Good Gov 7-9 With Q&A

cence
NAME: casnsessent SCORE:

-
SECTION: eee LLPR ROFESS OR:
True or False
1. During the 1980s, very few organizations created and implemented ethics codes,
businessperson can take some comfort when faced with an ethical dilemma by
T 2. A
talking openly about it with manabement because ethical decisions will always
withstand scrutiny.
‘T 3. Itis easy for an organization to develop ethics codes, policies and procedures to desi
with all relationships and every situation.
T 4. Generally, social responsibility does not cost money.
T 5. Social responsibility is good business but it does cost money.
T 6. Customers can‘t find out which firms are acting responsibly and which are not.
‘T 7. Businesses record of social responsibility today is much better than in past decades.
T 8. When translated, caveat emptor means “let the buyer beware.”
T 9. The ability of the Bureau of Food and Drugs to force businesses making or selling
defective products to recall them is most closely related to consumers right to
choose,
T 10. Recently, consumers and the government have been losing an increasing number of
product liability lawsuits against sellers of defective products.
| 11. One major reason for improving product safety is the consumer‘s demand for safe
products.
Ty 12, Corporate social responsibility addresses the social commitment of companies to

world problems,
r 13. With no focus on that issue and attention being paid to

sustainability and
transparency in international business, many
countries are now making greater
efforts to eradicate corruption, which will create proper conditions
for a deeper
involvement of business Groups in social
responsibility actions.
7-24 | Good Governance and Social Responsibility

|
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4
de ,
nding economies, and hence
T 14. . Aly expa
Developing countries represent the most rapidlY
the most lucrative growth markets for busines
_ are not new, there has been a
T 15. While individual and organized forms of phifanth
rs in the field of organized
Particular explosion of models in the past 0 yea
Philanthropy,
F 16. Corporate social responsibility has not undergone significant changes in the past
several decades.
7 1. : d should not be dismissed lightly,

While Friedman’s
n’s vie
has theoretic; an
that position is no wees al mertt pal business leaders of the 21st
longer widely shared by the 8!°
century.
icle where the emploploye yee makes

1 18. Employee matching gift programs are one such veh
contri bution.
the choice and the corporation matches or exceeds t he employee
If CSR is to have potential as a way to address social and environmental challenges, it

must be supported by a public that holds companies accountable.
There must not be enough motivation and momentum in the field to keep the social
responsibility of corporations a priority. ‘
Pursuing a mission of sustainable development can make our firms mor

competitive, more resilient to shocks, nimbler in a fast-changing world and mor
likely to attract and hold customers and the best employees.
to corporate behavior.
Consumers are also increasingly paying attention
Corporate Social responsibility and Corruption in a Global Context
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NAME: SCORE:
PROFESSOR:
SECTION:
Multiple Choice
Cu Caveat emptor
s laissez faire.
3. isa French term that implie .
peer evaluations.
b. implies disagreements over
“let the buyer beware.
c. isa Latin phrase meaning
“let the seller beware.”
d. isa latin phrase meaning
e cave is empty.”
e. isa Latin phrase meaning “th
to-day business wes aimed

Before the 1930s, most government involvement in day-
at
a. non-payment of income taxes.

b. discrimination.
c. protection of the free-market system.
d. consumer rights.
e. employment practices in factories.
sibility report for the

You Have been asked to complete this year's social respon
you include as 2 valid
insurance industry. Which of the following statements would
in this industry?
indication of socially responsible activities
in the previous two years,

This year, we sold more insurance policies than
new insurance products end
2
b. This year marked a 200% increase in the number of

services available to customers.
ions in the insurance
c. To date, few women and minorities hold management posit
industry.
anies
d. This year, more than 300,000 volunteer hours were contributed by comp
through loaned executives and release-time arrangements.
e. Fewer than one-eighth of the companies' charitable contributions go to people-
related activities.
Which of the following statements reflects the socioeconomic model of social

ma
>
responsibility?
a. “I did it my way!”- Frank Sinatra

_ b. “it’s easier and better to ban smoking than to risk multimillion-dollar lawsuits.” -
a university professor
c. “It's an absolutely preposterous proposal. The idea that any corporation has the
right to reach beyond company gates to what you could even describe as the

bedroom of the employee is rigic ious” ? spokesperson for the Tobacco
Institute ne
“In the private sector, employers can et away with quite a bit.” - an attorney
“We will not allow our motion Pictures to be shown in any movie house in the
south.” - a citizen
G5. Long-distance providers are becoming increasingly concerned about certain

activities within their industry. Various companies come together voluntarily to
implement new standards of social respongipility that members must abide by. What
seems to be the primary motivation in this case for an increased interest in social
responsibility?
Because corporations are creations of society, they are responsible for giving
back to the communities in which they operate.
These companies have realized it is in their best interest to increase their social
responsibility before they are once again subject to stricter regulations.
These companies are using social responsibility as 4 means to increase their
profitability both short term and long term.
Long-distance providers have started taking pride in their industry and its record
for social responsibility.
They feel a responsibility to their stockholders, employees, the government,
investors, and society as a whole.
Which one of the following is an argument for increased social responsibilities?
Because business is part of our society, it cannot ignore social issues.

Management must be concerned with providing a return on owners’
investments.
c. Corporate time and money should be used to maximize profits.
d. Individual businesses should not be expected to solve society‘s problems.
e. Social issues are the responsibility of government officials.
goal of a
Supporters of increased social responsibility would most likely say mat the
firm is to
a. maximize shareholders wealth.

b. provide jobs for the community and make a reasonable profit.
c. maximize profits while obeying the law.
d. beat the competition and stay in business.
e. create value and benefits for owners, employees, and society.

gument ¢ against increased social responsibility except
D 8. All of the following are ar
officials elected for that
ility of government
a. social issues are the responsib
purpose. s problems with their
b. companies
should maximize profits and not solve society'
time, money and talent, should not be
Society in general, businesses .
c. because social problems affect |
se problems.
expected to solve the ment intervention.
res pon sib ili ty by fir ms can prevent increased govern
d. social and providing them
e. business managers are primarily responsible to stockholders
a good return.
for increased social responsibilities?

Which one of the following is an argument
ety, it cannot ignore social issues.

Because business is part of our soci owners’
providing a return on
»
Management must be concerned with

b.
investments.
to maximize profits.
c. Corporate time and money should be used
ed to solve society's problems.
d. Individual businesses should not be expect
nt officials.
e. Social issues are the responsibility of governme
discloses the true cost of borrowing with

Pp 10. MasterCard sends a'customer a memo that the right
zes that the customer has
each billing statement. It does this because it reali
to
a. choose. .
b. obtain credit:
c. be heard.
d. be informed.
e. safety.
the content of its

The motion picture industry uses a rating system to describe
are accompanied by ratings such as PG (parental guidance
movies. Movies
system satisfies ©
suggested) or R13 (not suitable for those under 13). This rating
consumers’ right to
a. be heard.
b. safety.
c, be informed.
d. censorship.
e. watch what they want to watch.
rc
B12. A credit-card company is offering an annual
percentage rate of 3.9% However, the
company fails to mention that this is an i ntroductory rate,
and when consumers
receive their bills after six months promo period,
the rate has been increased
21.9%, the consumers feel their right to
to has been abused.
‘a. be treated fairly

b. be informed
c. safety
d. be heard
e. service
A 13. If Casio were to buy out all other calculator manufacturers, what consum
er right
would be at stake?
The right to choose

The right to be heard
epanse
The right to safety

The right to service
The right to be informed
£ 14. When people in an industrialized society contaminate the environment, the action is
a. wasteful.
-b. recycling.
c. redesign.
d. disposal. -
e. pollution
‘past several decades, concern for the environment has
refully handled by businesses because they are the primary source of

ts. eg
me stronger in the US but not yet in the rest of the world.
ased because today's industrialized processes are naturally more
mitted by smoke stacks combines with moisture in the atmosphere to

jat are spread by the wind, results,
‘ocial Responsibility and Corruption in a Global Context | 7-29

d. emissions
e. wet pollution
am
417. The company you Work for recently has committed itself to implementing a progr
of top
of social responsibility. After the company has gotten the commitment
t
executives, planned the program, and appointed a program director, you sugges
that a(n) be prepared periodically to evaluate the success of the program.
research report
social audit
pang
ethics evaluation
departmental memorandum
social actions report
A 18. What is the major. source of human emissions of air pollution in the upper
atmosphere?
a. Aircraft
b. Automobiles
c. Acid rain
d. Volcanoes
e. Factories
C19. Which of the following is not one of the steps in developing and implementing a
program of social responsibility?
planning
the social audit
eans®
commitment of employees
appointment of a director
commitment of top executives

(20- What specific gas is internationally considered a top concern for air pollution?
carbon monoxide
nitrogen dioxide
oana»w
carbon dioxide
greenhouse gas
hydrogen monoxide
B 21. Asocial audit is a
review of the costs of operating a social program.

aoanne
report of what a business has done and is doing about social issues.
review of a tax statement by the BIR.
review of management's social activity for the year.
report filed by social sector accountants.
8 22. Which type of pollution has seen the least improvement since environmental issues
became important?
a. Land
b. Air
c. Ocean
d. Water
e. Factory
A 23. A program to implement social responsibility in business begins with
total commitment of top management.

careful planning.
pans
appointment of a director.
a board of directors meeting.
conducting a social audit.
a global level is complex because

Implementing social responsibility on
consumers in most countries do not care about social responsibility. -

of the need to balance economic responsibility with other responsibilities.
‘ k many languages and some information is hard to translate.
Soe cineaaes like NAFTA and APEC, have their own expectations and
regi 7
standards. 4 .
local laws and regulations.
global companies are rarely subject to

AME __Tscore:
SECTION: __ | PROFESSOR:
True or False
T. Corporate governance Is a process that aims to allocate corporate resources in a

manner that maximizes value fo, aj] stakeholders-shareholders, investors
employees, customers, suppliers, enyiponment and the community at large and
holds those at the helms to account by evaluating their decisions on transparency
inclusivity, equity and responsibility,
Hedge funds are open only to a narrow range of professional or wealthy investors
who meet certain criteria set by watchdogs and regulators.
External stakeholders are the board of directors, executives, and other employees.
The statutory granting of corporate existence may arise from general purpose
legislation or from a statute to create a specific corporation, which was the only
method prior to the 19th century.
ence has not

The growth in the number of IPAs also means that a rich body of experi
ment promotion
been developed with respect to different approaches to invest
pment.
agencies and across countries at different levels of develo
tant role facilitating effective

Investment promotion agencies cannot play an impor
rnment.
communication between investors and the gove
the underlying assumption that

The principles of corporate governance embrace
ests provided they have sufficient
shareholders can best look after their own inter
rights and access to information.
evolved over the years into a

The nature of institutional investors has evidently
management companies with their
complex system of financial institutions and fund
- own corporate governance issues and incentive structures.
ries not committed to democracy

- OECD brings together the governments of count
and the market economy from around the world.
The Sarbanes Oxley Act of 2002 seeks to lay ground for a culture of proactive
that has been common to
management of risks going beyond the reactive approach
all industries.
Ion mata.cat woranna. » ~-dtaaal Initinsin. 1_aan

=
SCORE:
NAME: _|
PROFESSOR:
SECTION:
Multiple Choice
way a
policies, laws, and institutions affecting the
Cy 1. Itis the set of processes, customs, rolled.
corporation (or company) is direct ed, administered or cont
business ethics
agency costs
aoow
corporate governance
constitution
ge of a company’s
A 2. This drives prudential regulation such as capping the percenta
equity that can be held by an institutional investor and not just by individual
investor concerns.
diversification
cross listing
ano
short selling
investment banking
are created as legal persons by the laws and regulations of a particular

(~ 3. These
jurisdiction.
a. SMEs
b. general professional partnerships
c. corporations
d. MNCs
4. It is an investment account open to a narrow range of investors that take a wide

range of investment and trading activities in addition to traditional long-term
investment funds.
dividends
hedge funds
aoo®
ready-for-sale securities
money market placements
Governance and Social Responsibility

8 5. The effectiveness and credibility of the entire corporate governance system
and
company oversight to a large extent depend on that can make
informed use of their shareholder rights and effectively exercise their owners
hip
functions in companies in which they invest.
a. government
b. institutional investors
c. managers
d. securities traders
B 6. A financial institution that helps out corporations and government in raising capital
by underwriting and acting as the agent in the issuance of both equity and debt
securities.
money market trading

ao>ow
investment banking
corporate banking
ordinary savings
A 7. These are investor's money being pooled together from the sale of a fixed number
of shares a trust issues in its first offering.
a. investment trust
b. mutual fund
c. pension fund
d. IPO
8. A collection of assets forming part of a separate legal entity that came into being
from. the contributions to a pension plan for the exclusive purpose of financing
pension plan benefits. .
a. mutual fund
b. investment trust
c. pension fund
d. hedge fund
g, It is another institutional investor that is Professionally managed type of collective

* investment scheme that pools money from many investors and invests typically in
mainvestment securities which includes stocks, bonds, short-term money, market
uments, other mutual funds and Securities, including commodities such as
10US metals,
SAnstitutinnal tn..-—» - srimtnsiuae | R26

C. pension fund
d. hedge fund
10. They are the representatives who can bring the voice of the members of thei,
C
respective institutions.
principal agent
opportunists
aos
good activists
institutional investors
in one more than one stock exchange in

§ 11. The listing of equity shares of a company
different countries
diversification
cross listing
aooo
short selling
investment banking
A 12. It is an international development finance institution whose mission is to help its

developing member countries reduce poverty and improve the quality. of life of
people.
a. Asian Development Bank

b. World Bank
c. OECD
d. ICGN
? 13. t is a global membership organization of around 450 leaders in corporate

governance based in 45 countries with a mission to raise standards of corporate
.governance worldwide.
a. Asian Development Bank

b. UNCTAD
c. OECD
d. ICGN
6 14. Promotes the development-friendly integration of developing countries into the

world economy,
a. Asian Development Bank |

b. UNCTAD
c. OECD
d. ICGN
att
B 1s. These are the board of directors, executives and other emplo
a. external stakeholders
b. internal stakeholders
C. institutional investors
d. other interested parties

NAME: SCORE:
SECTION: PROFESSOR:
True or False
Toa. The entry of MNC increases competition and force domestic firms to imitate and/or
innovate.
T 2 Foreign direct investment has grown steadily in volume and is a major source of
development finance. ;
Fo3. Various investment incentive measures were granted through the different
investment regimes administered by the Board of Investments (BOI), Philippine
Economic Zone Authority (PEZA), Subic Bay Metropolitan Authority (SBMA),
Clark
Development Corporation (CDC) and other bodies not mandated
by various laws to
establish, maintain, and manage special economic or free port zones.
Compared with FDI inflows to the ASEAN countries, the Philippines received the
lowest level of FDI inflows particularly in the 1990s and the 2000s.
Legal restrictions, regulatory inconsistency,

inadequate public investme
nt in social
and physical infrastructure, and a lack of tran
sparency hinder foreign investment.
The Philippines. limits foreign ownershi
p for reasons of national security,
and publi defense,
c health.
Investors generally report that the

P hilippine bureaucracy is non-discriminato
slow to process these requirements ry but
,
The 1987 Constitution allows fore

ign nationals from owning land in the Philippines.
Foreign ownership in the banking sector is restri
Liberalization Act. cted by the 1994 Foreign Bank
Offshore companies not incor porated in the Philip

Issues for foreign markets pines may underwrite Philippin
but not the domestic market. e
Good Governance and Social Resp

onsibility
MEO. te
\
NAME: SCORE:
SECTION: | PROFESSOR:
Multiple Choice
D1 . Refers to the effect the presence of MNCs has on domestic firms in the same sector
vertical spill over

ao oD
cross listings
institutional investing
horizontal spill over
The Government of the Philippines (GPH) actively seeks foreign investment to
gain geo-political mileage.

aogop
attain industrial status.

encourage MNCs.
promote economic development.
C 3. It has become an important source of private external finance for developing

countries. :
a institutional investing
b. SMEs
c. FDis
d. MNCs
enterprises
nterprises enjoy the same incentives available to PEZA
Clark and Subic e
except for
: a ring, FD! inflows have been dominated by what sector which has a
anufactint he 2000-2007 period.
of 42.7%
sd and beverabe
ateatinn and Inenhroness DH 2 - eres

hiliopine law generally treats foreign investors in the same manner as their
in . . .
aeiest counterparts with important exceptions outlined in the
Securities Regulations Code.

Foreign Investment Act. a
aoo
‘Omnibus Investment Act.

ction Circulars.
Bureau of Trade.Regulation and Consumer.Prote
C 7, Companies that register with the Board of Investments (BOI) may employ foreign
nationals in supervisory, technical, or advisory positions for
three years from the date of registration, extendable by BOI upon request,
Qaoo0m
four years from the date of registration, extendable by BOI upon request.
five years from the date of registration, extendable by BOI upon request.
six years from the date of registration, extendable by BOI upon request.
The 1991 Foreign Investment Act (FIA) requires the GPH to publish the Foreign
Investment Negative List (FINL) which outlines sectors in which foreign
investment is
restricted or limited.
2°00 fm
open to Filipino investors.

open to foreign corporations.
limited to Filipinos.
Foreign investment is highly restricted in the
manufacturing.
oil exploration.
ano
retail trade industry.

mining.
Vertical spillovers from FDI occur as a result

of the interaction between domestic
and foreign firms that are not in the same
industry.
a. vertical spill over

b. cross listings
¢, institutional investing
d. horizontal spill over
‘ Governance and Social Resnancihilitu

oo Scanned with CamScanner
se?
Corporate Social Respon
Contex
and Corruption ina Global
7
Learning Objectives:
After studying this chapter, you should be able to:
1. Understand global corporate

social responsibility and relate
affects developing countries. how COR
2. Enumerate and discuss the CSR issues in international business.
3. Understand and explain the impact of corruption involving large

multinational companies.
4. Enumerate some of the initiatives to deter these wholesale corruption

perpetrated by international business and host countries.
ue
ption in a Global Context | 7-1

50¢ l Responsibility and Corru
Corporate Socia
Cost CORPORATE SOCI
The iPad's Human
Jan. 26, 2012 AL RESPONSIBILiTy
By Priyanka Boghani,
www.global po st .com
Corporate social r ibili
adop ting ‘ethic: al policie“= s’ OTot (CSR) has gained currency. Companies are
Codes of conduct’ stating h
Apple’s China-based suppliers of iPhones and iPads have drawn internation, int .
More companies are signing up to such initiatives sified
attention with their unsafe work conditions and ill-treatment of workers, said The New rece shee ce
York Times in a special report.
The in-depth, front page report, by Charles Duhigg and David Barboza, highlighteg
the human cost that goes into making the extremely popular iPhones and iPads, which porate CSR Executives, some even from
companies with a long anti-union record, meet up with campaigns, NGOs and indeed
Forbes extrapolated as 23 deaths and 273 injuries from a combination of factory accidents
trade unions.
and suicides.
Ironically, on the same day, Foxconn International Holdings Ltd., one of the two In the 1990s, McDonald’s, the hamburger corporation, took two campaigners
suppliers mentioned in the article, had the highest surge in stock in two months, after
through a long and exhausting libel court case in London after they criticized its corporate
Apple Inc., posted record earnings this week, according to Bloomberg.
practices. Then, there was the 2004 film ‘Super Size Me’. Its public image thoroughly
Among the problems at Apple’s supplier factories are excessive overtime, under.
dented, today McDonald's leaflets in the UK show happy local farmers producing organic
age workers, improperly disposed hazardous waste and falsified records, according to The
crops for healthy meals. Or, the oil company Unocal, which was severely criticized for
Times. Two years ago, 137 workers were injured while using a poisonous by a vicious
chemical to knowingly using forced labor to construct a pipeline in Burma, a country run
clean iPhones and last year four people were killed and 77 injured in two explosions international boycott. US labor rights’ groups took Unocal
at regime and subject to an
factories. The article does state that Apple “has made significant strides has a huge area on its website devoted to CSR.
in improving through the courts. Unocal now
factories in recent years.”
are
The Shanghaiist, a blog dedicated to the Chine different people. However, certain ideas
i - : se city,reported on the reactions In fact, CSR means different things to or —
of Chinese about philanthropy pares tt
netizens
i Baseilonth
to The Times’ article. One reader going by the name Evita, said, “It’s
becoming commonly eth accepted. One ig that CSR is not companieies take
h more fundamental. It isi . about how
i com
een che © an eae blamed, but also the system that tolerates its existence. work. It refers to som i muc
ing
. zivossnciale
“in-China should not be synonymous with the blood a nd world at large. Senate
for their actions in the
ifi ives.”
lives. responsibility and all ‘stakehot
Another anonymous commenter said, “Withou seer een ns, ’ con sumer groups envi
A ronmentalists, NGOs
off.” t Apple, Chinese workers will be worse lab or unio 1 s’ only.
over their interest as opposed to stockholder
The article posits that the pressure
of making products faster, cheaper and
efficiently has made suppliers like Foxconn cu more wi ide and specifically in theimizideveloped econamies Nis
t corners with worker safety The role of business
world i ng approach to a social
of products used. and the quality but
reolet identklio
Se e enie etod so smany
ify nlat
last
e few
h, deca
wher e des nesses are I aeee
busi i ae
A current Apple executive
told The e Times,
Ti “Ri
a€spowed
ne ility the
nsibour approach, dere ts proader inclusive se . Se ere ponsib
i= BUS ES
about a new iPhone than workin re all of its stak eho' pu ss a clas sica l concep
g conditions in China aoe also to
oo i e would get a higher
Apple,
;
meanwhile, postedts
increase in revenue to $46.3 billion; making of $13.1 . billio n for
ia profi
aniey |
"
reasons for shifting the role
nterpris
it the most and a ioe risees create

