Convergence and Foreign Investments

Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Santa Maria Bulacan Campus
International Standard Setting, Best Practices and Corporate Governance Reform
5.4 THE PROCESS AND PROSPECTS OF CONVERGENCE OF NATIONAL

STANDARDS
1 Introduction
The goal of financial reporting is to make information available for decision

making. Historically, there is diversity in financial reporting in different countries due to
culture, legal systems, tax systems and business structures. International financial
reporting standards (IFRS) harmonizes this diversity by making information
more comparable and easier for analysis, promoting efficient allocation of resources and
reduction in capital cost. However, before the evolution of IFRS, other accounting
standards such as US Generally Acceptable Accounting Principles (US GAAP), Financial
Accounting Standards Board (FASB) and the International
Accounting Standards Board (IASB), do exist. Convergence which involves moving
from the old system to IFRS is not an easy one just like in any transitional process.
Issues and prospects are there both in developed economies as well as developing
economies.
1. 1 Definition and Concept
In a financial reporting context, convergence is the process of harmonizing

accounting standards issued by different regulatory bodies. One example might be the
convergence of International Accounting Standards (IAS) and US Standards. The
objective is to produce a common set of high quality accounting standards to enhance
the consistency, comparability and efficiency of financial statements. (CIMA, 2008)
1. 2 Harmonizing National GAAPs
When the new IASC hung out its shingle in London in 1973, it faced reality by
embarking on a programme of setting standards with the goal of harmonizing national
GAAPs. Harmonizing meant:
developing IASC standards that could serve as a model on which national

standard setters could base their own standards
narrowing but not necessarily eliminating the range of acceptable methods of

accounting for particular types of transactions
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developing standards that set out broad principles but did not include the degree
of detail that would almost surely put them in conflict with most of the existing
national standards
writing standards that were more descriptive of acceptable practices than

prescriptive. For example, the IASCs first segment reporting standard said:
Some consider it appropriate to provide guidelines on how material a segment should be

before it is reported separately and to limit the segments to a reasonable number so as to
avoid unnecessary complexity. Such guidelines may be 10% of consolidated revenue, or
operating profit or total assets.
One of the pluses of this approach is that it led to what have lately been described
as principles-based standards that required judgement in application and that contained
relatively fewer exceptions and bright lines than might be found in the US GAAP and the
GAAPs of some of the other founding countries.
Another plus is that by not being as overwhelming as, say, the US GAAP, while at
the same time providing a reasonable level of guidance, the IASCs approach
encouraged countries to use the standards in various ways. During the 1980s and 1990s,
some countries mostly smaller ones simply got out of the standard-setting business
altogether and adopted IASs as their national GAAP.
Other countries either required or permitted IASs for some but not all companies,
generally listed companies but in some cases all banks or all regulated financial
institutions. Some countries went ahead and adopted selected standards individually,
though not the entire package of IASs. Some countries required IASs as a fallback in the
absence of a national standard dealing with a particular issue. And many countries
looked to IASs in developing their national standards.
There were a number of minuses, of course. One was that national standard
setters in the larger countries almost never adopted an IAS word for word. The
differences were often quite substantive, not just wording. Standard setters in many
countries that looked to IASs could not resist the temptation to make changes. It is
understandable that teams comprising representatives of different countries, working
somewhat independently without the guidance that a conceptual framework provides, are
likely to reach different decisions on which assets, liabilities, income, and expenses
should be recognized and how they should be measured. Even to this day, the IASB
Framework for the Preparation and Presentation of Financial Statements includes just
three paragraphs on measurement concepts, and all those do is point out that historical
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cost, current cost, realizable or settlement value, and present value are all employed to
different degrees and in varying combinations in financial statements without guidance
on when each might be appropriate (Pacter, 2005).
1.3 From Harmonization towards Convergence
When the old IASC was restructured in the International Accounting Standards
Board effective in 2001, the mission of the standard setter changed importantly to one of
convergence of global accounting standards. The IASC Foundation is the oversight body
for the IASB. Its constitution sets out the following objectives for the Board:
to develop, in the public interest, a single set of high quality, understandable and
enforceable global accounting standards that require high quality, transparent and
comparable information in financial statements, and other financial reporting to
help participants in the worlds capital markets and other users make economic
decisions
to promote the use and rigorous application of those standards
to bring about convergence of national accounting standards and International

Accounting Standards to high quality solutions (Pacter, 2005).
2 Prospects Associated with Convergence to IFRS
Convergence is driven by several factors, including the belief that having a single
set of accounting requirements would increase the comparability of different entities'
accounting numbers, which will contribute to the flow of international investment and
benefit a variety of stakeholders (Pricewaterhouse Coopers, 2007).
2.1 Efforts and Motivations
Efforts for convergence include improvement of the respective standards, and

those that aim to reduce the differences between them.
Motivations for convergence include the belief that it will result in increased
comparability between financial statements, which will benefit a variety of stakeholders.
For example, the FASB believes that "investors, companies, auditors, and other
participants in the U.S. financial reporting system" will benefit from converged standards
because it will result in increased comparability between the financial statements of
different firms.
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2.2 Benefits of Convergence of Accounting Standards
A 2008 report by PricewaterhouseCoopers (PwC) stated that convergence of

accounting standards would contribute to the flow of international investment and benefit
"all capital markets stakeholders" because it:
1. renders international investments more comparable to investors;
2. reduces the cost of complying with accounting requirements for global businesses;
3. potentially establishes a more transparent accounting system with greater

accountability;
4. reduces "operational challenges" for accounting firms; and
5. gives standard-setters the opportunity to "improve the reporting model" (PWC, 2007).
Additionally, a survey conducted by the International Federation of Accountants

found that 89% of accounting profession leaders who responded expressed that
convergence was either very important or important for economic growth for their
respective countries.
2.3 Challenges and Conflicts
Criticisms of convergence include its cost and pace, and the idea that the link
between convergence and comparability may not be strong.
3 Process of Convergence of Standards
STEP 1: Know the Objectives

