Corporate Governance: Trust that lasts

By Leonardo J. Matignas, Jr.

First Published in Business World (2/17/2014)

In the corporate world, it is often said that “TRUST” is the key to any successful organization. However, records from the past show that there are also organizations that are in difficult situations because of trust, more particularly “unfounded trust.” While all of us are born with the best intentions in life, we may have acquired along the way certain traits that are influenced by the environment where we operate, and more importantly, by what motivates us to do certain things.

This brings us to the current business environment in which we find ourselves. The questions arise: Can trust be the sole engine to run a business? Why is there a need to regulate it? Why is corporate governance high on the radar of regulators and other critical stakeholders of public companies?

Trust is from the Latin word FIDes; the root word is FID, meaning faith. Accordingly, corporate governance starts with the Board of Directors, as elected by the shareholders, to effectively carry out a FIDuciary role. Another word that can be associated with the role of governance is “conFIDence”.

Since 2002, the Securities and Exchange Commission (SEC) has advocated corporate governance practices for covered companies, with particular emphasis on companies dealing with capital or funds from the public.

The SEC first released the Code of Corporate Governance in 2002 through SEC Memorandum Circular (MC) No. 2, series of 2002, which required corporations, among others, to form audit committees. The Code was subsequently refined with the promulgation of the Revised Code of Corporate Governance under SEC MC No. 6, series of 2009. The Revised Code enhanced the provisions on strengthening compliance, particularly the requirement of a compliance officer in covered institutions. In March last year, the Commission mandated the submission of the Annual Corporate Governance Report requiring companies to disclose information ranging from its code of conduct and business; remuneration; internal audit and control; board, director, committee and CEO appraisal; to internal breaches and sanctions. All listed companies are also required to submit a compliance report to the Philippine Stock Exchange (PSE). The SEC’s Revised Code of Corporate Governance is again being revisited to further strengthen the practices espoused in the Association of Southeast Asian Nations (ASEAN) Corporate Governance Scorecard, in preparation for the ASEAN 2015 integration.

These SEC and PSE Circulars, which all advocate the core principles of corporate governance, which are fairness, accountability and transparency, introduced changes in the practices observed by the Board of Directors (and its committees), management and audit mechanisms.

There have been several definitions of corporate governance, one of which is that found in the SEC’s Revised Code of Corporate Governance. Simply put, though, corporate governance is “when the company does the right thing, at the right time, at the right place, using the right resources, implementing the right processes, and most importantly for the right purpose.” This definition may be long but the language is plain and simple.

Corporate governance is not premised on a lack of trust. It simply ensures that trust is accompanied by practices and principles that will further strengthen it. The Board, who is given this trust by the shareholders, is tasked to perform a very critical oversight role over management to ensure that key principles and core values of the organization are being adhered to by the latter in achieving the company’s business objectives. To management, trust is given that it will run the business within the purview of effective strategies, risk management, financial and operational controls. Finally, trust is given to the audit mechanisms (both internal and external) that they will ensure the continuing effectiveness of management in implementing the right strategies and practices to achieve the company’s goals and in accordance with acceptable standards.

The SEC provides opportunities for all the above positions of trust to continuously enhance their corporate governance practices in performing their respective roles. In SEC MC No. 20, Series of 2013, members of the board of directors and key officers of publicly listed companies are required to attend (at least once a year), a program on corporate governance conducted by accredited training providers. The training does not only cover the key principles of governance but it also includes mandatory topics that are very critical given the current developments in doing business. Hopefully, directors and management will welcome this as an opportunity to further sharpen their ability to govern and continuously nurture the trust inherent in their positions.

With all these, there is no doubt that if properly embraced, good corporate governance is the practice that ensures a company does what is right. Trust is now further supplemented by effective corporate governance practices to ensure that it will last.

Leonardo J. Matignas Jr. is the head of Risk and Governance practices and the Chief Risk Officer of SGV & Co. He also leads the pool of SGV partners who comprise SGV’s SEC accreditation as an Institutional Training Provider on Corporate Governance.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.