risk management committee were really doing their jobs, then probably some of these issues would have been highlighted. One mistake so far, based on the latest information I have access to, market cap dropped by $35-40 billion and they estimate that this particular problem in the US alone will cost them at least $20 billion, and probably more. In the case of the BP problem, they just settled with around $20 billion.
Again, since this is an SEC forum, I have very active engagement is SEC – they are very good in SEC. In fact, I’m very happy with their performance, they’re quite proactive. It’s composed of very experienced members. As you all know, the Chair is the former managing partner of a law firm and there are other very experienced members. So one of the things that I’ve been discussing with them is, the SEC must have some teeth. How come it’s only Kim Henares that’s feared in the country? They must think that when the name Tess is mentioned, it must generate the same fear. The problem is the fines that they can impose are prescribed in the law and they’re a small amount. So some companies would rather pay the fine than file their income statements. Now, this is not the sole responsibility of the SEC. Just like in everything, to really have good governance in the country, there must be an ecosystem that’s working. So around the SEC are the companies, the investors, the various stakeholders, the banks. And if, for example, a banker whose client does not file with the SEC, will insist that they file, then we will have less of that. But somehow, I think some of our banks, because of competition among banks, sometimes close their eyes to those regulatory incompliance issues. I used to audit banks, they have a parallel financial statement that they create because they know that the real financial statement is not the correct one because that’s the one submitted to the regulatory agency. So if the banks, for example demand that it be done, then the chances of compliance will be higher and that makes the work of the regulatory agencies much lesser. If for example, investors, the stockholders also demand that it be done, then the job of corporate regulators will be much easier. Stockholders have an issue also, you must attend the stockholders meeting not to get a free meal or a giveaway, but to really ask questions. Ask difficult questions, because that is your money. In fact, a simple definition of corporate governance is to make sure that managers return your money and protect your money. If you lose sight of that, then chances that it will happen will be much less.
Again, as I mentioned earlier, our journey towards better governance is going to be a long one. But it’s important that we’re focused on the right areas, we know what the priorities are, and may we all work together towards it. It cannot be SEC being the bad cop, I don’t think that’s the way we’d like it. Just like our own bodies, we want all our organs working in harmony. Then there will be less pressure on your heart if your kidneys are working well. So the kidney will be the PSE. And the PSE, which is a self-regulating organization, must also do its part. Again, the PSE has done a lot of improvements. They’ve invested in technology, they brought in a very qualified CEO, they have a board that is composed of diverse individuals and they put up the CMIC- which is a separate body that will monitor the integrity of the operations of the PSE. But again, this is a journey and we’re moving towards a level of governance that is at par – if not better – than the rest of the region. It is important that we do so, because whether we like it or not, there is a premium for good governance. We’ve been seeing in corporations in the Philippines, without naming names, companies that are perceived to have better governance, get a higher multiple. Companies that are not perceived well, will get less. Countries that are perceived to be better ranked also get a premium. Those that are less then get a discount.
Therefore, it is to all our interests that we continue along this path to good governance. 2015 is a very important year for us because this is the year where we’re going to be part of a more integrated ASEAN. And the beauty about an integrated ASEAN is that we become a larger market and with a larger market, we can attract more capital. With a larger market, the intermediation of capital becomes more efficient. And therefore, the cost to borrowers and consumers become less and their returns better. So for example, if PSE standards become the same as SGX and the other stock exchanges in the region, then we can create an ASEAN class of financial products that will then attract bigger capital that require lower return because they have more confidence about the debt of the market. So, those who want to raise capital will have many more options and more instruments to use and that is very important. Obviously, some do not like that because there will be more competition. But in a sense, we’ve seen with our own experience that you don’t have to own the whole market to prosper.
Actually, if the market becomes bigger, you can have a lower share and yet become more profitable. A case in point is the telecom industry. Before, I’m sure most of us are old enough, when we used to lift our phone and we would say, “party-line! puwede bang ako naman?” We leaped from that, but the crucial action that I think we have to credit from President Ramos, is that he liberalized the telecom industry. With the liberalization of the telecom industry, we have a PLDT that is more profitable than when it was a monopoly. And then we have Globe who is also equally profitable and my hope is for our own sake, there will be a third one so that when there is no signal for Globe, we could go to a third one. Competition is good. The same is true with airlines. Now, airlines are competing with bus companies in terms of passengers. Domestic tourism has reached over 50 million, and yet the companies are actually benefitting as well. And that is why I think we should not fear this. Because if we do the right things, we will win. Win for the companies and win for the consumers. Individually, all of us are small countries, especially with a giant neighbor like China. How can we attract someone who put up a large factory in our area or invest in the Philippines when our market is so small? And yet, if we become one, and to be one we must harmonize and not just say ‘we declare that we are now one’. We must harmonize standards, we must have the same disclosure requirements, we must have the same credit rating methodologies and criteria.
Then, you will have a market that will become potentially the 3rd largest in terms of population, a market that would have one of the largest middle class in the world, a market that combined, has total foreign currency reserves of close to a trillion dollars. So, that’s why I’m excited about 2015. It’s not going to just happen, it’s not going to be a big bang, it’s again going to be a journey. But, if we do it well and if we have the confidence in ourselves, then this will become an engine for growth of the PHilippines if we see it as an opportunity. Why?
