Philippine Corporate Governance Dean Cesar L.

Villanueva THEORIES OF CORPORATE GOVERNANCE In many legal jurisdiction, the theoretical basis upon which corporate governance is purseud greatly (a) influences the objectives for which the corporation is to be managed, (b) chracterizes the powers, duties and responsibilities of the Board of Directors as well as the extent of personal liabilities that may expose themselves to in breach of such duties, and (c) determines the rights of the persons (i.e., constituencies or stakeholders) who would have legal standing to draw upon such duties and responsibilities. Doctrine of Maximization of Shareholder Value versus Theory on Corporate Social Responsibility As Philippine Corporate Law is primarily a transplant from American Corporate Law, essentially then Philippine Corporate Governance principles and practice have largely been imported from their western counterparts. 1.) Maximization of Shareholders Value The generally accepted goal of the corporation under the Corporation Code of The Philippines is one that is based on what is termed as the "neoclassical economic theory of "Maximization of Shareholder Value which has been expressed here in the Philippine jurisprudential doctrine to mean that the primary obligation of the Board of Directors of a stock corporation is "to seek the maximum amount of profits for the corporation". It is otherwise referred as the "Stock Holder Theory". The tenets of the Doctrine of Maximization of shareholder value had been defended by Milton Friedman in his 1970 seminal article that was published in New York Times entitled "The Social Responsibility of Business is to increase Profits" where he concluded that "there is one and only one social responsibility of business - to use its resources and engaged in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in free and open competition without deception of fraud." Friedman discuss several grounds to support his opposition to the implication that business in general, and corporations in particular, have a "social responsibility" that is - that businesses should not be only concerned with profits, but "also promoting desirable social ends". Firstly, he stated that "in a free enterprise, private property system, a corporate executive is an employee of the owners of the business. He has direct responsibilities to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom. Secondly, he posited that business men are trained to make profits of which the measure has become financial science, and does not process specific competence in promoting public welfare, and that it would be especially difficult to measure whether businessmen are complying with such duty for social responsibility. He discussed that even if corporate executives could make such calculations, there are no parameters under "social responsibility" theory to guide them to determine how much cost on such social activities they can impose on the corporate venture. Thirdly, under rubric of "social responsibility", he suggested that many practices are merely selfservicing or window-dressing activities, when in fact the real motivation was to gain an advantage to the corporation in furtherance of profits. Implicit in Friedman's paper was his support for Adam Smith's

"hidden hand" principle: by allowing business to freely and fully function in its own specific competence of profit making, then society will be better served in the long run. The theory of maximization of shareholder value as the loan pursuit of a corporate enterprise has been criticized to be based on a flawed premise, the supposing that is the capital initially invested in the corporation that creates the wealth, when in fact it is the various sectors that work within the corporate enterprise that actually generate the wealth, including the protection and business environment provided by government. To illustrate, Marjorie Kelly writes in refutation to the theory of "maximization of profits for the benefit of stockholders. 3. Stakeholders in Publicly held Companies: Pre-Revision a. Formal and Legal Adoption of the Stakeholder Theory The Original SEC Code defined Corporate Governance as a system whereby shareholders, creditors and other stakeholders of a corporation ensure that management enhances the value of the corporation as it completes in an increasingly global market place. thereby introducing the stakeholder theory into the very heart and definition of corporate governance for publicly-held companies. In addition, the original SEC Code prvided for the following duties and obligations of the Board of Directors of a publicly-held company to its stakeholders as distinguished from the stockholders, thus: (page 59) (a) It contained the same provisions found in the BSP CG Circulars that as part of a director s General Responsibility A director assumes certain responsibilities to different constituencies or stakeholders, who have the right to expect that the institution is being run in a prudent sound matter. (b) In enumerating the Duties and Functions of the Board of Directors, it provided for an opening paragraph that hold that: To ensure a high standard of best practice of the company and its stakeholders, the Board should conduct itself with utmost honesty and integrity in the discharge of its duties, functions and responsibilities. (c) In particular, it enumerated as one of such duties and functions of the Board the obligation to Identify the corporation s major and other stakeholders and formulate a clear policy on communicating or relating with them accurately, effectively and sufficiently. There must be an accounting rendered to them regularly in order to serve their legitimate interests. (page 60) (d) In realm Audit and Accountability, the Board of Directors of a publicly-held company was directed to Maintain a sound system of internal control to safeguard stakeholders investment and the company s assets. (e) In terms of Disclosure and Transparency, it mandated that: The Board shall therefore commit at all times to full disclosure of material information dealings. It shall cause the filing of all required information for the interest of the stakeholders. (page 61) The Board is primarily accountable to the shareholders, and Management is primarily accountable to the Board.

The Board should provide the shareholders with a balanced and understandable assessment of the corporation s performance, position and prospects on a quarterly basis. Under the original SEC Code, good corporate governance required from the Board of Directors and management an approach in decision making and in the exercise of their business judgement, which must include the balancing of the interests of various stakeholders who do not have the same priorities, towards general objective. This is under the original SEC Code of the obligation of enhancing the value of the corporation as it completes in an increasingly global market place. Thus, the original SEC Code delineates the duty of the Board of Directors of a publicly-held company as follows: (page 62) 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. One of the inquiries then given to SEC was: Why in the setting down the responsibilities of the Board of Directors to ensure the long term success of the company, it would limit the exercise of its fiduciary responsibilities only in the best interest of the corporation and its shareholders, not including other stakeholders. From reading the provisions of the original SEC Code one got the impression that although there was no doubt that it had formally and legally introduced into our system of publicly-held companies the stakeholder theory, it had managed to provide only for general principles and doctrines, and that the codes operative provisions reflected the same inadequacies or shortcomings as the theory itself has been evaluated to possess, There seemed to be difficulties on the part of the SEC of putting flesh into general framework of stakeholdership, and providing a system of decision making in cases of conflicts arising from the varied interests of the identified stakeholders. This was understandable in the case of the SEC, because (page 63) unlike BSP and the IC whose industries are supported by matured set of statutory systems upon which they rely on to operationalize the stakeholder system, publicly-held companies are governed by the Corporation Code, which still embody a bias towards the maximization of shareholder value doctrine. Under the original SEC Code, the challenge therefore for corporate practitioners, governing administrative agencies, and the courts of law, was how to evolve a system of stakeholdership of publicly-held companies that would take into consideration the circumstances prevailing in the Philippine corporate scene, which were consistent with standards of what constituted best corporate governance practice. (page 64)