News and Events

Self-interest - it's all there is

Posted: 2011-08-29
Category: In the News

ECONOMIC PERSPECTIVE, Opinyon
By: Anna Liza M. Gaspar
August 29-31, 2011

 

Given the structure of corporations, especially those which are publicly listed, it is imperative that the welfare of stockholders is safe-guraded. This requires a proactive board of directors effectively overseeing and managing the firm.

Business and management literatures are peppered wuth companies going bankrupt as a result og mismanagement. What if its board of directors has gone berserk and plundered the company, "biting the hand that feeds them"?

Admired Then, Reviled Now

If we look at the United States it has Enron and Bear Sterns, among others, as examples of companies which went from being among the most admired to the most reviled of companies.

Locally, the most recent example and perhaps one which had the most impact is the bankruptcy of the College Assurance Plan (CAP).

Regardless of the arguments used by CAp in defusing management issues, it became more obvious that its high officials had skewed priorities in that individual officers' welfare was given priority over those of plan holders.

At the end of the day, the failure of CAP as a corporation lies on how effective management was in looking into the welfare of the company officials.

Since 1992, universities and colleges have been allowed regular tuition fee increases. This became a major concern of CAP stakeholders.

Conflict of Interest

This conflict of interest is often explained as a result of the agency theory.

Agency theory arises when one or more individuals, called principals of owners, employ one or more other individuals, called agents.

Agents are hired to perform some service which means the principals have to delegate decision-making authority.

It is inevitable that problems arise from agency relationship because of self-interest.

Chances are when the personal goals of an agent compete with that of the owners, which is usually maximizing owners' wealth, the agent will decide in favor of his self interest.

This is why compensation packages have to be designed in such a way that the incentive to do so is minimized.

Nevertheless, there are literatures detailing management abuse regardless of how favorably they were compensated.

Hence, policy makers favor the presence of independent directors within an organization's board as an additional safeguard in protecting the interest of stockholders.

Independent Directors

The Revised Code of Corporate Governance mandates that publicly listed companies, with no exemptions, "shall have at least two independent directors or such number of independent directors that constitutes twenty percent of the members of the Board, whichever is lesser, but in no case less than two."

According to the 2009 Corporate Governance Trends in the 100 Largest Publicly Listed Companies in the Philippines report by The Hills Program on Governance of the Asian Institute of Management, in 2009 there were 70 companies in the Top 100 which have two independent directors - an increase from 65 in 2008.

In spite of how often the country's Code of Corporate Governance is amended, independence is very difficult to ascertain. It is a state a mind.

Is someone who has all the qualifications to be an independent director, according to the Code truly independent considering that the income such individual derives from his directorship from that organization is substantial, say 20% of his total annual income?

Would he risk taking an unpopular position knowing the entire board can boot him out anytime and he would lose his job?

Would someone who makes a career out of being an independent directors - after all one can hold as many as 6 independent board directorship at a time - risk voicing out his opposition against the decision of his fellow directors and lessen his chances of being invited by these same individuals to be a member of other corporations' boards?

Vigilant Stockholders

The question is "What motivates independence"? A director is not necessarily independent just because he is labeled an independent director.

Nowadays that markets display extreme volatility, stockholders need to be more vigilant in monitoring the actions of their board of directors and management.

Regardless of how many independent directors there are in the board, they, like management, are governed by the same set of behavior, which means there are times they would decide not according to what option maximizes stockholders' wealth but rather what is best for their self-interest.

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