Amando M Tetangco, Jr: Of ironies and synergy
Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the
central bank of the Philippines), at the First ASEAN Corporate Governance Conference and
Awards "Governance Transformation in ASEAN: Reform and Priorities", Manila, 14 November
2015.
* * *
Can self-interest lead to the greater good? Prior to Adam Smith1 it was counter-intuitive to say,
"Yes." Human nature, in its narrowest sense, if you must, is anathema to the proposition that
individuals naturally uphold the common good. But proceeding from Smith's theory, we tap
individuals' natural inclination to pursue their own interests. We motivate them to see that good
governance works to their benefit. Self-interest therefore is channelled to nationally desirable
ends. Another "irony" results - supervised entities are now competing to adopt good
governance principles! In doing so, there is cooperation with regulated entities. Competition
toward cooperation.
This provokes another thought: Can the regulator partner with the regulated? I believe so.
When standards are merely imposed from the top-down, results can be unsustainable. To have
sustainability, interests of the regulator and the regulated must converge.
Can more granular measurement lead to unlimited possibilities? In the ASEAN Capital Markets
Forum (ACMF), I believe the answer is "yes". Since its initiation four years ago under the ACMF
Implementation Plan, the ASEAN Corporate Governance Scorecard (ACGS) has raised
awareness for tangible benefits of good governance practices among publicly listed
companies. The Scorecard has become increasingly more than a compliance metric or
tickbox. Rather, it is now a tool to achieve organizational alignment and focus.2
OECD studies show that investors have greater confidence in firms whose governance
standards are measured and clearly understood, consequently allowing better access to equity
and debt finance3, leading to reduced cost of capital4, and thus translating to improved share
value5. These are goals both regulators and the regulated desire. Since the initiative began in
2011, regulators have championed good governance principles. It is for "your own good," we
say. And, we have not been off-the-mark in our pronouncement.
Our advocacy has been heard. McKinsey has found that boards of directors of corporations
are increasingly "more confident in their knowledge of the companies they serve and more
strategic in their approach." And we know that strategy formulation is the first step to good
governance.6 Also, as shown in an ADB study7, PLCs have begun to voluntarily adopt best
practices. There is greater appreciation that a balanced scorecard can generate firm-level
1
Paraphrasing an idea in Adam Smith's The Theory of Moral Sentiments (1759).
2
"Robert S. Kaplan and David P. Norton, The Strategy Focused Organization: How a Balanced Scorecard
Companies Thrive in the New Business Environment."2001 Harvard Business School Publishing Corporation,
p. 8.
3
http://www.oecd.org/daf/ca/corporategovernanceprinciples/43654500.pdf.The Tangible Benefits of Good
Governance. Last accessed 11 November 2015. OECD.
4
Ibid.
5
Ibid.
6
Improving Board Governance: McKinsey Global Survey results. August 2013. Available at
http://www.mckinsey.com/insights/strategy/improving_board_governance_mckinsey_global_survey_r
esults last accessed 12 November 2015.
7
Asian Development Bank, ASEAN Corporate Governance Scorecard, Country Reports and Assessments,
2013-2014.
governance improvements8 and attract foreign investments. Ultimately, these enhance the
region's visibility, integrity and "branding" as an asset class.
The impact of good corporate governance is not just on the micro. It is also on the macro.
There is evidence that improvements in corporate governance of firms positively affect
aggregate economic activities at the country, and in our case, regional levels. Studies show
this is especially so when firms improve transparency. When firms are better governed,
interests of the firm and of stakeholders are more closely aligned. This gives firms stronger
incentives to achieve high productivity and efficiency, thereby raising "economy-wide"
productivity growth.9 Success inspires more success and good governance results in the whole
being greater than the sum of its parts.
In terms of corporate governance, ASEAN has certainly come a long way since the 1997
financial crisis. OECD reports that many key financial and corporate institutional reforms here
have translated to "stronger regulation, better resourced regulators, new institutions and an
increasingly involved shareholder base." A key facet of this positive development is corporate
governance reform.10
Moreover, as the ACMF effort has reached its fourth year, we have a better understanding of
corporate governance standards across the region. As regulators, we now have a common
diagnostic tool to help us improve corporate governance standards. Each country in the region
is expected to build on these standards to create their own corporate governance framework,
which should clearly articulate expectations on (among others) the fitness and propriety of the
board, checks and balances, and transparency.
The fundamental principle is that the tone of good governance should be set and come from
the top. It should remain the highest priority as it emphasizes the importance of having "fit and
proper" standards for individual board members. These standards, we believe, should put as
much weight on integrity, as on knowledge, expertise and competence.
Fitness and propriety are also displayed in the exercise of independent and objective judgment.
