INSIGHTS INTO THE
CORPORATE
GOVERNANCE OF
PHILIPPINE RURAL
BANKS
Number of Rural Banks Placed Under Liquidation
or Receivership (1970-June 2007)
1970-1980
1981-1990
26
168
1991-2000 2001-Jun 2007
139
62
Total
395
http://www.pdic.gov.ph
“It is a sad and disturbing reality
that at the root of most bank failure
cases we have encountered, the failure
of board oversight in the face of insider
abuse has been a recurring theme.”
Rafael B. Buenaventura, Governor, Central Bank of the Philippines
The Corporate Governance of Banks: Practical Measures to Strengthen Board of Directors
The Guildhall, London, 13 May 2004
CORPORATE GOVERNANCE
“A set of relationships between a company’s
management, its board, its shareholders and other
stakeholders. Corporate governance also provides
the structure to which the objectives of the
company are set, and the means of attaining
those objectives and monitoring performance are
determined.”
Organization for Economic Cooperation and Development (2004)
CORPORATE GOVERNANCE
OF BANKS
1.Banks are the dominant sources of external
finance in several countries;
2. Banks are generally more opaque than
non-financial firms (Levine, 2003);
3.Banks are frequently heavily regulated
(Levine, 2003);
CORPORATE GOVERNANCE
OF BANKS
4.Banks tend to have very little equity relative to
debt (Macey and O’Hara, 2003);
5.Banks’ liabilities are largely in the form of
deposits while their assets take the form of loans
which have longer maturities (Macey and
O’Hara, 2003);
6.In an environment where there is deposit
insurance, moral hazard can arise.
EXTERNAL INFLUENCES ON PHILIPPINE
CORPORATE GOVERNANCE
1. On the role of the Board (BSP Circular No. 283)
“The corporate powers of a bank shall be
exercised, its business conducted and its
property shall be controlled and held by its board
of directors.”
(BSP Circular No. 456) The Board is to constitute
the following committees:
EXTERNAL INFLUENCES ON
PHILIPPINE CORPORATE
GOVERNANCE
• Audit Committee – at least two of whom shall be
independent directors
• Corporate Governance Committee – at least two
of whom shall be independent directors
• Risk Management Committee – at least three
members of the board of directors
EXTERNAL INFLUENCES ON PHILIPPINE
CORPORATE GOVERNANCE
2. On the minimum qualification of a bank director
(BSP Circular 296)
• A bank director must have attended a special
seminar for board of directors conducted or
accredited by the BSP.
• A bank director must be fit and proper for the
position.
• A minimum of two independent directors should
be present at the board.
EXTERNAL INFLUENCES ON PHILIPPINE
CORPORATE GOVERNANCE
• An LBP representative who meets the
qualifications of a Director , can be an
independent director (BSP, 02 January 2003).
3. On disclosure and transparency (BSP Circular
No. 410)
• Rules and regulations on the selection,
appointment, reporting requirements, and
delisting for external auditors.
4. Philippine Deposit Insurance Corporation (PDIC)
•
•
•
•
•
General Information Sheets of 400 Rural
Banks
Typical board size is between 5-7 (84.25%).
Highest number of independent directors in any
rural bank is 3.
98.25% of the sample have 0-2 independent
directors.
Rural banks which combined the roles of
President and Chairman of the Board accounted
for 72.25% of the sample.
58.5% are family corporations, i.e. 50% or more
ownership is clearly held by a single family.
Rural Banks Rehabilitation and Review Committee
(1986)
• 137 rural banks were found to have fictitious, indirect
and questionable loans (DOSRI and other loans)
• 146 rural banks were found to have misapplied or
misappropriated bank funds
• 325 rural banks had past due DOSRI or DOSRI in
excess of ceiling
• 29 rural banks had manipulated bank records and
reports
• 37 rural banks were found guilty of non-compliance with
Monetary Board directions
Rural Bank of San Miguel (RBSM)
• Started banking operations in 1962 and had 15
branches by year 2000
• 1997, reported a net income of PhP 12.097
million
• 1998
reported net loss of PhP 11.499 million
deposits fell to almost 40% of 1997 levels
Bills Payables account shot up by 2,377.48%
received emergency loans from the central bank
Other Loans, 72.94% of total portfolio
Rural Bank of San Miguel (RBSM)
• Declared a bank holiday in 05 January 2000
• Placed under receivership in 21 January 2000
• PDIC, insured deposits estimated to be PhP 580
million
THE ROLE OF NON-EXECUTIVE DIRECTORS
“Challenging, questioning, probing, discussing,
testing, informing, debating, exploring,
encouraging”
• Engaged but non-executive
• Challenging but supportive
• Independent but involved