Intangible infrastructure

Alexander B. Cabrera Chairman and Senior Partner 21 May 2017

Billy the Kid, Jesse James, Butch Cassidy and the Sundance Kid are but a few names popularized in Hollywood cowboy movies, but they are non-fictional. America did have once upon a time a Wild West where people lived in dangerous times and at one point, in many towns, people carried loaded guns as daily accessory. One character in each town in the Wild West would be in constant danger of losing his life on a daily basis: the sheriff. Add to that – I almost forgot – his deputy.

America had gone a long way from days when governance was enforced through the sheriff’s rifle. Businesses, like bars, had a security governance of the bartender – well, having a rifle himself under the counter.

Despite some imperfections, I do admire the governance culture of the US, of its public institutions and its private entities. The government holds private corporations, especially public ones, to a high level of compliance through enforcement, and private institutions   hold their government to high ethical standards.

Don't get me wrong, I am not saying their government officials are all that ethical. I am saying that at least, they’re not let off the hook that easily. They may not always select the right president, but the check and balance in their government is strong enough that an erring president could not be that effective in destroying investor confidence.

Case in point is Donald Trump, who could not implement his negative campaign promises on immigration (such as sending people home by the bus loads and blocking entry of all Muslims) because the US is a country of laws that are enforced. Today, the whole world is watching whether the US can pin its president for obstruction of justice for allegedly firing the FBI director for refusal to let go of an investigation prejudicial to Mr. Trump.

In contrast, that kind of stuff is eaten for breakfast here and does not make a dent on the incumbent's tenure. We still remember the even recorded “dagdag boto” (vote padding) request of a former president to the Comelec head, who allegedly acceded instead of doing his job to protect the people’s vote. And what happened in the Oval Office between a former US president and a White House intern would not graduate into nothing more than tabloid entertainment here.

Not so in the US. Because the people, or their Congress, and their judiciary, hold their government to lofty ideals of governance. In turn, the government expects no less from its constituents and from businessmen, especially listed companies that are vested with public interest.

You may remember the mother of all corporate scandals then: the Enron case. It eventually led to the Sarbanes-Oxley Law, the legislation that Congress passed, binding the whole world, so to speak, wherever the US multinational is. They created the Public Company Accounting Oversight Board (PCAOB) that would examine US listed companies and their subsidiaries, and how they were being audited, even if the subsidiary was located outside the US. (Our working papers, for instance, were examined by PCAOB in our Makati office because we audit such subsidiaries, and it caused major stress to our people but we passed with flying colors.)

That is just an example of US enforcement abilities, and the fearful compliance of those subject to it. After saying that, I may miss the point of what I really wanted to say, which is, a government with high governance standards for itself breeds a high governance standard for private entities as well.

The annual World Economic Forum (WEF) Global Competitiveness Index, which also ranks 140 economies on governance, can actually support my simple thesis. Countries whose public institutions top the rankings for ethical behavior and corruption – like Finland, Singapore and New Zealand – also have private institutions that rank high in corporate ethics.

The United States has almost the same rank index in both public and private institutions at 30 and 27 respectively. Contradistinguish that with the Philippines where public institutions ranking (102) is lower than that of private institutions (71), likewise a low rank.

A culture of governance is important not only for publicly listed companies with multiple investors. It’s important for private companies as well. Poor governance comes back to haunt. For example, a private company’s chances of enticing an investor, or getting a loan, can be severely impacted if it has a below board tax practice when it was smaller, and did not change that when it got bigger. Look at the case of a family-owned tobacco company, which is now in trouble not for millions, but billions of alleged unpaid taxes. It’s tough to find a white knight with that level of governance.

A corporate governance (CG) culture is also important for retaining and attracting best talents. Bad staff turnover can make the business uncompetitive if not unsustainable. And sometimes, in worst cases, the company’s aggrieved employees themselves deliberately cause damage to the company that employs and takes advantage of them.

A country with a high level of CG culture acquires an intangible infrastructure that can attract foreign investments, reverse the brain drain, and deliver a purposeful and inclusive democracy.

The government unfortunately has the task not only to enforce, but to set an example. More than instilling fear, government can provide the inspiration for change. Private companies are never really bound to the same timing as the government, and responsible business improves ahead of government. But the tango is not a solo. It’s a dance for two. I would dare to say that the most important public-private partnership is not one that builds bridges, but one that builds trust. It is the road to the ranking and benefits of a First World country.


Alexander B. Cabrera is the chairman and senior partner of Isla Lipana & Co./PwC Philippines. He also chairs the Tax Committee of the Management Association of the Philippines (MAP). Email your comments and questions to aseasyasABC@ph.pwc.com. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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Alexander B. Cabrera
Chairman and Senior Partner
Tel: +63 (2) 459 2002
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