Good corporate governance and the bottom line

ariel nepomuceno_1RECENT scandals and reputation nightmares have led to the fall of big and renowned companies like Enron, Tyco, One Tel. No one could ever imagine that companies of this stature could collapse because of the misdeeds, unethical or negligent behavior of its directors and corporate officers.

Typically, companies fail because of adverse external market conditions, wrong strategic choices or just bad business judgment and not because a director or executive breached the trust of the shareholders or failed to properly discharge his duties. In the case of Enron, for instance, it appears that lack of independent monitoring and supervision by Enron’s board coupled with patent conflicts of interest led to its downfall.

Subsequent debacles occurred in other companies and one commonality emerged: directors amassing profits for themselves by engaging in fraudulent or criminal activity in tandem with the companies’ employees, contractors and service providers to the detriment of its shareholders. The lack of moral compass on the part of these firms’ decision makers became the buzz in the global corporate world. Suddenly, the stock market reacts when companies get involved in breaches of ethics and compliance principles. Share prices fall and the investors retreat.

Need to improve the rules

AS a result, various stakeholders called for reforms and initiatives in the practice of good corporate governance. And today, the drive to instill good corporate governance is now an urgent imperative. It is demanded by the law, government regulators and the international investment and financial community. Clearly, it makes good business sense to just do it.

Just this year, Group of 20 Finance Ministers have endorsed a new set of G20-Organization for Economic Co-operation and Development corporate governance principles as part of continuing efforts to promote market confidence and business integrity. These principles provide recommendations for national policy-makers on shareholder rights, executive remuneration, financial disclosure, the behavior of institutional investors and how stock markets should function. They essentially raised the need for signatory countries to promote transparent and efficient markets, compliance with the rule of law and ensure equitable treatment to all shareholders, including minority owners.

At the heart of this is the requirement of transparency and disclosure. A good corporate governance system should put primacy on the provision of fair, accurate and seasonable data about a company’s financial state of affairs, its ownership structure and performance. There is absolutely no room for fabricated accounting reports, bloated regulatory disclosures and feigned corporate transactions.

Government intervention

On the other hand, the Philippine Securities and Exchange Commission (SEC) Memorandum Circular 2 clearly prescribes that the Board of Directors is responsible for the companies’ success and sustained competitiveness; vision and mission; and purpose, value and strategies. The SEC even requires public companies to have a Manual of Corporate Governance and monitors compliance therewith. Moreover, the passage of the Securities Regulation Code of 2000 and the revised Philippine Stock Exchange listing rules all contributed to the protection of small local investors. It prevents concentration of decision making to stockholders who own big chunks of shares. And it attempts to address numerous and familiar situations where the minority does not have any voice at all. These reforms address issues relating to interlocking directors, self dealing practices and conflict of interest situations that proliferate in traditionally structured and led Philippine corporations.

Accountability of the top brass

Specifically, good corporate governance focuses on the Board of Directors’ direct responsibility over the success of the company. They are bound to conduct fair business activities and their personal interests must not cloud the decisions of the board. The board should take the lead in decision making. It should cease from being a rubber stamp of the executive managers and must take the center stage in exercising corporate powers and duties and must lead by example in the ethics and integrity space.

A very interesting development is the increasing need to include independent directors to traditional boards. It is widely observed that independent directors’ value lies in their ability to challenge the usual thought processes of the board by bringing new ideas, contributing their specialist skills, and adding the spice of check and balance to board discussions. More and more, we see independent, nonexecutive directors playing a crucial role in today’s company boards. They help the chief executive officer and the management team generate lasting economic value for its stockholders and stakeholders.

And it appears that good corporate governance practices positively impact on the companies’ bottom line. Since it helps prevent fraudulent and unethical activities of companies and clarifies the real role of the board of directors, aforementioned practices promote the reputation and image of the company and stabilizes shareholder sentiments and issues. In turn, it inspires investors’ confidence, facilitates easy access to capital, improves stock valuations and delivers financial success.

Best for the bottom line

The above conclusions are supported by studies and research work in this field. There is substantial evidence that there is a correlation between corporate governance and performance of companies. Some results show that those which do not practice good corporate governance have lower net profit margin and earnings per share. Companies that require the highest standards of governance minimize risks that are associated with its business operations on a daily basis. More important, it was revealed that in making investment decisions, investors now have observance of corporate governance principles as part of the checklist. Undoubtedly, it increasingly unlatches investment and paves the way for sustainable and long-term economic prosperity.

Without good governance, corporate greed shall remain unfettered. It is, thus, befitting to mention Mahatma Gandhi’s valuable reminder that “There is a sufficiency in the world for man’s need but not for man’s greed.”



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