A Business is also part of the community

I recall when I was studying in university, I was taught that maximising shareholder wealth was the priority concerned of a business. In this modern times, post GFC (Global Financial Crisis), the expectation has now changed it should now be maximising stakeholder wealth as the new mindset is that business cannot operate on focusing on enriching its shareholders at the expense of the community. Let’s hope with this new redefinition, businesses can find more compassion and generosity to extend some of their resources to help address the huge inequality still present in a booming Philippine economy.

From BusinessWorld Philippines

June 16, 2014

Stakeholders are back on the SEC radar

IN A BOLD move that is vintage Tessie Herbosa, the no-nonsense Securities and Exchange Commission (SEC) chair issued SEC Memorandum Circular 9 series of 2014, which reversed the removal of the phrase “and other stakeholders” from the Code of Corporate Governance when the SEC revised the code in 2009. Redefining the responsibilities, duties and functions of the Board, the revised code now clearly states: “It is the Board’s responsibility to foster the long-term success of the corporation and to sustain its competitiveness and profitability in a manner consistent with its corporate objectives and the best interests of its stockholders and other stakeholders” (italics ours).

The revised code also assigns to the Board the duty “to identify the corporation’s stakeholders in the community in which it operates or are directly affected by its operations and formulate a clear policy of accurate, timely and effective communication with them.”

This circular was enthusiastically applauded by many corporate governance advocates, led by the Institute of Corporate Directors (ICD) and the Shareholders Association of the Philippines (SharePHIL) which had been working for this change in the last several years.

What is the significance of this simple phrase “and other stakeholders” in the country’s governance regime? Plenty.

First of all, with this change, the Philippines rejoins many other advanced countries in recognizing the role of the stakeholder in the workings of a corporation. This is global best practice. Also, the new circular makes it clear and emphasizes to the business community that it has to address the needs and interests not only of the stockholders but also the other stakeholders of the company.

For so long, we have seen many local corporations operate with only the stockholders’ interests as their primary motivation. Governance advocates here and abroad refer to these stockholder-centric corporations as “corporate reptiles.” This SEC circular essentially mandates that it is time for boards of directors to think of the others who have significant and substantial stakes in the corporation.

According to Professor R. Edward Freeman, who first coined this word in 1984, a stakeholder is anyone who is affected by, or can affect, an organization. He classifies them into three categories: internal stakeholders (management, regular and outsourced employees), value-chain stakeholders (suppliers, bankers, creditors, customers, etc.) and external stakeholders (government, media, investors, community, etc.)

And what is the implication of the SEC’s assignment to the corporates “to identify the corporation’s stakeholders… and formulate a clear policy of accurate, timely and effective communication with them”? This is where the rubber meets the road. The challenge to corporations now, more than ever, is how to engage its stakeholders. And the best way to engage the stakeholders is to understand and address their interests.

The internal stakeholders or the management and staff of the company are concerned with competitive compensation and benefits; job security; work-life balance; a safe, clean and pleasant workplace; and training and development, among others — in short, meaningful and gainful employment.

On the other hand, value-chain stakeholders — customers, depositors and borrowers, suppliers, service providers, bankers, creditors — value fairness, transparency, prompt payment, value for money or mutually beneficial business relationships

Finally, the external stakeholders — the government, the media, investors, the community — expect regulatory compliance, payment of the right taxes, truthfulness, timeliness of information, dividends, fairness, accountability and transparency, good governance, ethical behavior, social responsibility and concern for the environment.

It is, indeed, a very encouraging development that the SEC has re-recognized the value of the stakeholders in corporations. The governance advocates salute the SEC in this move. And we look forward to the other pending reforms being waged by the SEC chair and her commissioners, especially the amendment of the Corporation Code, the updating of the Securities Regulation Code’s implementing rules, and the study it is contemplating on the unregulated use of pension and retirement funds in large corporates.

(The author is chair of the National Issues Committee of the Management Association of the Philippines. He is a trustee of the Institute of Corporate Directors and the Shareholders Association of the Philippines (SharePHIL). Having retired from the active management of companies more than three years ago, he now concentrates on his board duties in four corporations and six non-government organizations. Send feedback tomapsecretariat@gmail.com and rex@drilon.com. For previous articles, visit map.org.ph.)

Article location : http://www.bworldonline.com/content.php?section=Opinion&title=Stakeholders are back on the SEC radar&id=89237

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