Suits the C-Suite

15 April 2024

Bernalette L. Ramos & Charisse Rossielin Y. Cruz

Securing a competitive advantage in the insurance industry

Stiff competition, shifting regulatory policies, and increased investor expectations have elevated the importance of trust and transparency in today’s insurance industry. Investors are seeking not only greater coverage that spans years or decades but also ethical practices and long-term viability. This trend underscores the current investor climate where discernment is especially airtight, promoting healthy and sustainable practices within the industry.However, this development comes with its own set of challenges for insurers, including developing robust risk management mechanisms and adopting newer technologies across a range of services. Amidst growing competition, the main challenge for most insurers will be transforming their organizations into “preferred partners” instead of mere product providers.These trends and insights were highlighted in the EY Global Insurance Outlook 2024; furthermore, this comprehensive report explores purposeful strategies to help insurers achieve sustainable performance given the ever-evolving nature of the industry. The report provides salient insights, giving insurers the following key points of action to secure a competitive advantage.Prioritize trustTrust is the bedrock of the insurance industry—the core of every interaction, communication, and policy. Moreover, trustworthiness actively guides product development, customer-facing process automation, ecosystem partner evaluation, and technology adoption.Consumers will trust firms that provide the right advice, create the right solutions, and provide products and services that deliver tangible societal value. According to the EY Global Insurance Survey 2021, most consumers (79%) trust insurers that demonstrate genuine commitment to Environmental, social and governance (ESG) principles when making purchasing decisions. Additionally, 43% prefer purchasing from companies that positively contribute to societal welfare, despite higher costs. By incorporating trust into the company's strategies, insurers can attract loyal customers, increase profitability, and reinforce relationships with partners and regulators.Ensure transparency and privacyWhile insurers should take advantage of generative AI (GenAI) to reduce the savings and protection gap and satisfy new customer demand, companies should also be mindful of its actual and perceived risks. This gap refers to the shortfall between what individuals have saved for their future needs and what they should ideally have to adequately protect themselves or their assets against various risks, such as health issues, job loss, and damage or loss of property. The EY European Financial Services AI Survey 2023 showed that privacy (31%) ranks as the top concern among European Insurance executives around the ethics of GenAI followed by discrimination, bias, and fairness (26%); and transparency and explainability (21%). More than just legal and regulatory requirements, transparency and privacy are key components to establishing and maintaining client trust. Because data privacy is a significant public concern, companies must secure investor information and maintain transparency regarding its use and access. Redesign, simplify, and personalize your productsGiven the industry’s dynamic nature, prioritizing customer-centricity has emerged as the strategic “north star” for all insurance companies. This involves providing customized products that are convenient to procure, cost-effective, and augmentable with supplementary services and personalized recommendations. Prioritizing the needs and preferences of customers requires companies to undergo a holistic transformation across various aspects of their operations. This includes updating technology infrastructures, redesigning product portfolios, and restructuring organizational setup to better engage and serve new and existing customers.Precise customer knowledge is the foundation for more a personalized service and richer experiences delivered via preferred channels. According to EY Tech Horizon Global Survey 2022, 9% of global insurers plan to use AI and data science to drive product innovation through new offerings and personalization.Innovate with data for valueRevisit existing data from a new perspective, one that delivers value-driven solutions to your investors and partners. During tumultuous times, stakeholders want insurers to deliver more value through comprehensive policies, holistic solutions, and personalized experiences.Embrace “impact by design”The “impact by design” principle harmonizes the interests of the planet, people, and profit in developing products, services, or solutions that deliver societal value. Incorporating this into the company’s strategy leads to stronger customer acquisition and loyalty, higher employee satisfaction, and improved access to capital. Nowadays, compliance-driven thinking and expanded philanthropic endeavors are imperative. Specifically, product innovation, new business models, and purposeful investments can help insurers unlock growth as they safeguard themselves against climate risk, promote financial well-being, and encourage physical and mental health. Engage regulators to address protection and savings gaps Proactively addressing consumer protection and savings gaps with authorities and regulators demonstrates the commitment of an organization to building trust and confidence in the market, shaping a more favorable business environment for everyone.Measure trust effectivelyTo evaluate investor trust or perception, organizations must first establish specific metrics. Quantifying trust allows the company to track progress, identify pain points, and cultivate integrity among stakeholders. Having a high degree of trust is a hallmark of the world’s top insurance brands. The most trusted insurers have a larger and more loyal client base, increased profitability, and more lucrative relationships with partners and regulators.As highlighted in the 2024 EY Global Insurance Outlook, firms that don’t address today’s historically low levels of customer trust will be vulnerable to rising competition from outside the industry, including firms from the technology, automotive, retail, consumer goods, and banking sectors. An insurance industry that lacks trust will struggle to build strong customer relationships and grow its market share.Strengthen data securityGenAI promises to revolutionize risk assessment, claims processing, marketing, sales, and other essential business functions. Consequently, senior leaders must take the time to establish robust governance models and policies that ensure the responsible and ethical use of AI. Identifying the full range of risks, which includes data breaches and reputational issues, and designing the right framework for managing them are the top priorities. Data security is non-negotiable for stakeholders, so strong safeguarding measures are necessary to increase investor confidence in the brand.If insurers don’t deliver what the consumers want — precisely when, where, and how they want it — customers will take their business elsewhere. Bernalette L. Ramos is an Assurance Partner and the Insurance Sector Leader, and Charisse Rossielin Y. Cruz is a Business Consulting Partner and the Insurance Sector Deputy Leader, both of SGV & Co.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co