“ ns ea
: Ith and job opportuni
ties for
| the quarter any in im et ion dofstakeholt : tand ecology with
the world, according to Forbes. and, TE address the social
NaUAEIE techoplozy came t rrity
Prioiori
Maesnga
amo others. In one pollute a nd destroy
the society and on the abe’ al a nd bio -diversity worlaw mmunity evolved a new
d . + uman e the b usinessCSR,CO enterprises
° are :intent to
rons impact - me of the stakeholt sk Throug.
Oblems or the probie. i , sources are used ina
strategies ial ; goals, W here re
Pproach
aie in their business econo! ; socl
dressed resPo asi bly.
trike a balance between be ad r
rational manner and social N° ds are
._
ve set of policies, Pra
ctices; and pro
;
i making Proce.
CSR can be viewe tions, SUPP ly chains and decision
- awed as a comprehens CORPORATE SOciay RESPONSiBi, ITYINA
t and past actions i SSe,
that are integrated into business opera
asi ies for cur ren
GLOBAL CONTEXT
includ s vary DY busine ss, by size, by s Welj cg AND DEVELOPING COUNTRIES
throughout the company and i s quite big and it include tor
imp2
as adequate attention to future eiity and can prese rve int S all the The concept of c ‘Orporate soc;
. The ¥ . s ‘ Ocial Tesponsibili
:
and even by geographic regionthe business profitability 2° epetionot th Erest of pusiness In society and t 0 maxi fae mize the Positivesibilit i :
ices that increase
good pract ha e interests of
igen:
‘comes of business ae
activity.
defines CSR 25 ‘The int
stakeholders. To cite, Lotus Holdings 2 d fra c sbusines. In practice, ' much of the busi
ed by a company’s conduct
the stakeholders—all those affect financial success of driven by the co _usiness activity Y th that
the social, environmental, 3n
peen cerns of investor has so far been labeled CSR has
on .
policies and actions, with a focus
S$, Compani
'Mpact SOciety i W' i
world’s richest c ai Panies, campaign groups and consumers
e with the goal being to eer based in the
company, the so-called triple bottom-lin of stake holde rs is Considereg as
whole range
while achieving business success.” Thus, the Ices that
integral parts of CSR. internationalized and transf erred to ie oa framed in rich countries, then
but rather ; er businesses and social settings through
is not a legal obligation international trade, investm ent and ‘
important aspect of CSR is that it ene The strategic challenge for
One an image og at national and local oe
voluntary social and environmental positive initiative to establish governments
et-dri . ow best to shape an agenda th
ses MsMe,
e Business (SRB) that also encompas largely mark ven and responsive to concerns of rich country ena nas been
environmentally and Socially Responsibl e is chiefl y a result of
and drive to pursu
as well as giant corporations. The motivation ically in developed worly the past years, gov
companies: and NGOs in many middle-and-
rights movement, specif oemOver TES CE, governments,
pressure from well-organized consumer boycott againsta GSR evenhave accelerated the process
Fa ddivencountries
jow-income pro of f adaptation
i of the developed-
that acts as a watchdog and hardly hesitates to impose consumer 8 He through greater direct engagement. CSR movements and
coun ry
ces. An example is the consumer boycott
company that violated established CSR practi initiatives have emerged in countries such as China, India, South Africa, Philippines and
-made garments on the ground that these are
imposed on purchasing Bangladesh ready CSR Brazil among others. Governments of some middle-income countries facing major social
labor. Despi te the fact that in the not so distant past,
produced by under-aged child ons without challenges have explicitly sought to engage business in meeting
those challenges, as with
ly responsible business organizati
was more of a charity by affluent or social in creating Black Economic Empowerm entin South Africa or presidential encouragement of business
expecting any financial return, today, it very much a planned investment
efforts to tackle poverty in the Philippines.
Under the CSR concept, companies decide
positive image to enhance profitability.
y and a more sustainable environment. As sing recognition among companies that
voluntarily to contribute to a better societ In developed countries too, there is increa
of the rising companies there practice CSR world is ineffective in
evolved primarily in the western world, most to CSR in operations around the
y (Green Paper, 2001). There are a ‘one-size fits all’ approach or. The result has been
to enhance the image and acceptability in the communit drivers of socially respon sible behavi
responding to the business and low-income countries
driving forces behind CSR that include new conce rns and expectations from citizens, greater importance in middle
reinvigorated focus on the mes of role of business in poverty
consumers, public authorities and investors in the conte
xt of globalization. Social criteria ble local enterprise and the
s and institutions both including the value of sustaina
are increasingly influencing the investment decisions of individual redu ctio n.
as consumers and as investors. Increased concern about the damages caused to the
ties brought about by
environment by economic activities; transparency of business activi JUSTIFICATIONS FOR CSR
ologies are all contributing
the media and modern information and communication techn sector actors in mid
dle and
ica tions for public
ip Haemost There are two bro
ad sets ofjustif roa active. The two are
and pro
not
CSR: defensive quickly
to engage ith
low-income countries poli tially ahas 2 defe
nsive ju stification
may
by corporate officials oft a a ial ane our than

responsibility of other socie
free to make as much Ch
ty thay . A cy initiative t hat ini
acceptance mutually exclusive
™
money for the stockholders as possible.” (Friedman, 1962) ive strategy of engagemen
become part of a proact ng the pote
ntia l adverse effects
of
relate.s to mi
nimizi imposed through
justification ts when it is
The defensive nm ne and m arke or economic
ities, en vi ro ts ofof some maj
loc al co mm un nt , Govern men to ens ure that CSR
CSR on ly ch ai ns and n inve et y of initia
tiv' es
pp ri
international su
ya
. ertaken 4
have und
Powerhouses such as China
7-5
ina Global Context |
ial RESP! onsibility and corruption
Corporate social
-
om d to national economic and «
countries are tailorea Me
Practices with impact in the: A first broadly defipga .
interests ines activ! 11684 4
pu nts te tote add

activa
s6-to-business§ erandards
The experience of business-to-Bt
is that costs and benefits 4, na show it wa
oF : ranmen
Not to be equitably distributed alon
value chains, with casts of private standards ho,
vai ailer, These egcial ane err
g value issues are partly rooted ait dowimert {5
by producers whereas benefits accrue to the _ resou ree
C en
tween and buyers. Similarly, assurap,,,

ucers cess of COMPOSatE Contriputiog
bargaining power disparities between succe
oe of sourcing companies, the burdeg
schemes say very little; about the responsibilities
respons! of sourcing © ;. * Gn
the producer to comply. Depending on the strength and durability °" Hes, however, A MULTIPLICITY OF POL
ICY INSTRUMENTS
between buyer and supplier, the former may have an incentive to assi " the latter with
compliance. Further problems arise for supplier firms that have to comply with Multiple, CSR practice has identified¢
even conflicting, codes of different buyers csp: regulation, facilitation .p
there are NO bright lines between ther
ve
The proactive justification for public sector actors to engage with CSR is provideg wanting to promote a CSP agenda car
by the opportunity to increase the domestic public benefits of CSR practices in economic, than one of these government role.
social and environmental terms
The range of policy instruments y
In countries whose export sectors are closely associated with consumers’ social, to CSR is wide and reflects varying policy ap
health or environmental concerns (e.g. in agriculture and textiles), there may be positive governments ray prefer interventionist
2
Some
opportunities for governments to facilitate market access gains for their producers, drivers, i :
with the grain of market
factors that may determine
Foreign investment offers potential to transfer technical expertise to local capacity constraints; the
include
enterprises. Many large companies (encouraged by governments) are interested in
affected by CSR concerns; the de:
exploring practical mechanisms for enhancing the input of local enterprises, and locally
affected by international CSP drive
hired workers, into their projects. In some cases, this is encouraged through investment
presence of enterprises willing to chamor
incentives (e.g. in Nigeria) or through the terms of foreign investment contracts
(e.g. with stakeholders are comfortable working in gan
oil industry investors in Azerbaijan). In others, various kinds of partnership initiatives seek
to transfer knowledge and expertise, including on environmental CSR, the entire >
and social issues, In the broadest sense of
between large and smal! companies. as an ee
express
legislation in any country can be seen
CSR. Other areas of legislat
i incluaing —ome
ion includin:
Finally, a number of analysts and gover
nments ar € also beginning to explore the i
enterprise oe tO esabieg
frameworks, and righ ts of access ronment f
hypothesis that promotion of CSR in the domestic economy can bring benefits for
competitiveness as a whole. The exte decision-making are also important wid February 2007
‘nt to which this happens, however, is likely to
depend on the sector and country-specific UN Sustainable Development innovation 2c!»
features. More broadly, there is also scope
public sector actors in middle for
and low-income countries to harness enthusiasm
L BUSIN ESS
CSR IN INTERNATIONA
to help deliver public policy goals and
for CSR
Priorities. These avenues will be furthe trong nfluence on the
r explored
below. rketat! is showing some
ernational ma
With globalization, !nt rpnses tivities are
social
on
development of CSR. Mult inational ente oe more demands
POTENTIAL ROLES OF GOVERN
MENTS IN THE CSR AGENDA
system ;in each country COUP coupleled with new
e public ORION,CSR OF , 3 level 0 of sincerity that
oracticing
nsparency. Practicing COR OP
| Hai - tiy and tra
ticeable
From a sustainable development Fesponsibility, sustainability 3 oncan make ian
Perspective, pub reholders opin
potentially spans social, economic an
4 eri
lic sector engagement with CSR Satisfies the minimum based 0" me hich leads to * akeholders
5 environmental spheres, including issues of in local and international markets
in CSR are likely to differ from Country "HBAS, The goals of public sector engageme"
to the underlying drivers for public eng ‘O country, They might be structured in relation
agement in CSR.
17
oD: l Context
ng € igba
uption
7-6 | Good Governance and Socia{ Responsibilit y alf e d Corr
e rnsibi iityt
po
sppo
1 Reec
Corporate SOC
ET
er
of application
for CSR in the int
ifferent ranges :
duct of @ corporation can as Sure Nation To
differ be specific,
The following are the
al
an enterpris
nsible con whereverit. operates and e must
Protect
i
perspective where the socially venntders th fe strive to observe th e follo the primary rights of its workers
wing: mney *
increase in acceptance by the stake
e = Refrain absolutely
from makin 8 recourse to forced
ONMENT or obligatory labor and
SUSTAINABLE DEVELOPMENT AND ENVIR intimidation of any form.
e Bean advocate of the aboli
i el tion of child labor.
There re is is a pressing
> iS need to promote a * new economic
‘ i development MOdel
. tha, t e Respect the right of Privacy
and freedom of Opinion.
would secure the needs of the current generation wee infor today On the e Respect the exercise of the Polit
ical rights and of the trade unio
chance of future generation to enjoy theirs’. As a ro win Rom ria s 8eneratio, e Refrain n activities.
from discriminatory treatment by reason of sex, race,
should invest for the future and therefore, should stop bor 8 eBeneration,
political Opinion, citizenship
religion,
or social extraction.
by squandering resources at present. e Provision for a fair compensation.
e Provision for a healthy and safe worki
From the business standpoint, the state regulations cannot always guarantee tha, ng environment.
the entrepreneurial conducts of these big enterprises are all compliant With such However, it is hard to determine as to what extent the
development model. In addition, in some cases, there are outsourcing Practices and
above standards could be
issues not only in business process but also in labor and materials which can Promote the justifiably attuned on the basis of peculiarities of the host countries
particularly on the
adoption of standards lower than those prescribed in the home countries, It is socio-economic aspects. For example, average employees’ earnings differ
on a country-
context that the corporations should go beyond the minimum. Many in this to-country basis. Equal Opportunity in employment may earn the loudest
studies have shown applauses in
that in the medium-term, this model will many countries but sadly there are still cultures in a number
bring turn out about of host countries that are
better consumer favor, still too far off on this especially in women issue. For instance in some
product innovations, process innovations, parts of India, they
and the most basic of all the advan
material savings. tage S, Taw still have the “caste system” which is a social Stratification system
that separated
communities into hereditary jobs. A person borne ina caste will remain
in that class unless
HUMAN AND LABOR RIGHTS the person does something extraordinary. These are just some of the pre-defined realitie
s
that the enterprise has to deal with in operating internationally.
ne m Core tions particiularty the
larger ones, have a sig
oe = ween tne soci nificant influence not LOCAL ECONOMY AND SOCIETY
al and political life of only on
f er ected from the cou ntry in which they
ee a socially res Ponsible ope rate
hy
should be consis i behaviori standpoini t that corporati
ten
; t wi ons It is undeniable that
e Principl
i ne e of ions large international enterprises can bring extraordinary
fair n ess
Irn ni
and espect of b asic righ impact on the development of less-developed countries. This is however not without
1gi ts. Ir
Sased on the following csp deiteansiin egy of these large enterprises should be obstacles, for instance, the disparity on technological capability; the host country’s
lack
Be Compliant of capacity to adapt to these technologies that are expectedly advanced in most
scenarios. This gap could prevent the local country or economy from Maximizing
- The a the
Opere
ations condu Ct7 of f th benefits that these technologies can bring. Another issue would
of the hast the e e,enterprise
i Should no
be that the focal
, with Féga t be lower than the standards entrepreneurship might be overwhelmed due to entrepreneurial crowding and higher
rd to comp level of competitiveness of large multinational corporations.
lian
i » WOrking congie: ce with environmental laws,
¥ stakeholder ofite oe and
Many other things directly 0"
€rprise, It is necessary to involve the stakeholders in those relevant decisions that would
Be Consistent
Contribute to the development of the territory or to the host country in particular.
Have5 partnerEFS of the Involving the stakeholders produce local consensus which
respected . anyu/h Ne same 4j - reduces investment risks, The
following are the typical examples of conduct of multinational companies considered to
on th “ed anywhere and therefore we Human ‘ang labor righ
reco, » Both focaj apy. tionals jn the ho ig! ts are oug ht to‘endbe be responsible and have gained wide positive recognitions:
bee On OF rights the
BUSINESSES Will move on fhe entes ntetnational, Gea st Countries should press :
Brite iS follow Opt the same observance 2” * Transfer of technology;
avis w ;
© Path toward ea. 't does business. In this. 4!
. aft;
* The grant of licenses for the use of intellectual property rights at costs
ine CSR Practi compatible with the local market;
ice,
741 GGood Gove * Granting authority to manufacture products and brands that are protected
P monce ond So
cigy
Cia! BR, Pe. under international IP laws;
“SBON Sibi fig
¥
Corporate Social Responsibility and Corruption in a Global Context | 7-9
v
kills;
ment of local skills;
p
Training for the develo and skills,
e
nt of new pro ducts by means of local knowledge l partners; thie.
« Dev elo pme collaboration with loca
this Will
om ss toisthe & . ; : capital
lobal market Since the first environment
al moy
a
encourage the m tote
viably acce
gain
rt- up Capital. Ements took stand in the 1960s, and in the
estment in the local sta following decades, the consumers’ Movements s h have be
e Corporate venturing inv international level, with the increasing support gun to assert themselves at the
€ scientists who denounced the
is ¢5
The real test on the MNCs’ sincerity to develop the host economy oF country
narmfulness of some productions for the cain ni ‘ the environment.
invest on fixed asset if allowed by the host. Seeinglongtelr buildings ane other fixed asset, Consumers organizations point
they will be here for if not for good. out the impor tance of a reliable information on
could only mean one thing, the conditions of production and sale of the Products, including any indication on the
that can be potentialial igs
ri risin- from theiri use and consumption. All enterprises
know that their
A good number of international companies have visible initiatives reputation and, therefore, their success depends on t heir commitment towards
called “CSR in action”, they are manifested by giving out 4 portion of their income for
hospitals, adoption of a consumers, butmanethose that have. chosen a social resp onsible behavior not only watch the
projects like maintenance of roads, improvements of public
that should have been rendere d by the government, consumer-stakeholder as a client, but also as a “collaborator” in pursuing their CSR
school and many other activities
create a goog
These kinds of activities would give a good feedback from the community,
strategy-
integration and
reputation for the company and at the same time, propel the societal to the social
consolidation of stakeholders and the enterprise. The “aware consumption” represents, therefore, a new approach
se and of consumer s that are acquiring growing importa nce in
responsibility of enterpri
le with a sustainable and
TRANSPARENCY the market by promoting a production that is safe and compatib
concern health and eco-
fair development. The consumers’ demands not only
productiv e phases, but also the attestation that
Corporate transparency is a form of deep-rooted managerial initiative which sustainability of the goods and of all the
of exploitat ion of human resources .
evolved into a philosophy of removing walls and facilitating free and easy public access to they are not produced by means
corporate information. It involves openness, communication and accountability.
Transparent measures include financial disclosure statements, the freedom of SUPPLY CHAINS
information legislation, budgetary review, audits and religious compliance on reportorial —
v af complex, ageoften
globalization,
izati i have beco me very
supply chains ne
requirements of the authorities. Due to market s ow ° : a are
countries where human right protection ee choi
outsourced in a
iiss hihigh due ttoo sae absence o f
i
regulations, lerance of hard labor
or toleran bor
a . me for
The success of a corporate policy is closely tied to its “accountability” which i
environmental This situation represents
ugly head of exploitative
conduct). of this
of
indicates its attitude “to render account” of its objectives, its activity and its achieved (an to adopt 2 socially-responsible
i it — 1 lack
ent ugly ee t have chosen 1s \ |
results. It is 2 very important function because through these types of declarations the h ° supplyly chain is becoming
2 not only a commercial
enterprise holds responsibility of what it decides and of what it does, and to some extent, foien
c ontrol on the
it avoids acting arbitrarily. One. l
antee the ob servance of ethica
jes
companies 2 7ble to guar ir supply chain
partners
LEGALITY On the contrary, at cle
od by bin g all of the
din ¢.
whole produc rms of
behaviors through the ive effects in te
:
;
The adherence to the applicable set of laws in force is the minimu code, MY have
to their own ethical or quality
m requireme"t-
The prerequisite of CSR is to go beyond the law provisions in order to contribute to the on through specific certifications
inm arket reputat!
establishment of a fair and sustainable development. Therefore, it is clear that a socially ° im provements of the consumers,
. nd
responsible enterprise rejects conducts and practices such _ fair competition labels; Se ical investors lorgan izations.
corruption and tax evasion that put at risk the growth aaa develonraentet the societies * co nf id en ce
ae ents and social Of6%!
with
mstite
ons
* good relati
The enterprises that prefer a CSR tne
stakeholders
i
that they do not Participate toD Hla i a rket
ane™ Ss ef
. : . j legal ete
engagements ‘
financial
*2 the ofpublic
manipulations and insider trading, as well as
through the practices of tran
‘
pricing, facilitated by their transnational remntici a

