8.1 Evolution and Governance Framework in the Philippines

8.1 Evolution and Governance Framework in the Philippines

Corporate governance in the Philippines has undergone profound structural evolution over the past three decades. Historically characterized by concentrated family ownership, interlocking directorships, and opaque conglomerate pyramids, the Philippine capital market required decisive regulatory reforms to protect minority investors, enhance capital allocation, and attract foreign institutional investment. Today, corporate governance oversight is administered primarily by the Securities and Exchange Commission (SEC) through modern codes anchored on international standards.

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Historical Evolution of Corporate Governance in the Philippines

The trajectory of domestic corporate governance reform was catalyzed by regional and global financial shocks that exposed vulnerabilities in board oversight and disclosure practices.

Evolution of Philippine Corporate Governance
  ├── 1997: Asian Financial Crisis (Exposed systemic governance & transparency deficits)
  ├── 2002: SEC MC No. 2, s. 2002 (First Code of Corporate Governance - Prescriptive/Rules-Based)
  ├── 2009: SEC MC No. 6, s. 2009 (Revised Code of Corporate Governance - Expanded Board Mandates)
  ├── 2016: SEC MC No. 19, s. 2016 (Code of Corporate Governance for PLCs - 'Comply or Explain')
  └── 2019: SEC MC No. 24, s. 2019 (Code for Public Companies & Registered Issuers - Proportionality)

1. Pre-1997 Landscape: The Concentrated Ownership Challenge

Prior to the 1997 Asian Financial Crisis, Philippine corporate law—codified under the legacy Corporation Code (Batas Pambansa Blg. 68)—focused primarily on internal corporate mechanics rather than investor protection. Listed firms were dominated by controlling family groups who exercised disproportionate voting power relative to their economic equity. Boards were largely ceremonial, independent directors were rare, and minority shareholder protections were virtually non-existent.

2. The 2002 and 2009 Governance Codes

Following the 1997 crisis and the enactment of the Securities Regulation Code (SRC / RA 8799) in 2000, the SEC promulgated SEC Memorandum Circular No. 2, Series of 2002, establishing the country's first formal Code of Corporate Governance. This was later updated by SEC Memorandum Circular No. 6, Series of 2009 (Revised Code of Corporate Governance). Both early codes operated under a prescriptive, "one-size-fits-all" rules-based framework, treating compliance as a mandatory checklist rather than a strategic imperative.

3. The 2016 Watershed: SEC Memorandum Circular No. 19, Series of 2016

Recognizing that rigid prescriptive rules encouraged superficial "box-ticking," the SEC overhauled its regulatory philosophy. On November 22, 2016, the Commission issued SEC Memorandum Circular No. 19, Series of 2016, known as the Code of Corporate Governance for Publicly-Listed Companies (CG Code for PLCs). This landmark regulation abandoned rigid mandates in favor of an internationally accepted, principles-based framework.

4. Expansion to Non-Listed Public Entities: SEC Memorandum Circular No. 24, Series of 2019

To ensure governance standards permeated beyond listed equities, the Commission issued SEC Memorandum Circular No. 24, Series of 2019, creating the Code of Corporate Governance for Public Companies and Registered Issuers (PCORIs). This code applies to public companies (entities with assets exceeding ₱50 million and having at least 200 shareholders holding at least 100 shares each) and registered issuers of proprietary/non-proprietary shares or commercial papers, introducing proportionate governance standards tailored to non-listed enterprises.

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The "Comply or Explain" Regulatory Approach

The cornerstone of SEC MC No. 19, Series of 2016 is the "Comply or Explain" approach, mirroring the governance architecture utilized in the United Kingdom, Singapore, Australia, and Hong Kong.

