Lopez Holdings


Remarks by OSCAR M. LOPEZ, Chairman, Lopez Group of Companies, on the occasion of the 11th Annual FOCAP Forum on Prospects For The Philippines held at the Mandarin Hotel, Makati City on January 15, 2008

Officers and Members of the Foreign Correspondents Association of the Philippines, Fellow Guests, Ladies and Gentlemen:

A Very Good Morning, and a Peaceful and Productive New Year to all of you.

Through the course of this morning's forum, we have heard a number of treatises on prospects for the Philippines for 2008, touching on such aspects as our international competitiveness, the latest developments in the business process outsourcing industry and regional security.

For my part, I will share with you some thoughts on the subject of governance, both public and corporate, and how governance has come to be an essential weapon for global competitiveness. Of course, the converse also applies. Poor governance, whether public or corporate, can also become a millstone around our necks, as the sub-prime problems in the United States have so emphatically demonstrated. I will also share with you what we at the Lopez Group are doing to address our particular issues on governance.

In the most recent UNCTAD (United Nations Conference On Trade And Development) World Investment Report, reported in last Thursday's issue of BusinessWorld, the Philippines enjoyed Inward Foreign Direct Investments of US.5 Billion in 2007, up from US.3 in 2006 and significantly higher than the corresponding inflows of US.85 Billion in 2005 and US8 Million in 2004. Yet, UNCTAD's Inward Foreign Direct Investment Performance Index for the period 2004-2006, the Philippines ranked a lowly 102nd out of 141 economies, behind neighbors Indonesia at 95, Vietnam at 78, Malaysia at 62, Thailand at 52, and Singapore at number 5. Indonesia, ranked 95, is reported to have enjoyed Inward Foreign Direct Investments of US.0 Billion in 2007 against our US.5 Billion; our other neighbors attracted considerably higher investment. In the qualitative ranking done by UNCTAD, the Philippines was classified as underperforming. Among the issues that investors have raised in relation to investing here are the lack of infrastructure, high power and labor costs and the inconsistency of policies.

It would, I think, be convenient to lay most of the blame on deficiencies in public governance, because ultimately, accountability for a country's failure to attract investment must lie with its leadership and government institutions. Yes, we lack infrastructure, not the kind that wins the next election, but the kind that spurs investment, development and employment across a wide area. Yes, we have to bring down the cost of power by becoming more efficient in the generation, transmission and distribution of it, but also by calibrating our tax and royalty imposts on fuel with those of our competitor countries. Yes, we have to bring down the relative cost of labor by increasing labor productivity, but we also have to begin to allow the market to determine what labor rates it will bear. And lastly, yes, we have to solve the problem of inconsistency of policies and interpretations of policy and law in all three branches of government.

But is the problem of attracting investment merely at the macro level of public governance? The answer, of course, is no. There have been enough surveys and studies to lay a strong empirical foundation for the argument that, to attract capital, companies must be seen to have strong governance. A factsheet published by the International Finance Corporation offers, in relation to what investors will pay for good governance, the following, and I quote:

"An ABN/AMRO study showed that Brazil-based firms with the best corporate governance ratings garnered 2004 P/E ratios that were 20% higher than firms with the worst governance ratings. A study of S&P 500 firms by Deutsche Bank showed that companies with strong or improving corporate governance outperformed those with poor or deteriorating governance practices by about 19% over a two-year period. In a 2002 McKinsey survey, institutional investors said they would pay premiums to own well-governed companies. Premiums averaged 30% in Eastern Europe and Africa and 22% in Asia and Latin America."

Another McKinsey report states that institutional investors in companies based in emerging markets claim to be willing to pay as much as 30% more for shares in companies that are well-governed, and that companies can expect a 10% to 12% boost to their market valuation by going from worst to best on any single element of governance.

The question, then, is why should this concern the Lopez Group? Twenty years ago, the issue of corporate governance would probably not have concerned us. Upon returning to what was left of our businesses after the martial law era, I found that I needed to restructure P2.0 Billion of debt to save First Philippine Holdings from bankruptcy. My brother Geny found nothing left of the pre-martial law ABS-CBN except the shells of the original offices and studios and had to rebuild the company from scratch. The family itself had only modest financial resources with which to recapitalize these businesses. But we had the Lopez family reputation and track record in entrepreneurship, and with it, the credibility to convince investors and creditors to join us in rebuilding our businesses. Today, I have no doubt that we could easily pull together enough friends to raise one or two hundred million pesos for a worthwhile investment.

Recently, however, we doubled our equity stake in Meralco and acquired a controlling interest in PNOC EDC which is the biggest producer of geothermal power in the Philippines. These entailed a combined investment in the region of P80 Billion. At such orders of magnitude, you cannot merely trade on your reputation to attract familiar co-investors. You need to be able to attract both individual and institutional investors and lenders, from local and international financial markets, as well as technological, operating and financial partners. Your integrity and reputation must be ironclad. But beyond that, you must be able to demonstrate the ability to manage your business to world-class standards of governance and transparency, so that an investor or lender does not feel disadvantaged.

This is by no means an easy task for companies in the Philippines and around Asia. Most of today's principles and standards of governance have been developed in the mature Western economies where ownership of businesses tends to be broadly and widely dispersed, and where the issue of governance addresses the conduct and inter-relationships of professional directors, professional managers, large institutional investors and many individual stockholders. By contrast, in the Philippines and around Asia, ownership and control of most businesses are historically and sociologically vested in clans and families, hence the so-called "clan conglomerate" phenomenon. It is variously estimated that the ten leading family-dominated groups account for up to 80% of the total capitalization of the Philippine stock market. Historically, although we have tried to pattern what we do to prevalent practices in the West, the evolution of our laws and jurisprudence in relation to the conduct of corporations has tended to accommodate the economic domination of families. Sociologically, we find nothing wrong with this. It has been the Asian way and it is the way our economy evolved.