i
ope
«os
| 7-11
nin a Global Context
y ond corrupt!
sibility 9
te 50cid jpespon
7-10 | Good Governance and Social Responsibility Corpor?
INT! ERNATIONAL BU
SINESS
yy a eel
CORRUPTION IN increasing Debt
e is always somebody w,
S ‘eros, International Financier ’Ther Bribes increase
According to George the main sourc e of corruption,” ho the
Prices of
. When th
pays, and internati
ona | business is generally money borrowed internationally, bj Projects .
bery adds to 3 a &Se projects are paid for with
Ountry’s external debt. Ordinary
RUPTION
GLOBALIZATION OF COR
ry o-
, from the routine cases of bribe
Corruption takes many different forms to the amas sing of spectaras
to "grease the wheel s”
abuse of power that are said means.
ar
. THE ba Sapa, Westinghouse Electric ¢
h throu gh embe zzle ment or other dishonest P., Provides an infamous example.
westinghouse won a contract in the early 19705 to uild the Philippines’ Bataan nuclear
personal wealt ‘
It was alleged that i
larly for pup; plan t. ‘anttbet 43 Sle: gave President Ferdinand Marcos US$80 million in kic
For MNCs, bribery enable s compan
ies to gain contracts (particu The plant \ 2 billig ~three times the price of aco Gui wekbacks
they would not otherwise have Won company in Korea. Filipino taxpayers have spent $1.2 ‘lores plant built by the same
works and military equipment) or concessions which . 2 billion servic ing the plant’s debts—
Every year, Western businesses pay huge amounts of money
in bribes to win iets though the plant city bee it was built
ed to run to US$80 billion i ofa S170, ieanc
iraanean Produced a single watt of electri
influence and contracts. These bribes are conserv atively estimat aad i ee aaving 000 ace several earthquake fault lines. The Philippine government is
s is needed to eradicate globa|
a year; roughly the amount that the United Nations believe ei Pp Mf oe eal tod ay In interest on the loans taken out to finance the nuclear plant
d that in the preceding five years r Briones
poverty. In 1999, the US Commerce Department reporte and w 0 SO up to the year 2018. The Philippine Treasurer Leono
in 294 commercial contracts worth ussi4s recently:
bribery was believed to have been a factor commented
that the bribes paid by German
billion, In 1996, the magazine World Business reported toa “it is a terrible burden which never fails to elicit feelings of rage, anger and
ies are involved. According
companies alone were over $3 billion. Not just compan frustration in me. We're talking of money that should have gone to basic
services
France paid around $2
French secret service report, the official export credit agency of ls and hospit als.”
in 1994. like schoo
billion in bribes to foreign purchasers of "defense equipment”
y
Many Western Benefiting The Company, Not The Countr
Such bribery may be pervasive, but it is difficult to detect.
and helps off-load risks. In many power
own hands, but instead pay local agents, who get a 10% or Bribing high-level officials ensures profits
companies do not dirty their
has been, accord ing to the World Bank, both “a high
so "success fee” if a contract goes through and who have access to the necessary “slush projects in Asia, for example, there electricity.
ncy to over-estimate demand for
funds” to ensure that it does. Bribery is also increasingly subtle. It often takes the
form of level of corruption” and a tende
In contracts
semi-legal fees or “commissions”, and inflated or marked-up prices. were investigated by the natio
nal anti-
Western companies
guaranteed by export credit agencies, such “commiss ions” are included in the costs and In Pakistan, some 21 previous gove rnme nt of Benazir
for allege d kickbacks to the
thus, in the total contract value covered by the guarantee. "It is obvious,” comments corruption agency in 1998 signe d so many contracts with
Bhutto's 8 overnmeneet had
Transparency International, “that this practice constitutes an indirect encourag
ement to Bhutto and for overpricing. i for ins lati ions in ’ tota
instal lly inappropriate loca
tions
‘ of whic h were e unti l
power companies some
offense.” Until recently, ly
pos: sibly con sum
bribe which, in future, brings it close to complicit y with a criminal energy than it could
uce far more
that Pakistan was set to prod
produced.
business practice. Many countries including France, buy all the electricity
bribery was seen as a normal was contractually bound to
which could be 2010. Yet the government
Germany and the UK treated bribes as legitimate business expenses rruption, six of
claimed for as tax deductions. ed swo rn? st at em ents denying co ations that the
Although all = co
m panies fil_ ap bribes. SO serious were the alleg
" suppo TO!
onfes se .
Yet, far from ¢
eceiving
ri <a aateki‘
EXPORTING CORRUPTION em
: ial team OF invest igator s. was warne y tl )
Ww ee i ion efforts, pakistan
Gl Bank.sen rn # spent its clash with the power companieackag s wou
West ern gove rnme nts for Its anti- e of
ware ahi a of multinational corporations affect other countries " i
ernment went so far a8 '0 make the2 Rew ace
despa bbe eed development and exacerbate inequality and poverty. ds US, Japanese and Canadian gov ment’ s dropp ing charg es aga!
put off other investors. The IM" mea
aac eine mente firms. They transfer money that could be put towar 1998 condition
Scicas hat ores ® hands of the corrupt. They distort decision-making !
in favor loans at the end of
iain
bene!
e few rather than the many. They also increase debt the companies.
Context | 7-13
orfomeer : country; bypass local democratic processes; damaée tion ina Global
a nd corrup
; circumvent legislation and promote weapons sales. sponsibility
social re
Corp orate
7- 12 | Good Governance and Social Responsibility
ocratic Processes Greenstone .
Bypassing Local Dem
tion to a project ang Oo In return for its money, .
Bribery can be a useful way of getting around loci al opposi i . uting environm
tes Mrepuiatien ions.ten
polluand
been mass
tlys out meed illese
allow away
to tgetlogi n
s i lved with awar ding contracts. Take,| for r | with flo h ein and laws
area,ental
It carrie
bypassing the usual democratic processe invo
i
that wants to carry out a
nicke
and
ground the 8
nse of local people's health, say ater sources and the| egal logging
example, , the Norwegian mini
ng comp any, MIND EX,
es the expe’ Ma Nica @
veelocal
r envi
ete r ronm ent at the
Philip pine island of Mindo ro. The local popul ation believ mens gda Lanuza, a
ont he . ; oy:
cobalt strip mining and ruin their communities, you can smell the cyanid
mine will seriously damag e the environment when you are near the mine. Children
and there are othe r health
Problems. The technicians wha en have headaches,
; gull hon
she-water ts
ng to buy off local leaders. It gave area with us
MINDEX has responded by attempti say ess but when we ask them todrng oie
s Env iro nme nta l impa ct , they refuse.
a critical stage of the project’
watches to local politicians at acce ptab le to local Peop le Despite
that the mine was soci ally canents amsuch evidence
Wieataenn
Assessment, which had to prove
ee has received favorable environmental impact
” to a luxurious
for local distr ict leaders to go on a "study tour ass Sr eauiy wien th Officials. The Ministry of Environment personnel visit the
MINDEX has also paid
priest and paid local journalists to write firm's si
holiday island, built a new house for a local
Y € Company wants them and pays them,them, to do so
s
are signs of friendship.”
articles favorable to the company. MINDEX claimed the gifts promoting Arms Sales
gifts are attempts to manipulate
Local people, who oppose MINDEX, believed that such
e” ards those who carry out
the local tradition of “utang na loob” or "debt of gratitud tow Half the bribery complaints received by the US Commerce Department concerns
nst Filipino law. noted that allegations of bribery were
small acts of generosity and could be agai international defense contracts. A 1999 report
meeting made in 55 contracts between 1998-1999 worth some involved US$37 billion (£23.6 billion) in
MINDEX has also gathered local signatures given to mark attendance at a actually total. Swedish armaments manufacturer, Bofors, was
in “the biggest bribery
t projec
for the t. At least one signat ure was govern ment paid Bofors
and used them to indicate local suppor scandal in the history of independent India’. in 1986, the Indian
felt obliged to issue a disclaimer. |
a protest against MINDEX’s project. The Mindoro Clergy guns for the indian army. Within months
$1.3 billion (£802 million) for 400 Howitzer field
ed, Swedish radio claimed that £30 million worth of
of the weapons being deliver 'n June 1988,
X that the local population of r Rajiv Gandhi and his associates.
"We refute the categorical statement of MINDE
kickbacks had been paid to Prime Ministe
. Our people have consistently
shell
identifying
the Swedish auditor-general
Oriental Mindoro welcomes the mining projectoperations in a series of protest
document from s
the Indian press published ly channelled Bofors’ pay-ofts. In October 1999, the Indian
companies that had alleged
_.. their with tion
one opposi
strong our people in declaring our vehement opposition
to mining charges of “criminal conspiracy” against ee
actions ee We are Central Bureau of Investigation brought this
er the outcome of
against mining activity in our province.” middlemen and employees. Whatev
business people and Bofors
tions court case:
i the Environment and Getting Around Regula
Destroying legations eA0,
i all Ln jul ea
tinent. With
environmental “The affair has been disaster for the sub-con i pane
around that Bofors ~
Some companies use bribes as
a way of getting
reported that larceny and intrigue to savour, it is easy to forget
New Guinea in the 1980s eac
regulations. A report into logging in Papua arons: . ‘ now face
India and Pakistan, which nces acy
indian democree
for eat
"roaming the countryside with the self- assurance of robber b nucleaarmour
rowing
ever-gle ies of
r ‘balanc e of power’. The conseque
companies were unstab
;
social disharmony and ignoring the laws in order ees * mina kd party.”
ea g politicians and leaders, creating scandal
bribin fitici The Bofors
have been as dire...
and export the last remnan ts of timber.” In May 2000, meanwhile, the Asian 5 sa
rc a out
: : ,
" in an “alarming state general election and the emergence of the
velo pment Bank warned that the forests in Cambodia were
herau
rate of
wi lists have
Environmenta warned that, , at the current HIDING THE LOOT
lestruc-tion,
dest! ia's forests
corruption.
of Cambod ll be gone by the year 2003.
/ esets
: .
panescorrupt
-epenational
A den of inter” ion .‘which they who
- » Those can
Sometimes such bri
i
A 1999 Western Banks and Third World
ane handma through
by the Ni ibes come ed ofthatillegal
the form
in reveal a Canadi miningons.compa
politicanal donati r:
audit
Gr y the Nicarag uan gover nment
“ may
financial ipC oe well assist
- wh”
the bribe
- Frank Veoh
take bribes
“Mone mustring
y launde WhOal provide
se tio
find© sa eo e jnterna
areasd ofto Nicara
was allege
of thenymining
further?
made donate
have gua
ces,Arnold o Aleman
controls 70% compa
. The
700 teto Presid
;Seon ent which
their ill-gotten 9 fnancil channels and 1°
Resour
to 0on
bribesdonati
and that bank
takers to establish safe fi
ce to other people Green stone’s wasConsti
in Aleman mining guan Party
al Liberal
tutionNicara law sles ia vernation® sono lento P20
oO oe in the area where
sa ca nsparency In
can be given only by y Nicara guan citizens from within the country. ‘bil and Corry,
ity
responsi!
Corpor te social
| Good Governance and Social Responsibility
7-14
. ; We cann ot condemn corrup tion abroaa, be iz
j then tolerate American ba
_- account to Teceive pay
“America cannot have it both ways ir ks ent
treasuries, ’ and vin;
bribes or “donatio
ns” oil Companies (
taki ng brib es or loot ing th heir tre from Which included alleged
official s » ys Senator Carl Le Aquitaine). Citibank
m: jade m, rench Bovernm
uption.
making fortunes off that corr accounts. Ore th; ent’s oil company Elf-
a0 $1 million a year net from Bongo’s
centers are the major condy; ‘ tsang
and offsh ore financial
i,
po
=
=
Private banking services
N
>
from
a
2.
o=
°
cad
o
d USS40 billion
>
ry
=
s. AN esti mate an
repositories for bribes and corrupt Balms. ° ean banks ever
former communist economies finds i its way | nto - or oe nased as part of thean Much
contract.
of it illegitimately gained. Some $30 billion a counts alone. Leaders fr “War The three sons of Nigeria’
game of winning friends” has ended up in Swiss ees deposit in Siberia Some
African countries have collectively had up to $20 billion oo sa mienenare. S banks in Citibankaccounts ina a Sani Abacha, who held some $110 million
ilfanthWesren ae banks by Citibank. The bank mnie in the name of shell corporations set up
Haiti’s "Baby Doc” Duvalier is known to have kept $300 anks. WO Sons $39 million to deposit in another bank
while Philippine President Marcos salted away well over account in
. oo
Switzerland
after the new Nicer
in 1998
investigations into corruption Nigerian government began
Private Banking * Raul Salinas, the brother of former Mexican President Carlos Salinas, who
transferred $80 to 100 million in alleged drug money
Today, private banking increasingly used for confidential services ta international out of Mexico between
1992 and 1994 through Citibank’s accounts.
elites is believed to be worth as much as $17 trillion worldwide, and is experiencing
phenomenal growth. Globally, private banking is predicted to grow two to three times as
fast as ordinary consumer banking in the next few years.
In Switzerland, too, private banks still hide the assets of Bongo’s and Abacha’s
families, as well as those of Mali’s Moussa Traore and Zaire’s Mobutu Sese Seko. The
The private banking boom has its origins in the debt crisis and is a major reason private banking department at UBS, meanwhile, handles accounts for the family of
for the continued indebtedness of many poor countries. Because of the debt crisis in the Kenyan President Daniel Arap Moi.
late 1980s onwards, Western banks had fewer opportunities to lend to Third World
countries and thus started to pursue wealthy individuals in the Third World to encourage Offshore Banks and Companies
them to place their wealth in private bank accounts. The result was a revolving door. "There is no honest reason for being offshore. Bank secrecy and the offshore money
& UN
International loans to developing countries were creamed off by those in power and industry have no place ina globalized economy.”- Jack Blum, Offshore Expert
“transferred into banks . . . ironically often to ‘private banking’ branches of the very same Consultant
international banks that had issued the international loan . . . in the first place.” This has
been at least as profitable for the banks as for the individuals making the deposits. The r part of the system ro
Offshore banks and companies are anothe
average rate and hidden well away from itsctzens 6 .
money is siphoned out of poor countries
of return to banks for private banking accounts is over 20%,
1960s with sai ee tax havens
financial centers became prominent in the
An estimated 80% of loans made by commercial banks during the 1980s never
reached tt ac in same 61 offshore
their destined countries, remaining instead in US bank accounts. a Oe “en 2
In Latin a Islands ee
America, two-thirds of total debt is thought to have been deposited IntheCaribbean and South Pacific
in US banks. eerse around icbess
cente be sed ans e,
Si had increased five-fold between 1985 and 1994, to $
e ‘ou
Although the private banking boom is a global phenomenon
(in Latin America, for billion.
example, the market is already estimated at $450 billion),
the biggest beneficiaries have been a magnet for
been US banks. According to Raymond Baker, a financial specialis center: 5 or tax havens have
t at the Brookings Since the 1980s, offshore finance mid-1980s, a Morgan
Institute, the “US has, according to all credible estimates h clean and dirty. In the
become the largest repository money from Third World countries, et developing countries
one year
found that, in
of ill-gotten gains in the world,” not least because Offshore
of lax er inadequate ereekht A 1999 Guaranty Trust study of “capital flight offshore from 1 8 developing countries.
US Senate iny
inquir revealed that 350 of Citi tibank’sj 40,000 to escape taxation in
government officials or their relatives, cli ior foreign alone, a total of $198 billion disappear aselves tano n-residents
including: O06 cllents were senior (0°08 ion, lack transparency, and attract shell
centers impose little or N° taxes, offer
their own country, do not exch : substa
branches, Bongo had two private companies—businesses “with 1°
Corporations as well as a specl4 xt || 7-17
jon i ina Global Contetext
Corruption
7-16 | Good Governance and Socig| “af Res! ReSpO nsibility a9
Responsibility Corp’ ora
te Social
Wy
ate, offshore centers have t
h they opel
Tey
y wit h wh ic
ra They have Ome In November 1999 + thee
Because of the secrec ds © f crime Ce
e
aNnk ofOf Engl
launder the procee
He B,
¢ accounts
IMF estimated that
en
excellent places to the of Angola's and identif;
’ntified and froze the London bank
rin g schemes. IN 1996, 50 ai: de
ai dedd arandd aabet rebel
all money-launde ee Vears ted ag a Na Jonas $2
implicated in almost shore every year.n. Thr
GpP—is laundered 0offand . an S-Commun,
ti
NAS Savin
who was until recently
billion—between 2 to 5% of seglobal
.
$1,500 billio a 199 7 UN QP Aments, in ist
several
nose of the reedom-fighter” by
an yw he re be tw ee n §59 cluding tho
later, the IMF put the fig
ure
m corruption, ¢,
venues fro JS and UK
t laundered global re ,000 billion, wt
report likewise calculated tha stood at between $500 billion and $1
and prosti tut ion tracks. Ss cosiNG THE LOOPHOLES
pornography ts to hide their
offshore bank accoun
dealers also often use More sweeping attempts to rac j
Over stol
an international convention and alos ng loopho money will require both prom
omes more difficult f ulgating
When dirty money disappears offshore, it bec grows, bringing yet m Or t pla ce, ill-g otten gain s to leave
e mafi as countries in the firs Oles that allow
corrupti on. The power of crim Ore
governments to tackle into a “mafia state.”
helping to turn the country
corruption in its train and Closing down offshore centers is vital
the oo stopping the laundering of corrupt
nies can be set up for as little as
£100. Su money and the draining of resources from ird World. in poorer countries, however,
In some offshore havens, new compa process will have to :
24 hours, are not required to file ane
e
other local
companies, which can be set up in as little as in order to provide time to build up
offshore centers, it j : small tail an and other islands s aand small states set up offshore
returns or accounts, or to disclose ownership. In fact, in some UD tiles : Many
in the fir of aa and
any information about the ownership of banks, depositors . Te ate i ee eee only because they needed to diversify out
crime to divulge well
, wealthy criminals hold mu he ntime, public disclosure of offshore corporate ownership, ; as
shareholders of an offshore business. Not surprisingly agri :
accounts, is an urgent necessity
these companies vealn as filing of company
their money in such companies rather than as individuals. Who
difficu lt to trace when they are owned by yet vay
represent becomes even more
offshore companies in different jurisdictions.
other Yer BLACKLISTING COMPANIES
ns committee to investigate cases of

RECOVERING STOLEN WEALTH In 1998, the World Bank set up a sanctio
g out a World Bank-backed
involved in bidding for or carryin
corruption by companies investigations and to debar
meets regularly to review
2 International pressure has been mounting in recent years to return money which contract. The Sanctions Committee of debarred firms, ’The World
publishes a comprehensive list
Ae een stolen from public treasuries and stashed away in Western banks and offsh firms found guilty. It also were 54 companies on this
list, 36
Firms.” As of May 2000, there
ax havens. Several precedents exist for the return of such funds: “ Bank Listing of Ineligible tati on on the list.
the biggest country represen
; sis a3 of them British—by far
e 0 es. USS500 million of former Philippine President Ferdinand Marcos’ sanctioned
on against companies
money wee returned from Swiss banks to the Philippine government. The men t co! uld and should take acti n or OECD
ensure that no Wester
The UK gov ern
ommission on Good Government set up after Marcos was Ban k. It cou ld a Iso take steps to help Wor ld Bank, or
by the World ati on al financial institution
such as the
d by an int ern other internationa
l or
company sanctione ntry in the wor \d, obtains contracts with
deposed as recovered overa Il some $s $1 billi
billion of f the ili ion
SS billi that the
UK gov ern men t
uted in any cou
with
prosec ap ply to contracts
should particularly nt (DfID) and the
e In March 199: j A
freezing of all accounts national institutions. This for Int er national Developme
Court : London ordered the as the Departmen t ment could also ens
ure that
belonging to Frac
Seni Abacha’s family. In Octobe
r 1999, the dep artments such (CGD). The UK govern all in
Swiss government Slee the in rantee Department uses or corpora te compliance programmes
name of Abacha’s son ane banks to freeze several accounts held Export Credit Gua
anti-coru pt io n cla
millloneisf dollars “lunderad nee and thought to contain hundreds of there are binding ; n | evel.
al and :in ternatio a
In January 2000, Swiss a the Nigerian central bank and oil revenues. contracts at a nation n corruption co
d include
ul
t© f national action ments around
£390 million in accounts belonging te
in ve rn
ert ed ic h go
r level, conc
wh
Abacha and his associates. sat roze companies
At a broade
ch a
earlier, the Nigerian government had ba se of ‘blacklisted’ ould award a
contract. Su
Ur months
announced that it had alalready te rn at io na l da ta th ey sh
ad e and
managed to recover some $700 million of in
creatingrldan could use when deciding ©
- nfer en ce on Tr
NCTAD (UN Co
Abacha’s mone y. In all, Abacha i : billion in s, on
atthe UN Nation
na ti
believed to have stashed $1.5 the wo di
formation Coor
ante ld held by the In
embezzled funds in Western co ul d be he is ts , fo rm at io n
database
ex at illegal in
el already panies to comb
st an ce : i | co m!
Deveuplopm(Ien t), for in sation s py fiv e 0!
Gro CG), an organi ruption in a Global
Context | 7-19
: onsibility and Cor
social ResP
7-18 | Good Governance and Social Responsibil corporat e
ibility
2,
. gather ed from participati
500 entries
Js and companies
—
known or allegey ny
yr
brokering. The ICG has a database of
5
‘ .
individua In some instances
and other international sources on indivias ye world. Law enforce a BOvernme: nts ma ;
EMent age, ."* as the Commonwealth +
been involved in procurement irregularities around it! e it to make ”j Integrity
: chee,
Aeige Port on Cittinntion ue Politically committed to reform. But
to this database and companies us! enthusiastic in tackling co
already have access ” ruption, popular °s, “where governments are less than
SUPport a
still be mobilized in Suppo rt of an anti-corruption . a .
before pursuing contracts. eonten agencies of civil society can
ional public index Or ranking of Several NGOs are doj

NGOs are also calling for an internat anti-corruption: NGO, Tans
Corry, . , Oing just this b
see if they are being spent on piety Y, for example, monitoring debt relief funds to
At the moment, the international Pa Tene
companies. index ranks ¢ Ount;;
eptions index. The and raising awareness; and d Y reuct
International, publishes an annual bribery perc index ren “x
countries t hat do the bribing, this
rather than companies. Since it is not :
ing
fundamentally flawed. In Nicaragua, a new ant
i-corru ption movement, Citizen Action
Against Poverty
and Corruption, has organized popular
marches against corruption; is campaigning to get
GOVERNMENT ACTION the President and other ministers and
Politicians to declare their personal income; and is
in the process of producing a Popular manual
on corruption, which will be disseminated
All governments need to clean up their act but they need to do so in a
at “corruption hearings,”
environment in which donors are not imposing inappropriate, over-hasty policy changes,
in which resources and time permit genuine participation in social and economic decision. In Uganda, local civil society organisations including the Uganda Debt Network
making; and in which international agencies are not adding to the incentives for and the International Anti-Corruption Theatre Movement organize an anti-corruption
corruption. week every year during which public meetings, plays and a march are held in a general
attempt to raise awareness about corruption and existing laws holding politicians and
Any successful anti-corruption programme has to be built up:at a national level ministers accountable.
be appropriate to local and national contexts, and have full support from government
employees at all levels. In addition, as a 1998 Commonwealth report on corruption One of the most successful grassroots anti-corruption movements is the Indian
Power Organisation in
argues: Mazdoor Kisan Shakti Sangathan (MKSS) or Workers and Farmers’
with local people to demand access
Rajasthan. Since 1988, the MKSS has been organizing
action programmes need to be designed to meet the expectations of citizens, who holds public hearings to examine local
to local government accounts and records. It So
i to be informed about the national strategy to combat corruption. Effective the accounts match up to actual spending.
development works and to check whether exposed in the
‘on to fight corruption is most likely through programs which are nationally been that Sarpanches or local leaders
successful have these hearings
owned, i, designed to meet national al cicircumstances the stolen money.
and bui hearings as fiddling the books have returned
popular empowerment.” Puilt on the foundation "
DETERRENTS
{mposing anti- j F corruption.
Posing anti-corruption strategies by putting conditions on loans will not work most effective deterrents to
and ma y even lead to ; : ic punishments are some of the aeuea
little and, at worse itp implementing cosmetic changes which, at best, 4° was convicted in 1996 of paying
bribes pariep
ine the anti-corruption efforts. In Uganda, for instance, th In singapore,» middleman , Tomen and SE aa ea de fi sasrvestefaalsa
Ministry of Ethi
ee ? e " i i
beh alf of Sie men s, Pirel li, BICC

on
for any Boe ow vvenpany that the firms may
ban all five companies from bidding
with the five eae spf
ping an anti-corrupt® banned "firms associated direc
|
strategy such as the office of the inspe ere, engaged in develo jointly set up, and firms that shar
e the same
Auditor General. : The n ew Minist. ctor General of Goy ernance and d the
the office of t more public scrutiny can be another effective
projects to e, base
despera tely under- resour cedb "'y.may even draw resourc es away from thes? Opening develo pm en t government structur
governme” 1 ndia, a new local :
actually reduce the effectiveness of on by eiffusing responsibility across
Ba nk
f Kerala in south | cclaimed, even by the Worl d
Odies an . z
deterrent. In the state 0!“ has been 4
work,
on massive public participation,
pee ntion ina Global Context | 7-21

—
|
king j
probably the ; largest of its nd
—— sgramme
o is
!> the in push for Freedom of Information (ro)
“Kerala’s decentralisation prog
world. Three milf
7% of the State’s population) take part in Meeting,a Enable ordinary People to use inf,
°° en and courageous MEW OPPFOOCh to p,, knowledge can citizens hold their ‘ © informa: tion. O .
Se ag
This is o far-reaching, ence... lt reflects a profound commitment tog tp, “ON. Only if they have the relevant
the Overnm,
right vents
that belong to them are used jn
to atcountable and ensure that resources
ice
Sietr demands ond +o make institutions responsible an @ eee Tie” Help Increase Citizen Participation in Decision-Making
Which a,
system includes massive devolution of funds to local meetings, ee agit Den aes 's abantu babisi meaning “people do not know what
require a oe up plans for deploying them, and avanncenied eon Publi
‘° is g0INB © show mistrust of government decisions. Greater participation by
including. groups that represent the poor is a must in decision-making Z coecdioet ° local, regional
attendance at such meetings. Eight key democratic prineip re cen ral, and national. Greater citizen participation is also required in anata ig ane aodiine
etait social auditing
"maximum direct participation of the people; accountability public expenditure. Civil society Broups need to piay a “critical auditing function...if they
of performance) and transparency through the right to information. are to hold the state accountable to their poorer citizens.’ "In many countries,
si opposing
privatization-for example, water privatization plans in Panama and Brazil-has proved to
by
The potential for corruption, a problem before the new system, is minimizeg be one way to remove potential sources of corruption. Where work is put out to tender,
2 commitment to transparency and openness of all documents and decisions. As The
it is critical to ensure that there is always an in-house bid” from the public sectortoset ~~
Hindu newspaper notes: against any private contractors’ bids, something that the UX Office of Fair Trading
recommends as a key method for avoiding being cheated by a cartel. 2 Ensuring that such
"Total transparency is the only way to check the danger of decentralisation bids are made also makes it difficult for a contractor to buy @ contract at an artificially
degenerating into decentralisation of corruption. All documents on beneficiary inflated price.
4
selection, reports and minutes of meetings and all documents on works undertaken
taganes more
by the local bodies through contractors and beneficiary committees including bills Cracking down on bribery will not necessarily make international
t. But it will h d ond a clear =
and vouchers are public documents. Copies are available on payment of a fee.” accountable. Nor will it end corruption overnigh — i
on restricting the supply =
that the international community is intent boat undermine
in agi =
to continue to sae
in Thailand, meanwhile, a new constitution has strengthened the democratic Companies must not be allowed Corruptio , s
and development (Source: Exporting
rights of local communities, illustrated by electricity generation. Before 1997, local democracy f
y, cornerhouse. iccap.org).
governments, multinational companies and the World Bank had pushed electricity Multinationals and Bribery by Sue Hawle
privatization by building independent power plants with little regard to the interests of
local people. The violent breakup of any opposition would often have been the end of the
issue. As a result of the 1997 constitution, however, large development projects are now
subject to public hearings, and local councils, which are now elected rather than
appointed, must give their consent to such projects.
RESISTANCE
Figh
ting corruption is increasin
around the world, To be effective, ly engagi
they sie : of civil
Gaging the energies we society
i 8 roups
Mobilize Ordinary People

Civil society groups will n eed
to be pr
and sometimes confrontational ways in innoval”
Theyea
Y n wi also
will ate take
need on toni
be ga :
committed Ioto b el bei
transparent and accountable themselves
ons and Corruption ina Global Context | 7-23

social Res
ate
Institutional Investors, Gove
rnance
8 Organizations and Legal Initiatives
Learning Objectiv
es:
After studying this ch

apter, you should be
able to:
1. Define institutiona
l investor.
rnumerate and explain the different types of institutional investors.