To eliminate a variety of differences between IFRS and US GAAP. This is actually
done jointly by FASB and IASB, grew out of an agreement reached by two boards during
October 2002 also known as Norwalk Agreement which contains the memorandum of
understanding.
STEP 2: Know the Current Status

The IASB and FASB are currently working towards completing the convergence
programme laid out by a 2006 memorandum of understanding, which was updated in
2008. Efforts include projects that aim to improve the respective accounting standards,
and those that aim to reduce the differences between them.
Current Projects: IASB and FASB
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In a joint report published in 2012, the IASB and FASB stated that most of the
short-term projects outlined in the memorandum of understanding had been completed,
and that greater priority was now being placed on long-term projects. Short term projects
involve the amendment of one of the boards' standards to better align them with the other
boards, jointly issuing new standards.
Some short-term projects and corresponding action taken are listed below.
Segment reporting (completed): a new standard, IFRS 8 Segment Reporting,
was issued in 2006.
Fair value option (completed): US GAAP was amended to include the fair value
option in 2007.
Joint ventures (completed): IFRS 11 Joint Arrangements was issued in 2011.
Income tax (priority lowered): A joint exposure draft was published in 2009.
An update to the memorandum of understanding in 2008 introduced long-term

convergence projects, including the following.
Derecognition (completed): both boards issued amendments.
Fair value measurement (completed): FASB Statement No. 257 and IFRS 13
were issued in 2011.
Financial instruments with the characteristics of equity (priority lowered): a
joint discussion paper was released.
Revenue recognition (in progress): the boards issued joint proposals in
2010.
STEP 3: Know the Significance

In the light of the progress achieved by the boards and other factors, the US
Securities and Exchange Commission removed in 2007 the requirement for non-US
companies registered in the US to reconcile their financial reports with the US GAAP if
their accounts complied with IFRS as issued by the IASB.
During 2013, IASB and FASB published a high level updated on the status and
timeline of the remaining convergence projects.
4 Relation to Corporate Social Responsibility
It helps the economy to cope up with other economy.

Standard setters regulate the movement of convergence process through
establishing the prospects of the said standard.
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Boost up the competitiveness of the entities by which the standards they

apply is too modified.
Corporate Governance in Foreign Investments, Privatization and Corporate

Governance Reform
5. 5 CORPORATE GOVERNANCE AND FOREIGN INVESTMENT
1 Introduction
Investors have a variety of national markets to choose from. Good corporate

governance can enhance the attractiveness of one countrys financial markets relative to
anothers. It can also enhance the attractiveness of one companys stock relative to
anothers within the same market (Marston, 2007).
1.1 Definition and Concept
Corporate Governance
The definition of corporate governance most widely used is "the system by which
companies are directed and controlled" (Cadbury Committee, 1992). More specifically it
is the framework by which the various stakeholder interests are balanced, or, as the IFC
states, "the relationships among the management, Board of Directors, controlling
shareholders, minority shareholders and other stakeholders".
The Board of Directors

The board of directors is the primary direct stakeholder influencing corporate
governance. Directors are elected by shareholders or appointed by other board
members, and they represent shareholders of the company. The board is tasked with
making important decisions, such as corporate officer appointments, executive
compensation and dividend policy. In some instances, board obligations stretch beyond
financial optimization, when shareholder resolutions call for certain social or
environmental concerns to be prioritized.
The Management
Management, under the oversight direction of the board of directors, is fully

responsible for acting in the best interests of shareholders for all managerial functions,
including decision making, performance assessment, and fair presentation of financial
reports. No corporate governance would be necessary if management acted in the best
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interests of shareholders and if corporate gatekeepers (board of directors, lawyers, and

accountants) effectively discharged their fiduciary duties and professional responsibilities.
Corporate governance is needed to avoid concentration of power in the hands of

management and to create an effective system of checks and balances to appropriately
balance power-sharing authority between shareholders, boards of directors, and
management.
The Shareholders
Shareholders are a company's owners, they reap the benefits of the company's
successes in the form of increased stock valuation. If the company does poorly, however,
shareholders can lose money if the price of its stock declines. Unlike the leadership of
other business types, companies with shareholders rely on a board of directors and
executive management to run things meaning the actual owners, the shareholders,
don't have much say in the day-to-day operation of the business.
Good and Bad Governance
Bad corporate governance can cast doubt on a company's reliability, integrity or

obligation to shareholders. Tolerance or support of illegal activities can create scandals
like the one that rocked Volkswagen AG in 2015. Companies that do not cooperate
sufficiently with auditors or do not select auditors with the appropriate scale can publish
spurious or noncompliant financial results. Bad executive compensation packages fail to
create optimal incentive for corporate officers. Poorly structured boards make it too
difficult for shareholders to oust ineffective incumbents. Corporate governance became a
pressing issue following the 2002 introduction of the Sarbanes-Oxley Act in the United
States, which was ushered in to restore public confidence in companies and markets
after accounting fraud bankrupted high-profile companies such as Enron and World Com.
While good corporate governance creates a transparent set of rules and controls in which
shareholders, directors and officers have aligned incentives. Most companies strive to
have a high level of corporate governance. For many shareholders, it is not enough for a
company to merely be profitable; it also needs to demonstrate good corporate
citizenship through environmental awareness, ethical behavior and sound corporate
governance practices.
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Foreign Investment
Foreign investment involves capital flows from one country to another, granting
extensive ownership stakes in domestic companies and assets. Foreign investment
denotes that foreigners have an active role in management as a part of their investment.
A modern trend leans toward globalization, where multinational firms have investments in
a variety of countries. Foreign investment is largely seen as a catalyst for economic
growth in the future.
Foreign investments can be made by individuals, but are most often endeavours,
pursued by companies and corporations with substantial assets looking to expand their
reach. As globalization increases, more and more companies have branches in countries
around the world. For some companies, opening new
manufacturing and production plants in a different country is
attractive because of the opportunities for cheaper production, labor
and lower or fewer taxes.
2 The Link between Corporate Governance and Foreign

