CORPORATE GOVERNANCE IN EMERGING MARKETS Dr. Jesus Estanislao Former Finance Minister of the Philippines, Director of Institute for Solidarity in Asia, Chairman of the Institute of Corporate Directors in the Philippines

The dangers of weak corporate governance Corporate governance became a highly salient topic after the 1997 East Asian financial crisis The crisis revealed weakness of corporate governance and financial institutions in emerging markets The crisis showed that East Asia had to rise up to the corporate governance challenge – The need to introduce practices more in line with the OECD Global Principles of Corporate Governance

Improving corporate governance in East Asia Although the corporate governance principles were formulated in the West, their applicability is universal “ This is what corporate governance imposes on all of us, the duty of being transparent, the duty of being socially responsible, the duty of being fair, and the duty of being accountable, not only to shareholders that invest their money in a corporation, but also to the society taken as a whole. Whether those duties apply only to the United States or Europe and not to China or the Philippines certainly should not be a matter for debate. ” - Dr. Jesus Estanislao

Raising awareness and strengthening accountability Corporations need to know the principles of corporate governance – Compulsory training program for corporate directors Boards of directors need to be made more accountable for the quality of governance – The board responsible for the company strategy and its implementation – Competent audit committee and corporate governance committee on every board – Rules on remuneration of directors and CEOs

Tools for implementing good corporate governance The Institute of Corporate Directors introduced corporate governance checklist of what every board needs to do – e.g., have audit and risk management committees A scorecard was also established to track and evaluate the progress of companies – Many corporations have initial low scores, but they show dramatic improvements in the third year

Improving performance Corporate governance is about delivering results, not just box-checking – Results not only for shareholders but also society, community, and the economy Checklists and scorecards are not enough – Companies must use corporate governance as a way of improving their performance Corporate governance principles should be translated into substance and used to maximize company’s long-term value not only for the shareholders but also all stakeholders.

The Companies Circle Improving performance requires that companies share the best corporate governance practices The Institute of Corporate Directors established the Companies Circle – It is a group of companies with high corporate governance scores – They took strategy formulation and execution very seriously as major duties of the board – They serve as models for other companies

Strategy to include everyone Corporate strategy is not just for the board but for everyone in the company – From the CEO, the chairman of the board, down to the last employee The Institute of Corporate Directors helps companies translate their corporate strategy into daily operations Four phases of a pathway to improvement – Initiation into the pathway – Compliance with demands – Proficiency with strategy execution – Corporate governance institutionalized in culture

Corporate governance principles The major principles of corporate governance are fairness and responsibility – To both majority and minority shareholders – To all stakeholders: employees, environment, society as a whole, etc. Transparency is the necessary element of fairness and responsibility Corporate governance makes everyone in the company accountable for producing the best possible business results

Corporate governance in emerging markets Example: the Philippines are done with the first phase of awareness building, checklists, and basic compliance The country is now in the second phase of utilizing corporate governance as a tool to improve business performance – The need to increase the number of model companies – The need to recognize universality of corporate governance principles – The need to incorporate lessons learned from other countries and share the best practices

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