Role of the Board of Directors OECD-World Bank Asian Roundtable Singapore April 4, 2001 Dr. Jesus P. Estanislao

JURISPRUDENCE on the role of Directors in the US and other Western advanced economies is very advanced. (Per Prof. Black) In many East Asia economies: no similar developed jurisprudence Nor do they have long tradition of open and free corporate, industrial and economic practices

Dominance of FAMILIES and closely-related GROUPS over our business structure Thus: transparency and disclosure system of checks and balances fair dealing for all stakeholders, including minority shareholders are treated more as IDEALS

Facing up to the challenge…. modifying our legal framework opening up the economy to foreign investments --who are demanding CG practices and reforms The only questions are: how? at what pace?

Philippine scenario our corporation law puts responsibility on the Board in directing the affairs of the corporation the buck stops at the board management reports to the board the board must ensure that “ FAT” is in place

Philippine scenario In short: Boards are constituted because the law requires them. But the Boards do not exercise the powers the law confers upon them.

What is in the LAW. DIVERGENCE What is DONE. Narrowing the gap over time with: lessening of family control widening of share ownership giving teeth to anti-trust laws and competition policy

Boards are expected to: set strategic direction provide advice and counsel to management monitor management’s performance In practice: long-term strategy……... set elsewhere reports……………………..pro-forma board discussions……….little atmosphere……………… country club issues……………………...swept under the rug risks………………………..not evaluated targets …………………….treated as secrets directors…………………..kept in the dark

There is growing movement towards: appointment of independent directors imposing stricter reporting systems by regulators bringing directors to court by few activist groups audit committees are being required standards of disclosures and quality of F/S being raised Institutes of Directors have been set up convergence of the above will speed up reforms

Expectations from Corporate Boards act in behalf of all stakeholders do balancing act between conflicting interests of stakeholders maximize long-term shareholder value vested with public interest etc. In practice, these “sensitive and complicated topics” are discussed outside the boardroom.

Expectations from Corporate Boards act in behalf of all stakeholders do balancing act between conflicting interests of stakeholders maximize long-term shareholder value vested with public interest etc. In practice, these are delegated to the PATRIARCH

Change overtime in mind set from pursuit of personal and family interests To the broader public interests. Especially so in the case of: commercial banks financial deposit-taking institutions publicly-listed corporations

Change overtime in mind set from pursuit of personal and family interests By making the reforms systemic and comprehensive First, committed, properly equipped, and effective regulators must lead the reforms in the region via the financial supervision reforms and risk management systems they are introducing. Since most financing still comes from banks, the banking system is key. Need to pin our hopes on Central Banks, Ministries of Finance, SECs and Stock Exchanges

Change overtime in mind set from pursuit of personal and family interests By making the reforms systemic and comprehensive Second, markets must be made to play their role. Markets must practice what they preach by paying a premium for modern corporate governance practices. Imperative of a CG scorecard. Stock Exchanges may open up a specialty board for corporations open to ratings. Institutional investors (e.g. IFC) can push for common CG framework.

Change overtime By making the reforms systemic and comprehensive Third, changing the mind set. Orientation and training are crucial. After all, the problem with some economies is not the law, but with the spirit of compliance. Only Director education can help win the spirit behind the practice of CG and align it with the spirit of existing law.

Role of the Board of Directors OECD-World Bank Asian Roundtable Singapore April 4, 2001 Dr. Jesus P. Estanislao End of Presentation