Investments
(based on Emerging Market Investor Survey International
Finance Corporation)
Financial crises have a way of bringing corporate

governance to the foreground. For interested parties wanting to
know more, there is an impressive body of research that looks at
companies and the connection between strong governance and
better performance.
However, the existing literature only goes so far. It does not

look at whether the level and quality of firm-level corporate
governance plays a role as large-scale investors consider
investment decisions in emerging markets.
This study of emerging market investors sheds light on this

issue and reveals that emerging market investors care deeply about
corporate governance.
The findings have significant implications, not only for the emerging markets
business and finance community, but for policy makers, academics, the media, as well as
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for development finance institutions focused on sustainable economic development in

these countries.
2.1 Key Findings
At a Global Level
1. The global financial crisis has elevated the importance of good governance.
Another key finding from the survey: in the wake of the global financial crisis of
200809, investors are more cautious about investing in firms in countries that
have problems with corporate governance. When asked about China, more than 40
percent of investors surveyed responded with one of the following:
We are concerned about our investments in China because of corporate

governance issues.
We have slowed down our investments in China because of corporate

governance issues.
We need a higher rate of return to invest in Chinese firms because of

corporate governance concerns.
We have pulled out of China because of corporate governance concerns.
In particular, they pointed to opacity of ownership structure and general disclosure

concerns as reasons for their more cautious approach to Chinese investments.
Respondents had similar thoughts about their Russian investment portfolios. Of note,
investors surveyed said that they were more inclined to look seriously at targets in
countries with improving governance:
48 percent expressed increased interest in India

45 percent expressed increased interest in Brazil
26 percent expressed increased interest in South Africa
24 percent expressed increased interest in Turkey
2. Specific corporate governance-related reforms could make countries more

attractive investment destinations.
Investors who were interviewed discussed reforms they hoped to see in the
emerging markets where they invested or where they were thinking of investing.
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Respondents suggested that reforms focus on improved and more consistent

enforcement, specifically in:
Investor protection laws
Contracts
Respondents also highlighted a number of country-specific corporate governance-

related changes that would improve the investment climate and increase
the attractiveness of investments in these countries:
Less opacity in China
Fewer judicial and bureaucratic delays in India
Reduction in the number of multiple class structures in Brazil
Improvements to the rule of law in Russia
For emerging market fund investment decisions
3. Corporate governance is a critical factor in emerging market

investment decisions.
All 29 respondents said that governance is an important factor in making their

investment decisions. They all said that governance was part of their pre-investment
due diligence on a target firm.
All reported a process that includes learning about the firm, its controller, and its
management; and it often involves travelling to the country and spending time at the
firm. This is particularly the case for investor organizations with less formal
assessments, which tend to rely on the opinions of their locally-based employees who
visit the firms.
On the other hand, groups with more formal assessments tend to rely on both
objective and subjective governance factors, and often purchase assessment ser-
vices from an outsourced service provider. The number of firms spending more money
on such outsourced services since the financial crisis has significantly increased.
4. Investors are willing to pay a premium for better-governed emerging market

firms.
Investors interviewed said they would pay more for a better governed firm in an
emerging market than they would for a firm that came with some governance gaps.
Although it was difficult to put an exact number on the value of governance given the
range of other country and firm-level factors to consider, all surveyed investors
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expected to pay a higher premium for better governance in an emerging market firm
than the premium they might pay for a firm with better governance in developed
markets.
Company Specific
5. Investors often do not invest in emerging market companies with poor

governance.
All of the surveyed investors said that they would not invest in a firm with deeply
problematic governance.
Trust plays an important role here, they said:
Can investors trust that management is speaking the truth?

Does management demonstrate clear commitments to better governance by
working to institute basic corporate formalities, a code of ethics, a governance
officer and the like?
6. Lack of transparency is a red flag for emerging market investors.

Investors surveyed noted that the corporate governance factors they would
prioritize for emerging market companies might not be the same as the factors that are
important for developed market investments.
Of critical importance to emerging market investors: transparency and

disclosure. All of the investors surveyed said that willingness to disclose factored
heavily into their decision making. All emphasized the importance of information on the
motivations of a target firms controlling shareholder. All said that a target firms
reluctance to provide information or meet with shareholders would represent significant
causes for concern. These findings are consistent with prior research suggesting that
better disclosure helps attract foreign investments, and that increased disclosure
appears to make firms more attractive investments.
7. Board independence is a lower-level concern for emerging market

investors.
Respondents expressed less concern about board composition. Specifically, they

said that the presence of a board with a majority of independent directors was not as
important as other factors. It is not that this feature is undesirable in a target firm.
Rather, there are other, more pressing issues to consider, most said.
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Investors surveyed pointed out that most emerging market firms have a controlling
groupa family or a governmentunlike firms in developed markets. And since the
controlling group appoints directors, the independence of the board itself is
questionable, even if the directors are not associated with the controlling group.
2.2 Why this study matters
The Emerging Markets Investor Survey provides clear evidence that corporate
governance plays an important role in the decisions of emerging market investors.
Some are steering clear of firms in countries where governance remains problematic, or
they are demanding higher returns from such investments.
The information comes first hand from the investors themselves, and offers insight
into how corporate governance considerations impact their decisions. The study also
points to future avenues for follow up investigation, to identify more specifically the kinds
of governance changes that would be of value, and how to implement the changes at
the firm level and at the country level, with the goal of expanding the private sector and
supporting economic growth.
3 Corporate Governance and Foreign Investment in the Philippine Setting
3.1 The But in the Philippine Corporate Governance
The good news is corporate governance practices have improved among

