Laws on corporate governance

The Senate last week approved on third and final reading the proposed Pre-Need Code,  which seeks to protect the interests of holders of educational plans, memorial plans, health/medical plans, and similar schemes that cater to people’s desire to prepare and invest to some financial needs in the future. That is why this kind of business is precisely called “pre-need” or before the actual need arises.

The Senate’s approval of this proposed law brought back to mind many, very sad stories of parents whose investments for their children’s education all the way to college were derailed by the financial collapse in 2005 of two major educational plan firms — the College Assurance Plan (CAP) and the Pacific Plans. As an offshoot of the financial troubles of these pre-need firms, this reform bill to strictly regulate the pre-need industry in our country was initiated during the 13th Congress. However, it was among the legislative measures that did not see the light of the day. To date, there are still many parents, who, up to now could not collect from CAP and Pacific.

Fortunately, Senator Edgardo  Angara re-filed this measure last year as SB 2077, or the Pre-Need Code of 2008. As the chairman of the Senate Committee on Banks, Financial Institutions and Currencies, Angara sponsored and steered its approval last week at the Senate plenary. It could not be ascertained, though, as of press time yesterday if its House version was also approved before they adjourned the first regular sessions.

Under SB 2077, it mandates that pre-need companies must have a minimum paid-up capital of P100 million to provide a solid capital base and lessen the risk of instability in the future. Among the other Important features introduced in this bill include the industry’s supervision by the Securities and Exchange Commission (SEC) instead of the Insurance Commission; full disclosure of the pre-need companies’ income as well as its contributions to the trust fund.

These safeguards under this proposed Pre-Need Code should be able to impose the kind of discipline and strict corporate governance that these companies must adhere to in order to protect small investors like us parents who buy these kind of pre-need plans.  Both CAP and Pacific made bad business decisions and wrong choice of investments that victimized not only their customers but more so, of their stockholders who were co-owners of their companies.

These mistakes could have been avoided if the stockholders were properly informed and apprised of investment decisions that could make or unmake their companies. We are replete with examples of such corporate decisions that became full blown boardroom wars and have even reached the Supreme Court.

A temporary restraining order (TRO) slapped by the SC’s Third Division against a Court of Appeals injunction is turning out to be a major focal point of the corporate sector’s attention. While legal minds say the TRO resolution, penned by SC Associate Justice Minita Chico-Nazario, had nothing to do with the issues involved in the case, the timing of its issuance gave a Malaysian-backed business interest a “victory by technical knockout” over a group of Filipino minority shareholders.

The TRO has to do with a long-drawn battle for minority shareholder rights launched by Filipino stockholders of the Philippine Racing Club which currently owns and operates the prime Sta. Ana racetrack property. The group, which includes the prominent Puyat family, has questioned an alleged lack of transparency on the part of the Malaysian-backed group of Racing Club directors in connection with a swap deal.

The swap reportedly involves the transfer of the ownership of the Sta. Ana racetrack to a holding company controlled by the Malaysian group. The Filipinos appear to have been dismayed by the swap scheme since the title to the racetrack, valued at P12 billion, is being bartered with shares in the holding firm called JTH Davies, valued at P25 million.  The Filipinos had initially succeeded in blocking what they described as a lopsided deal. They obtained legal orders from the regional trial court. This was subsequently upheld by the CA and effectively stopped the Malaysian-backed group from ramming through the swap deal in question.

The timing of the SC TRO appears to be opportune as far as the Malaysians are concerned. The Racing Club is set to hold its stockholders meeting within the next few days during which the swap can be turned into a done deal. The Filipinos are getting a lot of pat in the back for the gallant fight they put up, but many feel the SC Third Division TRO dealt the cause of the Filipinos a major blow and rendered the battle for transparency moot and academic.

The more vital issue in the Malaysian-Filipino racing club row appears to be “transparency” and “shareholder rights” which have been the focal point of the country’s corporate sector reforms since the turn of the century. The reforms received much acclaim from the local and international business communities. The Asian Development Bank and the World Bank both poured in financial support for studies that would help push  the reforms. Congress passed the Securities Regulation Code in 2000, an offshoot of the Corporation Code which championed the pro-transparency and pro-shareholder rights reforms.

The Corporation Code specifically mandates the companies to allow shareholders to inspect corporate books including minutes of board meetings and stock registries, and to provide them an annual report including financial statements. The Securities Regulation Code, meanwhile, specifically requires that shareholders be provided with periodic reports to disclose personal and professional information about the directors and officers and certain other matters such as their holdings of the company’s shares, dealings with the company, relationships among directors and key officers, and the aggregate compensation for directors and officers.

The Filipino shareholders group say they are merely batting for the rights provided them by law.  Thus, this is the challenge for our legislators to ensure that the letter and spirit of these laws on corporate governance are strictly adhered to.