Board
Independence: Reality or Myth?
GGAPP Forum
for Independent Directors
October 19,
2015
I
congratulate Dr. Francis Estrada on his most comprehensive and educational
lecture on global corporate governance practice. If I were in the U.S. or any other OECD country,
I would say "amen" and my remarks
end here.
However, we
are in the Phl. Here the challenge is keeping in step with these global practices, but
making very sure that we "Inculturate" to Philippine
and ASEAN situation. It is a most apt term I first heard from CJ
Panganiban.
We need to
sweat some of the emerging details that are now before us, for instance in the
draft corporate governance blueprint making the rounds. Let me attempt to do that now --
The theme of
this symposium is a provocative one. Board Independence, Reality or Myth. In the course of addressing the question, I
beg your pardon in advance. I will try my best to be provocative.
What does the
symposium title mean? When we say independent, independent from whom? And
independent to do what?
The
Corporation Code and the SEC Corporate Governance Memorandum, 2002 provide the answer:
"It is
the Board's responsibility to foster the long-term success of the corporation and
secure its sustained competitiveness in a manner consistent with its fiduciary
responsibility, which it should exercise in the best interest of the
corporation and its shareholders ".
I would
myself interpret independence to mean, free to perform such a responsibility
unhampered by forces, be it management,
the majority shareholder, or for
that matter-- any other interests--- pushing interests that are not aligned with the corporation and its
shareholders in achieving its long-term success.
The particular
subset of "independent director" is
defined in the SEC Memo to be one who is without a relationship with the
corporation, is expected to exercise a
higher level of diligence in ensuring actions are in the interest of all
shareholders.
The need for
such independent directors especially arose from cases of misgovernance in the west -- of the "principal agent
problem" type. In many companies with defused ownership and with no
controlling shareholder it has happened that
management became unaccountable to anyone, and becomes its own
principal. Addressing this incentive
misalignment has been the driving force behind initiatives in OECD countries to
increase the number of ID's, in fact to a minimum of majority. And to ensure
that that the Chair is an ID, and other such limitations. This is wholly appropriate in that context.
However, the
situation in the Phl and the rest of Asia is quite different.
Here there
are really almost no such thing as companies with defused ownership. Here,
the principal value creators are
anchor investors, typically a family that has nurtured and grown the
corporation and continues to nimbly navigate it in fast globally changing environment. In fact many passive investors, not just local but global
strategic investors, put money in these
companies on the premise of continuity of that anchor investor family being in control.
In short
under this model, the interests of all shareholders are generally aligned with
the controlling shareholder. Think of the continuity across generations being
provided by the Ayalas, Sys, Aboitiz, Gokungweis, et al. The
advantages of this model has been well described in special section in The Economist a few months ago. It
contrasted it with the short termism observed in many firms in the west.
This
difference in situations give rise to question of appropriateness of the OECD model to Asia,
where “family anchor investors” are the
value creators. Take for example the
rule that majority of the Board should be independent or that ID's should be
especially empowered. In Asia, It is not
clear how requiring majority independents enhance long term shareholder
value. Especially when coupled with the
preference that terms of independent directors should be short.
As well
described by Chief Justice Panganiban,
the role of ID's in the Phl and similar Asian context, is an oversight
role, to make sure Board actions are for
the benefit all shareholders, that
related party transactions are at arms length and disclosed, and that
there is full compliance with laws of the country, especially ones on corporate
behavior and governance. That majority
of the board should be independent is
not needed for this, as rightly not
provided under our laws now. And it should stay that way.
Let me now
turn to the question of what will assure independence, and effectiveness. The draft CG blueprint as well as past SEC
issuances contain measures which I think miss
the point.
The most ones
most discussed pertain to term limits and number of seats.
A. Term limits.
1. No
evidence that longevity compromises independence nor on the advantages of term limits.
2. Longer
serving directors are more effective. And companies with longer serving
directors perform better.
(See for example, "the Non-Correlation Between Board
Independence and Long Term Firm Performance" by Sanjai Bhagat and Bernard
Black, professor of Finance, University of Colorado, and professor of law in
Standford University, respectively.
On Limits in
number of seats held by an ID. The evidence
likewise point to the opposite.According to a study by Ferris,
Jagannathan and Pritchard, professors in the University of Missouri-Columbia,
Binghamton University and University of Michigan Law School respectively--
"We find firm performance has a positive effect on the number of
appointments held by a director. We find no evidence that multiple directors
shirk their responsibilities to serve on board committees. We conclude that the
evidence does not support calls for limits on directorships held by an
individual."