3. Define cross-listing.
Enumerate and explain the motives of cross-list

ing.
Explain the role of institutional investors in corporate governance.
6. Name some of the global corporate governance organizations.
7. Address the basic questions concerning investment promotion and

facilitation.
ie
igi silanes
of the Sarbanes-Oxley Act of 2002 and

8. . CiteCite the reasons for the enactment
state its key features.
‘ng
s confronting institutional investors.
in
cha lle nge
9. Di Discuss the
§
i
3
a
a
a
3
a
a.
a
2
a
4
ations and tegal Initiatives { 81
aniz
—_. wovernance O”9
i means sitting across the table from p.
TT
. j
“peing a CEO stil
NSTITUTIONAL INVESTORS
vo instititutional investoand
rs and showin
having themg veut leader
believe s.)
jp You.»
- Christie Hefne institutional investors can
be descri SCribe . /
r age
ecurities i
in large volume of shar Tibed as Organizations that buy and-4ell
: treatment
pmetimes for preferential & quanti
ities or amounts that made them qualify
: : : an :
INTRODUCTION institutional investors in the Philippines are Hi 7 commission cuts. Examples of
ice Insurance System (sis) and the
ervice Scial Security . System (SSS), ' Government
:
Corporate governance is a process that aims to Miers, hwestore et ina ** orporated (AFSLAI). Armed Forces Savings and Loan Association
manner that maximizes value for all stakeholders-share ers, 4 bots Ss, pe blovers,
environment and the community at large an | e is t ose at the
customers, suppliers,
helms to account by evaluating their decisions on transparency, inc usivity, equity ang
responsibility. The World Bank defines governance as the exercise of political authority S follows: banks, insurance companies,
and the use of institutional resources to manage society's Pr oblems and affairs. retirement or pension : funds, hedge funds, investment advisors and mutual funds. Their
role in the economy Is to act as highly specialized investors whose competencies are
Corporate governance is the set of processes, customs, policies, laws, and focused On taking care of investments on behalf of others. The good thing about
institutions affecting the way a corporation is directed, administered or controlled. institutional investors is that they manage aggregated sums of money and have these
Corporate governance also includes the relationships among the many stakeholders funds invested in different investment prospects which are appropriate, ideal, and
involved and the goals for which the corporation is governed. favorable to each of the contributor under given circumstances.
the right,
In contemporary business corporations, the main external stakeholder groups are These investors are entitled to vote on their shareholdings. With
ce. And, with thet
the shareholders, debt holders, trade creditors, suppliers, customers and communities institutional investors can play an active role in corporate governan
their power to make a ‘to buy” or
affected by the corporation's activities. Internal stakeholders are the board of directors, significant holdings and war chest at their disposal,
will certainly exert influence on
executives and other employees. sell’ order of the shares in the investee corporation ss.
investor and how it conducts its busine
way the investee treats the institutional
Corporations are created as legal persons by the laws and regulations of a
S
particular jurisdiction. These may vary in many respects between countries, but a TYPES OF INSTITUTIONAL INVESTOR
corporation's legal person status is fundamental to all jurisdictions and is conferred by
statute. This allows the entity to hold property in its own right without reference to any
a ethat
estors
particular real person. It also results in the perpetual existence that characterizes the t ope to esa in ae
n viti ton narrow itrange of inv
nd is aninvinv menmen
estest t and ouning
t acctrad acti bacsecer 1B
modern corporation. The statutory granting of corporate existence may arise eeA hewee wi e of ee
from
general purpose legislation (which is the general case) or from a statute to create has its ~ ee
a vent fund Every hedge fund A aan
specific corporation, which was the only method Prior i , a ate
rvehod 0 ie
s att
to the 19th century.
om
ofainv dmen
iest ande the met
ets ro
determane
as és nate
iness the
in
In addition to the statutory laws of the relevant jurisdiction corporat
ions are
Hedge funds, as a class,
subject to common law in some countries, and various laws and regulati securities, and ceam(mone® histicated or wealthy
ons affecting eats this
gives
business practices, In most jurisdictions, corporations . dee funds are available only to sop
also have a constitution that
provides individual rules that govern the Corporation and authoriz
e or constrain its As far as membership, ‘ Ss This selective membership aiemit from many
decision-makers. This constitution is identified bya variety investors who meet certain ea “te is that, hedge fee ish typically include
of terms, in some jurisdictions,
it is known as the Corporate Charter, but j in the investor incentives, foremost © i ment ful nds. The exemP e fee structures, and
: ippi ‘nary invest . atiyes and leverage, ;
' Philippines, it is the Articles
ie of
on of derivatives delines and the existence of
Incorporation. regulations that rules ordin o
limitations on short selling, the applica
int e fund. Lighter Bul fu nds.
concentration of hedge
On the liquidity of ishing characteristics
fees are thehi
performance \ 8-3
it iatives
Let gal In it
tii on s and
jzat
ce organiza
8-2 | Good Governance and Socia} Responsib, ility sy Governan
n vi ( stOr
nal |
uti o
itut
Instit
<4
t, any Movement of
marke : 4 Certain .
astitution that helps out corp can
Investment Banking
; : Oration. gefinitely be felt by the entire liste , from one investstment
onMunityfund ther
to anoth e
toa financial i
k
An investment ban
and governments in
ete ly underwr
raising capita ee tment
"
and acting 2° we eget inthe issy
iting bank also assists COMpanies involy Nee cross LISTING
: fication , in
INV!
debt securities. AN d other diversi
of both equity and mergers, acq
sitions an
ati ons like
es such as market maki ng and the tr Ort, ne refers to listing of equity 5 sh
business combin ading
ake bond s and other bills, foreign exchange
e
Mmerent countrie anes ofa companyin more than one stock
revi ee
Investment bank also
of derivatives, fixed income
instruments like ere Of an company On more than one stock exch ange in sh 50 be used to refer to the listing of a
ty securities. Se ec :
transactions, commodity and equi anks ang ret there are companies that are listed in both the same country: for example in the U.S.,
not accept deposit uni @ NASDAQ, and in the New York Stock
investment bank is that it does change. Here in the Philippin
banks. Fychange and Makati sie aid Only have one (fused from the original Manila Stock
Stock
stock exchange which is the Philippine
exchange Inc. (PSE). U.S, ccrrpinies
Investment Trust asian oF European stock ichenevae a choose to cross-list their shares on different
the ga rategy to address U.S, dollar positioning against
Investment trus t refers to Investors’ money being pooled together from ly hang e major and dominant global currencies
§ a trust issues in its first offering. The board will normal
of a fixed number of share
al fund manager to invest this money in the stocks cid MOTIVES FOR CROSS-LISTING
over responsibility to a profession
or where the
shares of a wide range of companies. This Is typical investment endeav seeae-line i
| By cross: listing and selling
entity's money is invested in several placements more than most people could realisticay its shares on a foreign stock exchange, a firm typically
tries to accomplish one or more of the following objectives:
invest in themselves. The investment trust often has no employees, only a board 3
directors comprising only non-executive directors. In recent years, this has started to
change, especially with the emergence of both private equity groups and commercial To Improve Liquidity
property trusts both of which every so often use investment trusts as a holding company,
this strategy is normally used to increase the sources of funds, and consequently enlarge
. By cross-listing company can improve the liquidity of its existing shares at the
equity issues in foreign
the pipeline of money for wider investment coverage same time, find and support a liquid secondary market for new
markets. Firms from countries with small illiquid capital markets often outgrow those
to maximize liquidity, the
markets and are forced to raise new equity abroad. In order
Mutual Fund liquid markets in other countries or
firrn ideally should cross-list and is sue equity in more
the more source for investo rs’ money, the better for the
’ Mutual fund is another institutional investor that is a professionally managed regions. The idea still remain,
a : couective investment scheme that pools money from many investors and invests company.
cally in investment securities which include: a5, stocks, bonds, short-te i
instruments, other2 mutual jal funds
alee funds aand se curlties,
ies, including
| i © rcaltis
commodities
iti nach
such aas precious
urting To Increase Its Share Price
company’s share
-listing is trying to increase the
Another subtle reason in cross capit market. In rnore
al
in a segmented and illiquid home
commogn This fund las
is dl by a fund manager that buys and sells instruments price by defeating mispricing that the company has fresh
are cross-listed, not only
sacha, tee hee investments in accordance with the fund's investment
and liquid market or region where share ity is enhanced .
any’s share marketabil
Siteonne
tive, This Ss will source of funds but also the comp
be are overseen by Y a a t board of directors
i or tru > d
ge with ensuring that the fund is managed approptintaly
PO oF ie inate ceptance
To Increase Firm’s Visibility and Ac
adviser ar a ate
advise r and other
store other service o1 Baniz! ation s,
d s san dd ed le 5, d ul for f the fund's a cceptance to its customer
firm’s visibility and
t a
e best inte rests o 2
g inc rea ses the foreign mark ets gives the
Cross-listin Cross-listing in the
t govern ments. advertise trademarks
Pension Fund suppliers, creditors, and hos te image, to expos e and
0 enh anc e cor por a rtant ly, to become more
5 attention, and more Impo'
company the chance t
lacal pres
A pension fund Is| scti and products, to get better
into being from thestBab ton of assets forming a separate legal entity that came familiar with the financial community.
pension plan benefi or the exclu
Pension fundnis are
etimportant sha _
companies bececa
ausUSE a nheller Gunad sted an
PeNsioi n fundis Consid ond : va :
ered
as one of the bigges: t
investors
ors in the stork | 8-5
Legal Initiatives
ba
investors Governance organizations and
Good Gave ta si vi 7
nce and Social Re In
sponsibilit Institutiond
DIHity
To Support Takeover Bids
. a pri ncIPAL-AGENT ROLE (OUaLity)
establishing a Second,
as one of the initial steps In when an investor has ars
Cross-listing can also be view countrie s Or markets.
other firms in the host ad
market for shares to be used to acquire
for that matter, companies offer their
Shares ; the power to elect the officers for he aiNvestee Giseratsj the corporation, he can have
huge influence
takeover or business acquisition scenario if those shares have liquig arning 3 board seat may eventually be elected as the chi '0n. One scenario is an investor
more attractive
partial payment and it Is significantly be noteq whe
secondary market in other regions. High liquidity
level in the market can Process perfonmas executive officer (CEO). In this
in terms of nt at the sam Ng 4 dual roles—the role of being
the firm can issue new securitieswithout any noticeable traces of depression This unique capability of institutional : a time (board member and/or CEO).
ce.
market price resulting from the new issuan investments in the company, ds security and protection for their
To Support Share and Options Plan peETERRENT TO OPPORTUNISM

Create a secondary market for shares that can be used to compensate local
a company has
management and employees in foreign subsidiaries. For example, if
foreign subsidiaries and wishes to use stock options and share purchase compensation
plans for local management and employees, cross listing should reduce transaction ang
foreign exchange costs for the local beneficiaries. board. In corporate world, the level of audibil i
; stor’s voi
ility of the investor's voice may be directh
onate to th
Cee ialive to en of Investment he is representing. Institutional esto
ROLE OF INSTITUTIONAL INVESTORS IN GOVERNANCE on will serve as watchdog. Opportunistic attitudes of the other
tape
members of the board will therefore be in-check.
MONITORING
CORPORATE GOVERNANCE ORGANIZATIONS
Close monitoring of corporate performance from institutional investors is
expected considering that investments from these type of investors usually involve large INTERNATIONAL CHAMBER OF COMMERCE (ICC)
amounts of money. Another reason for close monitoring is that the profiles poe
expectations of these investors are different from the ordinary investors. From the cost- focusing on promoting growth and prosperity, spreading
An organization
benefit standpoint, the costs of monitoring can be easily offset by the expected positive for international business. This organization is
business expertise and advocate
returns. championing the global economy as a force
considered as the voice of the world business truly global
and prosperity. ICC, the world's only
for economic growth, job creation business views. ICC
DRIVER OF AGENT’S PERFORMANCE rtive in expressin g
, respon ds by being more asse
business organization
n and dispute resolution to making the
activities cover a broad spectrum, from arbitratio tem, business self-regulation, fighting
ites feursutten eal ete by institutional investor is so huge that the balance case for open trade and the market economy Sys
g commercial crime.
dtall mes, hewn en can " suffer without its investment, agents in the corporation will corruption or combatin
fieaster a oo ne pleasing its principal in terms of performance. Being a valued
ORK (ICGN)
OVERNANCE NETW
amount of money can be vale command better performance
knowing that such an INTERNATIONAL CORPORATE 6
ICGN's mission -is to
paleo by the investor anytime and have it invested in
another field of int erest by the ion of governance professionals, ce efficient
investor or worse, be invested in a competitor-investee- An investor-led organi2 a 'aS of corpor ate governance to advan utiona l investors
ember s are largel y instit
inspire and promote effective st
tandar
GOOD ACTIVIST Nm an ng d expertise of ICGN
t. Breadth ki extends across
Markets and economies world-wide. ae a
funds ni ae emen and policyma
collect ively represe nt
Institutional i . who the P
busines
members from investment,
908 boar anes eters ae those whose investment is significant enough t©
representatives who can be the earless fiscalizers on corporate policies. They are the slobal capital markets.
‘pasily ask
: ae ti
ques Ss ©
© voice of the investing institutions in the board. They ca"
, Ss on matter
is dq fectin g the
corporation
i and of course, t ey Mi
al Initiatives | 8-7
ce organizations and Leg
BG . Governan
S|) Goa Grusnninaavsicr shim ee a astOlSy
Vv
developed Ccountrj
BANK (ADB)
ASIAN DEVELOPMENT UNCTAD cover, Nes ang OF eco :
whose mission ig ates wit

delivery oft €chnical Nomies in transi tion. When appropriate,
lopment finance institution assistan er OrBanizations -
ADB is an international deve ove the quality of life t
2 ce, an d donor countries in the
s reduce poverty and impr Ip
its developing member countrie is own ed and fina Of t ir In performing
Manila, and esta blis hed in 1966 , ADB its functio
people. Headquartered in other parts of the by governments and int » the Secretar;
from the region and 19 are from eracts with ee
nizations of they ‘works together with member
its 67 members, of which 48 are non-government orga ni Blob :
rnments, the private sector, co isivsiatone s, as well as with governnmental institutions, na Nations system and regional
ADB's main partners are gove foundations, ations ‘he mm
pr sector,
ity-based organizations and including trad © and indust
development agencies, commun
” Non-governmental organizations,
ive sities worldwide.
uni 'Y associations, research institutes and
in 200g AD
Under Strategy 2020, a long-term strategic framework adopted
follow three complementary strategic agendas: inclusiv
e growth, environ me 8 wit NIZATION FOR EC
and regional integrat ion. In pursuing its vision, ADB's Nally ener ONOMIC-CO-OPERATION AND DeveLopment (ECD)
sustainable growth, Rite
assistance, grants, advice and knowledge, OECD brings together the govern
instruments comprise loans, technical s aa
me .
and
governments—ADB also provide Nts of countries committed to democracy
most lending is in the public sector—and to
w
the market economy from around the orld to:
of develop ing countries through equity ilivestine
assistance to private enterprises on Support sustainable e: conomici
its triple-A credit rating helps mobilize Fine
In addition,
P
guarantees and loans. S for Boost employment a
development.
er
Raise living standards
Maintain financial stability
INTERNATIONAL FEDERATION OF ACCOUNTANTS
oye
Assist other countries’ economic development
Contribute to growth in world trade
IFAC is the global organization for the accountancy profession. It works with ;
159 members and associates in 124 countries and jurisdictions to protect th mu '. compare policy
The Organization provides a setting where governments
interest by encouraging high quality practices by the world's accountants. IFAC 7 re
experiences, seek answers to common problems, identify good practices and coordinate
and associates, which are primarily national professional accountancy bodies represen
domestic and international policies.
2.5 million
! accountants
0. e ploy:
loyed i pub Icp ractice, f ! industry y and commer rme nt
ce, governm
ON
INVESTMENT PROMOTION AND FACILITATI
UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT ssful if they
facilitate investments can be succe
Specific measures to promote and es for impro ving the
polici
of, and not substitute for, broader
Establi
i take place within the context sound inve stme nt envi ronm ent,
of As a country establishes a
developing cuniewent UNCTAD promotes the development-friendly integration an investment environment. be useful instr ument s to ater new
UNCTAD has progressively evolved into and facilitation me: measures can
authoritative knowledge-b, . wer SCOnOmy: investment promotion or in those countries with a
recent
deheres and thats ge-based institution whose work aims to help shape current polic
investors, espec ially in smaller, more re mote markets promotion also
investment
inking on development, with a particular focus on ensuring that Jarpesil nomi c and politi cal inst ability. éEffective part ners and
policies and international actition are mu oe Hn hdfc history of macroeco by identifying local
tually supportive in bringing about sustainable profi table inves tment opportunities,
development. serves to highlight
image of the economy.
by raising the positive
To what extent
ganization works to fulfillciiisist
The organizati i ‘ment P pro. motion agency (IPA)?
this mandate by carrying out three key functions: hed an investment ed b y and benchmarked
Has the government establis us of the IPA been inform
al st at
1. It functions a i has the structure, mission, an d leg
discussions with arpa aaergovemmeria deliberations, supported by against international
good prac tices?
building. xchanges of experience, aimed at consensus As reflect s the
growing importanc
e that
stment
n in ve
2. It undertakes resear ch polici y analy
.
The rapid gr owth in
the nu mber of moIP tion. Centralizing foreig
sis and ro n an d policy
i investme disseminatio
government representatives and ex ert: governments ascribe t? me such as information es an opp ort unity
otis Palleedoh fen thee? : n activities, effective and provid
3. It provides technical assi :
stance tailored to the specific requirements of Promotion and facilitatio more cost
developing ‘lore
countries, » with
i :
special attention to the needs of the least advocacy, within a single agency ° Initiatives | 8-9
«Governance organizations and Legal
- pignal Investors:
88 Institution
.
| 1G Good Govern
2 ance and Social Res
ponsibility
yf
ofa country’s attractiveness to investors, The rowt,
to present a coherent impress! ion 5 overnment and the foreign ;
hat a rich body of experience has been developeg With
+ gn inv
8 overnment policymakers On the estor, the | Ai
in the number of IPAs also
means th es tment promotion agencies and across COuntrig antact with government and S Often the ma:
respect to different approaches to Inv s c «angi of investors, © Main source of feedback to
at different levels of development. Bovern, Conversely, through its regular
effec tive COMMUNIC envinronm
a the investment atio
channe 0
ent
! fiiees ’ ° : aBencies, the IPA can be an
i d IPAs, or aleare con templating doj |
at have recently esta blishe
pt mechan ho the sorerane

ment activities having an impact
ices |
i
| A following amo Pract
thi eriome inform the design of the IPA
This aRiESEh helps to ensure the full effectiveness of the IPA and to avoi repeating pagt penefits of investment incentives thei Stablished f
mistakes, impact on the economicoe interests Of othra, er mriate
. durgOr the evaluati
uation of if th the coststs al and
er countrie > tion, their tr, nspa
g a Parency,andind thei theiri
Is the IPA adequately funded and is its performance in terms 7 attracting investment The use of financial ang Othe
r inces:
regularly reviewed? What indicators have been established for Monitoring the
substitute for Pursuing Policy Measures tha ‘0 attract foreign investors is not a
performance of the agency? domestic and foreign investor
s alike. Int atea sound
competition aMOng
countries for Fp) May lead
Experience suggests that unless there is a full commitment to investment to ,
divert public resources away from more ea all increase in investment and
promotion agencies by the government, they are less likely to succeed in attracting new
however, incentives may Complement an alread oe uses. In some circumst
investors. They need to be adequately funded in order to attract and retain qualified and ' nt or serve as a : ances,
investme! a Y attractive enabling environment for
; : Partial Fectificat
motivated staff, ideally with private sector experience. Experience ion for Market
imperfections that cann
also suggests that addressed by direct policy reforms, ot be
agencies with links to the center of government and with private sector representation Nonetheless, authorities engaging in
strategies to attract incentive-based
on the board have higher visibility and credibility and hence a better investme
nt must Periodically evaluate their rele
record in attracting appropriateness and econom
ic benefits against their budgetar vance,
foreign investment. They are also more dynamic and adaptable to y and other costs, including
changing economic long-term impacts on resource
circumstances, a critical issue for countries undergoing major allocation. In doing so, authorities also
economic transformation, need to consider
thei r commitments under international agreements,
ntives can since investment ince
have effects beyond the countries that offer them
How has the government sought to streamline adminis , including bidding contests leading to
trative procedures to quicken and a waste of resources. Many governments, includin all OECD
to reduce the cost of establishing a new investm g member countries, consider
ent? In its capacity as a facilitator for that it is inappropriate to encourage investment by lowering heal
investors, does the IPA take full advantage of th, safety or
investors?
environmental standards or relaxing core labor standards.
Long delays and costlyprocedures to establish a new business entity
obstacles to new investment and entrepreneur is one of the What steps has the government taken to promote investment linkages between
ial activity. Many governments have
introduced reforms to quicken and simplify businesses, especially between foreign affiliates and local enterprises? What measures
the Process of starting a new business.
One has the government put in place to address the specific investment obstacles faced by
SMEs?
it can bring
Many governments aim to attract foreign direct investment because
iffusi ies and human
additional benefits to its citizens through the Soe wuberee culiceobien
foreign
res ond manage ement spillove :
local enterprises
expertise. These : close linkages
establish ; specially helpful
and are especially
n investors . ; rprises (SMEs). These
to harness the potential of local small and a ears sani.
linkages can be fostered through efforts to establs the context ofa strong competition
For j de and investment Ce chnology. Close linkages and the
a Open 3 ironment for the transfer of te reed by exverranent iStoris to
be oesThe
the att dots theconsult
government IPA promote
with the and Maintain dialogue mechanisms with investors? td diglpeali investment are a ec trek in education, training and
IPA on matters having an impact on investment? u
Mprove human resource development nied
fe Investment Promotion agencies can play an important role Public health.
and the government. As the int facilitating effective
munication between investors
erlocutor between the a
co tives|
i 8-10 | Good Governance atians and Legal Initia
| and Social Responsib
ility ance Orga ni za ti on s
st? rs, Gi GO! vern

l n®! Inve
Instit«tiutonaio
f
e n foreign and local ent erprises is
a Partic
7,
Promoting linkages betwee n forel s ing" for ular ¢ le, n
for SMEs. SMEs are the st x nit y gro up, acc oun tin g for over that their FespOnsibilitie,
eeeinvest tenord coto mm u
hav e mor e ifficultiace es gainssing ac, 95 pe, _c 88 Were |;
iness lation. SM ee ee be €nt
Gen . Credit similarly, the directors g lMiteg ba
othe . f boa
2nd in
es a ner lin
forming invest
;
kages with — iliates.
ai : ake.
the presence of an Omni Potensrdses of _ Provid
‘ ing Strategic Gire
‘ “ even foregone a “aa Pl ction to their co
Profitable investment opportuni layed, Sup Of eaded i mpanies.
ties may be delay . i 1 at their Pow
ers are limited
Sarbanes-Oxie t ensures t OF access to .
informatio: n,
in
Has Qs the
th government mademadeuse of inte
f rnational andsffere
jonal initiatives aime, . gs wel
invest t promotion expertise, ee d by the World # an i" atanbuildin l
direct aasc the means to Meet th at the Se
ee 3
pratite ‘° ise, Sucsuch as those ©, cess to nior &xec
uti Ves haye Ereater re
ganizations? Has the IPA
_
joined
/ othe: " company in
~ Tus, th
e director sponsibili
intergovernmental organizations regional and internation for; tion s of ty
oversight over important boards of companies
networks? af Matters oy, as Sr i will have
committees wilt have ind
and
egligov
genern ependent
ce anc e policy, in turn,
n
in the M the gj 'rectors ee compensation, selection of aud
Many international organizations work respons ible for
anageme
nt
Will have
ter exposure to liab
itors
of Compan
with IPAS,
eens ne Fe anee of be not Only ies Simi ility for any
Practices on investment promotion strategies and the Strate
gic direct larly trthe chi
ef Executives will now
asSGHnE inbul Wy hp y Capacity, For io n of the ¢ OMpany be
instance, the World Association of Investme S Will be st
nt Promotion Agencies ( f A) assists IPAs in rengthened but also its operat
ional
advising their governments on the formu Ts for Strate by add itional support
lation of investment promotion stra gic Planni they will receive
Foreign Investment Advisory Service, withi i tegie ng. In addition, they
n the World Bank Group Provides inve s; the Companies than Was
will also receive much
climate diagnostic studies at stment possible in the past.
the request of host governme Sarbanes-Oxley Act Provides for
recommengations for 2 comb nts, CONSisting of
ination of policy, regu ry and pro che
the past. Whistleblowers
institutional frameworks for investment promotion lato cedural reform, Cks and balances that were not available
and methods for mo wily now h ave in
effectiveness: ang UNCTAD’s opportunity to report fraud in greater Pro tection of the law as well
Advisory Services on Investmen Nito ring th eir companies, Simi as the
€xperienced in inst t and Trai ning (ASIT) js to report to the independe larly, the auditors of
ruction programmes for nt au dit committees, companies have
IPA staff to improve Capa
city.
FO what extent has the
government taken adv Oxley Act seeks to make
Jor Sromoting invest antage of information companies more transpar
ment? exchange networks ent and
controls put in place to moni ati j well as the internal
tor them. Any material change
to be reported to the shareholders in the monitoring of risks has
One of the roles of
IPAs is to facilitate
the reco
in real time.
Ss by Promoting Dar
tnerships between
Overall, the Sarbanes-Oxley Act seeks
to focus the attention of compariies on
fortifying their companies by anticipating risks,
all across lie oe
Preemptive action to guard against the damage
matchmaking that they —— = a Saleh
« Network curren this model of governance would be the oe
tly provides det = ats ae
imately 20,000 ailed, Standardj
Manufacturing i ive i ion. This informatiowill
n be m i siared
compani es wor ain
of Partnerships ldwide, thereby favoring the the enecen Ms oe poratilderson the board of directors. All ue rancor cole
between contra
Aa n 60 SPXs haye cto 'S, suppliers and subcontra Comp
. any
been set Up wit ctors. To will
any will have; both the opportunity and the resources to put all their minds togethe
h UNIDO’s assist to effectively manage their companies.
ance in more than 30
BOARD OF DIRECTORS
ds of companies
i ct m ies are
ar expected to play muchnuchmuc! more
more
active roles in : he Sarbanesitiey
the : st of Ss
shareholders.The
expects New
Ne York
that S
nore!tocksee ome
Exchange, consistent wit!
i abr
eS-Oxiey AAn
S seeks oi
Of risks go Provisions of the Sa ct cts
to ley the
the
. ent of any ot h er person
eT:
groun manager
IRE Beyond
the reacti
ve 2Pproa
q for 2 culture of pro
active | €gular
8 | i
sessions
it
wi hout the pal rtici ion Oo ft he
ticipatio
h that has been

