Congratulations to fellow Bulletin Columnist and former Finance Secretary Jesus P. Estanislao, the Management Association of the Philippines’ Management Man of the Year, named together with the equally deserving Antonino T. Aquino who saw to the remarkable transition of Manila Water Company from public to private ownership.

The recognition also draws attention to corporate governance, one of Dr. Estanislao’s continuing concerns in a career that has encompassed education, values and spiritual development, banking, and the public service.

Traditionally, shareholders of business corporations elect a Board of Directors that then elects company management—the President and senior officers.  Management reports to the Board while the Board reports to shareholders.  An external auditor is also appointed by shareholders to ensure that company financial reports are in order.

The system is not fool-proof.  In 1995, Barings Bank declared bankruptcy, its capital wiped out by losses incurred by a relatively low-ranking man.  In 2001, Enron collapsed on discovery of enormous debts and losses hidden in company-controlled enterprises.  Last year, Lehman Brothers disintegrated due to low-quality housing loans.  In our own backyard, Victorias Milling could not pay its obligations and has been run by creditors since 1996.

Company downfall often occurs when managements and directors put self above company—overpriced goods and services; hidden losses or inflated revenues to pump up share price or to produce higher bonuses or profit-sharing; problem children and unemployable relatives in highly-paid sinecures; irresponsible risk-taking; neglect of duty; conspiracy with external auditors; outright fraud; etc.

Private sector organizations have moved for better governance.  For their part, regulators (notably the Securities and Exchange Commission and the Bangko Sentral ng Pilipinas) have issued regulations for greater integrity, fairness, accountability, and transparency in corporate operations.

The SEC Code of Corporate Governance sets the tone.  Boards are expected to be trustworthy and act in the best interests of the company.  Instead of merely reacting to whatever information is received from management, Boards are expected to monitor and oversee management action, instituting a system of internal checks and controls and an independent audit mechanism.

Seats should be reserved for Independent Directors objective and credible third parties.  The Code requires the creation of an Audit Committee to oversee the management of credit, market, liquidity, operational, legal and other risks of the corporation and of relations with the corporation’s internal and external auditors.

Gaps remain, pointed out by irregularities still regularly reported among foundations, schools, government and government corporations, non-government organizations, even the church.

Many large companies are controlled by close business or family associates who pay scant attention to other shareholders.  We hear of warring siblings and irregularities in family businesses.  The CEO of a foundation, cooperative or other non-profit organization sometimes gets away with murder.

Colossal fraud sometimes attends the minimum accountability, and maximum authority of government corporate decision makers.  Unnecessary red tape, too, is misgovernance.

When MAP recognized Dr. Estanislao, it also recognized the vital need for good governance, the better to fully protect hard-earned money of investors, creditors, employees, customers, and taxpayers.

Comments are cordially invited, addressed to walalang@mb.com.ph.