The Asian economic crisis of the mid-1990's, however, shook things up. Closely-held and family-owned companies were perceived to be a major contributor to the crisis. As the argument went, prevalent acceptance of family-dominated control of companies across Asia meant that voting rights often exceeded ownership rights. There was a general lack of transparency in board actions and management since families tended to disregard the need for public disclosure. As a result, minority stockholders were kept in the dark on the actual status and performance of their investments. When the markets crashed, they were the most severely victimized.

As you will all also recall, the Enron and WorldCom scandals exploded as we ushered in the new millennium and this provoked what turned out to be a global revamp of governance standards and processes.

In the Philippines, this revamp took many forms, all of which I think are good and will be beneficial to us over the long term. First was the enactment of Republic Act No. 8799 or the "Securities Regulation Code" on July 18, 2000 which strengthened the laws and enforcement for good corporate governance. This was followed by circulars from the Banko Sentral imposing a "fit and proper rule" for bank directors, then by the Code of Corporate Governance by the SEC and more latterly, the adoption of the IFRS standard of accounting, among others.

We have embraced these changes. In First Holdings, our principal holding company for our power, utility, infrastructure and manufacturing investments, for example, we now have a Board comprising 15 Directors, of whom five are independent directors, namely Washington Sycip, Oscar Hilado, former Senator Vicente Paterno, Ambassador Cesar Bautista and retired Chief Justice Artemio Panganiban. A sixth director, Thelmo Cunanan, who represents the SSS as an institutional stockholder, is, for all intents, also an independent director. A representative of one of our international funders also sits in on our Board meetings as an observer. Within the Board, in addition to the Executive Committee, we have established an Audit Committee, a Finance & Investment Committee, a Compensation & Remuneration Committee, a Nomination & Election Committee and a Committee to Review Chairman's Compensation and Remuneration. We have adopted a Manual on Corporate Governance, a Manual on Anti-Money Laundering and a Code of Corporate Conduct. We have completed and submitted our 2007 Corporate Governance Scorecard for Publicly-listed Companies to the Institute of Corporate Directors and the results were made known just last week, and I am happy to announce that 3 of our publicly listed companies, namely, FPHC, First Gen and Meralco made it to the top 20 companies out of the 138 public-listed companies who were ranked by I.C.D.

But even before the regional and world financial markets started to move towards a reckoning on the quality of corporate governance, during the mid-1990's we were forced to take a hard look at how we were managing ourselves. Not because of governance issues, but because we had to determine how to stay competitive, particularly in our manufacturing businesses, in a rapidly globalizing economy. We looked at what our multinational partners and friends were doing, and asked ourselves --“ what is it that they have had to do to become leaders in a global market? We took our cue from them. We adopted the ISO standards, starting with ISO 9000 for process integrity and documentation, then moving to ISO 14000 for environmental consciousness and OHSAS 18000 for safety and health. Today, all our operating companies are ISO 9000-certified and most are certified to all three standards. Then we developed and introduced a very rigorous Environment, Safety and Health initiative, with rigorous annual measurement, recognizing that many of our businesses involved the delivery of essential services to the public.

This was not enough, however. To compete with the best in the world, in our own markets or overseas, we recognized that we would have to aspire to become world-class. In 2001, we adopted the Malcolm Baldrige framework of the US National Quality Awards program as a unifying framework for the systematic pursuit of world-class excellence. Later, we began to utilize a number of tools within the ambit of this framework, for example, Lean Six Sigma and the Investors In People standard.

Are we there already--¦are we world class? Well, based on Baldrige scoring, one of our electronic manufacturing companies, First Sumiden Circuits, could make that argument. It won the level 3 award of the Philippine Quality Awards last year with the highest PQA score ever garnered by an applicant in the history of PQA. As for the other companies within the group, we are all well into our respective journeys to becoming world class. I believe that this quest has already produced dividends. We have been able to attract some of the best and most reputable companies in the world to become our business partners here, for example, Royal Dutch Shell, our partner in the oil pipeline business, British Gas, our partner in the natural gas-fired generation business, Sumitomo Corporation, our partner in the industrial park business, Sumitomo Electric, our partner in the electronic manufacturing business, Sun Power, our partner in the manufacture of solar cells and Siemens, our O&M partner in the operation of our gas-fired generation units, and until a few years ago, Balfour Beatty, our partner in the construction business. We have been able to raise the capital we need to meet our growth plans, both equity and debt, from local and international institutions.

But we're not there yet. There are still questions that will have to be addressed as we strive for further growth in our business. We are cognizant that to win a higher valuation of our businesses in the market, we will have to deliberately and systematically address and resolve any issue that the market deems problematic, which is a never ending process.

But ours will not be a lonely and solitary journey. I believe that, to succeed in the new global economy, all major Philippine companies will have to make this journey. Good governance and world-class excellence have ceased to be competing options. Then again, there are really very few cases today where we can make a distinction between our market and the international market. There are constitutional ownership restrictions in some industries, but these are few and far between, and I believe that over time, some of these restrictions will be amended or eliminated. There are industries that are too small for international players; they will probably be too small for us as well. In any industry that has meaningful size and potential, however, we are up against global competition, so there is no place to hide. We must compete or die and so far we have successfully competed against international competition especially in the transformer manufacturing business and in the power generation business. We are prepared to face up to all the challenges thrown at us, even including adverse governmental regulatory and judicial decision, because I feel that our businesses are worth fighting for.

This is all I have to say, thank you and again, a very good morning to all of you.

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Lopez Holdings Corporation 
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