Philippines top-tier corporations in the last few years as capital market regulators in the
region started working more closely to promote best global practices.
The bad news? The reform momentum has not yet reached all publicly listed
companies.
Based on the 2014 Asian Development Bank country reports of the Asean
Corporate Governance Scorecard (ACGS), the average corporate governance scores of
the top 100 publicly listed firms in the Philippines had risen to 67.02 points in 2014 from
58 points in 2013 and 48.91 points in 2012.
The results demonstrate that our local PLCs (public listed companies) are
continuously striving to improve the corporate governance culture of their organizations,
Institute of Corporate Directors (ICD) founder and chair emeritus Jesus Estanislao said in
a press statement.
Among the top 100 corporations in the local bourse in terms of market
capitalization, the most elite grouping is the roster under the Philippine Stock Exchange
index. This list includes 30 of the largest and most liquid companies: Ayala Corp., Aboitiz
Equity Ventures, Alliance Global Group Inc., Ayala Land Inc., Aboitiz Power Corp., BDO
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Unibank Inc., Bloomberry Resorts Corp., Bank of the Philippine Islands, DMCI Holdings,
Emperador Inc., First Gen Corp., Globe Telecom, GT Capital Holdings, International
Container Terminal Services Inc., Jollibee Foods Corp., JG Summit Holdings, LT Group
Inc., Metropolitan Bank and Trust Co., Megaworld Corp., Manila Electric Co., Metro
Pacific Investments Corp., Petron Corp., Robinsons Land Corp., Semirara Mining &
Power Corp., SM Investments Corp., San Miguel Corp., SM Prime Holdings Inc.,
Philippine Long Distance Telephone Co. and Universal Robina Corp.
ICD is a non-stock, non-profit organization dedicated to the study and
professionalization of Philippine corporate directorship. It is the domestic ranking body for
the ACGS under the auspices of the Securities and Exchange Commission (SEC).
Among the five corporate governance categories, the most dramatic improvement
in average scores achieved by the countrys top 100 PLCs on a year-on-year basis was
in the following: role of the stakeholders, which increased to 5.48 points in 2014 from
4.85 in 2013 and 2.8 in 2012; disclosure and transparency, which was at 16.57 points in
2014 from 16.03 and 13.6; and responsibilities of the board, which went up to 24.41 from
19.71 and 16.4.
Average scores in all corporate governance categories improved. A slight increase
was also observed in the following: equitable treatment of shareholders (11.17 points
from 11.06 and 10.7) and rights of shareholders (6.79 points 5.5 and 5.6).
Despite the remarkable progress of the top PLCs as a sector, the ICD said theres
still considerable room for improvement in the countrys overall performance.
Lack of disclosure
In terms of the average score for all 252 companies listed on the Philippine Stock
Exchange, the countrys overall score has dipped to 51.1 points in 2013 and 2014 from
53.8 points in 2012. The drop in score suggests that despite the higher bar set for
publicly listed companies as far as corporate governance standards are concerned, a lot
of these companies dont measure up.
Part of the reason for the relatively low score of our PLCs is the lack of adequate
disclosures compared to our counterparts in the South East Asian region, explained
Estanislao.
The ADB report mentioned that the Philippines had fallen behind due to lack of
adequate disclosures, particularly on company websites, as most companies fail to
provide key information such as contact details, policies and procedures, to name a few.
There is a perception that potential investors have difficulty navigating or
searching for information on our PLCs mainly due to the variety of formats and content
employed from company to company. We hope that these issues will be addressed
soon, said Estanislao.
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The decline in the score of publicly listed companies was of significant concern,
the report said.
We foresee a challenge in ensuring that the score will improve because the
performance of the rest of the population of the companies might pull down the overall
average score. This is despite the top 100 PLCs significantly improving their performance
by 2015 when they will be ranked with their ASEAN peers, the ADB said.
The roster of publicly listed companies is just a small percentage of around
870,000 total corporations regulated by the SEC in the Philippines, the ADB noted.
High Sincerity
In a related development, the countrys capital market regulators, SEC and PSE,
were two of the institutions deemed most sincere in improving governance in the country.
Both ranked high alongside the Office of the President, Department of Trade and
Industry, and the Social Security System in the net sincerity ratings of 36 institutions in
fighting corruption, based on the latest 2014-2015 Survey of Enterprises. This was
conducted by the Social Weather Stations from Nov. 14, 2014 to May 12, 2015.
From a range of +69 to -69 points, the SEC scored 63 points, while PSE got 55
points. Random sampling for the said survey was drawn from 966 companies, one-third
of which consisted of large enterprises, while the rest consisted of small and medium
enterprises.
3.2 2016 Corporate Governance Code: Comply or Explain (Notable Changes)

This Code adopts a comply or explain approach which combines voluntary
compliance with mandatory disclosure. Listed companies must state in their annual
corporate governance reports whether they comply with the Code provisions, identify any
areas of non-compliance, and explain the reasons for non-compliance.
This Code also incorporates the principle of proportionality wherein the SEC
provides flexibility to covered companies in implementing the Code taking into account
their size, structure, risk profile and complexity of operations.
We noted some major changes in the new Code, and we present four of the more
critical changes, as follows:
1. Expansion of the definition of corporate governance to further emphasize the
responsibility of the board.
2. Increased balance of executive and non-executive directors.
3. The creation of additional required committees to improve the Boards accountability
and responsibility.
4. Increased focus on non-financial and sustainability reporting.
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3.3 An Update: The Rise and Fall of Foreign Investments in the Philippines and
Its Causes
The Philippines continuously embarked on policies of deregulation, liberalization,
and reforms to attract more foreign investments. The issuance of Executive Order No.
184 signed on May 29, 2015 which formulates the 10 th Regular Foreign Investment
Negative List (FINL) to reflect changes in List A that covers investment areas that are
open to foreigners and/or reserved to Filipinos. Said law removes the 49% ownership
limit in lending companies and 60% in financing companies and investment houses
regulated by the Securities and Exchange Commission (SEC) and trims down the list of
professions reserved only for Philippines nationals. With the 10 th FINL, only pharmacy,
radiologic and X-ray technology, criminology and law are the professions reserved for
Filipinos.
From 2005 to 2014, foreign investors injected a total of US$26.93 billion worth of
investments in the Philippines or an average of US$2.69 billion annually. From US$1.66
billion in 2005, Philippine FDI reached US$2.92 billion in 2007. However, the countrys
net FDI flows posted negative growths in 2008 (-54.11%) due to the recession in the US
that resulted to global economic crisis. In 2009, the Philippine economy recovered from
the economic crisis which brought back the confidence of foreign investors that led to a
53.73% FDI growth during the year. However, the country again experienced a sharp
drop in net FDI flows in 2010 that resulted to -48.06% growth rate. From 2011-2014,
positive growth rates of 87.85%, 60.20%, 16.15% and 65.78% respectively, were
recorded.
Factors Affecting the Foreign Direct Investment Inflow to the Philippines
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The Philippines failed to meet the expectations as regards attracting FDI

