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Company Law and Corporate Governance
The corporation, an artificial person, offers at least three essential advantages to its shareholding owners. One advantage is longevity. Whether the business is a large or small, ownership can easily be passed from one generation to the next or from one set of owners to another, whether or not offspring or partners survive or care to carry on the business. A second advantage is access to capital through the sale of shares, an advantage reserved directly for larger firms but not without important advantages to the public at large. Thirdly, modern corporate laws may protect a shareholder’s personal assets from creditors of the corporation, creating a powerful incentive for a wider public to participate in the economy.
One mark of the modern era of the corporate sector of the Philippines is the Corporation Law of 1906, based on United States law. Post-World War II policies also shape today’s corporate sector in the Philippines. From the 1950s through the early 1980s, nationalistic government policy favored strong intervention in business and economic matters. The emerging industrial elite influenced policy and profited from government protection against foreign competition. Import tariffs and currency manipulation were important weapons in the fight against competition. Eventually, however, the capital necessary to sustain artificially protected growth necessarily became scarce.
Transitional policies arrived none too soon in the 1980s. A modern corporation law was adopted, the Corporation Code of 1980. The new corporation law removed many barriers to business in the corporate form and instituted basic principles of good corporate governance. Tariffs were reduced and imported raw materials became cheaper, and tariff reform programs continued into the 1990s. These reforms among others contributed to increased competition and some reduction of corporate concentration. In the latter half of the 1990s, growth in gross domestic product (GDP) in the Philippines would match its regional competitors, but only in time for the Asian currency crises of 1997. From 1988 to 1997, return on equity and return on assets compared favorably with other Asian countries, averaging an annual growth of 12.6 percent and 5.3 percent, respectively.
Despite the reforms of the 1980s and 1990s, corporate ownership and control remain highly concentrated. In a study of 1997 data, the top shareholder owned over 40 percent of the market value of the average, publicly-listed business corporation in the Philippines. The holdings of the top five shareholders equaled nearly 65 percent of the market value of an average public company, and about 59 percent of the value of an average financial institution. The top 20 shareholders of business corporations controlled 75 percent of corporate value, on average, among listed companies.
Concentration in corporate ownership and control leaves relatively few shares on the market for public trading. In this environment, minority shareholders find that they have no meaningful opportunities to influence business decisions or even to enforce their rights under the letter of the law. Commentators armed with exhaustive studies have assessed blame upon the current state of corporate governance for volatile share prices and illiquidity. In the meantime, an underdeveloped securities market restricts access to capital and reduces a variety of direct and indirect opportunities for Filipinos to participate in the economy and benefit from the economic growth that otherwise ought to ensue.
Company law and corporate governance present a challenge, if not an obstacle, to economic development in the Philippines.
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