c With
wi i a m aterial
i r
elati i Or st i i p wi' ith
smenti at, Cott off-guard aS un common so far. it. t ' concerns
' of the the managem
A er Tt OF its
its i influe: nce. he
Veta &xpectar;
OF Unmet brainstorming without bei B bie
atio “xPected ev
Statementsns , Companies took enretscourstseruck. In —
, Th e chief &xeCut
ives
to creativ
had a ready
excuse
ore a3
ati
zations and Legal initiatives | 8-1
rn a ince Organi
Investors, Gove
Institutional
DISCLOSURES proTECTION OF WHISTLEBLOWER
The rampant misrepresentation of the financial situation of companies, °speciay, Sarbanes-Oxl
ey has
in the technology industry, by the use of pro-forma oe AAP conan 'S not Possipy, establish aprima le
fac ie case of "etaliation
Now without additional disclosures to compare them cas “ ‘ben 3°COunting rhe in
T einst
strurument wy de qd Protection to wh
favorfor ofachiey ;
emvin istleblowers
Under Section 401 (b) of the Sarbanes-Oxley Act, it woul n° e an e for Proform; a
plgoyters | jIS the d5 een
who can
NE factor to the ad
verse a
Malfe asance in the com
statements to omit any material fact which misrepresents a e fair or : rue POSition of the submi pany.
evidense We of proof rules wh
company. In addition, companies are now required to provide qua ntitative Measures ‘ created. In or ich
der to defeat t the retaliation was a
reconcile the pro-forma statements with the GAAP consistent financial statements. convincing ev ¢his Presump tion,
heenth act on + 4
idence, that presumpti
Ption of f retaliiation
ation isi
it Would have taken nee
employee, regardless Must establish, by clear and
The SEC is also rapidly moving towards real time disclosures so that each of the allege
d protec
@ sa
ted activity
i i
has prompt access to information, under Section 409 that will have a materi investo, me Sation with respect
to the
a] i
the company. The filing deadlines for quarterly and MPact On COMPENSATION Committees
annual reports have been acCeleratey
by a third. The SEC has also identif
ied items that need to be disclosed in real ti me.
Sarbanes-Oxley does
eter nobHS Kesliick the treeden oo 7
FRAUD Spell out rules governing
compensation in
New
compeYork
nsatiStock
° Exchange'swhich
govern ancece mat!
on committees h tS i ee
ru €s require eto form Home
the boards r ndent
;indepe , te
The premise for fraud control is that managements fre ‘quently exploit ; the BUsifdss sek ave the author
consistent with i to decide
weaknesses in internal controls for their dubious purposes. PCOAB's hority i On compensation
j polici ici es
Aud iting Standard
therefore, specifically requires that the assessment of 2,
internal controls t ake
into account
the susceptibility of the company's processes to fraud.
The internal co ntrols should
able to prevent, deter and detect fraud. be
GOVERNANCE POLICIES AUDIT COMMITTEES
Sarbanes-Oxley has sought to govern auditors at the board level

in order to avoid
the conflicts that can happen with the Management. These audit committe
es are
composed of directors and have the responsibility to ensure that the financial statements
of the company and the internal controls are consistent with the regulatory policy. The
to evaluate the board audit committees are also required to discuss the company's exposure to risk and the
and the management.
means to manage them.
EXECUTIVE COMPENSAT
ION
DEPARTURES FROM THE PAST
Sarbanes-Oxley recognize s that the mode of compensation, an increasing share

ges that executives received was responsible for
of equity and equity options, in the packa
i i
veral large companies. Thisis kind of compensation
encoraniee commie stalance sheet and the income statement to engineer
generous.
thet 52%
are overly survey by
of tie, AItoh
saneprice
Stock In addition, ae
increases.foricine
incentives ; Te ena
nce packages
period.
MeKeniieie iin 2003, : everitve con
ementcompensatio n isrm,way too ni : aE a
eeaion ase
ompani ale ; t of equi
find
ds leo ee
significant corre! lations between
accountinga hig) oe , high
restatements pesbortions
hig! Dee of accruals,
am the wae
Symptoms of fraud such as idely quoted study ofa profess
Capitalization
a. seen o f expenses,
of exp! * chicago
A
etc:W! ely quo’ sample of 50 firms accused of fraud by
reports that a were not, a clear pattern of higher
a iversity ' © i W ic ,
2 another 50 companies
8-14 | Good Governance Qnd
SEC by contrest
Socig} Responsibilit e Organizations and Legal Initiatives | 8-15
nc
ility vestors, G ‘overnal
institutional In
Oe
eg il
ent of stoc! k compensation was fo
:
occurrence of higher-than-averaé e aea atl companies
di
are more likely to h, ai the
former sample. Other studies also :
to enforcement action if their boar iat dominated by the management ang they dot
On'
have a block holder or an audit comm!
ttee.
and errors has been r,
a educed, 48% of ther. 49% of them reported that the risk of fraud
Severance pay is another conte ntious
aspect of executive compensation more efficient and 31 9% re agree that their
king case is that of the approval of a $149 mil ten
port lower er
ror rates. eir fifin
naanc i l operatioi
ncia
patently unrelated to performance. A str! ns are now
severance package for Michael Ovitz by th e Disney
Board in response to a request re Furth ermor e, co Fe wi
-_
autSiiatlon wf
dly worked
! a year as Disney's President va 0 m Her companies will be increasingly focused
CEO Michael Eisner, in 1996. Ovitz had har on lowering costs from —
en software. As many as 60% ofthem jenn through the purchase of SOX compliance
Eisner decided he wasn't the right man for the job.
manual processes. ave plans to implement technology to automate their
Increasingly, governance bodies are concerned that executive COMPEnsation
does not reflect the performance of the chief executive. While equity compensation isa ENTERPRISE RISK MANAGEMENT
means to address the agency issue by tying the interests of owners and managers, the
executives undeservedly also benefit from the overall
increase In market indices
unrelated to the financial performance of the company. In addition, severance Pay
ang
retirement benefits and a host of other fees paid to former executives
are not related to
performance. While Sarbanes-Oxley has not specifically mandate
any rule for
compensation for executives, it does vest authority on compensation
committees to
decide on executive pay is consistent with the overall interest of the company.
SARBANES-OXLEY: IS IT PERFORMING?
Boeing, implemented such systems in the past, indepe
ndent of regulatory policy, while
Sarbanes-Oxley sweeping provisions other companies are following in their steps under
greatly add to the costs of SOX pressure from new laws and regulatory
without 4 doubt. Most companies compliance standards. A recent Survey indicates that 50% of
see compliance including the need financial executives believe that they
compliance softw of Procu ring SOX integrate their SOX compliance with enterprise risk
are as a sunk cost for the long-term management, This best practice has
benefits that will extend over
benefits of credibility and efficiency
many years. In addition, they been spelled out, in all its details, in the seminal document
expect that the costs of SOX of the Committee of the
compliance will decline as Sponsoring Organizations of the Treadway Commission on the subject
companies deploy SOX comp .
automate their processes. lian ce software and learn
Currently, many companies to
will actually reap and the are unsur e about the benefits they
means to automate SOX The conceptual breakthrough that under girds the new approach to risk
processes are hard to compliance in a situatio
stan dardize. n where management is the realization that business risks, financial risk and operational risk feed
on each other and compound the impact of any one type of shock to a company.
Operational risk, such as fraud in the company, can create a liquidity crisis for the
company. Similarly, business risk, such as loss of intellectual property from outsourcing
of business processes overseas, could lead to bankruptcy of a company. The vulnerability
of companies has increased with the growing reliance on sophisticated financial
he instruments, an extended enterprise and information technologies. Increasingly,
™MPponents of Cos
Productivity and acc ts w companies realize that they need to create a culture in which a aa at all levels
ounting.
we respond to unnoticed sources of risk in any corner of the oe Oe “ onmanicate :
Figures have be
en
to the rest of the organization. This is facilitated by enterprise risk 7 spears w ie ele
collected. Other So to communicate potential threats to the company and galvanize org
urces sy hein Variety of Ways depending on how they are
ance COSt tevolres Onsulting indicate that 50% or more of overall
Corporate govern
rapidly before a crisis goes out of control.
documentation, tes
ting, SOX com : around Process improvement, controls
changing needs. Pliance software Procurement and adapting ide management of risks is the case of TriQuint
controls to An example of enterprise W
Semiconductor Inc., a US-based supp! lier o f communications components and modules.
swine ? h
TriQuint is conducti g a risk assessment of all the business
As part of its compliance effort,
8-16 | Good Go
vernance ang Soci 8- 17
al Responsibili overnancCce
Gove ) Organ i ti Ons a nd
Q iza:
dl Leg jal nitia
Ini tives |
'Oillity tutiona i Investor:
in. stitutituth
Insti
ors,
y
i
processes that affect its mr tance
risk across
i
sheet and income s tatement.wo That evaluation is;
all its five divisions. TriQuint's combi: ne Sart he
:
add to those factors an
|
the company oan nl helped it to gain insight into risks in the
businesses ita Nes, Teate
‘orts ; i
shareholder engagement Challenging context f Or the notion
ui of monitoring a large ny and their
say,at
Typicall fail when the cultures of two different companies
: clash, TriQuiUint }8s, Mber of com Fomation of b etter governance practices.
of institutional
made several acquisitions in recent years, and some of Hneee businesses have
with all shareholders, Creatin Nes
i are sig nificant, The costs
Operatig, monitoring and analyst ¢ € a free
rider prob while the benefits are shared
ou tside the United States. The; company has been able to identify and discuss h ie lem. This often leads to sub-optimal
ifi Overage of COm
new acquisitions face, including exposures related to specific panies unt £55 collecti
cultural ang "BUlaton, ve action is achieved.
environments. A key problem identi , ed
entifi
equity. Another relevant as j .
. Pect ® that domesti C investors do not vote their foreign
CHALLENGES CONFRONTING INSTITUTIONAL INVESTORS increasingly short-term investors dealsor at wiian er institutional inve
companies. stors are becoming
Pension funds, pro Moting shor
t-term thinking by inve
long term inve es pe ci ally defined stee
The principles of corporate governance embrace the underlying assum stment to Matc b enefit schemes should
Ption that h lia bil ities to th eir beneficiarie be able to mak e
years. But a nu
shareholders can best look after their own interests provided they have suffici mber of large institut s that stretch over many
ional invest Ors are not
and access to information. The increased presence of large institutional invest, ent rights acting in this way.
Ors in the Nev
i ertt
last decade fostered the expectation that a new breed of highly skilled and well- eless ” large j
stit
Nsti u o) nal al in
tuti
Fesourceg esttor inv
o sa r € often
professional shareholders would make informed use of their rights, promo Pmest let , nies on a long-ter ™ basis,is, si locked i into
t e sha
corporate governance in companies in which they invest in. These
ting 800d
diversification and index investing i since for r \ e
principles ar € reflecteg
to cover disclosure of voting policies, managing conflicts of interest
and ¢
between investors. However, institutional investors are not Operation
like other share holder
have a unique set of costs, benefits and objectives. s but
Accordingly, they have not always behav The nature of institutional investors
ed as desired, Institutional investors has evidently evolved over the
years into a
financial institutions that accept funds are complex system of financial instit
utions and fund Management companies
from third parties for investment with their own
name but on such in their own corporate governance issues and incentive struct
parties’ behalf. They include pension ures. A great deal can be done both by
companies. By 2009, they managed funds, mutual funds and insurance private agents and policy makers to improve the corpo
an estimated USS 53 trillion worth rate governance outcomes of
OECD area, including US$ 22 trillio of assets in the institutional investors’ behavior. In the Private sector
, enhancing collaboration among
n in equity. Additionally, there
made by the fund managemen are large investments institutional investors, as by establishing industry associatio
t industry directly under ns to share the costs of
stitutional investors a major their client’s name. This make Monitoring and voting have shown
force in many capital markets, s positive results. On the public policy side, prudential
regulations sometimes excessively limit holdings by institutional investors in individual
With the goal of Optimizing returns companies and restrictions on incentive schemes may also change their behavior in an
prudential regulation, institut for targeted levels of risk,
as well as for unintended manner. Given the right set of conditions, institutional investors can play an
ional investors diversify inv
mery or them having Inve estments into —_ portfolios, important role both in jurisdictions characterized by dispersed or concentrated
stments in tho usands of companies.
Sarde tea ones Some managers pursue ownership, their role facilitated by private and/or public policy action.
but increasingly, they Passivel
by nitisircy . ete indexing. At the sam y manage against a
e time, the invest ment chain has lengthened The effectiveness and credibility of the entire corporate governance system and
nagement , furthe r distancing investee companies company oversight will to a large extent depend on institutional investors that can make
from the informed use of their shareholder rights and effectively exercise their ownership
do not always stimulate institutional investors
functions in companies in which they invest.
ve nen
However, the force: s driving the actions of institutional eee
asis of the performance of from many other shareholders being determined bya
portfolio companies, but amine Seed is inne
benchmark larevieivad SS . unaér Management, Moreov on. the
er, fund performance against Objectives. In addition, the funds management spank a father tha aevele pinahtoh
o'ten by investors on the basis 4
years. Taken toget of mandates not exceeding Name is also highly significant. An explicit policy ~ is se tortesea darnestitseapiéal
management an three
apne sens favor a focus on increasing the size of institutional investors via, for instance, pension funds
Of portfolio companies, inane assets unde" mark r, in other areas the institutions are seen a5 a weak link inBAIT
a TALE the company
eaaete
indices, rather than on
“incentives for churning of assets and improving the performance
strong conflicts of interest
landscape rotated t0 short terms and to the pursuit of Povitinalenete NPS:
8-18 | Good Go ves | 1
8-19
vernance ond Soci tions and Legal Initi iati
izati
ernance Organiza
al Responsi i na | Investors,» Gov
Institutio’
bility
y-
yesibly pernicious. Others by contra
4S : already
i 5
too powerful and theirsir ¢ effects pe / {corporate
rate Bigovernan
ance and¢
" sah in promoting good « " rarabe governarice ne OrDorae
St, 6 ;
: sine robustenoud s0ve often) where jt iS possitste ‘

number of institutions) tester te
oe ili ee
ot all the arereuments relate to good cc ae é and é addressing
slopment, SSINB ott Othe,SC , butto 8 the cp
thett potenti Average holding Periods j stors OFtEM excerae IMMIASIONS
their
Foo. x
underpinning growin and deve shore is a close ave declined 5 From transactions. indeed, a ¥
:
h Ps “ sental and social goals. However,
relationship be
nerformance and accountabin les
eon although a great deal of around orld to
the ij own announced turnover targ
y By ets.
voodecrunncenn frequency traders, anothe the decline Might beds to under one year on
800d " -e thatthat} promotes company
corporate governance Pe ility, Ang average
Fr assat class. in dibs ‘8 the rising ‘porta
addressing these broader issues many institutional MWesto e HOR, the incentive
nce of high
rs
including their own ownershipandafund . un
pranagers structures influencing
are influen
the goal of optimiz ing returns foron targeted levels of risk, IMstitution,
ced by conflicts
With company sponsors of Pensi; KS and ins of interest
strategies, which i in some cases : " - COMpAaNIes, their
relationship to
tors pu portf tfoli
oliomany div ersifi cati sbi can trade between themse| ve
inves
i e ofrtfoli
rsue a -_ range os, of them having investments in Several thousany . © fact that they
SY may -
S. Such Ncentive s might work My contr o} many
any Ffunds that
led to highly diversified po ™ e active investment strategies and 4 to the di
sfavor of investors.
companies.
p i Though5 many manage rs pursu' In such a System , the costs inv
formance, some investors seek Portfolig practices over olved
benchmarks for the purpose of assessing ssessi p er : 4 a large Number Of onitoring the cor
companie S porate governanc
that are passively managed against a benchmark, in which case managers typically must with all (i.e. the free are a
Significant but the ben e
rider Problem). This efits will be shared
of EOTIESHIES will j mplies that Monito
purchase all the equities in the share index (e.g. S&P 500). the level of eversifi be sub-optimal unless ring and analyzing covera
therefore cation can arrangements ¢ ge
be extreme. With the emergence of a broad universe OF
collective act
ion. This does not € put in place to pro
investment managers and increasing access to information, active nay Professio monitoring and
Mean that institut
ar investors can or sho
Nat
mote
fee engagement with uld avoid
on average returns to them and thej r investee .companies
do not significantly outperform the market on a net-of-fees basis. Att there Can be fiduc’ since there are privat
e Samerting, and funds (ER lary duties such e
investors have increasingly channeled funds into lower cost, passive ISA) in the US that as with private sector
diversification funds, may be fulfj Ned thr sion pen
This trend towards passive diversification may not be conduciv activities might not ough voting. But it does mea
e to the Promotion of good be Pursued as effect n that such
the case. ivel y and as energetically as otherw
corporate governance. ise would be
Diversification, in a number of cases, is also driven In the public and Policy debate,
by prudential regulation such too much time and effort is being
as capping the percentage of a company’s equity that trying to solve the perceive
d Problem of short-termism taken up in
can be held by an institutional long-term shareholder who by appealing to the notion
investor, and not just by individual investor concerns, is often compared favorably of a
The review of various countries with “patient family owners.”
around the globe noted the benefits of permitting However, a long-term sharehol
pension funds to take a Significant der is clearly not necessarily a long
and efforts to give incentives to -term engaged investor
stake in companies. The investment chain has hold shares may not achieve their
lengthened by outsourcing of management objective. The real
to include investment managers and sub-advisors, problem of short-termism may well lie in
further distancing investee companies the executive suites of companie s and financial
from the ultimate beneficiaries. As a result, institutions with an emphasis on short payb
at every stage of the process there ack periods. Nevertheless, in a world of fast
Possibilities that incentives will not encour are moving technologies and competition, defining shor
age institutional investors to take t-termism is stil! a challenge.
in the corporate an interest
governance practices of investee
companies.
The principles that cover institutional investors are focused on “oread and
butter”
Institutional investors acting Corporate governance issues such as voting at company meetings, the nomination
as agents for ultimate beneficiaries are and
not directly remunerated on the basis of very often election of board members and to making their views known on remuneration policy.
the performance of Portfolio companies
based on company performa whether They support acting in cooperation which might take matters much further by
nce or better corporate gove
is certain private equity and hedg rnance practices. The exce underpinning more engagement, while leaving open the concept of long and short-term.
e funds where performance ince ption
often 20% of fund performance. Rath ntives are powerful,
er, they are remunerated often
management fees base on the basis of In sum, the nature of institutional investors has evolved over the years into a
d on the volume of
performance-based fees are gene. asse ts unde r Manageme nt. In the US, complex system of financial institutions and fund a wh their own
rally not allowed for mutual funds unless the fee als Corporate governance issues and incentive serUCEUNs. et eae
lengthened, increasing the number of institutions em ‘clare ates
investment in an enterprise. At each point, the incentive syste
p
a focus on increasing the size of ac - Taken toget i ;
gether, the incentive favor tcomes. Investment strategies have also eval ved with passive
Ssets under structu: re often indices and exchange trad ed funds becoming more important so as to
not necessarily an incentive 4 management, not necessarily bad b also ut investin
investing through indices
g tench
old
incentive structure might also5 sa .
lower costs and increase ficiaries. Against this background, the
returns to ben ete
Cs tin e to performance of port ds to be examined. With respect
churning of asse foli
ts (i .e, o buysom paris: i question of investor oversight of company
8-20 | Good ing
i an a
Governance | 8- 21
and Social Re ions anid Lega
jzatio Initiat.tives
sponsipiny 'y ga.
Investors y Fovernance Orgar
ti utio n al / Inve.
Instit
—;
to the exercise by institutions of their voting rights, turnout at company Meetin
gs hae
increased in recent years and there are dedicated corporate governance investors
However, cross-border voting remains costly and uncertain. Whether all these
developments are sufficient to improve corporate governance outcomes or whether they
are just going in the right direction is an open question, but a great deal depends
on
expectations. If the expectation is that institutional investors act as stewards of
companies, then progress might have been limited.
9 Foreign Direct Investment,
Privatization and Insolv
ency Regimes
Learning Objectives:
After studying this chapter,

you should be able to:
Define foreign direct investments.

”
Identify the types of FDI.
Show what the Philippine government (GPH) is doing to attract FDI.
Enumerate and explain the key features of a favorable investment climate.
Explain the idea of privatization.
for and against privatization.