My exhibit A
based on first hand experience as I am honored to be in common boards with them
are: CJ Panganiban, Amb. Joey Cuisia,
Mr. Washington Sycip, Mr. Oscar Reyes.
I challenge
anyone to contend that these gentlemen, despite having multiple seats/full time
jobs, do not perform effectively as directors in the boards they are in. Or
that the quality of governance in the corporations they serve will improve if
they resign, as compelled to by
regulation.
What then
assures independence in the actions of
ID's ? From my own experience -- it is the commitment of the controlling
shareholders to the highest quality of corporate governance. These shareholders seek out men and women
with solid reputations who share this commitment, who can contribute diverse
and independent views for the long term success of the corporation.
How about the
ID's themselves-- how do we ensure they act with independence? At the end of the day, the one thing that
assures independence is an ID's regard
for a reputation of a lifetime of integrity, probity, diligence. Which the person will not risk when put to
the test.
In fact, one
can argue that the more board seats, and longer more solid reputation built, the more independent such
ID's likely to be. ( Ever heard the
adage if you want something done-- give it to a busy man? )
Why do good
corporations, their majority shareholders and management, seek out such
independent minded men? It is not just
by what they can contribute due to their experience, knowledge and wisdom, but
indeed by their well earned reputation that they do not compromise
integrity. The companies, in turn, are
letting the world know that their corporate governance practice can withstand
scrutiny by such men and women. We
should not shackle such good aspirations with ill-advised fiats like limits on
term or number of seats of IDs.
The
particular case of limits on even non-ID is even more serious. This effectively disenfranchises owners, the
value and job creators, from overseeing their own companies. I requested PSE to tally the number of
individuals who will be affected-- those with 5 or more board seats. There are 53.
B. The risk
of over-regulation.
In the U.S. I
understand the number of listed companies have dropped from 8 k to 4 k in under
A decade, a combination I think of overregulation and readier assess to capital
without listing with the growth of private equity funds and in a world slushing
with liquidity. Here in the Phl we have
the lowest number of listed companies in ASEAN, and the one with the lowest
growth in listings. Perhaps, not coincidentally, we are also at the cellar of
"ease of doing business" of the World Bank in ASEAN.
Scoring and
ranking of corporate governance as is now pushed in ASEAN is fine, provided the
scorecard is well developed and acculturated -- I have issues with it. And is
not pursued obsessively. Otherwise it too becomes a case of shortermism.
But what we
need to watch out for is over regulations-- which create a compliance mind set,
or worse -- uncertainty, red tape, compliance costs, delays, and eventually deterioration in governance.
My worry is
the drift seems to be to regulate more at a time when our regulators, well
intentioned and diligent though they
are, are already overburdened. In the
2015 edition of the World Bank's Ease of Doing Business, we are ranked 161 of
189, the lowest in ASEAN 6, behind Indonesia and Vietnam. On starting a
business, we have the most number of procedures at 16 steps and will take 34
days. Singapore takes 2.5 days, Malaysia 5.5 days.
I therefore
welcome the intent to shift to
"comply or explain" model similar to the rest of ASEAN, in addition
to scoring , as a basic approach. Rather than strict fiat. The language,
though, of the draft CG blue print is confusing. In "comply or explain",
"explain" should mean "disclose to the public" not
"explain to the SEC who would then have the power to reject the
explanation as unsatisfactory". That to me is not "comply or
explain", but "comply or comply".
Why am I
concerned over this? There are a number
of new areas in the draft CG blueprint that go way beyond what is now in law.
For example,
there is an entire section on "Duties to Other Stakeholders". If
these duties were limited to those in law or by mutual contract, I would not
have a problem. I am concerned however over possibly ambiguity once we stray
from "fiduciary responsibility to the company and its shareholders "
to "duties to other stakeholders".
Just to site possibly far fetched examples to make a point--
Will
Directors be duty bound to heed the clamor,
say of labor unions, or even, SharePhil or ICD against labor contractualization even if this
is allowed under our laws? Or by
Greenpeace against a coal plant even if it has the approval signature of DENR,
local govt and all of the 150 other signatures to start a power plant? Who defines who is a stakeholder?
Someone was
telling me also of initiatives to compel gender balance. Here I will be at my
most provocative. To me this is both
intrusive and unnecessary. On two
grounds.
First, I
think it is just a matter of time before women take over. We are seeing this everywhere, in UP, there
are more women in the college of law. And in the college of medicine, it is the
men who are given a quota. In the BPI,
already a third of our Board are women, and the majority of management corps
are female.
Second, let
me ask a question -- is it not the height of regulatory heavy handedness to
make women in corporate boards mandatory, when they are no longer even mandatory in some marriages?
With that I
end my remarks, I think I have been
provocative enough.
