Enforcing rules in the boardroom

First, a confession. About the only exposure I have had to goings-on in corporate boardrooms is watching Korean “teledramas” where the action centers on conflicts between board members, sometimes belonging to one family but divided by generations, and business differences serving as proxy battles over personal and familial issues.

But the links between family “issues” and business and corporate tussles are not all that ludicrous or the sole concern of scriptwriters. We have seen countless real-life examples of corporate conflicts that barely disguised deep-seated personal differences between corporate officers and board members. We also know of families that have been torn apart because of business or policy differences. Or how greed and lust for power among members of a family (and not just in the corporate setting) have led to thievery, corruption and abuse of power.

Indeed, business conflicts may read like boring accounting reports, but at heart they reflect deeply personal, if contradictory, values and principles.

You don’t have to take my word for it. In his memoir, “For Love: The secret of a vision-inspired life,” Jess Estanislao, chair emeritus of the Institute of Corporate Directors (ICD) and former finance secretary (during the Cory administration), describes the situation he faced when first he contemplated setting up an institute promoting good corporate governance.

“There was a lack of transparency in corporate reports on performance, which focused mainly on financial standing while sweeping under the rug those equally important non-financial aspects,” Estanislao wrote. “Even though corporations were supposed to be separate, independent bodies before the law, they were being used to front personal, family or state control over corporate assets.”

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It took the Asian financial crisis of the 1990s to shake up the comfy, cozy relationship among corporate directors, their shareholders and even government regulators, Estanislao noted. International institutions such as the World Bank and the OECD (Organization for Economic Cooperation and Development) took the lead in drumming up interest in corporate governance reforms, which at the time was a novel concept and raised suspicions of government meddling in the private sector.

But today, says ICD chair Francis Estrada, more and more corporations are “buying into” the concept and practice of good corporate governance. The main principles of good governance in the corporate sector include accountability, transparency and fairness, promoting “principles on how corporations should operate.”

The returns on a good corporate reputation may not be immediately apparent, concede Estrada and Estanislao in a meeting with some media practitioners. It may take some time to reap the harvest of a good name, creating value translated into public trust and perhaps patronage, and even foreign investment.

But what is good for the corporate community, they say, will also be good in the long run for the country. Good corporate reputations among local companies, says Estrada, who is a former president of the Asian Institute of Management, can help “essentially accelerate development, specifically sustainable development.”

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Among the reforms advocated by the ICD, a key component of the training it offers to corporate directors and executives, is the inclusion and empowerment of independent directors, who are invited to join the board primarily to represent minority stockholders as well as the public, including suppliers and customers.

Estanislao has some concerns about how the independent directors are chosen and given the recognition they deserve.

“If they are to be truly independent, the nomination committee must itself be independent,” he asserts. In some companies, he adds, the independent directors (usually a minority in the board) are given the time and opportunity to meet separately after a board meeting and draw up their own recommendations which they then present to the board chair.

And though the motivation may have been well-meaning, both Estrada and Estanislao concede that, due to factors like familiarity and personal ties that may develop over time, independent directors may end up less independent than they should be.

This is why, a few years back, the ICD proposed that “term limits” for independent directors be imposed, precisely to prevent the development of cozy relationships among the independent directors and the firm’s board and owners. Understandably, the proposal was strongly opposed by business leaders, although it seems that they have since been reconciled to the idea which was adopted by the Securities and Exchange Commission in 2011.

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THE ICD is now seeking to expand its coverage from the Philippines to the region, working on the development of the Asean Corporate Governance Scorecard (ACGS), which, it explains “intends to raise the corporate governance standards and practices of Asean PLC (publicly listed companies), and to showcase top performing PLCs by increasing their visibility and appeal to global investors.”

The scorecard, says Estanislao, can be used by regulators (and even investors and customers) to check whether companies are “adhering to governance guidelines and rules,” making sure management and owners will not surreptitiously siphon off corporate assets or, in Estrada’s words, “engage in skullduggery” for their own advantage at the expense of their stakeholders. And that includes, however small our stake may be, you and me.