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The corporate governance system for the GOCC sector

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Cesar L. Villanueva

M. A. P. Insights

The corporate governance system for the GOCC sector

PRINCIPLES OF PUBLIC CORPORATE GOVERNANCE
1. Full Implementation of the Stakeholder Theory in the GOCC Sector

The GOCC Governance Act recognizes that all GOCCs, whether chartered or nonchartered, are imbued with “public interest” as it declares the State policy under Section 2 thereof: “The State recognizes the potential of [GOCCs] as significant tools for economic development. It is thus the policy of the State to actively exercise its ownership rights in GOCCs and to promote growth by ensuring that operations consistent with national development policies and programs.”

The principal obligation of the State to serve the public interests must permeate through the GOCCs as instrumentalities and agencies of the National Government. Although the financial viability and fiscal responsibility is one of the primary thrust of the National Government under RA 10149, nonetheless, such State policy must have as its thrust, national development.

The goal must primarily be, to serve the public needs, rather than the proprietary right of the State to the profits derived from the operations of GOCCs.

a. Comparing with the Concept of “Corporate Governance” for PHCs

The CG Code for PLCs defines “Corporate Governance” as the “system of stewardship and control to guide the organizations in fulfilling their long-term economic, moral, legal, and social obligations towards their stakeholders.”

On the other hand, the Revised Code of Corporate Governance, defines the same term as “the framework of rules, systems and processes in the corporation that governs the performance by the Board of Directors and Management of their respective duties and responsibilities to stockholders and other stakeholders which include, among others, customers, employees, suppliers, financiers, government and community in which it operates.”

As statements of principles, both PHC governance codes have formally adopted the Stakeholder Theory as distinguished from the Stockholder Theory or the Doctrine of Maximization of Shareholder Value. Yet, as discussed in an earlier paper in this series, in their operative provisions both codes have actually adopted a hybrid corporate governance system that follows the following hierarchical placement of interests, thus:

“Principle 1 therefore sets a hierarchy of priorities for the Board and Management in the fulfillment of their duties and responsibilities to the various stakeholders:

* “First and foremost, they must foster the long-term success of the company to sustain its competitiveness and profitability — which thereby place the stockholders in the first rung of stakeholders whose interest must be served;

* “Secondly, the manner of pursuing the “foremost objective of maximization of profits,” must be consistent with the company’s objectives and long-term best interests of other stakeholders.

“The foregoing governance formula is consistent with the adage that ‘in order that a company can do good in the communities it operates in, it must necessarily do well in its business operations.’ It is also consistent with the PSE’s concept of corporate governance as a framework that governs the ‘performance by the Board of Directors and Management of their respective duties and responsibilities to the stockholders, with due regard to the stakeholders.’”

In comparison, the GOCC Governance Act mandates the interests of the public as the foremost objective of public corporate governance, and the only “stockholder’s interests” that the Government preserves for itself is that in serving the public interests, GOCC assets and resources are utilized judiciously and without unduly undermining government financial status. The Government as equity-holder of all GOCCs has no “profit maximization” objective.

Therefore, we had defined in a published work the term “Public Corporate Governance” as “constituting a set of policies, rules and processes by which the State, through its representatives and agencies, mainly through the governing boards and management of such government corporations, manage and control public resources to achieve the objectives of government through a sustainable delivery of programs and services to the public.”

In essence, the application of the Stakeholder Theory is at its purest in the public corporate governance applicable to the GOCC Sector.

In practice, the realization of the Stakeholder Theory is achieved under the proper weighing in GOCC Performance Scorecard of the two perspectives of “Social Impact” and “Stakeholders’ Interest.”

2. Primary Responsibility for Corporate Governance Is with the Board of Directors/Trustees

The leading principle of corporate governance in the private sector that “the Board is primarily accountable to the shareholders and Management is primarily accountable to the Board.”

Prior to the passage of the GOCC Governance Act, the corporate practice in GOCCs organized under the Corporation Code was for the Chairman of the Board and the CEO to be designated by the newly organized Board based on the “desire letter” issued by the President of the Philippines; whereas, in most chartered GOCCs, the charters would provide that the Chairman and CEO were appointed directly by the President. What often resulted was a diffused sense of responsibility and accountability in the public corporate setting: having received a direct mandate from the president, the CEO felt that he was not accountable to the Board headed by the chairman, but to the president directly.

The GOCC Governance Act did away with such practice and expressly provides that the CEO as head of Management “shall be elected annually by the members of the Board from among its ranks,” who shall be accountable to the Board by the fact that the “CEO shall subject to the disciplinary powers of the Board and may be removed by the Board for cause.”

In addition, as previously discussed, under the principle of “command responsibility”, it is now part of the fiduciary duties of the Governing Board of every GOCC to “[e]lect and/or employ only Officers who are fit and proper to hold such office with due regard to the qualifications, competence, experience and integrity.”

The GOCC Code of Corporate Governance, in the particular provisions quoted below, now enshrines the leading corporate governance principles best expressed as follows: “The Board of Directors (Board) is primarily responsible for the governance of the corporation. It needs to be structured so that it provides an independent check on management.” “While the management of the day-to-day affairs of the institution is the responsibility of the management team, the Board is, however, responsible for monitoring and overseeing management action.” “The Board is primarily accountable to the shareholders and Management is primarily accountable to the Board,” thus:

III. GOVERNING BOARD

SEC. 5. Board Directly Vested with Corporate Powers. — Having been vested directly by law with the legal capacity and authority to exercise all corporate powers, conduct all the business, and to hold all the properties of the GOCC, the Governing Board is primarily responsible for the governance of the GOCC. Consequently, it is the Board and not Management, that is primarily accountable to the State for the operations and performance of the GOCC.

SEC. 6. Board Duty to Properly Select and Provide Independent Check on Management. — Concomitant with the power to elect the CEO from among their ranks and to appoint other Officers of the GOCC, it is the duty of every Governing Board to ensure that they elect and/or employ only Officers who are fit and proper to hold such offices with due regard to their qualifications, competence, experience, and integrity. The Board is therefore obliged to provide an independent check on Management.

SEC. 7. Mandate and Responsibility for the GOCC’s Performance. — Although the day-to-day management of the affairs of the GOCC may be with Management, the Board is, however, responsible for providing policy directions, monitoring and overseeing Management actions, as articulated in its Charter or Articles of Incorporation, and other relevant legislation, rules and regulations.n

The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or the MAP

 

Cesar L. Villanueva is the Vice Chair of the Corporate Governance Committee of the Management Association of the Philippines (MAP), the former Chair of the Governance Commission for GOCCs and the Founding Partner of the Villanueva Gabionza & Dy Law Offices.

cvillanueva@vgslaw.com

map@map.org.ph

http://map.org.ph