Corporations and the common man

11 August 2010

Mirror Image, Business Mirror

WHAT goes on inside corporations? Why should the common man care? Most people simply think of corporations as organizations using large amounts of resources to hire many people in order to produce products and services.

Yet, others see corporations as the exclusive playground of the wealthy and powerful who maneuver tirelessly to further their interests through power plays and sheer business acumen. These impressions are mostly true but what happens behind the scenes and in the boardroom of a large corporation is much more complicated and can involve many issues critically affecting ordinary people.

The way corporations are directed and controlled by their boards and top management, often referred to as corporate governance, is important in ensuring that corporations behave in a financially- and socially-responsible way. To be sure, most corporations are reasonably well-governed and provide much-needed products and services to the public, in the process yielding attractive returns for their shareholders.

But good corporate governance is not automatic and cannot be taken for granted. High-profile scandals since the 1980s have shown the enormous damage that badly-governed corporations can cause on shareholders, employees and the public. Enron and WorldCom in the US are classic examples of corporations with promising beginnings, which ended in ignominious bankruptcy due to bad governance. These companies' CEOs have been sentenced to more than 20 years in prison. Locally, BW Resources, College Assurance Plans and the Legacy Group of Companies, among other firms, have been implicated in publicly harmful corporate behavior. Legacy founder Celso de los Angeles has been arrested for his alleged involvement in insurance and pension scams involving the corporations he used to head.

Meanwhile, the governance of government corporations was recently brought into the limelight when President Aquino mentioned the generous compensation of Metropolitan Waterworks and Sewerage System (MWSS) board trustees in his State of the Nation Address. In his translated speech, he lamented that "just recently, people lined up for water while the leadership of the MWSS rewarded itself even though the pensions of retired employees remain unpaid." Water supply and pensions are issues people readily understand. Thus, the image of corporate leaders receiving compensation in the millions while those that depend on the corporation do not get their due brings the issue of corporate governance to stark relief for even jeepney-riding Filipinos.

The large compensation of corporate leaders, while usually a closely guarded secret, is assumed to be justified due to the substantial performance responsibilities of these individuals. Unfortunately, corporate crises usually reveal that such compensation have very little to do with performance. For example, during the recent financial crisis, which emanated from the US, Merrill Lynch reportedly made a total write down in 2007 and 2008 of more than, $22 billion due to its disastrous sub-prime-mortgage business. However, Merrill Lynch CEO Stanley O'Neal retired in late 2007 with more than $160 million in stocks and benefits while the company's stock price plunged by 41 percent.

Some would argue that what corporations do is a private matter: between top management and their principals—whether shareholders or, in the case of state-run corporations, Malacanang—and should not concern anyone else. This is patently false. Corporations are legitimized by the government by virtue of the law. The Constitution says that corporations must contribute to the common good. The framers of the Corporation Code made it clear that the rationale for the corporation is to be government's partner for socioeconomic development. Therefore, the question that should be in the mind of the common man when evaluating any corporation is: How is the corporation being a partner of the government for building the nation?

Corporate issues will continue to occupy the public mind in the foreseeable future, as they should. Concerns about labor relations in Philippine Airlines, the planned privatization of the Philippine Gaming and Amusement Corp. and, of course, the distribution of Hacienda Luisita are all important to monitor, as they all have implications for the common good.

Being merely a legal person and not one made of flesh and blood, a corporation does not have a conscience. Thus, it is vital that board directors and top managers do. Is this too much to hope for? The personal enrichment of corporate leaders shouldn't be an issue as long as they are creating the value that they are mandated to produce for all of the corporation's stakeholders. Giving incentives to managers to perform is the whole point of the market system. The system is obviously not functioning if rewards are no longer linked to performance. Beyond self-interest, board directors and top corporate managers should be more responsible stewards of the corporation itself and mindful of its ultimate accountability to the common man.