compared with ASEAN neighbours. The following critical factors are reviewed and
compared with its counterpart in the ASEAN region to determine where the country
needs to focus in order to attract foreign investments. The following are major setbacks
that make our country less attractive to investors:
1. Inadequate infrastructure
Inadequate infrastructure as
well as the continued listing of
poor infrastructure during the
last decade contributed to the
weakened competitiveness of
the country. Foreign investors
prefer economies with well-
developed network of roads,
airports, water supply,
uninterrupted power supply,
telephones and internet
access.
2. Corruption
Recent studies suggest that

corruption negatively impacts
impacts FDI inflow and may act as a tax on FDI; thus corruption in the Philippines ,
whether practiced or by mere perception of
investors. Based on the 2014
Corruption Perception Index, the
Philippines landed 85th out of 174
countries and 3rd least corrupt in the
ASEAN region next to Singapore
and Malaysia and same rank as
Thailand.
3. Inefficient government
bureaucracy
The 2010 study conducted

by the Economic Research Institute
for ASEAN and East Asia (ERIA) to
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further improve the ASEAN Economic Community (AEC) scorecard on the Philippines
revealed that some of the problems encountered by private firms included in the survey
while establishing firms in the Philippines were bureaucracy and too much red tape,
lengthy procedures, delayed issuance of permits due to slow processing, lack of
transparency in the guidelines and procedures, and corruption. It was likewise mentioned
in the study that the slow FDI inflows in state-run IPAs were caused by delay in the
issuance of permits from both LGUs
and national agencies (NGAs).
In the same vein, the statistics

of World Banks Ease of Doing
Business, the Philippines ranked
86th, out of 189 economies.
Furthermore, in comparison with
selected ASEAN countries, the
Philippines had the most number of
procedures and longer time needed in
starting a business.
4. Crime and theft
Based on the 2014-2015 Global Competitiveness Report, among the ASEAN

countries, Singapore has a competitive advantage over all ASEAN member-countries in
terms of having a safe and secured environment. The Philippines on the other hand,
along with Thailand and Myanmar ranked high in terms of business costs of terrorism and
in terms of reliability of police services.
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5. High tax imposed
3.4 Key Features of Foreign Investments Act of 1991
Republic Act 7042 as amended by RA 8179, also known as the Foreign

Investments Act of 1991, is the basic law that governs foreign investments in the
Philippines. It is considered a landmark legislation because it liberalized the entry of
foreign investments into the country.
Concept of a negative list

The Foreign Investments Negative Lists (FINL)is a shortlist of investment
areas or activities which may be opened to foreign investors and/or reserved to
Filipino nationals.
Opened domestic market to 100% foreign investment except those in the
Foreign Investment Negative List (FINL)
Redefined export enterprise to mean at least 60% for export.
Allowed 100% foreign ownership of business activities outside FINL but without
incentives.
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4 Relevant News, Issues and Conflicts
4.1 President Estradas BW Resources

Scandal At the close of trading on October
The Best World (BW) Resources 11, 1999, BW Resources recorded a stellar
scandal, dubbed the biggest in the history of performance: stock price was up 4.3%, or
the local bourse, is said to have nearly
caused the markets collapse at the turn of P4, to P97 after touching a high of P107
the 21st century. during the day. It accounted for 50% of total
Long before Resorts World, Solaire trades, or the equivalent of P3.19 billion
and City of Dreams Manila, there was BW worth of shares changing hands, urging a
Resources. Filipino businessman Dante Tan PSE probe.
incorporated the Best World Gaming and
Entertainment Corp. (BWGE) in 1998,
becoming the major shareholder of the
Though the upheaval -- which led to
tourism and leisure company
the ouster of Mr. Estrada in the Second
Starting in 1999, BW Resources EDSA Revolution from January 17 to 20,
stock surged in what the bourses 2001 -- was not immediately triggered by
surveillance team described in a report as a the BW scandal, the fact that Tan was one
case of insider trading. PSEs surveillance of the key contributors to the Presidents
team resigned en masse after the bourses campaign caused all the mystique.
leadership dismissed the teams findings,
which painted the market as an old-boys
club, spooking foreign investors. 4.2 PSE board member, officer face off
MANILA - A recent audit conducted
by the Philippine Stock Exchange (PSE),
which found majority of its trading
Mr. Tans closeness to then participants in violation of rules, reportedly
President Joseph E. Estrada is said to have led to a dispute between some members of
led him to secure a gaming license from the exchange's board and management.
state-run Philippine Amusement and Sources said results of the audit
Gaming Corp. Both BW and BWGE were which found 55 of all 66 brokerage firms in
violation of the Securities and Regulation
also able to secure a hefty loan -- P600
Code and PSE rules and regulations, and
million -- from the then state-owned was published onlinecaught the ire of
Philippine National Bank. some board of directors who held key
positions in some of these firms.
One of them was Ismael Cruz, PSE
Macaus casino tycoon Stanley Ho broker-director and chairman of IGC
was announced to have been elected Securities Inc.
IGC Securities was fined for several
chairman and director.
violations, including submitting proxy forms
whose signatures did not match those in the
19
company's Customer Account Information Department of Justice on Wednesday,