08 April 2024

Christian G. Lauron and Janeth T. Nuñez-Javier

Priorities for financial services firms in the digital age

Political and economic issues are not the sole contributors to the growing complexity of the global financial services landscape. Digital assets and the digitalization of finance, including digital payments and artificial intelligence (AI), are also greatly impacting regulator standards for effective supervision. In the Philippines, the digital transformations of the banking and financial services sectors are rapidly accelerating, driven by efforts to integrate more Filipinos into the formal banking system. Data from the Bangko Sentral ng Pilipinas (BSP) shows that approximately 22 million Filipinos acquired access to formal financial accounts between 2019 and 2021. This development indicates an increase in banked Filipino adults to around 56% in 2021, up from 29% in 2019.This development was driven by the faster growth in digital payments, particularly in merchant payments, peer-to-peer remittances, and business transactions of salaries and wages. BSP aims to digitalize 50% of retail payments and to onboard at least 70% of adult Filipinos into the formal financial system.Last week, we discussed trends covered in the 2024 EY Global Financial Services Regulatory Outlook Report, which highlights areas of longstanding regulatory interests. This article will focus on four critical areas that financial services firms need to prioritize in the age of digitalization and AI. Upgrading legacy systems through upskillingThe financial services industry is increasingly focused on modernizing outdated systems and embracing an agile approach across all business functions. Therefore, firms must remodel their operating structures to enhance agility and efficiency.A key focus is upskilling, particularly for Chief Risk Officers (CROs), who must understand the risks associated with cloud computing and predictive analytics. Moreover, they need to grasp the implications of emerging technologies, such as machine learning, and adapt to new processes and methodologies, such as the agile approach.Some firms are still struggling to update legacy systems, however, leading to greater regulatory scrutiny. The 12th EY and Institute of International Finance (IIF) Global Risk Management Survey found that 94% of CROs say they need new skills and resources to meet the changing needs of the risk management function, with data science and cyber expertise topping the list.Enhancing digital transformation resilienceAccording to the 11th AnnualEY/IIF Global Bank Risk Management Survey, CROs expect their senior management team to focus on implementing process automation (88%), modernizing core IT functions (66%), using analytics to improve customer insights (64%), cloud migration and adoption (63%), and customer self-service capabilities (63%) over the next few years.However, if not integrated effectively, such changes can introduce unwanted risks. Introducing a third-party technology, a common requirement of digital transformations, can be revolutionary for customers and for internal ways of working, but it can increase a bank’s risk profile.Also, per EY’s 2024 Global Financial Services Regulatory Outlook, regulators will continue raising the standard of digital resilience and tackle increased operational reliance on IT systems, third-party service providers, and innovative technologies, which increases complexity and interconnections within the financial system and is driven by digital transformation. Proactive monitoring to address cybersecurity risksAmidst unprecedented levels of volatility and global uncertainty, cybersecurity has remained top of the list of near-term risks for banks around the world.The 13th EY/IIF Bank Risk Management Survey showed that in the short term, nearly three out of four CROs identified cybersecurity risk as their top concern over the next 12 months (73%) and two-thirds (66%) of respondents naming liquidity risk as the top financial risk for the next year.The report, which was based on data from 86 banks across 37 countries, explored the dynamic nature of risk management in banking. For example, CROs must be vigilant regarding the rise in fraud and other financial crimes caused by economic stress. Given the constantly evolving cyber threats, socioeconomic disruptions, and third-party risks, organizations must be proactive and agile.Establishing cross-functional teams and an AI governance frameworkAI regulation has advanced in the past years but still lacks overall clarity. International bodies such as the Organization for Economic Cooperation and Development and the United Nations are developing guidelines to support coordinated approaches for responsible AI use.Various governments are pushing ahead with new legislation. For example, China included a draft AI law in their 2023 legislative work plan, but the process timeline is unclear. Canada also seeks to establish legislation through an AI and Data Act. However, some countries are cautious about government interventions, which might stifle innovation. The United States, Japan, South Korea, and Singapore are focusing on voluntary guidelines. Recently, EU institutions have reached an agreement on its AI Act, a comprehensive legal framework regulating AI and a landmark in global AI regulation. On a micro level, AI adoption will continue to advance in the banking industry, from both a business and risk management perspective. Utilizing advanced technologies will be critical to realizing positive outcomes from digital transformations; therefore, organizations must establish technology- and AI-enabled risk management teams as well as a robust AI governance framework.Future-proofing in the digital ageAmidst financial pressures, new competition, regulatory scrutiny, and shifting consumer behavior, banks are under pressure to embrace new technologies and pivot towards digitalization.While financial regulators are considering the need for new rules to complement their existing authority, financial services firms should focus their attention on building resilience through senior management accountability, developing and implementing an enhanced operational resilience framework, and addressing operational disruptions. Finally, they should create cross-functional teams for AI projects to manage risk and compliance effectively. Establishing a comprehensive governance framework for adopting digital or new technologies can help organizations realize benefits and minimize risk, strengthening their positions in the digital era. Christian G. Lauron is the Financial Services Organization (FSO) Leader and Janeth T. Nuñez-Javier is the Banking and Capital Markets (BCM) Sector Leader of SGV & Co.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co.

01 April 2024

Christian G. Lauron and Janeth T. Nuñez-Javier

Financial institutions trends in 2024

This year, the global financial services landscape will be impacted by factors such as volatile geopolitics, rising energy costs, and rampant inflation. The spillover regulatory effects from high-profile bank failures last 2023 will also be felt this year and beyond, but they are not entirely unfavorable.For example, more global regulatory reforms are taking shape to address the impact of the TBTF dilemma, or the perception that “the banks are too big to fail.” This theory refers to the situation where interconnected financial institutions have grown so large that their collapse could severely impact the entire financial system.The 2024 EY Global Financial Services Regulatory Outlook Report highlights areas of longstanding regulatory interests. Among the priorities discussed, this article will explore five trends for banks and financial institutions.Digitalization of finance and integration of AIWith digitalization becoming the norm, some firms are struggling to update legacy systems, leading to greater regulatory scrutiny. This challenge will impact not only banks but also other institutions. Consequently, regulators will raise their standards of operational resilience, particularly in areas like technology. Doing so requires firms to reduce deficiencies in IT outsourcing, IT security, and data governance.Financial regulators are looking to implement new rules for better control and ethical use of artificial intelligence (AI). Adopting responsible AI practices bolsters customer trust and strengthens a company’s reputation, setting it apart from its competitors. This strategic positioning can unlock growth opportunities and drive long-term success. Increasing importance of ESGThere is a greater regulatory oversight on environmental, social, and governance (ESG)-related reporting and disclosures as well as climate-risk management and stress-testing. Financial regulators worldwide are focusing on net-zero transition planning, with a growing supervisory focus on carbon markets and greenwashing risks. In 2023, the International Sustainability Standards Board (ISSB) issued sustainability disclosure standards with the goal of standardizing sustainability reporting. Furthermore, the Philippines is one of the countries planning to adopt these standards for local implementation.The significant decline in the variety and variability of life forms on Earth, also known as biodiversity loss, is also posing a systemic risk to economies and financial systems. This phenomenon encompasses the reduction of species, genetic diversity, and natural habitats on the planet. With the ISSB identifying it as an upcoming focus area, biodiversity loss is expected to receive increased attention.Regulators require firms to have concrete plans to manage their financial risk exposure as they transition to net-zero. Net-zero targets will require an organization-wide transformation, a robust plan that considers biodiversity and climate-related risks, and a flexible roadmap for firms to enable these changes. An institution-wide approach should incorporate business strategy, governance, and risk management when setting clear targets and supporting sustainability disclosures. Firms should also invest in ESG training for key personnel.Adoption of open finance and cross-border payment integrationSeveral jurisdictions are developing open finance frameworks, such as the European Union, Australia, Hong- Kong, Indonesia, Philippines, and Brazil. Additionally, they have adopted a regulatory-driven approach for open finance. As such, a global standard may be necessary to avoid regulatory fragmentation. Open Finance regulation will require firms to set up multi-year strategic, operational, and technological transformation programs.In the Philippines, the Bangko Sentral ng Pilipinas launched its Open Finance Pilot project in 2023 and updated its Open Finance roadmap. More and more jurisdictions worldwide are expected to adopt and expand their Open Finance frameworks to facilitate seamless cross-border transactions. One example of a recent model for collaboration in the financial sector is the linkage of Singapore’s PayNow with India’s UPI and Thailand’s PromptPay.Persistence of financial crime and fraudAddressing financial crimes remains a priority for regulators. The increase in scam payments requires new tools and regulatory compliance mechanisms. Firms may need to consider using more sophisticated technologies, such as AI-powered solutions, to enhance digital transaction security and anti-money laundering (AML) efforts.Given the global nature of financial crimes, various regulators and governments are working together to expand AML measures. In 2023, various firms faced supervisory scrutiny over AML violations as authorities intensified economic sanctions and re-evaluated the oversight of politically exposed persons.While technology is creating new types of threats, it also offers new tools in the fight against financial crime. Fraud and investment scams, especially at the retail level, are pushing customers toward risk-taking behavior. Bank transfers account for most scam payments, requiring critical monitoring and analysis. Crypto crime prevention and regulatory scrutiny will continue to surge, and firms in other industries will need to adopt data and AI solutions for financial crime compliance. Board and management oversightSeveral regulators released post-mortem analyses on 2023’s bank failures, highlighting the need for timely and comprehensive resolutions—a goal some banks failed to achieve. Consequently, boards must possess a thorough understanding of their policies, systems, and controls to identify and address risk management challenges and oversight weaknesses. Firms must consider whether their performance and incentive structures work and whether they are aligned with stakeholder goals and the firms’ fiduciary duties. Furthermore, they should also consider board and management oversight issues from a new perspective, instead of relying on established practices. Navigating the regulatory environmentGiven the ever-evolving nature of the financial landscape, firms will need to prioritize consumer impact, ESG, digitalization, financial crime, and operational resilience. By focusing on people, processes, and technology, firms can maneuver and leverage the tumultuous—but opportunistic—regulatory environment.Next week, we will discuss critical areas that financial services firms need to prioritize in the age of digitalization and AI. Christian G. Lauron is the Financial Services Organization (FSO) Leader and Janeth T. Nuñez-Javier is the Banking and Capital Markets (BCM) Sector Leader of SGV & Co.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co.

