THERE is a public perception that the system of corporate governance (CG) in the private sector is of “superior standard” when compared with public CG system; or that at least, there is greater adherence and compliance with CG principles and best-practices in the private sector than in the public corporate sector. In another way at looking at it, our society generally considers public corporate sector to be more prone to corruption than that of the private corporate sector.
This article compares the prevailing CG system for government-owned-or-controlled corporations (GOCCS) with those for publicly-held companies (PHCs) in the private sector, in an attempt to determine the veracity of such perceptions, and in conclusion offer the explanation for such divergence.
The article is written under the presumption that most of the readers are fully aware of the CG principles and best practices prevailing for PHCs which are currently divided into two groups: (a) publicly-listed companies (PLCs), which are governed by the Code of CG for PLCs; and public companies, which are non-listed companies having assets in excess of P50 million, and having two-hundred (200) or more stockholders each holding at least one-hundred (100) shares of a class of its securities, which are still governed by the Revised Code of CG.
Consequently, the article will primarily articulate on the existing CG structure pertaining to GOCCs, and in the process compare them with their counter-part principles and best practices pertaining to PHCs.
THE GOCC GOVERNANCE ACT OF 2011
In July 2011, Congress passed into law Republic Act No. (R.A.) 10149, formally denominated as the “GOCC Governance Act of 2011.”
Apart from the appropriation act, it was the first substantial legislation signed into law by then President Benigno S. Aquino III, which sought to “promote financial viability and fiscal discipline in [the GOCC Sector] and to strengthen the role of the State in its governance and management to make [GOCCs] more responsive to the needs of public interest.”
The GOCC Governance Act unified into the so-called “GOCC Sector” all government corporations, whether chartered (i.e., created by direct act of Congress) and non-chartered (i.e., those organized under the Corporation Code of the Philippines), whether stock or non-stock, and whether performing commercial or proprietary functions, or those having in addition regulatory powers.
The policies sought to be pursued under RA 10149 are based on the State’s recognition of “the potential of [GOCCs] as significant tools for economic development,” requiring “the State to actively exercise its ownership rights in GOCCs and to promote growth by ensuring that [their] operations are consistent with national development policies and programs.” Towards such end, the Act mandates that the State shall ensure pursuit and realization of the following public policies:
(a) Judicious Use of the Corporate Medium: The corporate form of organization through which government carries out activities is utilized judiciously.
(b) Efficient and Monitored Use of Resources: The operations of GOCCs are rationalized and monitored centrally in order that government assets and resources are used efficiently, and that government exposure to all forms of liabilities including subsidies is warranted and incurred through prudent means.
(c) Transparency, Responsibility and Accountability: The governance of GOCCs is carried out in a transparent, responsible and accountable manner, and with the utmost degree of professionalism and effectiveness.
(d) Proper Reporting and Evaluation of Operations and Management: A reporting and evaluation system which will require the periodic disclosure and examination of the operations and management of GOCCs, their assets and finances, revenues and expenditures, is enforced.
(e) Competent Governing Boards: The members of the Governing Board of every GOCC are competent to carry out its functions, fully accountable to the State as its fiduciary, and act in the best interest of the State;
(f) Reasonable, Justifiable and Appropriate Remuneration Scheme: Reasonable, justifiable and appropriate remuneration schemes are adopted for the directors/ trustees, officers and employees of GOCCs and their subsidiaries to prevent or deter the granting of unconscionable and excessive remuneration packages.
(g) Competitive Neutrality: There is a clear separation between the regulatory and proprietary activities of GOCCs, in order to achieve a level playing field with corporations in the private sector performing similar commercial activities for the public.
The GOCC Governance Act does not contain a provision for the issuance of implementing rules, for as in the case of important legislations in the past, such as the Corporation Code, the provisions of RA 10149 are self-executory. Indeed, the Act sees its policies, principles and rules maturing and growing as the Governance Commission for GOCCs (GCG) manages the GOCC Sector, through its memorandum circulars and rulings.
More importantly, the so-called “implementing rules” of the Act shall find themselves expressed in manuals and codes that the GCG is mandated to promulgate, sometimes on its own power, and others with the approval of the President of the Philippines.
THE GOVERNANCE COMMISSION FOR GOCCS (GCG)
As the counter-part of the Securities and Exchange Commission (SEC) for PHCs in the private sector, the GOCC Governance Act constituted the GCG as the “central advisory, monitoring, and oversight body with authority to formulate, implement and coordinate policies” for the GOCC Sector.