The "state" of independence is defined by parameters on term limits, a cap on the number of
concurrent independent directorships and the challenge of a seemingly limited number of
qualified independent directors. Systems of checks and balances should likewise be deeply
embedded across all levels in the company.
Unquestionably, an environment that fosters transparency should be the new norm. A system
for cooperation and collaboration among government bodies, regulators, and supervisors
should be in place to ensure reasonableness of disclosure requirements. We must display the
will and capacity to implement standards and take enforcement actions, if needed.
A business model that often draws discussion and one that is almost always associated with
our region - is related party interest. While we recognize that such a corporate structure has
inherent risks, we must also be mindful that synergies can lead to success of individual
companies. It would therefore be beneficial to set higher oversight and control standards. This,
to address conflict of interest concerns and propriety of related transactions.
Our own efforts at the Bangko Sentral ng Pilipinas with respect to our supervised entities follow
the global thrust closely, while at the same time being mindful of emerging domestic industry
concerns and unique situations in our legal and regulatory environments. However, regulation
alone is not enough. A culture that induces appropriate/proper behavior, even when nobody is
watching, is needed.
Ladies and gentlemen, the scope of governance must be broad. Our initiatives must not begin
and end with PLCs only. The financial environment where PLCs operate is made up of many
moving parts. Efforts must extend to financial market segments as well. In particular, we must
promote orderly financial markets that feature real price discovery and enforce responsible
market conduct.
From the perspective of a central bank, we view good corporate governance as the foundation
of safe and sound banking operations. It embodies principles of fairness, accountability and
transparency. The Basel Committee on Banking Supervision emphasizes that since banks
have an important financial intermediation role in the economy, the public and the market must
be highly sensitive to any difficulties potentially arising from any corporate governance
shortcomings in banks.11 Clearly, the financial industry thrives on public trust to sustain
resiliency. But I believe these principles are true not just for the banking sector but for all
commercial endeavors as well.
We should also recognize that SMEs make significant contributions to regional growth. Thus,
they should be included in our continuing transformation process. This transformation should
also not leave consumer protection behind. Ladies and gentlemen, governance must be
inclusive.
For certain, we give credit to ACMF for identifying good corporate governance as a prerequisite
for economic and financial integration. In doing so, ACMF strategically built a strong foundation
for our single market of ten separate economies. Good corporate governance as a bedrock is
essential for an economy whose combined GDP is expected to grow 4 times to US $10 trillion
by 203012 and is projected to become the 4th largest in the world by 2050.13 With this forecast,
we are therefore beginning strong with that trajectory in mind.
Diversity in ASEAN is a good thing. It suggests availability of niche markets that can be tapped.
Different needs can be explored and met. Pockets of expertise can be harnessed.14 Each
nation has a comparative advantage that will benefit the others. Regardless of our differences,
we should work together to continually make the Scorecard reflect internationally recognized
good practices in a manner that remains relevant and applicable to ASEAN. This can be done
through systematic collaboration, to ensure cohesion and promote synergy. As each nation is
here represented, I am confident we are off to an auspicious and productive start.
But can there be constancy amidst change? The answer, I would say, is "yes." This year, the
Philippine SEC celebrates its 79th Founding Anniversary. Its core functions endure, yet it also
makes history by launching the Philippine Corporate Governance Blueprint. In crafting the
plan, I understand that the SEC convened a multi-sectoral consultative working group, which
considered past, present and changing requirements of corporate governance, while
remaining sensitive to nuances of the domestic market. For this endeavor, we congratulate the
Philippine SEC and its proactive and tireless Chairperson, my friend and colleague, Honorable
Teresita Herbosa. We look forward to the Blueprint's introduction.
My final thoughts for this morning. For sustainability of the corporate governance initiative,
achieving synergy among seeming ironies is the challenge. Self-interest toward the greater
good, Competition toward cooperation, Partnerships between regulators and the regulated,
Unity in diversity, Consistency amidst change.
In addressing these seeming ironies, balance is key. Balance in choosing a firm regulatory
stance, while respecting and giving a wide berth to what motivates PLCs and individual firms.
I believe we are on the right track.
As we fulfill our mandate as the country's central monetary authority, and as member of the
Philippine Financial Sector Forum - comprised of financial regulators, we stand one with you
in the vision to make ASEAN an "asset class" of its own.
On behalf of the Monetary Board and the officers and staff of the BSP and the Financial Sector
Forum, I congratulate the ACMF, and the fifty PLCs of the region, inaugural award recipients
of the ASEAN Corporate Governance Award. For being exemplar in your way of governance,
and being the elite first of many batches that will bring more investments and growth into our
region, we warmly applaud you.
As we say in the vernacular, maraming salamat and mabuhay po tayong lahat.