25 March 2024

Marie Stephanie C. Tan-Hamed and Katrina F. Francisco

Multipolarity and de-risking: Navigating geopolitical uncertainties (Second Part)

Second of two partsFaced with the prospect of an increasingly uncertain future, the world faces an era of unprecedented change. Rising geopolitical tensions and major shifts in the global market may propel organizations to adapt and rethink their strategies, with two critical concepts coming to the fore: multipolarity and de-risking.The EY Geostrategic Outlook is an annual report by the EY Geostrategic Business Group (GBG) that selects the top geopolitical developments for the year by analyzing the global political risk environment. The GBG first conducts a crowdsourced horizon scanning exercise with subject matter resources to identify potential risks, then conducts an impact assessment to narrow down the top geopolitical developments that are both highly impactful and highly probable for companies worldwide.In the first part of this article, we discussed the evolving multipolarity in geopolitics, specifically tackling the developments surrounding the geopolitical multiverse, AI, the oceans, and competition for essential commodities. These underscore the need for economic diversification and resilient supply chains due to increased geopolitical disruptions. However, it also aggravates global policy coordination challenges, escalating potential transnational uncertainties.The second theme is de-risking, with governments increasingly combining economic policy with national security to stimulate domestic production of critical products in sectors such as semiconductors, telecommunications, renewable energy, electric vehicles, and biotechnologies. This trend, more prevalent in 2024, indicates a shift in policy focus towards national security over pure economic considerations, possibly fueling inflation and hindering global innovation due to increased government intervention in supply chains and investments.Global elections supercycle With a wave of elections happening in geopolitically significant markets representing more than half of the global population and the global GDP, this global elections supercycle will generate policy and regulatory uncertainty. This in turn has long-term implications for industrial strategies, ongoing military conflicts, and climate policies. The outcome of Taiwan’s presidential election, which concluded last 13 January, may affect political and economic relations with Mainland China as well as broader geopolitical dynamics. Later this year, campaign dynamics from the US elections could increase volatility for businesses, while election outcomes can result in far-reaching shifts on domestic and foreign policy issues on global alliances, regulations, and climate change. Economic securityRecent global developments have increased geopolitical rivalries and heightened the neo-statism (a new cross-party consensus about needing a more interventionist state) trend, leading to a greater focus on economic self-sufficiency and increased intervention in supply chains. In 2024, de-risking global interdependencies is expected to be a critical tool in geostrategic competition, with policies targeting reduced reliance on geopolitical competitors, promoting domestic industry competitiveness, and enhancing sociopolitical stability. The White House readout on the meeting between PBBM and VP Harris on the sidelines of the November 2023 APEC meetings in San Francisco states that VP Harris announced a “new partnership with the Government of the Philippines to grow and diversify the global semiconductor ecosystem under the International Technology Security and Innovation (ITSI) Fund, created by the CHIPS Act of 2022. This partnership will help create a more resilient, secure, and sustainable global semiconductor value chain.”Particularly impacted will be sectors like aerospace, defense, and advanced digital technologies, where stringent economic security policies will be enforced. Traditional strategic sectors, like energy and critical infrastructure, will see regulations and incentives used to protect or promote domestic production. Emerging strategic sectors, such as healthcare and agriculture, will come into greater focus with regulations aimed at increasing resilience to supply chain disruptions. Value chain diversification According to the July 2023 EY CEO Outlook Pulse survey, 99% of CEOs plan strategic changes in response to geopolitical challenges such as government tensions and policies encouraging value chain diversification. This creates political risks for companies entering or expanding in alternative markets in 2024. Despite ongoing investment in developed markets, geopolitical swing states are expected to be key to diversification efforts. Country-level political risks, infrastructure quality, labor dynamics, global interest rates, and government incentives will influence these decisions.Sustainability considerations, including carbon taxes and emissions reporting requirements, will further shape the diversification agenda. The 2024 election supercycle intensifies policy uncertainties in several markets affecting labor laws, infrastructure investments, and industry policies, adding another layer of complexity to diversification and investment decisions.Sustainability Currently, some countries are prioritizing economic growth and energy security over emissions reductions, leading to inconsistent sustainability regulations. Some governments are boosting their domestic green economy while potentially slowing the implementation of sustainability regulations to meet short-term economic goals. Green policies could face opposition if they are viewed as protectionist or discriminatory. For example, the EU’s Carbon Border Adjustment Mechanism (CBAM), a tariff on carbon-intensive products, may trigger global trade tensions as impacted countries may retaliate with their own tariffs on European goods. However, it can also act as a key driver for developments in international carbon pricing policy, as several countries are now seen either exploring or creating their own CBAM or are revisiting their current carbon taxation levels. For the Philippines, understanding how CBAM may impact direct exporters to EU of scoped-in industries, including looking at those industries where the raw materials of scoped-in industries are coming from the country, should be prioritized. This is aside from the legislative actions within the country exploring the implementation of an emissions trading scheme or the imposition of a carbon tax on the industries that contribute most to our country’s emissions. Consequently, geopolitical tensions could grow between countries advocating for ambitious climate action and those perceived as impeding this progression. Despite these tensions, geopolitical competition could increase green investments in emerging markets, with major players like China, the US, and the EU targeting geopolitical swing states.Climate adaptationWhile the United Nations Framework Convention on Climate Change (UNFCCC) initially focused on reducing greenhouse emissions, in 2024, about 80% of its parties have established a national adaptation plan, policy or strategy due to increasing global temperatures. For instance, the National Framework Strategy on Climate Change highlights that the Philippines’ approach on climate change identifies climate change adaptation as its anchor strategy, with climate change mitigation as a function of adaptation. This is mainly a result of the country’s less than 1% contribution to global emissions and the various studies highlighting the vulnerability of the Philippines to the impacts of climate change, with the February 2024 Swiss Re publication, Changing Climates: The Heat is (Still) On, indicating that the country suffers the most significant economic losses as a percentage of GDP mainly resulting from flooding and tropical cyclones. It is because of the heightening risk and accelerating climate change impacts experienced globally that the urgency for more actions relating to adaptation have increased. Combined with the more modest growth in adaptation finance flows, the global adaptation funding gap is widening, with developing countries needing about USD212 billion per year up to 2030 and around USD239 billion per year from 2030 to 2050, based on the 2023 Global Landscape of Climate Finance, issued by the Climate Policy Initiative. Geopolitics and adaptation funding for developing nations have previously been at the forefront of climate negotiations. This will only continue, as central to the politics of adaptation funding is the fact that countries such as the Philippines have contributed almost nothing to making climate change happen, and yet are the ones experiencing the first and worst impacts as a result. C-level considerations to navigate geopolitical uncertaintiesThe evolving geopolitical landscape calls for a thorough recalibration of business strategies for organizations to navigate through uncertainties effectively. By embracing multipolarity and de-risking strategies, organizations can foster resilience and agility amid heightened geopolitical competition.While juggling these challenges, sustainability remains critical. Conflicting interests may lead to inconsistent regulations in the short-term, but moving toward a greener economy remains paramount. Therefore, organizations must prioritize green investments and climate adaptation measures in their strategic planning.Navigating the geopolitical uncertainties of 2024 and beyond requires proactively anticipating the shifts in economic policies, regulations, and global relations. The exact path may still be uncharted, but understanding and responding to these developments will help boards remain competitive in the global market and future-proof their organizations. Marie Stephanie C. Tan-Hamed is a Strategy and Transactions (SaT) Partner and the PH Government and Public Sector leader of SGV & Co, and Katrina F. Francisco is a Partner from the Climate Change and Sustainability Services of SGV & Co.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co.