Understand the different arguments
of insolvency.
Explain the concept
law and illustrate how the rehabilitation is done.
lvenc y
Understand inso
re st ri ct
ic tiio ns up on foreig n investment of the
d
i s c u s s t n
he e o p e nnness to an
D
GPH.
“Anything that makes your attempt to buy an OSsetp, Ore
risky can have a material effect on the amo
u
investment we get. These days, we'g be} Nt of
we get lots of foreign direct jn _ ky. ig
gis
We should not restrict it. We should make it ete
- Nourie° y RoubinTr,
i
INTRODUCTION
To attract FDI
presence of foreign fi nflows and gene
j ze .
fomlen inve nt reerms, the Phi rate the positive spillover effects from the
Foreign direct investment refers to the direct investment in productive assets f lippin
p es liberalized ized its FDI
j policy
i and offered various
a company incorporated or un-incorporated in a foreign country to the host country. 4 i
system entirely different from the investments in shares of local companies by Foreign
entities.
Economic theory suggests that foreign direct investment (FD!) paucityve of FDI firm-leve| panel
positive spillovers to domestic firms in the host country. Since multinatio Can generate data, it is difficult to measure or disentangle
na | Corporations contribution and different effects the
(MNCs) are an important source of international capital and of FDI.
technology, their entry can
facilitate the transfer of technical and business know-how
resulting in pr Oductivity Bains Foreign direct investment (FDI) has grown steadil
and competitiveness among local firms. These y in volume and is a major
spillover effects develo Pp through source of development .finance. Recognizing that FDI can contri
Practices demonstration and diffusion, or best bute to economic
through the creation of linkag es development, all governments want to attract it. However, the experien
and domestic firms becoming either suppliers with foreign ce has been
or customers, or through th mixed.
experienced workers from foreign
to local firms. The entry of MNCs
competition and force domestic ma
firms to imitate and innovate. A country’s development depends on domestic and external financing.
Developing countries have many developmental needs, and they often have a savings or
trade gap. In an economy in equilibrium, it is an accepted identity that savings equals
investment (S = |). However, economies are seldom in equilibrium, and in a developing
economy, a shortfall normally exists between savings and the desired level of investment,
which countries seek to fill by capital inflows. As such, external financing is important for
economic and social development.
the Bretton Woods Institutions and the United Nations sae were
Since
i ed, official
establish lopment assistance (ODA) has grown steadily and played a lea
ici develop ital for economic growth and development of less
There are two
broad Classifications role as a source of external capital fo Thad Paesioane). cenenidoce dhe
domestic firms: hori of technological spillovers from FDI
zontal (within or to dlsvelopesdicountries ataune 2 Or Sivonen direct investment (FDI), have grown
intra-indust
effects. Horizonta
l spill over refers ry) and vertical (inter-industry) spillover early 1980s, private capital flows, particu ak ortant source of private external finance
to the effect
firms in the same
sector. Vertical Spi the presence of MNCs has on domesti¢ at a phenomenal rate. FDI has LTE i en major types of external private flows
llovers fro
between domestic
and foreign firms FDI occur as a result of the interaction for developing countries. It is different or onpeterm nresebatsel mating profits from
through ba ckwardor forward trade li
that are ‘f nthe
same indust
ry. This may take place in that it is motivated largely by investors snk ending and portfolio investment, in
Backward linkag nkage. | between foreig and domes
es are created n tic firms: production activities that they peer often motivated by short-term profit
when sane .
Products from dome
stic firms. Forward ource raw materials and intermediate contrast, are mente. be influenced by a variety of factors (e.g. interest
link ms * are
domestic and foreign firms, created through contacts betwee” considerations. These!
prone to herd behav
me ior.
rates) and they are
a
NG COUNTRIES
IN DEVELOPI
FOREIGN DIRECT IN VESTMENT
indicators that the
i ien investment can be one orn is on globalizati host
increasing foreign eneral, opening its window On. FO}; UNtry,
fee
economy is growing and i” Br borders; it has certain advantages to Ait
Profitability of the venture. The er
nbothinven
the che ,°8
|
than merely movini g sap ital across
nning (1980, 1988) argues that a firm’s foreig ity of location specific factors andth
e
country and the investor. UU d by firm and location specific advantages, - Overall, the factors that influe
Ope ent nce FDI
decisions are mainly influence
Sst country market, factor prices (labor,
economicic ee 1975; Walder
a & & JunEdwards
policy (Singh 1996), market size (Lardy 1995. Milner g profitability and
ies
(intere st rates, exchange
rates, tax etc.),
1998), political stability (Tesai 1994) ang ho measures. the Protection afforded to in vesting firms
by tariffs and/or other
ounnes! macroeconomic policy, tax regime and erie fora re ©Onsidereg as FDI POLICY SHIFT
major determinants that attract FDI to developing mand aiken eco Ws Benerate job jn THE 19905
through new establishments and expanded business : end & ite activities and In the last t wi inns
indirectly increase competition within domestic markets and facilitate the transfer of
policies. Through the © decades, the Philippines has considerably liberalized its FDI
improved technology and management techniques. blic Act 7042 or the Foreign Investment
all Owed foreign equity participat Act (FIA)
ion up to 100% in all areas not
For the investor, the potential benefits lie in penetrating a market, 8aining vestment Negative List. At the same
access pursued changes in its inve stmen time, the Philippines
to low-cost raw materials, diversifying business activity, reduction of cost t incentive schemes in order to
in Production encourage FDI inflows.
processes and defeating some of the disadvantages of exporting, such as trade barriers
and transport costs. FDI also enables companies to learn about the host market and how Various investment incentive measures were granted through the different
to compete in it. Multinational enterprises (MNEs) own and control investment regimes administered by the Board of Investments (BOI), Philippine Economic
operations abroad to Zone Authority (PEZA), Subic Bay Metropolitan Authority (SBMA), Clark Developme
benefit from diverse production location and globalization of market. nt
Corporation (CDC) and other bodies mandated by various laws to
establish, maintain and
manage special economic or free port zones. BOl-registered enterprises,
MNEs undertake production in different countries to minimi depending on
ze Production costs their status, are allowed income tax holiday between 3 to 6 years,
and expand globally. Firms therefore choose least cost locatio tax and duty free
ns for their production importation of spare parts, and tax credit on raw materials. PEZA grants
activities that the propensity ofa firm to get involved in interna the most
tio nal production depends generous incentives including income tax holiday, basic income tax rate of 5% of gross
on three conditions: ownership advantages,
location advantages and internal income earned, and tax and duty-free importation of capital equipment, spare parts and
advantages. ization
raw material inputs. Except for the income tax holiday, Clark and Subic enterprises enjoy
the same incentives available to PEZA enterprises.
Internal factors in host countries are
also important determinants. There
elements ofa host country that are consi are
dered location-related factors; First, FDI PERFORMANCE
Ricardian type endowments, which mainl there are
y comprise natural resources, most
labor and proximity to markets. kinds of
Second, there are environmental
function of political, economic, legal variables that act as a The 1980s witnessed fluctuating FDI inflows but with the liberalization efforts in
and infrastructural factors of
a host country. the early 1990s, steady increases in FDI inflows were registered from 1991 to en
Although substantial declines were observed in 2001 and ona pated
These factors play a crucial role a i
in a firm’s decision to enter i sed from 2004 to 2007. In terms o f FDI sectoral distribution,
are four types of FDI: a host country. There aes
oem EE taking place as inflows to the manufacturing sector slowed
: and telecommunications contin
® Resource seeking ( inflows to the services sector particularly finance
linport wt Motivated by access to local, natural or human rise.
resources).
:
e Ex Pson platfor
saaatitutm ing(a basis
(Substituting for exports to the local market). been domini ated byYY th e food and
for exporting to a regional arian} Within manufacturing, FD inflows have
° Rationalized or The share of chemicals and
beverage sector with a ane
2000 to 2007.
vertically disi ie om
according to local (locating each stage of pT i ie 12.2% iin the 1980s. Coke, ke, refined
Costs). Ay partic
Gisintegrated chemical
i prod ucts fell to 4.2%
in the 2000s from 9% in the
the above factor ular inv es tment may be motivated by severa uctsa eesoot y
also om 3.3%
s simultaneously petroleum and othe r fuel prod
, d supplies fell to 2% from a share
1990s. Similarly, FDI inflows " Set ta parecftT3 nsport equipment from 3.7%
also a ie
of 9% ini the 1990s.T here is
9- 4 | Good . tization
Privatization an
and Insolvency Regi
Governance Gnd
Snriant
ian Direc
Foreign Direct Investment,
-
Crea ge
GOVERNANCE
is was the country’s largest source of FOI inflo

: Up
ped from 56% in the 1980s to only 139% in the P Of go,
Presen Os
en substantially diluted by the increasing Sovernance and the body that govern interactions
sapore. Japan’s share increased from 13% jn the foe burden that firms face
in complying
S ty
fei] to 18% in the 2000s.
ment policy reforms and opening up

: improvements in FDI of more sect
inflows to ors £0 fore;
the count to be more
o the Philippines have been associated with ex and compl
limited and the country’. "Y's Fp, correertf
stat ct aten
market fai Corruption, and
cre eed Protect consumers often are not intended to
its neighbors in East and Southeast Asia, Com
pa red With (World Bank, 2004). Djankov
developing Cilhitries The
oo generally et al, (2002)
the Philippines received the lowest level of Fp not associated with better societ
al outcomes in
corruption. - hey Y also fi
. In terms of cumulative FDI linflows Nd a correlatio; n between strict
_ ‘
regulation and increased
inflows, for instance
hile the Philippines barely incr
eased atUSS18.9¢
INFRASTRUCTURE
KEY FEATURES OF THE INVESTMEN

T CLIMATE The better the infrastructu
re of the host economy,
foreign investors. For example, the more attractive it is to
the Quality of transport and com
The
%E
fair.
TOLOWT be estimated from expenditure munications system can
tie major factors on road transport (Hill and Mund
that influence firms to ay, 1991). Ernst and
decision to Young identified the foll
icular developing country: owing infrastructure factors as importan
t in attracting FDI. These
include:
ACCESS TO FINANCE AND
INTERNATIONAL INTEGRATI
ON ¢ Good base of related and Supporting industri
es like suppliers, sub-
contractors, university research center, business services and raw
‘influences 2 firm’s tenden materials.
cy to invest. Businesses * Good transport facilities roads as well as port system for both sea and
fits exceed the cost of inv air.
estment. However, * Low cost and availability of utilities such telecommunications, energy and
€s do not face credit con
straints unrelated to water.
are less likely in countries
with well-developed e Environmental regulations and procedures.
S€erch has shown the importanc
e of financial e Availability of sites and premises.
97). A healthy financial system
allows them to
m mitral, rather than their current stoc
k of cash. In countries with inferior infrastructure, businesses must dedicate more
‘ancial systems comprises of banks, fina resources to acquiring information, procuring inputs, and dewerng theirProeects fone
ncing
rsater tendency to grow faster than countries market. This undermines the competitiveness of firms, at oe * worst, deters them
efnicientiy.
from entering markets where they could otherwise operate
° in es 2003 F€port, countries that SKILLED LABOR FORCE

n ah as Brazil, Chin
aggressively pursued
a, India, Malaysia, Mexico, the
iCely in the 19905 than those that did of the essential
for economic growth of a country is its
re quirements
One ng,
not. This wil of human development. Education, traini
knowledge infrastructure and th level human capital development. Realizing this
* ObEniness to trade and
fore ign direct investment
for
health and social services are tools
;
in dev elo pin
; 1 wean need to deploy resources for human
importance, governments ital is therefore
ili y of human capita
ilabilit
capital development. Systematici 95° SS licy
na forge
attracting F DI. Such policies should be
necessary before formulating any PO |
designed to:
cy Regimes | 9-7
swernance and atization and Insolven
Sscigi Responsi
bititty n Dir ect in vestmen t, Priv
Foreig
manpower in the various sector. TECHNOLOGY FacToR
Identify critical shortages of Ss okilled
, ore
© address the reasons for the shortage
S of the
-
economy and take measures t
e Develop knowledge Te ee Ragen tegies
oe for creating a skilled labo rfo,
gn i investors find
i a van future sar
growth.
ee Tee
that foreiign
on reasonabje
e Set targets for human resource developmen
expectations of growth.
development activiPport
ee
ties
INnovat;
directly on,
Processes. It also involves lots of
on the
7 . publilic sector can undertake
complementary Services. research and
MACROECONOMIC FACTORS or with private Partners to provi
de
Investment is motivated by profit, and foreign investors will always Choose g PRIVATIZATION
country with an optimistic business sector which ismeasured in terms of Gross Domesti-
Product (GDP) growth rate, inflation rate, level of industrialization, etc. There In the Ordinary ¢ .
is an in whole or in part theo Ontext, privatization ; |
Privatization is a stage or course
existence of herd mentality among foreign investors that tends to breate:a band Wagon of action of tran: sferring
Wnership of a busine SS enter, Prise,
effect in a particular country; China and some other East Asian countries are recent the public sector to the Private sector agency or public service
from
oowrdiig
nsfer of ipotanneee
an . In a wider p erspective, privatization
examples of this. India now exhibits a similar attraction. By contrast, Nepal, Bangladesh ie and functions : means th
to the Private
sectors which may include.
and many other slow growth third world economies have so far received ‘vices
\ like power, , water and
very negligible include. revenue Collection, trans ortation.
i Other f
amounts of FDI. ; f law enforcement, and i
even include runn in some, advance countrie
ing a Prison, aha
s, this may
POLITICAL STABILITY
PRO-PRIVATIZATION
Political certainty and transparency is a very important determinant for Proponents
developing countries to attract FDI. Political uncertainty of Privatization
believed that private entities can more
in a potential host country may efficiently
unexpectedly change the ‘rules of the game’ under which deliver goods and/or service than government due
businesses operate. to free market rivalry. This is based on
the premise that government should be more on the
regulatory aspect, that being, it has
Instability in a host country’s government or monet no “business in business.” Besides, government is not generally known as a good
ary and fiscal policies results provider
in more uncertain investment results and may of goods and services most especially in less-developed and developing countr
depreciate firm’s value. The following ies. In
political factors are the most seriously consi general, it is argued that over time privatization will lead to lower prices, better quality,
dered by investors in pre-investment decisi
making: on more options, lesser corruption, lesser red tape and faster delivery of both goods and
services.
® Frequent changes of government
° Critical attitudes of opposition From the business economic standpoint, the argument for privatization isthat,
political parties towards FDI
Lack of transparency in the publ the government has few incentives to make certain that they can run well the —
ic service ini determining how wel :
© Degree of nationalism i
they own. Ina state-run business, for iins tance, » therether iiss difficulty
di ining
it is bein run considering that the absence of basis for comparisons ae er | ,
e Incidence of corruption
do net ave : le
¢ Possibilities of terrorism stat : olies, Another is that the government administration efficiency of}
i
in evaluating the effectiveness and ney
of inet
‘ echnical co mpetence
are engaging |
ing into.
Business and political risks are credible
determinants of FDI location variables industries that government
such as regulatory environment, inflation, hen government experiences an insuffi
i iciency ‘ of funds
incidence of violent or peaceful power ‘ i
transitions and host country relationships with or taxation, unlike private
other countries are among the facto
't can have .
easier ways vet ing i it el ther by borrowing
identified, rs Aether of of COVenTE advantage by |
the state-run nterprises
enterprise
enterprise.
erprise. There There is therefore 4 clear un to private enterprise . When itis
ompared
aper cost ¢
because it can borrow money a “ ae be use d to cover for los
ses.
Privatized, the taxpayers’ Money
a ncy Regimes | 9-9

0 OO EE Ee
Accountability (when that may be more expensive

ises ar e answerable to their Share than bu ying from abroad), forcing an industry to
5 of publicly-owned compan tt (feere its prices/fares to satisfy the electo
Managers of privately-owned eae rat e or control inflation, increasing its staffing
IRS g i og uce unemployment, or moving its oper.
and to the consumers. ; Decision makers an to the b roader c ommunityi ang ations to marginal constituencies.
accountable
the other hand are required to be more “”
NOt
“political stakeholders. Profits

of it actually will be to the
‘
arephisedCorpora ti
. crat e i a generate profits for their shareholders. Private companies
Funds best position to se the needs of ;
stment capital in the
financial ma ae its byA being in theements on quality. rve theinta rgees
consum ers. Competi tion brings improv
Private companies have easy access of inve ately liquid. This fluidity charicher kets
more especially when the said markets are appropr istic
respond to the marke
of maneuvering swiftly to Security
will make private company capable
t and
to overall business environment.

Go ‘ “a
vernments have had the tendency to
“bailout” poorly run businesses, often
“ue to the sensitivity of job losses, when economically, it may be better to let the business
Dispersion of Resources old.
There are more tendencies that the resources, profits and incentives wil; b
ANTI-PRIVATIZATION
dispersed and diversified in a highly privatized environment, this would give Sere
opportunities to more entities. Availability of investment to a good number of entities wa Those who oppose privatization argue the claims that governme
nts are ultimately
ignite the capital market, promotes activities, and adds more spin to the economy in js | the people so they have to make certain that the enterpris es they own are
accountable to
process. * will cause governme nt to lose public
well managed. Nationalized enterprises run poorly
democratic governments do have an incentive to maximize
support and votes. Thus,
Corruption to the pressure of future elections.
efficiency in nationalized companies, due
; government monopoly is prone to corruption considering that some decisions
n parts of the social terrain
= made primarily on the basis of decision-maker’s personal gain. Dishonesty would Opponents of certain privatization believe certai lity
from the unpredictabi
forces in order to protect them
lefinitely compromise resources which would lead to poor performance should remain closed to market
(such as private prisons, basic health care and basic
and ruthlessness of the market provides benefit
is that some of the utilities which government
Tainted Purpose education). Another view re or unabl e to produ ce a profit,
ct and difficult to measu
society at large and are indire are by definition not subjec
t to
Ac
detieatn ain or an iindustry may be run or used by the government mainly a such as defense. Still anoth
er is that natural monopolies
.
sfying political goals. And, the government may put off development and administrated by the state
. : competition and better
improvements due to its political implicati
concerns. Plications rather than addressing valid economic
implic:
on perspective is the need
for
issue in the anti-privatizati
The controlling ethical . Market interact ions are all gui ded by
of social support missions charging
responsible stewardship thy market must be com mit ted to
No More Subsidies essful actors in a heal believe that this ’
self-interest, and succ will bear . Privatization opponents
m pric e that the mar ket
se pri mar y alm
ff
Efficiency can bring in profits.
i With
i profi minim wi i the maximu mission for social sup
port, who
e with government
needed so taxpayers’ money will be saved booger mee sre model is not compatibl ser vic e to soc iet y.
WI lity and quality of
is delivering affordabi
ment might
n functions of govern
Natural Monopolies
als o poi nt out that privatizing certai ite d cap abilities to
Some wou ld lim
rge fir ms wit h specialized and torn nai tion’ s
The existence of natural Monopolies ion and cha ding a war torn
do hamper coordinat t suii ted for. In
rebuilildi
state-owned. Governments can enact anti -tru i not mean that these sectors must be the y are no eit her Wi j
ty,
whi; ch er to provide securi
i
st legislation and bodies to deal with am" erform functii ons fir m wou ld, in ord
example, 4 private e their es
competitive behaviors.
infrastructure for ited and complicat J
wou ld be bot h necessarily lim an d structu re
which mm
to hire security whi ch, due to @ lack of co
Political Influence th government,
or coordinate wi difficult. A government agency,
marth othe
t, might be
Nationalized industri ries are between firm and governmen
i Insolvency Regime
s | 3-1
ane an jee
populist reasons. Examplesples iinclude making ence from politicians for politic? privatization and
: itifrom local produc
n dust ry buy supplies seeefs Investmen t,
Foreign Direct
Responsibyt;
9-10 | Good Governance and Social
ility
hand, would h ave the enti
re military of a nation to draw upon for
of command security, whose
j S clearly define
d,
Chain
Furthermore, Oppo
state-owned nents of privatizat
assets in to pri ion argue that it le to
vate hands for the following reason is undestrab
transfer
s:
Accountability
The public does not have any control

or oversight of private companies.
Capital
Governments can raise money 7
to state-owned enterp in the financial markets more

rises. cheaply to re-lend
Concentration of
Wealth
Profits from successful enterpris
es end up in private, often fore
of being available for th i gn, hands instead
e common good.
.
Cuts in Essential Servic
es
and could over-react to sho Profitability and service levels,

rt-term events. A State “ow
term view, and thus be less ned company might hav
likely to cut back onm ainten e a longer-
ance or Staff costs, tra
to stem short-term losses
. Many pri ining, etc.,
vate compani es have downsized while
profits. making record
Goals
The government may seek to

use state co Mpanies as instruments to fur
goals for the benefit of the nation as a whole. ther social
Job Loss
Due to the additional financial bur

den placed on Pri
without any government help, unlike the public compa vatized companies to succeed
nies, jobs could be lost to keep
more money in the company.
Natural Monopolies
Privatization will not result in true com
petition if a natural monopoly exists.
Political Influence
rE
Privatization and Po
verty
It j .
[i
ovivatiear 's acknowledged by many studies that there are winners and losers with
minusé . Lack of transparency leading to state-owned assets being appropriated at
ig
ule amounts by those with political connections, absence of regulatory
institutions, improper design and inadequate contr
ol of the privatization process leading
‘t.ho,
to asset stripping, are some of the major concerns.
Profit
iy,
Private companies do not have any goal other than to maximize profits. A private
company will serve the needs of those who are most willing (and
able) to pay, as opposed
to the needs of the majority, and are thus anti-democratic.
AGO
gg
INSOLVENCY REGIMES
ra
INSOLVENCY
Insolvency refers to the inability of a person or an entity to pay its debts as they
fall due. There are two (2) aspects from which insolvency can be defined, first, cash flow
liquidity which is the inability to pay debts when they fall due; second, asset insolvency, a
state where the entity’s asset is lesser than its liabilities.
A business can be cash flow illiquid (or temporarily “insolvent”) but “balance
debt that it
sheet solvent” if it holds fixed illiquid assets, particularly against short term
a business can have negative
cannot be straight away realize when needed. Conversely,
flow is healthy by reason of steady
net assets showing on its balance sheet but its cash
obligations as they fall due.
revenue streams that is able to serve debt
with bankruptcy. The two however, are not

Insolvency is co mmonly confused
only i
imilarrity
simila i two have is . this two deals deal with troubled debt.
this
. The
entirei ly similar " te
imilar being and bankruptcy is a matter of law. There has to be
declared that and entity is
Vale dees ai s in court and it the court that will be to
bankruptcy Braker ne vent but not legally bankrupt. Insolvency can lead
be insol
paakcat nae ton may also be a temporary insolvency and fixable without
ankruptcy, but the co
creditors.
legal protection from
to keep
y of inso Ivency can take measures
Companies facing the poss of credit to borrow money Is one
ast. ‘in g existing lines
ially afloat at le
t
men deadline s;
se lv es fi na nc e ;
ates more liabi lity and new pay
th em ihis et
to av oi d in so lv ency; however, eeper into financial trouble if
not checked.
Way co
ti on th at wi ll bury down the 9-13
an op olvency Regimes |
t, Privatization and Ins
nt,
me
Forel gn Direct Invest
o a common hedge against insolvency,
Selling off assets to other compa
. nies is a Is
hanging hand s, for example.
Consumers may notice a local grocery store C
ng 2 takeover ney 2 larger

Another option for avoiding i nsolvency is b y allowi
corporation. It is normal for major conglomerates to seek ou if the smaller compa n ¥
for acquis ition or takeov er procee d ae aredu ct rirea may Fone
viable companies
eethe acquiting adi pany
currently flirting with insolvency, the rights to its ed
valuable enough to save it from financial ruin on one han cathe wholesalefaod industry
operational leverage on another. This happens quite oftehiJA agree to Sell off all of
Struggling or insolvent manufacturers of a popular product may 8
their assets to a corporation with better financing.
Insolvency does not necessarily lead to bankruptcy, but all ae cade

insolvent. Once an announcement of a vency ma fe,
are also considered
or remain with
stockholders may have to decide whether or not to sell off their shares
the company until it can regain its financial footing.
CONSEQUENCE OF INSOLVENCY
The main heart of modern insolvency legislation and debt restructuring practices
is no longer on the easiest solution which is liquidation and the consequent elimination
of insolvent entities. Laws and trend now is on the remodeling of the financial and
organizational structure of the corporation experiencing financial distress so as to permit
the rehabilitation and continuation of their business. This is known as_ business
turnaround or business recovery. In some jurisdictions, it is a violation under the
insolvency laws for a corporation to continue in business while insolvent. In others, the
business may continue under a declared protective arrangement while alternative
options to achieve recovery are being worked out.
INSOLVENCY LAW AND BUSINESS REHABILITATION
The Philippine insolvency law which was enacted in 1909 has three (3) principal
subjects:
1. Suspension of payments
2. Voluntary insolvency
3. Involuntary insolvency
FEATURES OF INSOLVENCY LAW
Rehabilitative
It is considered rehabilitative because of

its suspension of payment provision
which allows the restructuring of debtor’s obli
Operation. gation to enable it to continue its

haves we® a
tor by discharging
him
REHABILITATION
LAW (THE PROCESS)
7 Tie ba‘
sinceerehabilir
taotieon law can can be be found in P.p. 902-A as .
amended whict
Stay Order
wa
R chions.TheAny-
recr
haed
da a
bili
igta
s tion rulse S authorize
red both debtor-initi ated and creditito
or-r-i
ini
i RE
tors holding at least nittia

i ted
25%
aE NA
iste
Adequate Protection
The stay concept is not an absolute

rule. During the effectivity of the stay
creditors may seek relief from order,
its effects. In this regard, the rehabili
tation rules will adopt
the concept of adequate protection.
A secured creditor, for example may ask
relief from
the stay order if he lacks adequate protection.
A creditor is considered as lacking
adequate protection if it can be shown that—
1. the debtor is not honoring a pre-existing agreement to keep the property

insured;
2. the debtor is failing to take commercially reasonable steps to maintain the
property; or
3. the depreciation of the property is increasing to the extent that the creditor
becomes under-secured.
of lack of adequate pro tection, it the court shall take steps to protect
j ng
the creditor’s
Petes interest su ch as ordering the rehabilitation receiver to make payments or
e cr t u
;
a y,
ity.
i
Rehabilitation Receiver
ize the a2 ppointment of a duly qualified pers
on as
The rehabilitation rules A eae underhabilitation. The rehabilitation recei
ver,
a rehabilitation receiver for the de ourt, does not take over the management and control
who is considered an officer of the: court, see and moni tor the operations of the debtor
of the debtor. His His Pp primary role is to over
imes
zation and Insolvency Regimes | 9-15
ivati
Privat
Investment,
Foreign Di rect
-ecomme
nd to the court begat
whether the
pending proceedings. He is also tasked to FEC" at the rehabilitation plan i
rehabilitation of the debtor is feasible as well asi to IMP ilitati les
rehabilitation give }j
ru g im
approved. To protect the rehabilitation recelver, ne good faith in the exercise of his
immunity from suit for any act done or omitted by him
function and powers.
Equality is Equity” Principle ee equity” principle prescribed by the

The rehabilitation rule adopt the
Supreme Court for rehabilitation cases. This principle banicel™ A oored, should be Place
goes under rehabilitation, all creditors, whether secured or ree arate Recovery, Th
6° Pied areditors cu e
on equal footing. Consequently, unlike SEC Rules on
and ee ona asbtar et ‘he
rehabilitation rules do not classify creditors into secured
do they give creditors the right to vote against the rehabilitation © oRanett .
or i tie on the
rehabilitation rules grant or give the creditors is the right to oppose
petition and rehabilitation plan. The court, may, however, approve the re 3 tation plan
creditors if, in its judgment, the
even over the objection of the majority of the
rehabilitation of the debtor is feasible and the opposition af the creditor 1s Mmalitéstly
unreasonable.
In deciding whether the opposition of creditor is manifestly unreasonable, the

court may consider the following:
1. the plan would likely provide objecting class of creditors with compensation
greater than that which they would have received if the assets of the debtor
were sold by a liquidator within a three-month period;
2. the shareholder or owners of the debtor lose at least their controlling interest
as a result of the plan; and
3. rehabilitation receiver has recommended approval of the plan.
Cram Down
The rehabilitation rules provides that in approving a rehabilitation plan, the court
may impose such terms, conditions or restrictions as may be required for its effective
implementation or for the protection and preservation for creditors if the plan fails. Once
the plan is approved, it is binding upon the debtor and all
_ : : persons wh ted
by it, including the creditors, whether or not they parti © may be affec
Cipated in t ings or
opposed the plan. Payments to the creditors shall be allowe So e
d only to the extent called for
by the plan.
An approved rehabilitation plan may be modifiified or .