The Three-Tier Architecture of the Code

The Code of Corporate Governance is structured into three distinct structural components:

1. Principles: High-level statements of corporate governance objectives that apply universally to all publicly-listed companies. Principles are non-negotiable; companies are expected to embrace and uphold them.
2. Recommendations: Objective-oriented practices designed to help companies achieve the Principles. Recommendations allow operational flexibility, recognizing that different corporate scales, ownership structures, and business models require tailored governance solutions.
3. Explanations: Detailed guidance notes that provide context, rationale, and best-practice illustrations for each Recommendation.

Structure of the Code of Corporate Governance
  ├── Principles (Mandatory governance ideals; universal application)
  ├── Recommendations (Recommended operational practices; subject to Comply or Explain)
  └── Explanations (Guidance notes, practical context, and interpretive rationale)

How "Comply or Explain" Operates

Under this philosophy, the SEC does not automatically penalize a publicly-listed company for not adopting a specific Recommendation. Instead:

• Compliance: The company implements the specific Recommendation and discloses how it achieved compliance.
• Explanation: If a company chooses not to adopt a specific Recommendation, it must formally explain:
  1. The specific business or structural reasons why the Recommendation was not adopted;
  2. How the company's alternative internal governance practices achieve the overarching objective of the underlying Principle; and
  3. Any compensatory risk-mitigating measures implemented in lieu of the Recommendation.

The Reporting Vehicle: Integrated Annual Corporate Governance Report (I-ACGR)

To operationalize "Comply or Explain," the SEC issued SEC Memorandum Circular No. 15, Series of 2017, mandating the submission of the Integrated Annual Corporate Governance Report (I-ACGR):

• Consolidated Filing: The I-ACGR unifies the disparate corporate governance reporting requirements of both the SEC and the Philippine Stock Exchange (PSE) into a single comprehensive disclosure document.
• Statutory Deadline: Publicly-listed companies must submit their I-ACGR on or before May 30 of each calendar year covering the preceding year's governance practices.
• Public Availability: The I-ACGR must be published simultaneously on the corporate websites of the listed issuer and the SEC disclosure portal.

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The 16 Principles of Corporate Governance (CCG for PLCs)

The CG Code for PLCs is organized into 16 overarching Principles, grouped into five thematic pillars representing the holistic corporate ecosystem:

Pillar I: The Board's Governance Responsibilities (Principles 1 to 7)

• Principle 1 (Fiduciary Leadership): The company should be headed by a competent, working board to foster long-term success and sustainability.
• Principle 2 (Clear Board Roles): The board should establish clear mandates, board charters, and executive responsibilities.
• Principle 3 (Board Committees): Board committees should be set up to focus on specific governance areas (Audit, Corporate Governance, Risk Oversight, Related Party Transactions).
• Principle 4 (Director Competence & Diversity): Directors must dedicate adequate time, undergo continuous training, and reflect diversity in gender, age, skills, and background.
• Principle 5 (Independent Judgment): The board should maintain independent directors, establish cumulative term limits, and separate the Chairperson and CEO roles.
• Principle 6 (Performance Assessment): The board should regularly assess its performance, committee effectiveness, and executive management.
• Principle 7 (Integrity and Ethics): Directors must govern with ethical standards, establishing a code of business conduct and anti-corruption policies.

Pillar II: Disclosure and Transparency (Principles 8 to 11)

• Principle 8 (Transparent Corporate Reporting): The company should establish comprehensive policies regarding disclosure of material information.
• Principle 9 (Integrity of External Audit): The board should establish an independent external audit mechanism to ensure financial integrity.
• Principle 10 (Transparent Ownership Structure): Clear disclosure of beneficial ownership, controlling blocks, and conglomerate cross-holdings.
• Principle 11 (Timely Public Disclosures): Disclose all material corporate information via established digital and exchange media channels.

Pillar III: Internal Control and Risk Management (Principle 12)

• Principle 12 (Risk Governance): The board must maintain a robust internal control system and an Enterprise Risk Management (ERM) framework.