18 March 2024

Noel P. Rabaja

Multipolarity and de-risking: Navigating geopolitical uncertainties (First Part)

First of two partsThe world faces an era of unprecedented change, and the geopolitical landscape is anticipated to be volatile and unstable in 2024. These major shifts in the global market along with rising geopolitical tensions may propel organizations to adapt and rethink their strategies. According to the EY 2024 Geostrategic Outlook, organizations will need to consider two critical concepts as they plan for geopolitical disruptions: multipolarity and de-risking.The EY Geostrategic Outlook is an annual report by the EY Geostrategic Business Group (GBG) that analyzes the global political risk environment and selects the top geopolitical developments for the year. The GBG conducts a crowdsourced horizon scanning exercise with subject matter resources to identify potential risks. The scan encompasses the four categories of political risk in the geostrategy framework — geopolitical, country, regulatory and societal — throughout all regions of the world. The GBG then conducts an impact assessment to narrow down the top geopolitical developments that are both highly impactful and highly probable for global companies.In this first part of the article, we discuss the evolving multipolarity in geopolitics, where a greater number of powerful actors shape an increasingly complex global system. Uncertain relationships between powers like the US, EU, and China, and growing influences of smaller states and actors highlight this theme. It underscores the need for economic diversification and resilient supply chains due to increased geopolitical disruptions.The geopolitical multiverseAccording to the report, the growing influence of players seeking to change the status quo will create a more complex geopolitical multiverse. On top of tensions from US, EU and China influencing global dynamics, actions by geopolitical swing states (meaning countries that are not specifically aligned with any major power) will play more important roles in driving geopolitics this 2024. In particular, countries with resources across the energy value chain, such as Saudi Arabia, the UAE, and Brazil, are expected to play key roles in their respective regions.In 2023 alone, even as the Ukraine war persisted, the BRICS (Brazil, Russia, India, China, and South Africa) and G20 (Group of Twenty) welcomed significant new members, hoping to expand their influence in global affairs. In Northeast Asia, Japan and South Korea restored bilateral diplomacy. These developments and others discussed in greater detail in the report show that geopolitics has become a multiverse of increasingly complicated mixes of alliances and rivalries, with overlapping bilateral, regional and various other institutions and grouping. AIThe 2023 EY CEO Outlook Pulse study shares that nearly all their CEO respondents (99%) plan to invest in artificial intelligence (AI). On the other hand, governments have been grappling with how best to regulate AI as technological advances increase its significance to national security and geopolitical competition. This 2024, the dual race to innovate and regulate AI will see an accelerated shift toward geopolitical blocs. Domestically, governments want to foster innovation to compete geopolitically, simultaneously seeking to regulate it before the technology outpaces policymakers. While seeking to capture the promises of the technology, such as advancements in national security, improved healthcare outcomes, and enhanced economic productivity, governments will also try to design AI regulations to reduce the likelihood of macro risks. These risks include increases in political instability due to misinformation campaigns, the potential for social and economic dislocations as AI takes on more job functions, heightened national security, and cybersecurity risks. While AI will not necessarily reshape the global balance of power in the year ahead, it will increasingly become a significant arena of geopolitical competition. Domestic challenges in the US and ChinaThe US and China, the two biggest economies in the world, are facing major domestic challenges of their own for various reasons. These challenges will continue to raise political risks within each market, will have significant implications for geopolitics, and pose downside risks to the global economy this year. Such downside risks to the global economy will likely have significant implications for emerging economies such as the Philippines.The 2024 US election will heighten societal tensions and policy uncertainty. With the partisan divide in American trust in various news sources, there is a potential increase in risk of some population segments questioning the legitimacy of the election, in turn possibly perpetuating policymaking challenges. On the other hand, China faces a challenge stemming from whether their official policy mix will effectively address potential financial and macroeconomic weaknesses that may come about. Cyclical challenges in their real estate market and their high municipal government debt levels will likely persist, and may result in policymakers introducing periodic, targeted actions to reduce the risk of financial crisis.OceansRecent events such as the destruction of the Nord Stream 2 pipeline and more frequent freedom of navigation exercises highlight growing geopolitical tensions. With almost half the global population living within 100 miles of the sea, competition over access to and control of the world’s oceans will intensify in 2024, with implications for data flows, food supplies, supply chains, and energy security. As much as 90% of global goods trade is shipped through maritime routes, and many of the busiest maritime transit paths are at risk of political disruption. At least 95% of global data flows through undersea cables. The Luzon Strait is strategically located between Luzon and Taiwan, connecting the South China Sea and the Western Pacific, and as such, is important for global commerce and cable communications.Competition for essential commoditiesThe war in Ukraine, climate change, and the energy transition are shifting global supply and demand dynamics for various essential commodities. This leads to more intense geopolitical competition in 2024 to secure supplies of three key commodities in particular: critical minerals, food, and water. The most visible area of commodity competition will be for minerals that power EV batteries and the broad energy transition. Food instability and insecurity remains a top concern from the 2023 Geostrategic Outlook, with climate change continuing to affect food production and crop yields. Lastly, water may become a subject of commodity competition due to significant changes in precipitation levels, potentially escalating tensions in water-stressed regions. In the second part of this article, we will discuss the theme of de-risking, with governments increasingly combining economic policy with national security to stimulate domestic production of critical products in sectors such as semiconductors, telecommunications, renewable energy, electric vehicles, and biotechnologies. This trend, more prevalent in 2024, indicates a shift in policy focus towards national security over pure economic considerations, possibly fueling inflation and hindering global innovation due to increased government intervention in supply chains and investments. Noel P. Rabaja the Strategy and Transactions (SaT) Service Leader of SGV & Co.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.