Forms. November 28.
The dubious proxies were In its 78-page complaint, the SEC
discovered by the Trading Participants alleged that the individuals, who include
Regulation Department (TPRD), a former owners of Calata before its maiden
department under the Market Regulation market offer and the firm's financial advisor,
Division (MRD), which polices the activities conspired with one another to artificially
of brokers and listed companies, and makes raise the price of Calata shares by as much
sure they adhere to the rules and code of as 226%.
conduct of the PSE and to all related Charged for market manipulation
regulatory requirements. under Section 24(b)(i) and (iii) of Republic
According to sources, an angry Cruz Act 8799, otherwise known as the Securities
summoned Jinky Alora, head of TPRD, after Regulation Code, were:
her superior, then PSE vice president and Michael Ilustre Angeles,
MRD head Joseph San Pedro, fined IGC Carmeo Dela Cruz Bunag,
Securities for unauthorized use of proxies, Arnold Ryan Dellosa,
an offense under the SRC that could be Richie Ramille Isip,
ground for imprisonment. Arnold Daquiz Martin,
Sources said Cruz blew his top Gary Lincoln Taboso,
during a confrontation with Alora at the PSE Dennis Philippe Vistan,
brokers' lounge in Makati where some Zandro Jose Zulueta,
employees were having lunch. Glaizel Eco,
They said Cruz bad-mouthed and Juvy Ocampo,
berated a flustered Alora for 30 minutes.
King Bryan Sulit,
One recounted that "he was about to slap or
Alvin Morfe,
punch her" and even shoved his face just
Sheryl Sia.
"two or three inches away" from hers.
Citing the alleged argument between Zulueta is the CEO of Absolute
the two, the sources said Cruz ridiculed the Traders & Consulting Services Inc., the
MRD, claiming that other broker-directors in financial advisor of Calata when it
the board also resent the way the division is conducted an initial public offering (IPO) in
meting out penalties like a fund-raising May.
activity.
He was also shareholder of Calata
4.3 13 face charges for 'manipulating' prior to the IPO, along with Isip, Taboso and
Calata share price Vistan.
MANILA, Philippines (UPDATED) - The SEC said the respondents
Painting the tape and hype and dump. traded Calata shares from May 23 to June
8, 2012 through multiple brokers to
These are the methods at least 13 intentionally and unlawfully raise the price of
individuals employed to manipulate the the said shares through illegal schemes
share price of agribusiness firm Calata such as as 'painting the tape,' 'hype and
Corp. in the Philippine Stock Exchange, the dump' and other methods for their own
Securities and Exchange Commission profit.
(SEC) said in complaint filed before the
20
Painting the tape happens when one PSE, about the strange movement in
engages in a series of transactions that are Calata's share price.
reported publicly to give the impression of
activity in a security. The SEC said it found conspiracy
Hype and dump is buying at among the respondents because their
increasingly higher prices than current trades were clearly coordinated and
levels, and then selling at even higher intended to have a significant impact.
prices. Zulueta and the other pre-IPO
shareholders accounted for 32.95% of the
The schemes allowed the respondents to volume of Calata shares bought, and
sell 86.99 million Calata shares during the 38.47% of those sold.
period, earning P216 million, which provided According to the SEC, they
them more funds to continue manipulating financed the participation of the other
the price of Calata even beyond the period, respondents in the price manipulation
said the SEC. through their independent holdings or
The SEC noted the list of respondents may [rolled] over proceeds of their scheme.
still grow. Eco, Ocampo, Morfe, Sia and Sulit
Various John and Jane Does who may were also connected with Calata.
have provided the funds for the trades of the The rest -- Angeles, Bunag, Dellosa
respondents and/or aided or abetted in the and Martin -- either resided in depressed
commission of the crime herein charged... areas or owned small assets, therefore,
have yet to be identified. would not have [had] the financial means to
commit market manipulation by
Over 200% share price hike themselves.
Calata held an IPO on May 23 at an offer If found guilty, the respondents may
price of P7.50 per share. be fined between P50,000 and P5 million,
and imprisoned for 7 to 21 years, depending
Since its IPO, Calata shares rose by on the decision of the courts.
a cumulative 226% to a peak of P23.95 per
share, its market closing price on June 4. 4.4 6 brokerage firms get SEC
sanctions
The SEC said the increase was
peculiar since there were no significant
events or disclosures made which could
have accounted for the sharp increase in The Securities and Exchange
the price and volume traded for Calata
Commission (SEC) has penalized six
shares.
brokers for failure to comply with the
The SEC, through its Investor implementing rules and regulations (IRR) of
Protection and Surveillance Department, the Securities Regulation Code.
wrote the Capital Markets Integrity Corp., a
self-regulatory organization tasked to
regulate and monitor trading activities at the
21
The brokerage firms were The securities regulator based the

Equitiworld Securities Inc., First Orient new measures on global best practices and
Securities Inc., IGC Securities Inc., Regina standards as being done in leading capital
Capital Development Corp., SJ Roxas and markets.
Company Inc., and The First Resources
Management and Securities Corp. The Philippine Stock Exchange Inc.
(PSE) also reported that its net income for
All six are trading participants in the the first half of 2016 was P372.70 million, up
Philippine Stock Exchange (PSE) whose by 1.6 percent from P366.84 million in the
presidents and compliance officers have same period last year as income from other
been issued notices by the SECs Markets sources rose and expenses declined.
and Securities Regulation Department.
The operating revenues from
The citation letters issued said the January to June 2016 registered a 13.9-
brokers failed to submit new requirements percent decrease to P560.81 million due to
prescribed under the IRR, which took effect lower income from listings and trading.
last Nov. 15.
Its listing-related income dipped by
Their violations included non- 14.3 percent as fund raising through
submission of risk management and internal equities were put on hold due to volatilities
control procedures, business continuity and and uncertainties ahead of the May national
disaster recovery plan, comprehensive elections. Average daily value turnover for
information technology plan, updated written the six-month period was at P7.51 billion
supervision and control procedures, and from P10.04 billion a year ago.
copies of proposed contract of outsourced
activities or services. This contributed to the 11.2-percent
decline in trading-related income and 22.0-
Penalties imposed on the erring percent dip in service fees. Meantime, the
brokers ranged from P30,000 to P60,000; companys other income increased by 41.5
they were coupled with a stern warning that percent to P156.41 million due to higher
heavier sanctions would be imposed on gains in investment income.
them if they continued to violate the
regulatory requirements.
The SEC said these requirements are