. ; achiev bete ue only on motion and
if the Court determines that such is necessary to e
forth therein. esired targets or goals set
In case of the failure of the rehabilitation

plan, t :
recommendation of the rehabilitation receiver, m ay term ne court, motu proprio or upo"
inate the Procee
dings.

hE
PROPOSE D CORP
ORATE RECOVERY AND
INSOLVENCY ACT
aw
—
sayment at boskemnmen ns legislation also deals wit

h admini
cement interest, rescission
transactions, , new money and of pre-commencement
local context such as the effect cram
nfs
down. ‘ . .
The CRIA also takes into consideration existing
border insolvency.
Unlike the Insolvency Act and the Rehabilita

tion Law, the proposed Corporate
Recovery Act expressly categories different forms of debt relief avail
able to a corporate
debtor in financial distress. They are as follows:
Suspension of Payments
This limited remedy provides a company with a moratorium on debt payments

while it negotiates an out-of-court arrangement with its creditors. To prevent abuse, the
moratorium is limited to three months under the watch of a conservator. Further, if a
debtor chooses this remedy, it is precluded from obtaining relief under court-supervised
rehabilitation or pre-negotiated rehabilitation for an entire year thereafter. This “election
of remedies” is designed to prevent debtors from delaying the enforcement of creditors’
claims by first suspension of payments and then seeking rehabilitation.
Fast-Track Rehabilitation
this
er the prop osed legislation. A debtor is limited to
This is the default relief und proceeding; (b) the
dy, unle ss (a) it has ini tia
; ted a pre-nego tiated rehabilitation
reme y of the creditors have
r is a non- stoc k corp orat io n or partnership; and (c)a majorit
debto itation proceeding.
on of the proc ee ding to court-supervise d rehabil
requested conv ersi
tr an sf er of th e as se ts of the debtor into a new company

es the
This remedy involv ors © e
btor oin exchange for their credit. The
objective
which will be owned by credit Fthe de tion with minimum or no debts
at all.
iness under is the setting up of a
is to continue the. old bus rocedure. Invo lved in the process
eo ‘ntricate
- yiiy-awited by the old debtor in exchange for its assets,
This involves quite an intrica
an y to the creditors of
ta le of the shares of the new comp |
company that wil g 0
Issuance of bonds, auctionin | 9-17
y Regimes
privatization and Insolvenc ‘
m ent,
rect Invest
Foreign Di
the debtor company in exchange for their credit and the eventual! ownership of the ney
company by the creditors of the debtor.
This relief has encountered a lot of criticism as statutory relief. It will

MOst like}
be deleted as a form of statutory relief, without prejudice to it being part
of a Court.
supervised or pre-negotiated rehabilitation plan.
Court-Supervised Rehabilitation
This is the counterpart of the rehabilitation proceedings under the

Present
regime. Unlike the present rehabilitation process which is court-driven, the CR}
A Makes
court-supervised rehabilitation creditor-driven.
The remedy contemplates the formulation of a plan

under the SUPErVision of the
court. The legislation establishes minimum standards
for the plan to Maintain
transparency and fairness. The creditors vote on the plan
according to specifics Classes
(secured creditors, for instance would usually be a separate
class). If the vote of the
majority of each of the creditor classes (voting on the basis
of size of claim) is obtained,
the court shall approve the rehabilitation plan.
If support from all the voting creditor classes is

not obtained, the court may
nevertheless approve the plan if evidence is shown that
eighty percent of all the voting
creditors support it.
If the court approves the plan, it bec

omes binding on all creditors, even
who voted against it. The proceedi those
ng is converted to liquidation is
submission of the plan, (b) the cour case of (a) late
t’s failure to approve the plan, or
breach of plan. (c) the debtor's
Pre-Negotiated Rehabilitation
Experience in the Philippines has

shownt hat the informal workout
of-court restructurings are qui process or out-
te common. This process, how
of near unanimity among the cre ever, suffers from the need
ditors. Dissenting or “maverick
the whole process. According ” creditors can frustrate
ly, there is a need for acc
restructuring agreement. elerated court approval of
the
The pre-negotiated rehabilitation process allows for summ

ng ratification of a rehabilit ary judicial
ation that was approved by
e the debtor sought relief fo 2
rm the court. It allows
plan without needing a debtor
to obtain unanimity, so
ation are met, an long as the
da ma jority of the creditors supports the
negotiated plan is crammed down
on
9-18 | Good Governance and

Social Responsibility
New Dissolutio fas
"and Liquidation
This is th
@ final resort und
k appointment nder the legislation, T
oe - envisioned ean sure liquid
thatatortheanddeb formulation of a ialdoe n Plan. Theaw provi calls for the
existing legal Provisions on pref ebtor’s assets are sold quickly. It also seeks t sans! ae
the proceeds fro Mm the sal Preference of credits. F or example, under the > XO. amiend
creditors.. Proceeds a cethaining ho
rom e Properties are distributed titheseanes
_ Properties, are distribute 2 follows: such sales, and from sales of non-mortgaged
akes 1. first, ; to meet Npaiunpa; d admini :

2. second, to workers rial ila expenses;
3. third, to the government f wages;
: f h : or back taxes;
the 4 ourth, to all creditors not specificall| ;
tain 5. fifth, to creditors whose claj cally mentioned; and
— ms are subordinated by law or agreement.
the There are encouragin
sed, Philippines. While there was no g aiara
develo men,
rs in the insolvency law regime of the
of years, our S y movement in this area for a significant number
they' Rehab, ilitation
upreme Court has responded to
Rules that wave tment ot th weet of the times
i
by quickly adopting
: © our rehabilitation law. Call it judici iv
nay but the reality of the situation is that this singular act of ie Sivice teat te
;
ting contr
iearea d, in no O insign
ibuteaa, insigniifican
fi -
t part, to the restoration .
of public confidence and order in
Bee More importantly, the Philippine Congress is now responding to insolvency law
late developments more than it ever did before. Several legislative bills have been filed in the
or’s present Congress. The House Committee on Economic Affairs is conducting several
hearings on the proposed legislation more than any other congressional committee had
done before. Practitioners, academicians and experts—both from the private and
government sectors—are actively participating in the deliberations.
the world’s
io It is hoped that the insolvency law of the Philippines will come to par with
ee best insolvency law practices
in the not-so-distant future (Adapted from the Article:
in the Philippines,
Recent Developments on Insolvency Laws and Business Rehabilitation
e
by Francis Lim).
OPENNESS TO AND RESTRIC TIONS UPON FOREIGN INVESTMENT

cial
yy a Philippines (GPH) actively seeks foreign investment to
some
The Goyernmen a a the Philippine investment landscape has
a Econo mic
ppmote ecorom™ i its free trade zones, including the Philippine
pe
the noteworthy advantages such ana peza.gov-ph). Certai n indust ries have exper ience d
Zone Authority (PEZA) (http:/ as “especially those that levera ge educa ted, Englis h-
Fan
t of impressive growth in recent yeal>,
r
Speaking Philippine labo
nc R me.
and nsolvi
zat on
at
m n o Pr
t nv
1 1!
ll
EE
ee reer
i sistency, inade
Despite these strengths, legal restrictions, Eee Nack of ahepanetiay hinds
public investment in social and physical infrastructure ie regulatory authority remaing
foreign investment. In many sectors of the economy, GP aepmnplex amd shaw fuchic '
ae a a
ambiguous and corruption is a significant factor. In aE
system inhibits the timely and fair resolution of commercia Pp
|
Index/Ranking
Measure | eek |
TI Corruption Index. . | 2012 — | aie (34)
Heritage Economic Freedom | —-2013,—=|_— 97 0f 177 (58.2)

World Bank Doing Business | | 2013 | 138 of 185
‘wcCGovtefeawveness’ fon
MccRuleoflaw | 2018
[MCC Control of Corruption =| 2013 1
MMcCFiscalPolicy =| 2008, 4
‘MccTrade
Policy =| 2008 | SOHO
‘MCC RegulatoryQuality =| 2018, | 38%
“MCC Business Start
Up _ 2013 50%
MCC Land Rights Access ; 2013 61%
MCC Natural Resource Protection
| 2013 | 66% pi ninenennrcrnrced
Philippine law generally treats foreign investors the same as their domestic
counterparts, with important exceptions outlined in the Foreign Investment Act
(detailed
below). Corporations or partnerships must register with the Securities and Exchange
Commission (SEC) (http://www.sec.gov.ph) and sole proprietorships
must be registered
with the Bureau of Trade Regulation and Consumer Protectio
n (BTRCP) in the Department
of Trade and Industry (DTI) (http://www.dti.gov.ph). Investors
generally report that the
Philippine bureaucracy is non-discriminatory but slow
to process these requirements. To
streamline business registrat ion
process, the GPH is implementing the Philippine
Registry (PBR), a single, web-based business registration Business
system that integrates business
registration processes now handled by five governm
ent agencies.
The 1991 Foreign Investment Act (FIA) requi

Investment Negative List (FINL), which oO equires the
: GPH to
foreign equity Participatio

‘ n is restricted by the Con
which foreign Ownership isanandlimited (generally st itution o
to 409 i
r laws, Part B lists in
6) for reasons of natio areas
nal security,
9-20 | Good Governance

and Social Responsibility
deME
{S fes}
nse , he
Pure
blis Ic‘i health m
i oral S and the
M I Protection of smmal
NO procedural mech l and mediui m
anism to request a i
waiver from the idgi
jal
tve ee
The 1987 Consti
Phil
ippi tu ti on
rpines. The Prohibits foreign nationals from own
Investor
s! L ing land in the
Contiguous parcel up WS foreign
to 1,0 investors to lease a
Only Philippine ci
tizens Can practice
medicine and allied prof licensed Professions such
essions » accountancy, archit as engineering,
environmental planning, so ect ure , inte rior design, chemistry,
cial work, teaching, law, real
estate services, respiratory
re changes brought about in
the ASEAN through Mutual
eign nationals in supervisory, technical,

or
e of registration, extendable by BOI upon
; of majority foreign-owned BOl-registered
enterprises (i.e., president, general
Manager and treasurer, or their equivalent
exempt from the five-year limitation. Other s) are
investment areas reserved for Filipinos
include mass media (except recording), small-scale mining
, private security, utilization of
marine resources including small-scale utilization of natural
resources in rivers, lakes, and
lagoons, and the manufacture of firecrackers and pyrotechnic devices.
Foreign investment is highly restricted in the retail trade industry. Retail trade
enterprises with paid-up capital of less than USS2.5 million, or less than USS250,000 for
retailers of luxury goods, are reserved for Filipinos. Foreign investors are prohibited from
owning stock in lending, financing or investment companies unless the investor's home
country affords the same reciprocal rights to Filipino investors. Foreign ownership in
enterprises engaged in financing and securities underwriting that are regulated by the
for lending
SEC is limited to 60%. Changes in the 9th FINL cap foreign ownership at 49%
companies.
gn investment include: private radio communications

Other specific limits on forei
i ally-funded public works construction and
etwarks (207) en ae ec) natural resource exploration, development, and
eptions), educational institutions (40%), operation an
1 a eal awe
Pilea
with “ities (40%), operation of commercial deep sea
gement of public util! “ procurement contracts (40% for aye eta
ec euon
mana
(40%), Philippine governme ational locally-funded public works, ton ae i
0%) operations of Build-Operate-Transter ng (40%,

aemana
Haetment
adjus iln
comp anies 6), ). essi
‘ce andsescorn(60%proc
of priv ate land s (40%),menan
Public utilities (40%), p iant hip companies and invest t ho
With some exceptions), financl
olvency Regimes | 9-21
nt , Pr i jvatiz ation and Ins
Invest me
Foreign Direct
_eans of national security,4 defense f
limits foreign ownership for reasons of natio
The Philippines ; sives, firearms, ¢
and public health. Industries such 45 the manufacturing of 210 cenarally fimnited te
military hardware, as well as the operation of massage ed to 40% in non-export fiers.
40% foreign equity. Foreign ownership in SMEs is also hin able it to monitor, investigate
The SEC has implementing rules and regulations that wie ith foreign ownership equity
- i
and impose penalties on corporations that do not comply W!
requirements of sectors covered by the FINL.
au an
Foreign ownership in the banking sector's restricted by fgcaee
Liberalization Act. The Act limits at 10 the number of _ 4 eady been issued The
Rana
full-service branches in the Philippines, and those licenses each ee
to six branch offices , each. In 2 ddition, of h banks
ms i foreign
the four
banks are limited six branc es aes
to 1948 is allowed to open up to
operating in the Philippines prior
rankings May own up te 60% of a
Publicly-listed foreign banks with national or global
locally-incorporated subsidiary. Foreign banks that do not meet these no are
limited to 2 40% stake. Since 1999, the Banko Sentral ng Pilipinas (Philippine Central
of new bank
Bank) (http://www.bsp.gov.ph) has imposed a moratorium on the mata
licenses. Micro-finance institutions are exempt. Philippine law also requires that majority
g resources in the
Filipino-owned banks must control at least 70% of the total bankin
country.
ownership, subject to a sliding

The insurance industry is open to 100% foreign
the level of foreign equity. As a
scale of minimum capital requirements depending on
-owned and controlled
general rule, government agencies, including government
owned Government
corporations, must secure insurance protection from the state-
s to the
Service Insurance System (GSIS) (http://www.gsis.gov.ph). This policy extend
government's interests in projects implemented under the BOT law, but BOT regulations
also allow proponents/operators to secure bid security and performance bonds from
surety or insurance companies accredited by the Philippine Insurance Cormmission.
Offshore companies not incorporated in the Philippines may underwrite

Philippine issues for foreign markets but not the domestic market. Current law also
restricts membership on boards of directors for mutual fund companies to Philippine
citizens.
The Lending Company Regulation Act of 2007 which established a regulatory

framework for credit enterprises that do not clearly fall under the scope of existing laws
requires majority Philippine ownership for such enterprises.
. In addition to the restrictions detailed in the FINL, firms with more than 40%
foreign equity that qualify for BOI incentives must divest to the 40% level within 30 years
from registration date or within a longer period as determined by the BOi. Foreign
controlled companies that export 100% of production are exempt from this requirement

Certain Non-luxy
: r : ;
public within eig htY years ish
establthe
retail from ments m
ust offer at least 309%,
start of operation, of their equity to the
July 2012, Presiden
t Beni &NO Aquino III js
orde % s ued an ex ecutive order closing
78
; ' Kt Participation in large

infrastructure projects. Franchises on Public
utilities-railways, urban rail mass trans
systems, electricity and water distintri ution, and telephone syst it
to enterprises with at least 60% ems—may only be awarded
"ppine ownership. While US firms have
won contracts
in planning,
: | tendering,
1
ecto t In frastructure projects;
; regulatory
JESS © collecting and/or increasin g tolls and fees;
and linge
i rini
ambiguities about guarantees and other support provided
by the government. °
The Aquino administration has established the “Public Private Partnership (PPP)
Center” (http://ppp.gov.ph) to promote transparency and oversee project development
and approval. Resources for right-of-way and land acquisition have been allocated and
single borrower (SB) limits for Philippine banks that finance PPP arrangements have been
relaxed. PPP infrastructure projects costing more than P1 billion (about USS25 million)
undertaken through contractual arrangements authorized under the BOT Law may
register with BOI to be entitled to incentives under the Omnibus Investment Code.
KS
FDI AND REGIONAL PRODUCTION NETWOR
not
ipa tio n in reg ion al/ glo bal p roduction networks provide domestic firms
Partic . as well. These can generate
s but to newer tec nologies
tech
only access to export market al wnhe current regional economic
spillovers and extern
substantial positive the e blishment and development of
important In facilitating
integration process is
tworks.
regional production ne
automakers and electronics
foreign
to affiliate S af ven the
Philippines 5 is'> ho networks, However, gi
st
The ei r pr od uc ti on
ted in th ries,
companies and has participa” tion netw orks
produc
of MNCs in these indust
ipation in hese nomy beco me limited. While the Philip
pines
na rr ow pa rt ic
Country’s into the parts, these are
s fo r sp il lo ve rs el ecen
tr onics a nd auto
opportunitie o r t s ar e h i g h te ch ese
noloBy p' roduct su ch as
en t, and low value added
la t
rges e x p nd
nsiv e,
ntrated in labor-inte
Mainly conce |
. |
Regime S 9-23
Insolvency
i
n and
Pririv' atizatio
Foreign Direct investment,

. . _ c ence, th e backward linkages to th, Indu:
segments like semi-conductors and wiring harnesses. H ained limited.
. tech exports hav erem
domestic economy created by these high
Skills
ASSESSMENT OF FDI SPILLOVER EFFECTS
Neces
Prof. Fernando Aldab, Specig
The empirical analysis done b y Prof. Rafaelita Aldaba and
2010) shows that based o,
wpe ‘ ies
from the Philippine Institute for Developmental Studies ( (Nov. oes
; mul SME F
the full sample, productivity spillovers take place horizontally from multinationay
corporations to domestic firms within the same industry at the five-digit eles iS no
evidence that productivity or employment spillovers take place between | oreign and of SM
domestic firms either through backward linkages (where domestic firms supply inpre
intermediate inputs to foreign firms) or through forward linkages where tailor
TOFEIgn firms
supply intermediate inputs to domestic firms). Though these results may be attributed
partly to the data aggregation and other limitations of the dataset, these are consistent Linka
with the present condition of the manufacturing industry characterized by the weakness
of forward and backward linkages between firms. Given these limited linkages between firm:
domestic firms and MNCs, it would be difficult for productivity spillovers from foreign can
affiliates to take place through forward or backward linkages channels. fore
POLICY RECOMMENDATIONS Imp
The experience of the Philippines shows that FDI spillover effects are not
automatically generated. opening-up the economy to FDI has contributed to the country’s
exports of high technology products and overall economic growth. However, the spillover
effects of FDI to domestic firms has remained limited due to the domestic firms’ weak
competitiveness and inability to absorb the technology or knowledge being transferred.
This implies that for spillovers to take place, the absorptive capacity of domestic firms
must be strengthened.
To deepen the firm linkages within the economy, the development of domestic
parts and suppliers would be crucial. With the increasing regional economic integrati
on
in East and Southeast Asia, potential opportunities could arise from the growth of
regional
production networks where domestic parts and su pplier firms could act as subcontr
actors
of outsourced parts and components. To improve the competit
iveness of domestic parts
and suppliers and strengthen their linkages with foreign affiliates, the
government needs
to adopt a more comprehensive approach that would
combine industrial policy to
improve and develop domestic parts and supplier firms with measure
s to create an
environment conducive to the creation and expansion of FDI-related
spillovers as well as
increase participation in higher segments of industry value
chain. The following policies
are suggested:
Human Resource Development and

Training.
The government must implement substantial reforms in all stages of education

and training system to raise the learning capabilities of firms and upgrade labor skills.
9-24 | Good Governance and Soci

al Responsibility
eames
industrial ang
he Technology Up
grading.
foreign affiliates of MNCs.
Improvement of Infrastructure and Logistics and

Overall Investment Climate.
easy cupply-chalr cea 2 lost that lower production cost and facilitate the
) m the procurement of inputs to the export of outputs
are important for the operations of production networks.
The government must continue
to pursue policies to lower power and communication costs, provide
sufficient port
systems, reduce travel time, and offer travel and shipment options. To improve the
country’s investment climate, it is important that the government immediately focus not
only on inadequate infrastructure but also on the country’s low institutional quality,
corruption and inefficient bureaucracy that continue to constrain doing business in the
country.
Capacity Building and Adequate Funding for the Department of Trade and Industry and
Board of Investments’ Competitiveness and Linkages Program.
provide adequate resources for the
Strengthen the capacity of the staff and industry
the programs to be designed to improve
effective implementation of MNCs.
es between domestic firms and
competitiveness and linkag
|
an sf er Po lic ies
Conversiion and Tr cae
sin ce 20 07 to rel ax and streamline eect
has worked pas on
The man | Baex)nk regulatory framework. There are no pa ictions
on the the fulfu l ang
=)
foreign exchange ( a funds associated with foreign investments,
nar
g
dpi
immediate transfer 0
se payments an
or payment of royalties, lea
| 9- »S
g I m es
!
D
| |
. En ae quirements for foreign exchange
pro vid e Spe te from non-
Central Bank regulations han ge corporations and
iar y fore lg
purchases from banks and their subsid ers, and remittance
agents. There is no
m Or other
ne ster ai
req me e imposed on export earners
man inory
Sadat eigi n s
te forie ge surr ender
exchanke al Bank follows a market.‘
as overseas workers. The jatar faneeted iain
foreign currency earners such
determined exchange rate‘ policy, with scope
i
tility. To intel foreign
for curb i e xchange speculation
. ;
Seioathing excessive STE” surges
exchane oa fem hae in foreign portfolio capital, the
r the Peso’s rapid a e th would impose ceilings on non.
and tempe
7 al
monetary authority announced in late 2
relative to bank’s capital.
deliverable forward transactions
Expropriation and Compensation

atio n of private property for public use or
in the
Philippine law allows for expropri
the Philippine government offers
interest of national welfare or defense. In such cases,
ion, foreign investors
compensation for the affected property. In the event of expropriat
law to remit sums received as compensation In the
have the right under Philippine
exchange rate at the
currency in which the investment was originally made and at the
on a mutually-acceptable price can be a
time of remittance. However, agreeing
protracted process.
There are no recent cases of actual expropriation involving US companies in the

Philippines. Since the implementation of the BOT law in 1990, some BOT contractors in
the energy sector, including US firms, have reported disputes with local government units
(LGUs) on real property tax assessments. Some LGUs initiated auction and/or confiscation
proceedings on the contractors’ assets, which the companies have challenged in the
courts. ‘
Dispute Settlement
Many foreign investors describe the inefficiency and uncertainty of the judicial
system as a significant disincentive for investment. Investment disputes can take years to
resolve. While the judiciary is constitutionally independent of the executive and
“ legislative branches, it faces many problems including understaffing and corruption.
In
addition, a number of Philippine government actions in recent years have raised
questions over the sanctity of contracts in the Philippines, High-profile cases include the
government-initiated review and renegotiation of contracts with independent
power
producers, court decisions voiding disadvantageous and allegedly tainted BOT
agreements, and challenges to foreign participation in large-scale natural resource
exploration activities. The GPH has received foreign donor support for
judicial reform
Projects through the Asian Development
Bank, the World Bank and USAID.
InJ j . .
contacts eer ee Aquino signed an executive order requiring all government
Provisions for sited ' and joint ventures with the private sector, to include
ernative dispute resolution. According to the order, the goal is to make
9.
26 | Good Governance and
Social Responsibility
e-
le ss . ‘ on su mi ng , pa rt icularly for larg
resolving disput
es expe and time-c
ib s
pe nsive, tedious, cts.