11 March 2024

Vivian C. Ruiz

Empowering women in the workplace

The theme for this year’s International Women’s Day (IWD) is Inspire Inclusion, which aims to cultivate belonging, relevance, and empowerment for all women—regardless of age, race, ethnicity, religion, ability, or sexuality. Furthermore, IWD is a global celebration of the cultural, socioeconomic, and political achievements of women. This day reminds us of the progress made toward gender equality and social equity; however, there is so much more that can be done.A 2023 LinkedIn deep-dive study on gender representation leadership data worldwide, supported by the platform’s workforce data and research, shows that despite longstanding efforts to promote gender equality in the workplace, women remain disproportionately underrepresented in leadership roles. This is particularly true in the technology, information, and media industries. This gap not only hinders the potential of organizations to thrive but also perpetuates gender biases, underscoring the need for more inclusive practices. One of the key pillars of IWD 2024 is promoting diversity in leadership. Therefore, there is a need to continue uplifting women, especially those in marginalized groups. By fostering inclusion, organizations can leverage diversity, improve decision-making, and innovate. At SGV, over 60% of our 6,000-strong organization comprise women. In fact, as of December 2023, women make up half of our Partners and Principals combined. Inclusion means so much more than providing a physical space for women. It’s about ensuring that their voices are heard, amplified, and valued. In line with this, SGV continues its journey to accelerate gender equality by building an inclusive environment and fostering a culture of equal opportunity and meritocracy.As we celebrate women in March, we see five areas where we can all support and empower women to enter, thrive, and lead in the world of business.1. Encourage more women to go into businessWhether in small, medium, or large businesses, promoting entrepreneurship among women helps balance the economic playing field. Today, only 2% of venture capital funding globally is allocated to women-owned businesses. Women need support to grow and scale sustainable businesses, including access to networks, mentorship, and resources. SGV, for example, participates in EY’s Woman. Fast Forward movement, which offers women access to vital resources, support, and networks that can help them break barriers in the business world and attain leadership roles. 2. Bridge the gender gap in STEMIn the Philippines, only 36.3% of the workforce in the science, technology, engineering and mathematics (STEM) industries are women, according to LinkedIn data cited in the World Economic Forum’s (WEF) Global Gender Gap Report 2023. This reflects the broader global trend where less than 30% of researchers are women. The industry has an underrepresentation of women at every seniority level, with the gap only widening for more senior positions.The EY Ripples and Women in Technology initiative aims to change this story. The EY STEM App, a brainchild of this initiative, is a free, gamified platform developed for girls aged 13 to 18. SGV has launched this initiative locally, bringing the app to schoolgirls in different parts of the Philippines. It aims to inspire them to pursue STEM careers, contribute towards a knowledge-based economy, and become catalysts of change. 3. Elevate women to the C-levelAccording to 2020 data from the World Economic Forum, the Philippines is only one of four countries where women outnumber men in senior and leadership roles. However, there is still a challenge in penetrating the upper part of the organization ladder. A comprehensive national study, titled Women in the Philippine C-Suite released in 2021 by the Makati Business Club (MBC) in partnership with the European Union, UN Women, WeEmpowerAsia,and the Philippine Business Coalition for Women Empowerment (PBCWE), revealed that only 3% of C-suite positions are occupied by women. The study showed that women need different support mechanisms to guide them towards higher career paths.Consequently, there is a need for other models of leadership. Unlike ones that follow hierarchical structures and protocols, which often limit innovative input from the bottom up, future-fit leadership focuses on encouraging contributions from all levels of the organization. The future-fit leadership model empowers women to excel in C-level positions by harnessing their distinct leadership qualities and contributions to decision-making.4. Champion gender diversity through meaningful partnershipsSGV supports concerted efforts to promote gender diversity, equity, and inclusivity in the business sector. In a similar vein, companies should explore connecting and engaging with like-minded organizations that share the same ideals. By sharing experiences and ideating ways to challenge the status quo, women can support each other in closing the gender gap.In addition, the firm was a founding member of PBCWE, which unites highly respected Philippine companies in a shared commitment to be supportive employers for women through equitable and inclusive practices in the workplace.5. Include men in the conversationIn 2021, SGV launched the #SheInspires series to showcase the inspiring journeys of accomplished women leaders. It also tackles critical yet often overlooked issues, such as single parenthood, unequal household duties, and burnout. Including men in the conversation could be instrumental in addressing these issues. For example, one of the #SheInspires sessions tackles the role of men in advancing gender equality in the workplace. In addition, SGV actively participates in the Champion of Change Coalition, previously known as Male Champions of Change Philippines, where our SGV Country Managing Partner serves as a member. Since its launch in 2020, this initiative taps key male business and industry leaders to accelerate transformational changes to close gender gaps, advance the diversity and inclusion agenda, and champion women’s economic empowerment in their respective organizations and society at large.Promoting inclusivity in the long-termOverall, an inclusive workplace drives innovation, inspires employee productivity, and generates sustainable growth. Moving forward, let us focus on creating safe spaces for women where their voices are heard, their insights and strategies take shape, and their achievements are celebrated. True to the theme of IWD 2024, by inspiring inclusion, we can build a better working world. Vivian C. Ruiz is the Vice Chair and Deputy Managing Partner of SGV & Co.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.

04 March 2024

Lucil Q. Vicerra

Compliance made more convenient: BoC updates and enhanced post-clearance audit

While there was a slowdown in customs post-clearance audits (PCAs) in 2021 and 2022 primarily due to the pandemic, the Bureau of Customs (BoC) Post-Clearance Audit Group (PCAG) ramped up its activities thereafter.The BOC issued a total of 932 Audit Notification Letters (ANLs) in 2022 and 2023, marking the audit commencement for hundreds of importers. With the BoC’s increased target collection of P959 billion this year, the BoC is expected to continue issuing more ANLs and conducting more PCAs. ONGOING PCASA PCA is a post-release evaluation conducted by the BoC and is intended to verify the truthfulness and accuracy of declared customs values, and tariff classifications of imports, among others. It is an exercise performed by the BoC through the PCAG to assess importers’ compliance with their obligations to pay correct duties and taxes on importation and keep records in accordance with law. A PCA typically involves an audit of import activities made in the last three years, and a review of all import documents and records relating to such activities. The current auditees are companies, both multinational and local, from almost all industries with regular import activities. Even companies located in economic zones and enjoying duty and tax incentives are being audited to check on their compliance with the conditions set for exemption. Accredited Super Green Lane importers, who are enjoying faster clearance of goods, are likewise being audited as part of their commitment to submit themselves to periodic review. In selecting importers for audit, the PCAG uses a risk management system to conduct systematic benchmarking and review of historical trade data, allowing it to determine compliance markers. It also analyzes import data from the BoC’s Management Information System and Technology Group and gathers derogatory information from different customs offices. It also seeks to gather information from the proposed exchange of information with various government agencies. In a PCA, the importer is required to actively participate, discuss with the PCAG officers, and provide the examiners full and free access to records. Importers are expected to address questions relating to correctness of declarations and submissions made by customs brokers on their behalf. FILING A PRIOR DISCLOSURE PROGRAM (PDP) APPLICATIONPursuant to international best customs practices, the PDP authorizes the BoC Commissioner to accept disclosure applications by importers of their errors and omissions in import declarations that resulted in duty and tax liabilities on past imports. When availed of by importers, the PDP effectively helps to prevent a full customs audit and minimizes the imposition of steep penalties otherwise imposed in a regular audit. The general penalty for negligence, for example, which is 125% of the basic deficiency duties and taxes, may be reduced to 10% in a successful PDP filing. Importers should take note, however, that the PDP mechanism is only available within a limited time frame, that is, 90 calendar days from the receipt of an ANL, in case there exists an ANL served. In the absence of an ANL, the PDP may generally be filed at any time. INCREASE IN PDP FILINGSRemarkably, the PCAG continues to drive compliance of importers, as shown in the availment of the PDP mechanism where importers, whether under audit or not, voluntarily disclose their errors and pay the deficiency duties and/or taxes. In 2023, the BoC collected P1.793 billion from PDP applications, which is 12.6% higher than the PDP collection in 2022 of P1.592 billion. The collection from PDP applications accounts for more than 91% of PCAG’s total collections of P1.959 billion in 2023. This significant increase in PDP payments shows that more importers are voluntarily disclosing their exposures, demonstrating good faith, the commitment to comply with customs laws and regulations, and the desire to contribute to the government revenue collection efforts. The PCAG continues to encourage importers to avail of the PDP instead of letting PCAs ensue. COMMON CUSTOMS ISSUESThe filing of a PDP application by an importer presupposes having knowledge of customs issues to be disclosed and quantified duties and taxes to be paid to customs. Hence, for a PDP application to be successful, it is imperative for the importer to conduct a prior internal customs compliance review. In the review, importers should make sure that the components of the dutiable value of imports are fully captured in the declarations to customs. These include checking on the proper declaration of price or cost and adjustments such as insurance, freight, royalties or license fees, interest, proceeds of subsequent resale, as well as transfer pricing adjustments. Importers should also be keen on reviewing the proper classification of goods for purposes of determining the applicable duty or tariff rates. Other common issues noted during a PCA include the improper declaration of the components of the landed cost for VAT purposes, improper calculations of excise tax in cases applicable, disallowed preferential duty rates due to missing certificates of origin, and misuse of tax incentives, if any, to name a few. Specific issues and considerations may apply to certain industries. Importers can also make use of the review to monitor compliance with administrative requirements, principally record-keeping. COMPLIANCE MADE MORE CONVENIENTOverall, it seems more prudent for importers, whether under audit or not, to avail of the PDP in view of reduced penalties and simpler processes. It is certainly less cumbersome than undergoing the full PCA process. If a PDP application is found to be a full disclosure and is well-supported, it will likely be approved to the benefit of the importer. To prepare for customs audit and manage the filing of PDP applications, if need be, importers may consider establishing robust internal processes for imports, creating a strong and adequately supported supply chain team, ensuring consistent interactions and coordination with customs brokers and other providers, and regularly reviewing its overall customs practices. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co. or EY. Lucil Q. Vicerra is the head of Indirect Tax/Global Trade & Customs of SGV & Co.