Pillar IV: Cultivating a Synergic Relationship with Shareholders (Principle 13)

• Principle 13 (Shareholder Protection & Engagement): Respect shareholder rights (voting, appraisal, information, dividends), promote active participation at general meetings, and establish transparent dispute-resolution mechanisms.

Pillar V: Duties to Stakeholders (Principles 14 to 16)

• Principle 14 (Stakeholder Rights): Identify key stakeholders (employees, customers, suppliers, creditors, communities) and protect their statutory rights.
• Principle 15 (Employee Participation & Whistleblowing): Establish employee engagement frameworks and safe whistleblowing channels free from retaliation.
• Principle 16 (Sustainability and Social Responsibility): Recognize and report on environmental, social, and governance (ESG) impacts and sustainability performance.

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International Governance Benchmarks

Philippine corporate governance does not operate in isolation. The SEC explicitly benchmarked its regulations against two primary international standards:

1. G20/OECD Principles of Corporate Governance

The Organisation for Economic Co-operation and Development (OECD) Principles represent the globally recognized benchmark for policymakers. The Philippine CG Code incorporates the core OECD pillars:

• Ensuring the basis for an effective corporate governance framework;
• The rights and equitable treatment of shareholders and key ownership functions;
• Institutional investors, stock markets, and other intermediaries;
• The role of stakeholders in corporate governance;
• Disclosure and transparency; and
• The responsibilities of the board of directors.

2. The ASEAN Corporate Governance Scorecard (ACGS)

Initiated by the ASEAN Capital Markets Forum (ACMF) in partnership with the Asian Development Bank (ADB), the ACGS evaluates publicly-listed companies across the six participating ASEAN nations (Philippines, Singapore, Malaysia, Thailand, Indonesia, and Vietnam).

ASEAN Corporate Governance Scorecard (ACGS) Structure
  ├── Level 1: Core Scoring (100 Points Total)
  │     ├── Part A: Rights of Shareholders (10%)
  │     ├── Part B: Equitable Treatment of Shareholders (15%)
  │     ├── Part C: Role of Stakeholders (10%)
  │     ├── Part D: Disclosure and Transparency (25%)
  │     └── Part E: Responsibilities of the Board (40%)
  └── Level 2: Adjustments
        ├── Bonus Points (Exemplary practices exceeding minimum benchmarks)
        └── Penalty Points (Sanctions, non-compliance, or major governance breaches)

Under the ACGS framework, domestic companies are evaluated by an accredited Domestic Ranking Body (such as the Institute of Corporate Directors / ICD in the Philippines). High-scoring companies are recognized across the region as ASEAN Asset Class PLCs, enhancing their visibility among global institutional asset managers.

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Comparative Matrix: Philippine Governance Regimes

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Practical Exam Traps & Regulatory Pitfalls

• Trap 1: Believing "Comply or Explain" Means Compliance is Optional. Exam questions often test whether a company can simply ignore a Recommendation without consequence. Under SEC rules, adopting the practice is flexible, but disclosure is mandatory. Failing to explain a deviation in the I-ACGR is an actionable disclosure offense subject to severe regulatory penalties.
• Trap 2: Confusing the Scope of MC 19 (2016) and MC 24 (2019). SEC MC No. 19 applies strictly to publicly-listed companies (PLCs) traded on the Philippine Stock Exchange. Non-listed public companies (such as debt issuers or unlisted firms with 200+ shareholders) fall under SEC MC No. 24, Series of 2019.
• Trap 3: Misidentifying the I-ACGR Submission Deadline. The I-ACGR is not submitted with the quarterly reports or SEC Form 17-A (Annual Report). It has a separate statutory deadline of May 30 of each year.
• Trap 4: Conflating OECD and ACGS Roles. The OECD provides the international conceptual framework and principles, whereas the ACGS is the regional scoring instrument used by ASEAN capital market regulators to objectively evaluate and benchmark corporate governance implementation.