intended to improve market structures,
enhance investor protection, and strengthen
the anti-money laundering framework.
22
We have seen trading activity pick up with the constitutional cap on foreign
together with listings following the May ownership.
national elections. This renewed interest in The Court found that the SEC had
yet to make a definitive ruling on PLDTs
our market, together with the new products
compliance with the capital requirement pur-
we hope to launch this year, should bode suant to the Gamboa decision and the
well in the improvement of our financial Gamboa resolution, thus any ruling would
performance in the second half, PSE be premature, it stressed.
President and CEO Hans Sicat said. Also, the Court cited that the
determination of PLDTs compliance with
Costs were effectively managed as the capital requirement is a question of fact
total expenses were lower by 8.3 percent to best left to the SEC as the court is not a trier
of facts, the high court held.
P271.66 million. SC spokesman Theodore Te an-
nounced the directive was issued during the
We are hopeful that we can get summer session of the magistrates here.
more investor participation once products The Court voting 8-5, denied pe-
and services like the Dollar Denominated titioners motion for reconsideration of the
Securities, Real Estate Investment Trust, Courts November 22, 2016 decision (which
and Public Private Partnership Company denied the petition and the petition in
intervention) for not having raised any
Listings are introduced, Sicat added.
substantially new grounds to warrant a re-
consideration, Te said.
Te said the Court maintained its 8-5
voting against the petition filed by lawyer
4.5 SC Ruling on PLDT Nationality Jose Roy III.
Roys motion for reconsideration, according
The Supreme Court (SC) rejected to the Court, failed to raise new arguments
with finality a petition of intervention filed by that would warrant the reversal of its
lawyers questioning the Securities and decision issued on December 21.
Exchange Commissions (SEC) In its en banc resolution dated Nov.
implementation of the high courts June 22, the SC justices voting 8-5, denied the
2011 ruling that effectively stated the petition filed by Roy against SEC Chair
regulator has the jurisdiction in ruling on Teresita Herbosa who, the High Court said,
Philippine Long Distance Telephone Co.s did not commit grave abuse of discretion
(PLDT) compliance to the 40-percent limit to when she issued Memorandum Circular 8
foreign ownership. Series of 2013 for lack of merit both on
The SC earlier cleared an SEC procedural and substantive grounds. and
memorandum that applied the 60:40 rule the petition in intervention filed by Atty.
only on voting shares. Wilson Gamboa.
In its decision, the SC said that it is The petitioner argued that SEC
not a trier of facts and threw out a petition abused its discretion in issuing MC 8,
alleging the SEC has gravely abused its wherein it omitted the uniform and separate
discretion in ruling that PLDT is compliant application of the 60:40 rule in favor of
23
Filipinos to each and every class of shares purposes of determining compliance

of a corporation. therewith, the required percentage of Fil-
In a decision penned by Associate ipino ownership shall be applied to both the
Justice Alfredo Benjamin Caguioa, the Court total number of outstanding shares of stock
en banc upheld the validity of SEC entitled to vote in the election of directors
Memorandum Circular 8, Series of 2013 or and the total number of outstanding shares
Guidelines on Compliance with the Filipino- of stock, whether or not entitled to vote in
Foreign Ownership Requirements the election of directors
Prescribed in the Constitution and/or Ex- The Court found that the SEC did not
isting Laws by Corporations Engaged in gravely abuse its discretion as it was simply
Nationalized and Partly Nationalized Ac- implementing the Gamboa decision and the
tivities). Gamboa resolution (2011 and 2012 ruling).
The five justices who dissented with The Court reviewed the Gamboa Decision
the decision are Senior Associate Justice and Resolution and reiterated that both
Antonio Carpio, Associate Justices Teresita defined capital broadly but only to apply to
Leonardo De Castro, Arturo Brion, Jose shares of stock that can vote in the election
Mendoza and Marvic Leonen. of directors and that MC 8 simply
In the Gamboa decision, the Court implemented and is, thus, fully in
held that the capital requirement in Article accordance with Gamboa, the SC said.
XII, Section 11 of the 1987 Constitution In the same ruling, the high court,
refers only to shares of stock entitled to vote however dismissed the second issue on
in the election of directors. Roys petition on whether the SEC gravely
The Court directed SEC to apply this abused its discretion in ruling that PLDT is
definition of the term capital in determining compliant with the constitutional cap on
the extent of allowable foreign ownership in foreign ownership.
the case of PLDT and if there is a violation The court found that the SEC had
of Section 11, Article XII of the Constitution, yet to make a definitive ruling on PLDTs
to impose the appropriate sanctions under compliance with the capital requirement
the law. pursuant to the Gamboa decision and the
Roy questioned the constitutionality Gamboa resolution, thus any ruling would
of the memorandum for not conforming to be premature.
the spirit and letter of the Courts decision in Also, the Court cited that the deter-
the case of Gamboa v. Teves promulgated mination of PLDTs compliance with the
on June 28, 2011 and its Resolution on the capital requirement is a question of fact best
motions for reconsideration issued on left to the SEC as the courts is not a trier of
October 9, 2012 on the limit to foreign facts, the high court added.
ownership under Section 11, Article XII of
the Constitution.
The high court, in a ruling, said there
was no grave abuse of discretion on the
part of the SEC when it issued MC No. 8.
Under MC No. 8, specifically Section
provides that all covered corporations shall,
at all times, observe the constitutional or
statutory ownership requirement. For
24
http://business.inquirer.net/198680/c
orporate-governance-in-ph-
improving-but
http://www.bworldonline.com/content
.php?
section=Economy&title=coping-with-
the-challengesbrthe-2016-corporate-
governance-code-for-publicly-listed-
companies&id=140184
http://www.ntrc.gov.ph/images/journa
l/j20150708a.pdf
http://www.journalofaccountancy.co
m/content/dam/jofa/archive/issues/2
013/02/fasb-iasb-convergence.pdf
5 References
https://www.icjce.es/images/pdfs/TE
http://marketmonitor.com.ph/6-
CNICA/C02%20-
brokerage-firms-get-sec-sanctions/
%20IASB/C208%20-%20IASB%20-
http://marketmonitor.com.ph/sc-
%20Estudios%20y%20varios/Paul
affirms-ruling-pldt-nationality/ %20Pacter%20-%20What
http://www.dlsu.edu.ph/research/cen %20exactly%20is%20convergence
ters/aki/_pdf/_workingPapers/Parcon %20-%20abril%202005.pdf
-Santos%20-%20FINAL.pdf http://news.abs-
http://www.tripleiconsulting.com/indu cbn.com/business/10/29/09/pse-
stry-resources/foreign-investment- board-member-officer-face
act-ra-7042/ http://www.rappler.com/business/169
https://psa.gov.ph/foreign- 26-13-face-charges-for-
investments-press-releases manipulating-calata-share-price
https://psa.gov.ph/sites/default/files/F
I%20Q4%202016.pdf
6 Questions and Answers a. True; True

