What sports can teach us about corporate governance

Ben Teehankee
Green Light, Manila Standard Today
December 2, 2002

The SEC recently released guidelines for choosing independent directors for public companies. The hope is to remove all possibilities of conflict of interest so that directors can exercise independent judgement for the maximum good of the company’s stakeholders. This is another step in the regulatory body’s string of reform moves to motivate public companies to behave properly. During the year, the body required all companies to submit corporate governance manuals and these are are set to go into effect by January 1, 2003. The SEC ruling which requires external auditors to report error, fraud or losses to the SEC if their clients refuse to is likewise set to take effect on the same date.

With all the hard work of the SEC and other bodies in setting up the rules meant to ensure that public companies are better run along the principles of accountability, fairness and transparency, why do I have a sinking feeling that something is still not quite right? I believe that it’s because of certain issues that remain unresolved – issues which relate to the very foundation of all the recently released rules on corporate governance.

ISSUE ONE: Commitment to the broader purpose of business vs. token compliance with the rules in the pursuit of profit

The corporate governance rules attempt to encourage commitment to the values of accountability, fairness and transparency – values which are critical to a thriving business and investment environment and, therefore, to national development. If there was real commitment to such values among companies, perhaps there wouldn’t be too much need for the rules. And here lies the issue. Will companies develop the much needed commitment to these fundamental values or will the single-minded pursuit of profit lead to mere token compliance to the new rules?

Some people find discussions of corporate governance too theoretical and distant from their lives. Filipinos love sports, though, and the lessons here translate easily to business. In amateur sports, the competitions are often preceded by an oath of sportsmanship with glowing reference to values of determination and fairplay. These values are the at the core of what makes sports such a worthwhile activity and fun to watch. As the games unfold, however, it becomes very clear that some teams and players are mainly committed to winning. And, as we have seen even at the Olympic games, the desire to win easily falls into “winning at all costs”, whether through the use of drugs, hiding facts about qualifications, or worse, as when a we see “balyahan” or “sahod” in basketball, harming competitors.

I like watching sports. I like seeing my team win. But I don’t like to see cheating. And I would be very disappointed if my team would cheat – even if it were to win. In business, as in sports, it’s not fun when the players begin to cheat. It’s even less fun when the referees ignore the cheating. Spectators hurtling peso coins at players and referees are sending a message: We hate what we see. Clearly, an excessive emphasis on winning in sports often results in counterproductive behavior which leads to the sport itself becoming open to question. When this happens, everybody loses.

Similar things can be said about business. Shareholders, customers, creditors and the general public like to “play” with a winning company – a profitable company. But only if it doesn’t cheat. For if it cheats, say, on its financial statements, merely to appear profitable then it cheats the very people who are rooting for it. So in the sport of business, a true winning company will display its commitment to honorable behavior at all times. It will not merely comply with the rules when the referee is looking.

ISSUE TWO: Shareholders vs. stakeholders

Some analysts have pointed out the sheer folly of thinking that directors, especially independent directors, could make any difference in the governance of companies. They cite, for example, that since managers and owners are practically the same people in Philippine companies, there is no longer any need for the independent director. After all, as the argument goes, since the owners are represented in the board they are, therefore, already protected. So who is the independent director protecting?

This thinking completely ignores the fact that a business, even if owned by stockholders, is not an island. It is a part of a bigger community which stands to gain or lose because of how it behaves. This is the reason that disclosures and transparency are so important. A friend of mine bought a Hewlett-Packard PDA, a Jornada, shortly before this company merged with Compaq. I was considering the same thing but realized that with the impending merger, the future of the Jornada was cloudy since Compaq’s iPaq was a more respected PDA and it was unlikely that the merged company would support both products. True enough, HP announced after the merger that it will be slowly dropping the Jornada, to my friend’s chagrin. So what boards decide affect parties other than stockholders.

Pursuing my sports analogy, things which happen on court often spill-over outside the court. In Europe, football hooligans are famous for wreaking havoc in communities after a hotly contested game. During the dark days of local collegiate basketball, games would sometimes be followed by rumbles and substantial damage to property. The organizers could not argue that it was purely an insider concern. Parents, passersby and neighboring businesses were clearly affected by the results of badly managed games. And the organizers acknowledge their accountability to the public.

So who is the independent director protecting? The stockholders, of course, but also the other stakeholders of the company. The independent directors are internal watchdogs for the rest of society – helping to make sure that the company, through the actions of its management, is always behaving in a trustworthy manner.

It will probably be a while before these issues become clearly resolved in the minds of most business leaders. I think, though, that the new rules released by the referee called the SEC is pointing the way. It will be up to the company players to do the rest while the public as spectators watch vigilantly. I look forward to the opening buzzer of the game on January 1, 2003. I hope that strengthened by the new rules, commitment by corporate directors to the common good will carry the day in the sport we call business.