26 February 2024

Marie Stephanie Tan-Hamed and Neil Paurom

How public-private partnerships drive sustainable growth

Public-private partnerships (PPPs) are powerful tools for driving economic progress, particularly in rapidly growing economies like the Philippines. To sustain this high-growth trajectory and achieve the economic goals embedded in AmBisyon Natin 2040, the government recognizes the significance of infrastructure development and the vital role of the private sector.According to the Public-Private Partnership Center, a PPP is a contractual agreement between the government and a private company targeted toward financing, constructing, operating, and maintaining infrastructure projects that traditionally fell under the public sector. The PPP model ensures that risks are optimally shared between parties, underscoring its cost-effectiveness and alignment with developmental objectives.PPP arrangements leverage the expertise and efficiency of the private sector in delivering public goods and services. This strategy, enshrined in the 1987 constitution and initially codified through the Build-Operate-Transfer (BOT) Law, has contributed to the robust infrastructure pipeline and positioned the country as one of the regional leaders in PPPs. This intersection between the private and public sector as engines for national development and economic growth was the focus of the SGV Knowledge Institute event last week, “Philippine Economic Outlook: Public and Private Partnerships as a Catalyst for Sustainable Growth.”PPPs are more than financial solutions for public ventures; they are catalysts that boost productivity and streamline processes for faster implementation and improved service delivery.THE ROLE OF THE MAHARLIKA INVESTMENT FUND (MIF)The Maharlika Investment Fund, established through Republic Act (RA) 11954, has as its main objective the stimulation of economic growth and social development while generating optimal returns.With its focus on balancing profits with societal benefits, the MIF has the potential to foster socio-economic integration. Acting as both a catalyst and magnet for Foreign Direct Investment, the MIF aims to achieve significant financial returns and facilitate national development. This fund provides additional flexibility for the government — with an option to finance infrastructure projects in sectors like green and blue projects, sustainable development, healthcare, road networks, water, energy, and telecommunications, thereby enhancing economic growth and creating more jobs.PPP PROGRESS IN ASEANThe Philippine PPP program has consistently drawn participation from local conglomerates, as they flock towards the large-scale infrastructure offerings of the government. However, there is much work to be done to establish the country’s infrastructure sector as a reliable investment destination for foreign capital. Despite this, there is an estimated $53.3 billion worth of PPPs under implementation, and another $48.4 billion in the pipeline. This underlines the scale and scope of private sector involvement in nation-building projects.Considering the limited fiscal space caused by the government’s much-needed response to COVID-19 pandemic, the country is currently focusing on key PPP projects to bridge the infrastructure gap and revitalize economic growth. Notable examples include the recently awarded and long-awaited rehabilitation and optimization of the Ninoy Aquino International Airport (NAIA) PPP, the Metro Manila Subway (MMS) Operations and Maintenance (O&M), and the North-South Commuter Rail (NSCR) O&M. The MMS O&M and NSCR O&M projects are expected to be submitted for approval within the year.Implementing PPPs used to involve navigating a complex legal framework, spanning various guidelines set by the BOT law, National Economic and Development Authority, the government-owned and -controlled corporation regulator, and ordinances set forth by local government units (LGUs). The recent enactment of RA 11966, or the PPP Code, aims to cure that by unifying and streamlining PPP development and implementation both at the national and local level.AREAS OF OPPORTUNITY FOR PPPsHealthcare. Healthcare is a prime sector where PPPs can facilitate growth. Given that out-of-pocket expenditure comprises nearly 45% of healthcare spending, there is a crucial need for more innovation. PPPs could play a pivotal role in attracting investments, enhancing the quality and accessibility of essential healthcare services. Healthcare PPPs in the pipeline include the University of the Philippines Philippine General Hospital Diliman and the Cagayan Valley Medical Center Hemodialysis Center.Education. PPPs could drive considerable advancements and elevate the country’s global standing in this crucial sector. For a country striving to improve its position in international educational rankings, private capital can become an indispensable tool in uplifting national education. According to the 2022 Program for International Student Assessment (PISA), the Philippines placed 77th out of 81 countries, necessitating the need for more investment. The Philippines has utilized PPPs through the PPP for School Infrastructure Projects (PSIP), where the Department of Education (DepEd) was able to construct additional classrooms to help reduce the classroom backlog. In 2012, SGV & Co./Ernst & Young Australia Infrastructure Advisory provided transaction advisory support for the development of PSIP 1.Energy. The PPP Code enables implementing agencies to enter into contracts on power generation and transmission, as well as projects relating to energy efficiency and conservation. This cooperation could lead to greater diversification of energy sources, boosts in renewable energy production, and advancements in energy-efficient technologies.Transportation. Transport infrastructure projects continue to be a key driver of overall economic growth. With government initiatives to improve connectivity, transport systems, and reduce traffic congestion in urban areas, the private sector can either participate in various projects in the pipeline of the Department of Transportation or submit their own unsolicited proposals. Two PPP projects being provided with project preparation support services are the Manila Bay-Pasig River-Laguna Lake Ferry System and the North Integrated Transport System.Water. Access to clean water and sanitation remains a challenge for a lot of our countrymen, especially in rural areas. Water and sanitation PPPs can be a viable solution to address basic needs while promoting the sustainable use of water. One water PPP currently in the pipeline is the Bislig City Bulk Water Supply and Septage Project.IMPLEMENTATION CHALLENGESThe Philippines is no stranger to the implementation challenges hounding PPPs. As with any other innovation in policy, growing pains are always expected. The key therefore is ensuring that we absorb the learnings and insights from these real-world encounters.Financial constraints. Given the scale and gestation period of most infrastructure projects, securing adequate and sustained funding remains a major issue. Economic uncertainties can adversely impact budget allocations for ongoing projects and subsequently affect private sector confidence.Transparency and accountability. Maintaining transparency is critical to fostering trust. Ensuring accountability on both sides is crucial for the long-term success of PPP projects, and issues in this area can significantly impact the efficiency and effectiveness of PPPs.The successful execution of PPP initiatives depends on a robust regulatory environment and technical support from entities like the PPP Center, the lead agency for PPPs. Newer players, like the Maharlika Investment Corp., can stimulate project development and attract private-sector financing for sustainable development projects and further accelerate national growth.FISCAL POLICY DEVELOPMENTSAs mentioned earlier, one crucial fiscal policy development is the recent enactment of the Philippine PPP Code. The PPP Code unifies disparate legal frameworks, streamlines the approval process for projects, and safeguards public interest. It aims to address current challenges and encourages more PPPs by clarifying uncertainties and streamlining requirements.THE ECONOMIC TRANSFORMATION AGENDAThe journey to sustainable growth is underscored by strategic pivots against a changing world. The Philippine Development Report 2023 represents a transformational blueprint emphasizing digital transformation, improved connectivity, PPP maximization, and an enhanced role for LGUs in accelerating development.Building investor confidence is crucial for PPPs, not only for attracting investment but also for socioeconomic development. The Philippines must demonstrate its credibility by meeting obligations while promoting transparency, good governance, and trust. This provides an attractive investment climate and ensures the sustainable growth and effectiveness of PPPs.Driving sustainable growth in the Philippines involves the concerted efforts of public and private stakeholders. PPPs serve as powerful enablers in guiding the country toward economic security and long-term development. For executives, harnessing the potential of PPPs presents a unique opportunity to engage in nation-building while generating significant business growth. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co. Marie Stephanie C. Tan-Hamed is a Strategy and Transactions (SaT) partner and the PH Government and Public Sector leader of SGV & Co., and Neil Paurom is an associate director for Infrastructure Advisory at SGV & Co.