b. True; False
1. Statement 1: Divergence is the c. False; False
process of harmonizing accounting d. False; True
standards issued by different regulatory
bodies. 2. Under the oversight direction of the
Statement 2: Investors often do not board of directors, who is fully
invest in emerging market companies responsible for acting in the best
with poor governance. interests of shareholders for all
25
managerial functions, including decision 4. This Code adopts a comply or

making, performance assessment, and explain approach which combines
fair presentation of financial reports? voluntary compliance with mandatory
a. Board of Directors disclosure. Listed companies must state
b. Shareholders in their annual corporate governance
c. Management reports whether they comply with the
d. Stakeholders Code provisions, identify any areas of
non-compliance, and explain the
3. Statement 1: Recent studies suggest reasons for non-compliance.
that corruption negatively impacts a. Cooperative Code
impacts FDI inflow and may act as a b. Corporation Code
tax on FDI; thus corruption in the c. Corporate Governance Code
Philippines, whether practiced or by d. Civil Code
mere perception of investors.
Statement 2: Lack of transparency is 5. According to Cadbury Committee,
a red flag for emerging market 1992, it is the system by which
investors. companies are directed and controlled.
a. True; True a. Cooperative Governance
b. True; False b. Corporation Governance
c. False; False c. Consultancy and Governance
d. False; True d. Corporate Governance
26

Convergence and Foreign Investments

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Convergence and Foreign Investments

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Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

International Standard Setting, Best Practices and Corporate Governance Reform

5.4 THE PROCESS AND PROSPECTS OF CONVERGENCE OF NATIONAL

The goal of financial reporting is to make information available for decision

1. 1 Definition and Concept

In a financial reporting context, convergence is the process of harmonizing

1. 2 Harmonizing National GAAPs

developing IASC standards that could serve as a model on which national

narrowing but not necessarily eliminating the range of acceptable methods of

writing standards that were more descriptive of acceptable practices than

Some consider it appropriate to provide guidelines on how material a segment should be

1.3 From Harmonization towards Convergence

to promote the use and rigorous application of those standards

to bring about convergence of national accounting standards and International

2 Prospects Associated with Convergence to IFRS

2.1 Efforts and Motivations

Efforts for convergence include improvement of the respective standards, and

2.2 Benefits of Convergence of Accounting Standards

A 2008 report by PricewaterhouseCoopers (PwC) stated that convergence of

1. renders international investments more comparable to investors;

3. potentially establishes a more transparent accounting system with greater

4. reduces "operational challenges" for accounting firms; and

Additionally, a survey conducted by the International Federation of Accountants

2.3 Challenges and Conflicts

3 Process of Convergence of Standards

STEP 1: Know the Objectives

STEP 2: Know the Current Status

Current Projects: IASB and FASB

An update to the memorandum of understanding in 2008 introduced long-term

STEP 3: Know the Significance

4 Relation to Corporate Social Responsibility

It helps the economy to cope up with other economy.

Boost up the competitiveness of the entities by which the standards they

Corporate Governance in Foreign Investments, Privatization and Corporate

5. 5 CORPORATE GOVERNANCE AND FOREIGN INVESTMENT

Investors have a variety of national markets to choose from. Good corporate

1.1 Definition and Concept

The Board of Directors

Management, under the oversight direction of the board of directors, is fully

interests of shareholders and if corporate gatekeepers (board of directors, lawyers, and

Corporate governance is needed to avoid concentration of power in the hands of

Good and Bad Governance

Bad corporate governance can cast doubt on a company's reliability, integrity or

2 The Link between Corporate Governance and Foreign

Financial crises have a way of bringing corporate

However, the existing literature only goes so far. It does not

This study of emerging market investors sheds light on this

for development finance institutions focused on sustainable economic development in

2.1 Key Findings

We are concerned about our investments in China because of corporate

We have slowed down our investments in China because of corporate

We need a higher rate of return to invest in Chinese firms because of

We have pulled out of China because of corporate governance concerns.

In particular, they pointed to opacity of ownership structure and general disclosure

48 percent expressed increased interest in India

2. Specific corporate governance-related reforms could make countries more

Respondents suggested that reforms focus on improved and more consistent

Respondents also highlighted a number of country-specific corporate governance-

For emerging market fund investment decisions

3. Corporate governance is a critical factor in emerging market

All 29 respondents said that governance is an important factor in making their

4. Investors are willing to pay a premium for better-governed emerging market

5. Investors often do not invest in emerging market companies with poor