MANILA – If efforts to reform the Philippine Stock Exchange (PSE)—including legislated reforms and products to entice investor interest—have been barely enough to create a deeper and richer equity capital market in the country, perhaps the better approach is for external forces to jolt the local exchange.

This was the theory that led PSE corporate governance head Jonathan Juan Moreno to pursue a project that involved an ostentatious goal of putting the Philippines in global investors' map.

The former military-officer-turned-corporate governance expert who joined the exchange in 2007 did his homework first.

He met with managers of American and European investment funds, academics, rating agencies and government officials in Singapore, Hong Kong, Vietnam, and Thailand. He concluded that the strongest concerns about governance in the Philippines stem from lack of enforcement.

"The rules exist, but seem to make little difference to investors because they are not adequately enforced," he told abs-cbnNEWS.com in a previous interview.

He said foreign fund managers and investors are looking at markets where they are assured of 3 aspects: profitability, safety, and liquidity.

The safety aspect is hinged on corporate governance standards, which boil down to, among others, adherence to disclosure rules. Foreign investors also cited the governance standards of regulators of a financial market, which in the Philippines, involve the Bangko Sentral ng Pilipinas, the Securities and Exchange Commission, and the PSE as a Self-Regulatory Organization (SRO). The SRO status refers to the ability of the PSE to police its own ranks, and ensure that the brokers and market players follow its disclosure and other regulatory rules.

RP barely in investors’ radar

Moreno said foreign investors consider the Philippines’ capital market as their "last resort" because of concerns over profitability, transparency and security.

"They look at the Philippines last when they invest their money," he remarked.

He shared that in a typical Asian portfolio of a global fund manager, only an average of 0.8% is invested in the Philippines.

Usually, when a global fund manager has a mandate to invest funds meant for emerging markets, some equity stocks in the Philippines are just used as a plug-in. For example, if a fund manager has to have 20% of his portfolio in Asia, and he only has 19.5% at the end of the reckoning period, some stocks in the Philippines are added in to round off his numbers.

The lack of foreign investors in an equity market the size of the Philippines has a chicken-and-egg impact on local investors.

Only less than 1% of the Filipino population invest in the stock market, a 2007 PSE study revealed.

There were only 430,681 accounts being maintained for Filipinos as of that year, a banner year for the exchange, and of the number, 103,412 or just a little over one-tenth of 1% of Filipinos were active or involved in at least one trade per year.

Foreign accounts were much smaller, totaling only 4,713.

For these reasons, Moreno scoured for reform models that the PSE could follow. Currently, there are indices like the FTSE4Good based in United Kingdom, and the Dow Jones Sustainability Index based in the United States, that sift through listed companies that profess to meet higher ethical, environmental, and social standards.

Despite the global economic crisis, companies that are part of these indices have performed better. Global sustainability experts have harped on their stock performance as proof that there is a profitable market for companies that not only consider short-term financial gains but also issues that have long-term impact on the firm’s operations.

Eventually, Moreno found inspiration in the success of "Novo Mercado" of the Sao Paolo Stock Exchange or BOVESPA of Brazil. It is available to companies that adopt high standards of corporate governance with the goal of reducing investors perception of risk and buoying share values.

‘Maharlika’ board

Not long after, the concept of the "Maharlika" board was well on its way.

"Maharlika," a term that has roots on nobility and aristocracy in a war situation, will be the name of the fourth board in the PSE bearing companies adhering to strict corporate governance standards. It will bear what are called the "blue chips of blue chips" or listed corporations willing to live by strict corporate governance standards.

It is slated to be launched by the first quarter of 2010. Moreno said it will be the first of its kind in Asia and will set the benchmark on how companies should manage their businesses.

The underlying goal is for the PSE to be the first to elevate itself to the new board, and thus fastrack its own internal reforms. (Read: Corporate governance issues haunt PSE)

Although launching the "Maharlika" board will not guarantee more investments from these investors, Moreno said it could boost their confidence.

"We are in the confidence game here. They said the corporate governance board is encouraging and worth a second look," he said.

Corporations that wish to conduct initial public offerings may list directly in the corporate governance board, while those currently belonging to the PSE's existing boards may choose to migrate.

Moreno said 5 firms have already expressed interest to migrate to the new board, and two are interested to list directly.

Listing criteria

To make it into this basket of elite companies, Moreno said one must comply with a set of criteria which will be based mainly on a corporate governance code that PSE recently drafted. This code is currently being vetted by different stakeholders in the capital market, mainly local and international fund managers and issuers.

The code defines a well-governed company as one that:

• develops and executes a sound business strategy;
• establishes a well-structured and functioning board;
• maintains a robust internal audit and control system;
• respects and protects the rights of its shareholders;
• ensures the integrity of its financial reports;
• recognizes and manages its risks;
• adopts and implements an internationally accepted disclosure and transparency regime;
• respects and protects the rights and interests of its employees, community, and other stakeholders;
• does not engage in abusive related-party transactions and inside trading; and
• develops and nurtures a culture of ethics, compliance, and enforcement.

Moreno said the implementation of the code would employ a "comply or explain" approach wherein listed companies would be required to notify the exchange, through disclosures, whenever they fail to follow certain aspects of the code and why.

He noted that the global crisis has put more pressure on regulators to enforce strict corporate governance standards to boost the confidence of investors.

At present, the PSE has 3 boards.

To get into the first board, a company is required to have a pre-tax profit of at least P50 million and a minimum pre-tax profit of P10 million for three years before listing.

Companies with an operating history of at least one year prior to listing, and which "demonstrate potential for superior growth" may apply into the second board.

The third board, meanwhile, is for small and medium enterprises that have been operational for at least a year before listing.