19 February 2024

Kristopher S. Catalan and Patricia Jazmin D. Patricio

The IPO journey for family businesses

Taking a family business public through an Initial Public Offering (IPO) is a significant milestone that requires strategic planning and careful execution. The transition can unlock new opportunities for growth, but also brings challenges brought by increased scrutiny, regulatory requirements and stakeholder expectations.In an IPO, a private company becomes a publicly traded entity, offering its shares to the public through a stock exchange. This transition from private to public status is marked by the issuance of new equity shares to institutional and retail investors, expanding the company’s ownership base. This may not be appealing for some family businesses, as it may dilute the family’s ownership and even run the risk of losing control.Looking at it from a different perspective, an IPO lets family owners realize previously unmeasured value of their companies with the opportunity to cash in through secondary offer during the IPO or later on subject to lock-up restrictions. On the other hand, the public will now have a chance to invest in what it used to be a private company with hopes of future capital gains or dividend payouts. For the company going public, it is an important step in accessing significant long-term capital that can fund expansion programs or new strategic investments that bank creditors or private investors may not be able to provide.KNOWING WHEN TO DO THE IPOIn the 2023 EY Global IPO Trends Report, the ASEAN IPO market was generally challenging, with high inflation rates and elevated interest rates reducing IPO activities for most countries in ASEAN. In the Philippines, there were only three IPOs, all completed in the first half of 2023. Globally, moderating inflation rates and interest rate cuts could attract investors back to IPOs. Locally, a good number of IPO transactions are expected this year due to strong economic fundamentals, but the government and private sector remain wary of global and local headwinds which may undermine investor confidence.Company or sector specific conditions must be considered when going listed. For example, the Philippine Securities and Exchange Commission (SEC) requires a company to establish three years of profitable operations, i.e., at least P75 million of cumulative net income, excluding non-recurring items, for the latest three full fiscal years and a minimum net income of P50 million for the most recent year. Companies with established profitability and cash flows that are consistent with their equity story will generally generate good valuations.Up and coming sectors and economies with good outlooks, such as those in mining and minerals due to the global demand for raw materials for batteries of electric vehicles, or technology companies in South Korea due to advances in artificial intelligence (AI), have had good valuations recently. Growing interest in critical minerals such as lithium and nickel are heavily influenced by environmental, social and governance (ESG) factors which has lately been a focal point for benchmarking companies’ potential. These conditions are hard to predict and are often “one without the other,” making it key for companies to prepare early to move fast when the right time and conditions come into play.DEFINING CORPORATE IDENTITY WHILE BUILDING A LASTING LEGACYOften characterized by tradition and family values, family businesses may hesitate to go public. The business-as-usual attitude must cease as companies will need to revisit and upgrade certain aspects of their operations, talent, performance measurement, and even redefine strategies.That is not to say that the family legacy and tradition are lost during the transition to being a public company. Family businesses need to tread this line carefully to ensure that what made them thrive in the past can be part of their current business narrative while adopting new ways of working. Family businesses will need to start the IPO readiness assessment as early as possible to know what needs to change and when. From detailed elements such as the operating or accounting manual to complex business processes such as entity-wide risk management or investor relations, they must assess their level of maturity to know what, where and when help is needed.A readiness assessment also enables aspiring family businesses to determine current structures and policies (i.e., operating policies and processes, financial and management reporting, data, systems and technology, risk management, etc.) that need to evolve to be future-fit, while retaining the rich history that defines the identity of the family business.STRENGTHENING PEOPLE AND PREPARING THE NEXT GENERATIONFamily businesses must assess how capable their current management teams are in leading them to their desired future. A compelling equity story and strong financials are futile without captains who can steer the ships. Strengthening the management team can include hiring experienced professional managers who are equipped with expansive business networks to help the company grow and thrive as a listed entity. Companies may need to create new positions to help grow and sustain their businesses or manage risks in navigating regulatory complexities and complying with securities laws.Companies must identify family members who can retain key leadership positions in critical areas of the business and in the board, as well as a succession plan that enables NextGen family members to train early in the ways of the business. Based on the 2023 EY and University of St. Gallen Family Business Index, only 13 out of 179 board seats (7.3%) for 17 family enterprises in ASEAN were occupied by NextGen family members, with practically zero NextGen on the boards of the four Philippine companies included in the study.Family businesses have rich histories and backgrounds which are integral to a compelling equity story. Company history can demonstrate the readiness of the company to navigate the future while defining what the company represents. A compelling equity story should be able to narrate the humble origins of the business and where it wants to go in the future.OPTIMIZING INFORMATION WITH THE RIGHT INFRASTRUCTURE AND TEAMOften, some IPO aspirants inadequately prepare their financial, management and tax reporting, with outdated legacy systems or predominantly manual reporting processes that cannot produce the required reports on a timely basis. Worse, private companies may not have a complete finance team capable of providing these reports and an IT team who can support these organizations.Prior to going public, these companies must be able to produce financial and non-financial reports with material business information within the required reporting timelines. During IPO, the Prospectus must include three years of annual audited financial statements, reviewed by the underwriters and approved by regulators. Post-IPO, annual and quarterly reports must be submitted to the Philippine Stock Exchange and SEC within the deadlines set.Suffice to say, these instances highlight the importance of an efficient and effective financial and management reporting process that can generate timely and reliable reports. Information reliability and relevance depends on whether the companies have the right infrastructure and team that can generate reasonably accurate corporate reports. The right infrastructure means that organizations need IT systems and policies that support how data is accumulated, recorded and reported so that management and the public can optimally use this information in making decisions. The right team does not only refer to competent manpower — it means a continuously trained talent pool, periodically replenished through strategic hiring.PROTECTING THE REPUTATION OF THE FAMILY BUSINESSGoing public raises the company’s profile, making it more visible among customers, partners, and potential business collaborators. This increased visibility exposes the public company to higher reputational risk, thereby increasing scrutiny on the family’s brand. Companies need to institutionalize enterprise-wide risk management and strengthen compliance to protect their reputation.Family businesses may seek guidance from third-party legal and business advisors to help their companies prepare. They must involve underwriters and regulators early to anticipate issues that may hinder the IPO. Family businesses must also be ready with alternative fund-raising activities in case the IPO is deferred or abandoned so that their growth objectives can remain on track.ASSESS, PLAN, EXECUTE — AND FOLLOW THROUGH!An IPO should not only be viewed as a one-time event focused on raising capital. It starts from the decision to do an IPO and transform the company before the listing happens. It is a meaningful journey for the companies and its owners which requires a paradigm shift from the entire organization that cannot be done overnight.The strategic decision of a family business to go public demands meticulous planning and near seamless execution. Post IPO, these family businesses must be able to deliver what they committed to investors. When done right, barring unanticipated unfavorable economic events, this beneficial corporate upgrade called an IPO should enable family businesses to sustain the value promised to both the family and public investors. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co. Kristopher S. Catalan is an assurance partner and the EY private leader of SGV & Co., and Patricia Jazmin D. Patricio is a Financial Accounting Advisory Services (FAAS) manager of SGV & Co.