Among other things, the GCG is empowered to classify, evaluate the performance, and determine the relevance, of GOCCs, to ascertain whether they should be reorganized, merged, streamlined, abolished or privatized, in consultation with the Department or agency to which they are attached.
The Act mandates that “In addition to the qualifications required under the individual charters of the GOCCs and in the bylaws of GOCCs without original charters, the GCG shall identify necessary skills and qualifications required for Appointive Directors and recommend to the President a shortlist of suitable and qualified candidates for Appointive Directors.”
To maintain the quality of management of the GOCCs, the GCG is mandated to prescribe, pass upon and review the qualifications and disqualifications of individuals appointed as officers, directors or elected CEO of GOCCs, and disqualify those found unfit. In determining whether an individual is fit and proper to hold the position of an officer, director or CEO of the GOCC, due regard shall be given to one’s integrity, experience, education, training and competence.
ORGANIC DOCUMENTS IN THE GOCC SECTOR
The GCG undertook the formal adoption and promulgation of the organic documents mandated under the GOCC Governance Act, thus:
a. Ownership and Operations Manual for Governing the GOCC Sector
The GOCC Ownership/Operations Manual provides for the objectives of State ownership in GOCCs, and provides for the formal structure of the basic relationship between the State and its various agencies with the GOCCs. It is deemed to be the “Magna Carta in the GOCC Sector”, since it—
- Provides for the Governing Principles and Objectives of the State as an “Active Owner” of the GOCCs;
- Defines the Role and Relationship of the State, its agencies and instrumentalities, vis-à-vis the GOCCs as “significant tools for national development”;
- Provides for the roles and responsibilities of GOCCs and the Primacy of the Boards of Directors/Trustees in the governance of the GOCCs;
- Provides Guidelines for the Monitoring and Evaluation of the GOCCs and their Governing Boards and CEOs;
- Provides for the Policy Framework for Tasking GOCCs to Undertake Non-Commercial Activities.
GOCC Governing Boards are encouraged to look at the GOCC Ownership/Operations Manual as a “Bill of Rights and Responsibilities” as they pursue the proper role and responsibilities of the GOCCs in which they serve.
For example, against an overbearing Supervising Agency, the Governing Board of a GOCC may point to the provision of the Manual that explicitly calls for respect of the legal structure and operational autonomy of each GOCC. While supervising agencies of the National Government are mandated to ensure that the corporate plans and programs of GOCCs under their supervision are congruent with the sectoral objectives and priorities of their respective departments, the Manual provides that such Supervising Agencies shall not be involved in the day-to-day management of GOCCs.
Another example would cover GOCCs like SSS and GSIS which really do not hold government funds, but actually have custody and trust obligations of the contributions of employees and pensioners, Such GOCCs may invoke Article 6 of the GOCC Ownership/ Operations Manual to parry the demands of an Administration on off-beat “pet projects”, which clarifies that the role of the State in such GOCCs “is not that of an active owner or investor, but a guardian to promote the best interests of the members of the public whose contributions are to be prudently invested for their benefit, and also as a guarantor for the contingent liabilities.”
b. Code of CG for GOCCs
The GOCC Code of CG contains the mandated governance principles and best-practices applicable to GOCCs, and adopted from the OECD Governance Guidelines for State-Owned Enterprises, as well as from the SEC’s Code of CG. The Code is intended to instill within the GOCC Boards and Management the highest sense of responsibility, transparency and accountability, and covers the following areas:
- Role and Responsibilities of the Governing Boards, and the individual Directors as “fiduciaries of the State”;
- Disclosure and transparency requirements;
- Code of Ethics of Directors and Officers in the GOCC Sector;
- Creation of Board Committees and similar oversight bodies;
- Providing for an Integrated Corporate Reporting System (ICRS);
- CSR Statement and the Role of Stakeholders.
In addition, the GOCC Code of CG contains a provision on the “Obligations of the GOCC to the Members of the Governing Board,” such as the provision of staff support. Another key feature is allowing GOCCs to obtain Directors and Officers Liability Insurance (DOLI) coverage for members of the Board and Officers. The DOLI is intended to insure against contingent claims and liabilities that may arise from the performance of their functions, except in cases when there has been a breach of a fiduciary duty or a commission of fraud. This is of particular importance when viewed in the context of RA 10149 having imposed a lot of responsibilities on the Board and required them to act with extraordinary diligence.
(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 CG 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.