In a combined ASEAN, the Ph will have the 2nd largest population. Singapore, Malaysia, Thailand, are practically at full employment – in fact, Thailand has to import people from its neighboring countries and even as far as Sri Lanka to man the factories in Thailand. And here we are with 100 million talented Filipinos. And that is why the President is really focused on two things outside of good governance. Good governance is an overarching strategy, but two things – infrastructure, and investment in people. And to do so, we need fiscal space, nothing’s for free. So, 2015 is the start of another era for us. An era where there is much more challenges but also a lot of opportunities. In fact, even before 2015 happened, in 2013 and 2014, ASEAN had more FDIs than China. Imagine that. The Philippines with its FDI issues, imagine if we catch up, the advantage of ASEAN would even be much more because people are starting to see the potential of ASEAN.
And those of you who don’t like looking at maps, maybe you can look at the map when you get home, you will realize the ASEAN makes sense. Because the vision of ASEAN is to be the hub of Asia trade. Geographically, there is no other choice. Because for example, for China to get its raw materials, it has to go through ASEAN. China and India cannot go directly to each other, there are many high mountains in between them. Besides, they don’t completely trust each other. And on the other side, there’s Russia and countries with historical issues and ASEAN is the one now that’s taking the lead. We’ve done that by starting all these free trade agreements with the region around us, but we still haven’t really fully connected ourselves. Because to be ourselves, our infrastructure will have to be world-class. And of course, Singapore has done its part and the others are ahead of us, but the next president of the Philippines will really have to double up in terms of infrastructure. And if we’re able to do that, and we do have the fiscal space and we do have the investors who are interested to do so, the Philippines can then position itself as the gateway to ASEAN from the North because we’re the most northern part of ASEAN to Japan. Also, because we are hispanic by history, we can be again the gateway to Latin America.
Because in a world that is in transition, where the aggregate demand used to depend on the ¼ of the world that is prosperous but aging now, there will have to be a readjustment. And the opportunity for ASEAN countries like the Philippines is to go to markets that it has not traditionally penetrated well. In the case of ASEAN and the Philippines, it’s Latin America, Africa, and south-south trade is going to be an important component of this. Then in the case of the Philippines, Europe is going to be a market that we haven’t penetrated well.
But within ASEAN, there is an opportunity as well. Because the big question always in the mind of many people is, where is growth going to come from? When you look at intra-ASEAN trade, it’s only around 25%. And intra-ASEAN trade is mainly intermediate goods. This means semiconductors that are going to be part of another product that’s then sent to China, then ultimately sent to the final consumption market. In fact, two-thirds of Asia trade is intermediate goods, then it’s sent to final markets. What we need to do is increase intra-ASEAN trade and shift it more from intermediate to final consumption goods and I think we are starting to see that. Some of the products we buy right now, there are Thai markings, there are Indonesian markings, so the more we trade with each other in terms of final consumption products,the value added is higher, the incomes of both countries increases. But to do so, we must be able to harmonize our standards. We must be able to trust each other’s’ governance. So for example, the food standards where it says: ‘inspected by the Philippine FDA’ is something that’s the same level as the FDA of other countries where they respect each other’s’ standards. So governance is something that’s pervasive, it’s in everything we do. It is not there so that you can get a high rating in SEC-PSE listed companies has improved – I think it is now 60-something from 58. But the average of Thailand-listed companies is at 75 using the same methodology. So, let us not do this for show, for ratings, or to get an ISO standard. That doesn’t work. That’s what we call check-in governance, it must be built-in. Internalize, make part of the culture, make part of the way you do things. The same with our country, it cannot be President Aquino and Kim Henares and the Ombudsman fighting cases. It must be us believing that this is the right way to do things, that this is good for us. And that is why I keep telling people that countries much smaller than us like Singapore with 1/20th of the population of the Philippines, has an economy that is slightly larger than us, people who are richer than us, and yet we’re a bigger market because our ecosystem has not properly operated with each other and therefore we need to continue up the path of better governance.
I commend the SEC, the PSE, and thank the USAID for supporting this push towards better governance. So, those of you who are mad at me for issuing the Department Order, I’d like to apologize but it’s nothing personal. And I told Chair Herbosa, give exceptions! I am sure that there are super-people who can do 20-30 boards and can work up to a hundred years old, fine! But let’s put a transition to this because our generation is not as well-built as older generations. It’s nothing personal, it’s just an effort to put up a straw man. I really believe that if we do not deal with this issue of governance and build it into our culture and the way we do things, then this period of positive perception of the country will not last. We say we are no longer the ‘Sick Man of Asia’ we are now a bright spot, we can even be a brighter spot because we’re such a blessed country. Blessed because we are the youngest – economies are all about people – we’re the youngest in the region in Asia where our median age is 23.5. We’re right in the middle, we’re well-endowed with natural resources, most of us have the ability to communicate in English, a lot of our fellow Filipinos are very talented. In fact, the question is, “How come a Filipino is better abroad than in the Philippines?” How can that be? How come we follow the traffic rules abroad and not in the Philippines? How come we pay taxes in Singapore and not in the Philippines? Those are things we have to answer because there’s only one thing we could give to future generations – that’s our country. And this is our generation’s responsibility to pass on our country in a better shape than we inherited it. And we’re facing many challenges like climate change, for one. But I was only given one hour, I can’t talk another hour.
Again, thank you for this opportunity, I hope I was able to share with you some of my thoughts on governance. It is something that is not there to listen to, something that is not there so that you’ll get a good mark, something that is not there so that you’ll get an ISO, it is something that we must internalize and we must do every minute of the day.