12 February 2024

Aris C. Malantic and Julius Ivan L. Bautista

Transforming bold vision into a successful IPO journey (Second Part)

In this period of economic recovery, entrepreneurs are increasingly looking at initial public offerings (IPOs) as an avenue to raise additional funds. But in the face of economic and geopolitical headwinds, how can CEOs turn their bold vision into a successful IPO? In the first part of this article, we discussed how a company can start its IPO journey and the key factors to consider in order to succeed. However, now that we know what characterizes a successful IPO journey, CEOs need to ask if they are ready to deliver. Here, we discuss how the right IPO strategy and preparation can contribute to a successful IPO. IPO STRATEGYAn IPO strategy starts with an equity story that incorporates a well-built corporate strategy and a fine-tuned business plan. A corporate strategy focuses on the company’s long-term goals, an optimal group structure, and growth objectives, while a business plan defines how the company can compete within the market and seize new opportunities. With a well-polished IPO strategy, IPO aspirants can better evaluate their strategic options by deciding on potential multi-track approaches to listing and the potential listing venues, coordinating with external advisors and identifying the right capital market that will resonate with the company’s business sentiments and growth ambitions. A well-defined IPO strategy should be anchored on a holistic end-to-end view of the key milestones in an entity’s IPO journey — from strategic planning to IPO execution and after-market performance. This strategy is typically supported by a health check to identify any potential gaps within the company’s structures, finance function, environmental, social and governance (ESG) agenda, systems and controls, and investor relations. STRUCTURESOrganizational structures bind the teams working together towards a common goal and demarcate functions between them. Given an IPO’s transformational nature, aspirants should consider revisiting and reshaping their current structures where needed to support the efficient functioning of the organization as a public company. This might also entail re-evaluating the group structure, governance, ownership and corporate structure. IPO aspirants should reevaluate the group structure if the potential issuer or listing vehicle is part of a group. The group should define which company will be the potential issuer or listing vehicle, the country of registration, and its legal form. They must also assess which group structure is best positioned for listing through a transfer pricing analysis of current and future related party transactions. Governance structure reevaluation can start by assessing whether there is a defined set of regulations and documented policies and procedures, and whether these align with governance reporting requirements and provide adequate transparency and accountability to current stakeholders. Since company ownership will be opened to the public, current shareholders should assess the ownership structure, the optimal proportion the public will own, what types of investors they are planning to attract, and the corporate image they want to project since these potential investors can influence the strategy and direction of the company post-IPO. Corporate structure should also be reassessed to let potential investors identify each business unit or department’s level of responsibility and accountability. A well-defined corporate structure separates management and ownership roles. Internally, the structure should also allow CEOs to articulate the business plan to the group organization, how the IPO affects employees, and how business operations will be adjusted prior to and upon realization of the IPO transaction. FINANCIALIPO aspirants must look at the finance organization through the lens of public markets even before they go public. Depending on the listing venue, changes to generally accepted accounting and financial reporting principles currently being applied may be required in preparing the financial statements. Companies need to check if the current finance infrastructure and processes can produce timely financial reports, as these are vital in building investor trust and confidence. As regulations on financial reporting vary across jurisdictions, a well-functioning financial statements close process that is supported by a capable mix of resources with the appropriate skills are necessary in responding to expanded reporting requirements. Potential public and institutional investors will also consider the company’s external auditor. Appointing a credible external auditor will help improve investor confidence in the financial reports of the company. External advisers can provide objective viewpoints that can help in addressing any financial reporting gaps that the company may have overlooked in previous periods to optimize the finance function. ESG AGENDAIn the Philippines, the ESG agenda is emerging as an important element for stakeholders in the IPO stage. Investors have started to consider ESG factors when making investment decisions, along with a company’s financial performance, resilience, and ability to sustain operations during adverse situations. Public companies are required to disclose their sustainability efforts as well as include their plans to further improve performance and achieve their ESG targets. Companies can ensure compliance with sustainability principles by engaging advisers with an ESG background. Regulators also continue to develop and standardize climate disclosures required of public companies, such as the Securities and Exchange Commission’s (SEC) Revised Sustainability Reporting Guidelines and the Sustainability Reporting Form, to keep up with global developments around sustainability reporting. SYSTEMS AND CONTROLSIPO aspirants should revisit their enterprise-wide systems and controls to identify potential weaknesses and opportunities for improvement. Continuous process improvement should be implemented to ensure that the systems and controls are effective in capturing and mitigating potential risks, especially in a growing business operations setting. Entity-level controls, information technology (IT) general controls, and business processes controls should be documented properly to ensure they can support the requirements of a public company. An effective internal audit function should be in place, performing as intended in the organization’s overall control framework. Internal audits can focus on areas such as the effectiveness of the company’s internal controls, corporate governance, and accounting processes. Internal audits also help the company in its continuous process improvement efforts. INVESTOR RELATIONS AND COMPLIANCE FUNCTIONSA company’s investor relations function facilitates two-way communication between the company’s corporate management and its investors. It also enables the integration between finance, communication, marketing and legal functions. Critical information provided by the investor relations function includes press releases, earnings reports, and analyst briefings which contribute to a transparent relationship between the company and its stakeholders. They help ensure that shareholder concerns and interests are also communicated to management and the board. Further, the investor relations function cohesively monitors the company’s stock price, performance, competitive position, and public image. An investor relations officer normally reports to the company’s Chief Financial Officer (CFO) or Treasurer who has the primary responsibility over investor relations. Meanwhile, the compliance function becomes even more relevant due to the additional regulatory requirements for a publicly listed company. These include regular reporting and ad hoc disclosures such as information on mergers and acquisitions, changes in leadership, legal issues, and significant sales or purchases of assets. TIMINGAppropriately timing the market can result in a win-win situation by providing optimal valuation and IPO proceeds for the company, and investment returns for IPO investors. IPO aspirants must be able to communicate a realistic timeline to the entire IPO team and set milestones tracked by a Project Steering Committee and a Project Management Office (PMO). The PMO ensures that the IPO project has enough resources throughout the IPO process, monitoring the strength and buoyancy of capital markets, current economic indicators, and company performance. Some companies decided to postpone or withdraw IPO plans due to market volatility, after-market performance of previous IPOs, and geopolitical uncertainties. In such cases, contingency plans are necessary to achieve the right timing — especially when the market reaches its ideal state for IPO listing. The PMO should be able to assess when to execute these contingency plans and consider the multi-track approach designed during the evaluation of the company’s IPO strategy. IPO TRANSFORMATIONStarting the IPO journey does not mean immediately closing any gaps found during preparation. Instead, it presents the organization with an opportunity to identify them, prioritize which gaps require immediate action, and plan how to close gaps which can affect the company’s valuation before and post-IPO. Our accumulated experience in supporting IPO aspirants tells us that IPO journey must be approached as a structured, managed transformation of the people, processes, systems and culture of an organization. Through careful planning and consideration of these factors, companies will be better equipped to transform their bold vision for growth into a successful IPO. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co. Aris C. Malantic is a partner and the Financial Accounting Advisory Services (FAAS) leader and Julius Ivan L. Bautista is a FAAS associate director of SGV & Co.