ionetemh
i raract
e capital-intensive
s¢ gl ? ensive infr
t
astructure and developmen cont
ment of
the Int ern ati ona l Center for the settle
Philippines isi a member of on the Recognition and
The
(IC ID) and has adopted the Conven
tion
Disputes (ICS r,
Inv estment
“Ne w Yor k Convention”). Howeve
Awards (the
t of Foreign Arbitral
enforcemenco oces its resulting s or
hilippine urts
An es Ke ab id e by the arbitral prrs.
3 E al a aw Ct
lUd in the Philippines can take
rear yea
see ene g an SU
arbitr
kr up tc y an d insolvency law
anew b an
n July 2010, the Philippine Congress passed idation of
eye *
tation and liqu

|
mew ork for the reha bi li

ah aioe a more predictable fra under court-
iated by debtors or credi tors
ted may be init
- eee smgabited rou proceedings. The law also sets
the conditions
egot iate d, or out- of-c ourt The law
p ;
: nt ar y (c re di to r- in itiated) liquidation.
-initi and involu ed Nations
i for vol untary ry ( (d Sa di ng s in ac co rd ance with the Unit
pr ocee er Cross-Bord
recognizes Cros
s- order insolvency Model Law on
and Development's involving
4
center for Inter national Trade gs in a fo re ign jurisdiction
courts to recognize p roce
ed in ed by the
insolvency, allowing the es. Re gi on al tri al courts designat
to the
assets in the Philippin cases. According
qa foreign entity with ency an d ba nk ru pt cy
jurisdiction over insolv ippines
Supreme Court have Do in g Bu si ne ss report, the Phil
2013 Ease of ses.
International Financ
e Corporation’s
g ins o lv en cy an d bankruptcy ca
in resolvin
s 65 th of th e 85 economies studied
ra nk
INCENTIVES
MA NC E RE QU IREMENT S AND
PERFOR
quirements r investors wh
o are
Performance Re th e B Ol! fo
tablished by t proposal. BO
I-
nc e re qu ir ements are es pr ov e d pr oj ec
Performa the ap
an d ar e us ually based on od uc ti on s¢ he dule and export
ives d yearly pr
granted incent ov i de a projecte 25 % of total project co
st
an ie s pr intain at le as t
registered comp gi st er ed projects must ma d so ur cing requiremen
t.
rget s. Re local va lu e- ad de
performance ta d co m ply with the 25% ca l so urcing requirem
ents.
equi ty an nger subjec t to lo
in the form of retail ers are NO lo
rc h 2010, foreign Government
Agreement on
As of Ma
ry to the wTO blices the pu
ct of 2003 requir are at
e r n rv ic es fr om enterprises that
Th e G o v ng se ast 75%
Procurement. ‘oc _and consulti om en te rprises with at le
es fr
afrastructure Servic
ure go o ofa single
sector to proc - e cr it er i a for selection
pino-O W” ines obje ct iv to raise
least 60% Fili g h Ph il ip pine jaw outl fo re ig n co m panies continue
d other and_ inconsistent
rest. Alth ou
Filipino inte r e m e n t sy stem, US an p r o c u r ement
onic proc u ent
portal electr ri ti es in governm
ir re gu la
about
concerns ntrolled
implementation. uc ts a nd /o r Filipino- co
to local prod urchases of goo ds and
foreign-
Philippine la nd/or from a
uati h the offer
e s in t h e bid eval
enterpris t bid
nthe lowes
supplies. Whe lowest
domestic
en cy Regimes
| 9-27
d en te rp ri se , t h e
at iz at io n and Insolv
owne estment,
Priv
Direct Inv
Foreign
i yan that
than foreignn t bidderY .,
the of the » foreig
provided its original bid was no more than 15% higher
foreign entity.
al treatment in government project,

Filipino consultants also enjoy preferenti cts due to technical need, the law
Filipino consultants work for foreigners on such proje
funding is indispensaby|,.
requires that they are the lead consultants. Where foreign
Multilateral
inos. vitae oe done,
foreign consultants must enter into joint ventures with Filip
‘e eanele with
agenctts report that their implementing partners have thus far see
law. Fo ty ‘the 1 May
both donors’ internal procurement guidelines and Philippine
participate in foreign-funded development assistance projects provide vers reign
assistance agreement expressly provides for use of the foreign Pi amen or
and guide wee: . Official
international financing institution’s procurement procedures
Act further authorizes the President to waive statutory
Development Assistance
preferences for local suppliers for foreign-funded projects.
The Government Procurement Reform Act does not cover projects under the BOT
Law, which allows investors in qualifying projects to engage the services of Philippine
and/or foreign firms for the construction of infrastructure projects. Procurement by
government agencies and government-owned or controlled corporations is subject toa
countertrade requirement entailing the payment of at least USS1 million in foreign
currency. Implementing regulations set the level of countertrade obligations at a
minimum of 50% of the import price and set penalties for nonperformance of
countertrade obligations.
Incentives
According to the Senate Tax Study and Research Office, there are about 180 fiscal
incentives laws and issuances in the Philippines as of December 2012. President Aquino
has stated his support for fiscal incentives rationalization publicly and listed fiscal
incentives reform as a priority legislative measure. A number of bills have been filed in
the Philippine Congress but the scope and detail of reform remain contentious.
Every year, the Investment Priorities Plan (IPP) outlines the list of investment
areas entitled to incentives.
Screening for the legitimacy and regulatory compliance of compa

nies seeking
investment incentives appears to be non-discriminatory, but the application process can
be complicated. Incentives granted by the BO! often depend on action
by other agencies
such as the Department of Finance (DOF) (http://www.dof.gov.ph), includ
ing its Bureau
of Customs (BOC) (http://customs.gov.ph).
Significant incentives offered to BO!
registered companies currently include a 4
to 6 years income tax holiday (ITH) (depending
. on whether the project is non-pioneer or pioneer), which may be extended for another
oe years “pon compliance of certain criteria, with the aggregate benefit not to exceed
izle wertener
ae taead deduct
n i, numbe r ion from labor
of direct taxableas incom e of 50% of the wages corresponding
against the previous year for the first five
€ of registration, but not sim ultaneously with ITH; duty-free import
ation of
9-28 | Good Governance and Social Resp
onsibility
capital equipment, s Pare Ss and
- acc
tax and duty exempt; Ns OnParts, ee five
years from date of registration;
impo rted br
any = ocks and genetic materials for ten years;
arfage dues and
roducts f or ten Years: he oe duty, impost, and fees on non-
supervisory, technical OF advis ory oss E abili ty to employ foreign nationals in
dyis resqviced aie ns; and the simplification of customs
€n applying for BOI registration and enterprises
submitted to the Board during its application.
es encourag
enterprisTo e widerin
that locate distributio
aiid
n ot;
of industry across the Philippines, BOI-registered
enterprises can deduct fro : eveloped areas are entitled to "pioneer" incentives. Such
infrusthucturenparie, Sine taxable income 100% of the cost of the necessary and major
100% of its incremental ris enterprises may also deduct from its taxable income
liaesdl far EOt-ver or expenses for five years, which is double the rate that is
egistered projects not located in less-developed areas.
nore then aon tae apply specifically to export-oriented firms. An enterprise with
Fe pial ign equity that exports at least 70% of its production may be entitled
to incentives even if the activity is not listed in the IPP. Aside from ITH and duty-free
importation of capital equipment, registered enterprises may also be entitled to tax credit
for taxes and duties paid on imported raw materials used in the processing of export
products for ten years and may have exemption from taxes and duties on imported spare
parts, and access to customs bonded manufacturing warehouses.
Generally, the export commitment for export-oriented BOl-registered

more Filipino
enterprises is 50% of total production if Filipino-owned (i.e. with 60% or
equity). BOl-registered,
equity) and 70% if foreign-owned (i.e. less than 60% Filipino
within 30 years from registration date
foreign-owned firms must divest to the 40% level
BOI-registered, foreign-owned firms that
or within a longer period determined by BOI.
from this requirement.
export 100% of production are exempt
rts
ien ted firm s with at leas t 50% of their revenues derived from expo
Export-or .
ona l ince ntiv es und er the Export Develapment Act of 1994
may register for add iti vided the
may be elig ible for both these and BOI incentives, pro
Registered exporters ve
acc ord ing to BOI rule s and reguiatlons and the exporter “oes
exporters are registered e. Specific export incentives include
Or simi lar ince ntiv es twic
take advantage of the same export revenue.
ran gin g fro m 2.5 % to 10% of annual incremental
a tax credit
enterprises to establish
vi de s in ce ntives form : ultinational
Jippine law also pro | dquarters in the Philip
pines.
le? and regi onal operatin g hea not
Pal headquarte rs
tional companies that do
regional or area ch es of mu lt in a
d as bran
arters are define h ac t as centers for
supervision,
Regional headqu co un tr y, a w hici
n or de ri ve income from the inc lud e mption from income
tax,
ear Incentives or
Communications, © r
coordination.
ex em pt io n fr or m value-added tax, sale
tax,
rofits remittance a | headquarters subject
exemption from branch p to the region
y an d re ndition of services
lease of goods and propert
s | 9 -29
sglvency Regiime
ve st me nt , Pr iv atizatioi n and In
In
Foorree ign Direct
| taxes, fees, OF charges impo sed by a local
to 0% value-added tax, exemption from > and duty.f,,,
es ‘and value-added tax
unit (except real property solely used for the
government and conference ma terials and equipment
importation of training |
headquarters functions.
centiv es as regiona|
enjoyjoy manyman of the same in
Regional operating headquarters va lu e-
branch
added tax, applicable ing 3,
da rd 12 %
headquarters but are subject to the stand e! ives Work
co me tax. Foreign execut
profits remittance tax, and 10% corporate !n effects duty fies
. headquarters may import per sona | and householdst Shing etion
aregional operating
immigration. Eligible muitioattiioné™ si blishin
benefits ina
and may obtain
arly
ar te rs mu st sp en d at least USS200,000 ye
operating headqu
for the sup ply of spare
Multinationals entities that establish regional warehouses
foreign markets also enjoy
parts, manufactured components, or raw materials for
s duties,
incentives on imports that are re-exp orted, including exempt ae ion from custom
tended for the Philippine
internal revenue taxes, and local taxes. Imported merchandise in
market is ‘subject to applicable duties and taxes.
Right to Private Ownership and Establishment

Philippine law recognizes the private right to acquire and dispose of property or
business interests, subject to foreign nationality caps specified in the Philippine
Constitution and other laws. The 1987 Constitution grants the government authority to
regulate competition and prohibit monopoly, but there is no implementing law. The
Aquino administration has prioritized the enactment of an anti-trust law. Congress is
considering several anti-trust bills. In June 2011, President Aquino issued an executive
order designating the Department of Justice (DOJ) as the government’s competition
authority until anti-trust legislation is passed.
A few sectors are closed to private enterprise, generally on grounds of security,

health or public morals. For example, the Philippine government Operates or licenses all
casinos through the Philippine Amusement and Gaming Corporation (PAGCOR)
(http://www.pagcor.ph) and runs lottery operations through the Philippine Charity
Sweepstakes Office (PCSO) (http://www.pcso.gov.ph)
Generally, only the state-owned GSIS may insure governme

nt-funded projects.
BOT projects and partially privatized government corporations must meet GSIS insuranc
e
and bonding requirements in proportion to Philippine 80vernment interest
s. In addition,
government funds are usually deposited in the Central B . :
ank ie
or In government-o ned
banks. w
Protection of Property Rights
The Philippines has established procedures forr

; egistering clai rty, but
delays and uncertainty caused by the judicial syste 8 claims on property
mM remain a problem. Questions

reparaing Ne generg| .
also clouded the inva
Stment. ¢ and the Properertty rights they
rt,
support, h nave
wh; Philippine
rights protection, for
Philippines cnlisted
(USTR) Special 301 tenn ; on United s ge of intellec tual property
tates Trade Representative
Musical St. US distrib
cinematographic,
widespread unauthorizeg
software, as well as
cable television systems of motin pictures
Motion oj : programming
and other :
Further 7. on
lines remains prevalent.
more , trademark infringernent of a variety of product
i
otth at have unclear provisions relating to the rights of copyright
owners over broadcast, r roadcast, cable retransmission or satellite retransmission of
The Philippines has generally strong patent and trademark laws. Its first-to-file
patent system grants patents valid for 20 years from the date of filing. The holder of a
patent is guaranteed an additional right of exclusive importation of his invention. The
United States announced its Patent Prosecution Highway (PPH) partnership with the
the
Philippines starting in January 2013. The PPH is a global program that streamlines
countries. However, the
examination process for patent applications filed in participating
for pharmaceuticals and significantly
Cheaper Medicines Act limits patent protection
licensing of pharmaceuticals. The Philippine
liberalizes the grounds for the compulsory reported it has not
intellectual Property Office (http://www.ipophil.gov.ph)
(IPOPHL)
in 2008.
licensing since the law passed
received any application for
!
wn ma rk s, whi ch do not need to be in actual use
rotects we ll -k no kin the
Tradema law , anddp pri or use of a trademark in
beciprotec ted un der the
ilippines
or regii stered to sa ad em ar k ap pl ic at ion. In July 2012, the Ph
ired to file a tr of
Pkilipetnes is not requ an ag re em en t tha t facilitates the protection.
Madrid Protocol, by ob ta in ing an international
registration
co un tr ie s
erde number of ;
maerks a InSs a
radeea Wo rld
gi sl at io n tha t wo uld fully implement the
ght law, le Phonograms
in the area of copy"! tiona(WIPO) Copyri ght and Performapencndiesng andfor more than a
Intellectual Property organ | ine Congress afte
r being
handle
cr ea te d un der the IPOPHL to
treaties has been ratified dae ht burea u will be and
mp ut er so ft wa r e as literary work,
decade. Once enacted, 4 STE a also prot ects co and sound
er al ca te gories of works
copyright matters. Philippine . offered in sev au di ov is ua | works, ne
wspapers,
for sound recor di ng s, ects of
exclusive rental rights moet the Agreet™ ent on the Trad e-Related Asp
of protection on
recordings. Terms
. ible Wi
:
and periodicals
% are compat!
jwency Regimes | 9-31
n and Inso
men t Privatizatio
ect Invest
Foreign Dir
actment of the Anti-Camcording a,
Intellectual Property Rights (TRIPS). Fur ther, the en ding of motion pictures in theate,,
llegal camcor
in 2010 provided stringent penalties for | unlawful camcording incidents ;.
reduce
The Act has reportedly helped to significantly
the Philippines.
trialiddesigns, performers’ rights, and trade

The IP Code also recognizes ind ae sign is for a period of five years ang
ng industrial de
secrets. The registration of a qualifyi 5, While Philippine law recognize.
may be renewed for two consecutive five-year period + exclusive rights for copyrighs
the exercise 0. Whi nt
performers’ rights for 50 years after death, ‘su
ectiry is| ambig Peous le
east er the
S re are
er e no a fieg
Codi
and retra nsmission
owners over broadcast
rules on the protection of trade secrets, Se ae q fal information. Other important
syne
«plant Variety Protection
iminal statutes protect tra de secrets and confidentia
criminal Act, whichan
laws defining intellectual property rights are th . ‘on f
provides plant breeders intellectual property rights consistent with the 1991 Union foy
Act,
the Protection of New Varieties of Plants Convention, and the eset —
providing WTO-consistent protection for the layout designs of integrated circulls.
Generally, the Philippine government en forcement agenci

es are most responsive
to target infringement. Agencies
to those copyright owners who actively work with them
ght owner brings it to their
will not proactively target infringement unless the copyri
IPOPHL has
attention and works with them on surveillance and enforcement actions. The
jurisdiction to resolve certain disputes concerning alleged infringement and licensing. In
and
June 2011, IPOPHL launched its IPR Arbitration and Mediation Center to receive
facilitate IP disputes presented to the center for review, resolution, and settlement
through mediation and arbitral proceedings. Although intellectual property owners have
sometimes used the IPOPHL's administrative complaint system as an alternative to the
judicial system, the process can be slow-moving due to limited resources. Joint efforts
between the private sector and the National Bureau of Investigation (NBI), Philippine
National Police (PNP), Bureau of Customs (BOC), Optical Media Board (OMB)
(http://www.omb.gov.ph), and several LGUs have resulted in successful enforcement
actions.
Enforcement actions are not often followed by successful prosecutions.

Intellectual property infringement is not considered a major crime within the Philippine
judicial system and takes a lower precedence in court proceedings. In October 2011, the
Philippine Supreme Court approved Rules of Procedure for Intellectual Property Rights
Cases, a key judicial reform identified in several recent Special 301 reports. The special
rules include: streamlined procedures to expedite cases and rules of evidence for IPR
cases; provisions for the speedy, summary destruction of seized goods; designation of
four courts with national jurisdiction to issue search warrants; and regional IP comnnietl
courts. The special rules have the potential to improve IPR-related convictions as !t
shortens lengthy court action that led many cases to be settled
out of ecclivarcble’
SVE on ee victed
intellectual property violators rarely spend time in jail, since the
them to apply for probation immediately under Philippi ilippine law. As of 2012,
IPOPHL reported that 161 out of 231 IP violations cases filed
in hae oflen eines 2001

have been dij Ismmi
Missed, whi
are
not yet available as , while the latest statistics on court convictions on IP violations
eR
of the reporting period.
|
T ransparency of the Regulatory
System
Philippine nati ;
public consultation toca agencies
: by law to develop regulations via a
are required
most cases, this ensures
ae
some transparency in ne. often involving public hearings. In
lished in
e rulemaking process. New regulations must be pub ;
national newspa perso : ‘ taking
f general circulation or in the GPH's official gazette before
;
affect,
istent,
e Re su e sid e, how eve r, reg ulatory action is often weak, incons
and snpredictatl I the Philippines are generally not sta
tutorily
nt, but are atta hea BE PI CVES
independe the President and,
therefore, subi ac ed to cabinet departments or the Office of
cribe business regist ration,
PSUnjeGt te political pressure. Many US investors des
a
frustration.
customs, immigr ation, and visa procedures as burdensome and a source of
t eign
To counter this, some agencies, such as the SEC, BO! and the Departmen of For
Affairs (DFA) (http://www.dfa.gov.ph), have established express lanes or "one-stop

s success.
shops" to reduce bureaucratic delays, with varying degree of
nt
Efficient Capital Markets and Portfolio Investme
Non-
foreign portfolio capital investment.
The Philippines is generally open to and money
s may pur cha se dome stic ally -iss ued securities and invest in equities
resident exchange
ts. They may also inve st in bank deposits, although foreign
market instru men with
to remi t prof its and repa tria te capital for peso time deposits
purchases from banks ons.
days face some restricti
maturities of under 90
but remains dominated by government
securities market is growing now
The
iss uan ces hav e bee n steadily increasing and
private sector
bills/bonds. Nevertheless
,
maj or Pil ipp ine enterprises. Between
source of financing for
ant upgraded the
constitute an import & Poor s, and Moody's
r 2012, Fitch, Standard
June 2011 and Octobe one not ch below investment
grade, contri buting
credit rat ing s to
sovereign
Philippines’
io n of th e Ph il ip pine capital market.
to robust expans
; controlled
. open to foreign-
“ipp
Philipp ine Stoc k Exch
- . ange
the Phil ippi ne Stoc k Exch ange (PSE) is
growing, the Philippine
Membership | orated under Philippine law. Although
activity.
ighb ors in size, product offerings, and trading
stock brokerage tacary firm on the PSE are governed by for
eign ownership
lags ma icl y-l ist ed
stock market
in any ; ue" itution and
other laws.
Investments in the con sti t
ceilings stipulated st actively-traded comp
anies
s an d the ten mo
260 jisted firm stic market capitali
zation.
ab ou t 35 % of do me
value and
g snies tO widen their investor base, the PS
E introduced
There are jess than
selection of
e float criteria in the
atization and Insolvency Regimes | 9-33

P r i v
reforms in 20 ect Investme n t ,
Foreign Dir
t
is limited to the Departmen
al government agi encies .
i
Direct i
lending by no n-financi 6 focusin, g on the poorest areas not being
of Social Welfare and Development (DSWD),
served by micro-finance institutions.
nge .
Anti-Money Laundering and Information Excha
Task Force (FATF) Sk be ‘onitoe dit findings within five days
The Paris-based Financial Action fraud or error, Osseses or¢ potential losses
of receipt. Mater
ial findings include
ering Act ee a a 7 rr oney ag gregatini & 10% or more of a comp
implementation of the Philippine Anti-Money Laund viata Consolidated assets, indication any’s
foreign exchange deale s of company insolvenc Y, and
Laundering Council. Covered institutions include comP'y WIth various that could result in financial internal control weaknesses
Bank and must
agents, which are required to register with the Central
reporting problems. _
and requirements related implementation of the
to ‘the
Central Bank regulations A number
pines is a member of the Egmont of local accountanc Y
Philippines’ anti-money laundering law. The Philip international
firms are affiliated with the “Big Four’
intell igence units and the Asia Pacific Group accounting firms, namel ly KPMG,
Group, the international network of financial and Deloitte.
PricewaterhouseCoopers, Ernst & Young,
on Money Laundering.
Outward Investments
The Philippine government has been working to address “strategic deficiencies”
that pose potential risks to the international financial system, as identified by the Asia ; There are generally no restrictions on outward investments by Philippine
residents, although foreign exchange purchases from banks
Pacific Group on Money Laundering. In June 2012, the FATF moved the Philippines from and their foreign exchange
subsidiaries/affiliates above US$60 million per investor or per
its “dark gray” to “gray” list following the enactment of key laws allowing ex parte inquiry fund per year require prior
into bank deposits/investments and making terrorist financing a stand-alone crime. approval from the Central Bank. As part of the USSE0 million ceiling,
residents may also
Legislation to address remaining major deficiencies is pending before the Philippine purchase foreign exchange from banks and their foreign exchange subsidiar
ies/affiliates
Congress. Bills include broadening the definition of the crime of money laundering and to invest in foreign currency bonds/notes, as well as peso-denominated securities for
expanding predicate crimes and covered institutions. President Aquino has certified the settlement in foreign currency, issued offshore by the Philippine government or resident
matter as urgent. entities.
Following the signing into law of the Exchange of Information on Tax Matters Act Qualified investors, such as mutual funds, pension or retirement funds,
in March 2010, and the issuance of implementing rules and regulations in September investment trust funds and insurance companies may apply with the Central Bank for
2010, the Organization for Economic Cooperation and Development (OECD) upgraded the higher annual outward investment limits. All outward investments of banks in subsidiaries
Philippines from its tax standards “blacklist” to the list of jurisdictions that “have and affiliates abroad require prior Central Bank approval.
substantially implemented the internationally agreed tax standard” for the exchange of
information. Foreign exchange earnings and divestment proceeds from outward investments
were funded with foreign exchange purchased from banks or their
that
Accounting Standards exchange corporations are not required to be inwardly
subsidiary/affiliate foreign
remitted and sold for Pesos.
In 2005, the Philippines started to fully adopt the Philippine Financial
Reporting
Standards patterned after the International Financial Reporting Standards
issued by the prises
International Accounting Standards Board (IASB). Effective Jan. 1, 2010, the Philippine Competition From State-Owned Enter
s some cleat
also adopted International Financial Reporting Standards s generally compete equally, with
for SMEs which except for Private and state-owned enterprise Auth orit y (NFA)
limited circumstances, apply to enterprises which do not have public accountability and government's Natio nal Food
In 2002, the
exceptions. r to import rice. Though, in 2012, the
with total assets from P3 million to P350 million (about US$75,000 to US$8.75 million)
or (http://www.nfa.gov-p h) slowed th e private secto minimum
liabilities from P3 million to P250 million (about US$75,000 to USS6.25 rt tion to the private sector, including
of all rice impoporta
million) GPH ceded about 83% specific quota (C SQ) imports.
With limit ed excep tions,
access volume (MAV) and country ance risks
for the government's insur
The Philippine SEC requires the corporations’ Presiden
t, chief executive officer rations, at
a priv atized gover nment corpo
and chief financial officer to assume management responsibility
and accountability for incl
Ne in BOT
those
uding a
Sa projects
ore and
financial and inte
ii rest
Sai s,SON sient t’s interest.
statements. Financial statements are examined by independent auditors in least in proportion to the Philippine governmen
9-36 | Good Governance and Sacial Responsibility Investm ent, Privatization and Insolvency Regimes | 9-37
Foreign Direct
4
limited re “sources that
results in limited
trials. Corruption,
fa i . investi
impunity, and abuse of seer atitions, few Prosecutions,
;
and lengthy
remain endemic,
The government has also intervened to directly caP e soy ‘the Philippine
additional private markets. During heavy typhoons and ee
ket
PRine
t of f b basici goods On May 10, 2010, approx
oli ea id a bas
aske imately 75% Of registered
i e con t ols on gas
impose temporary y pric i ds anc President citizens voted in elections
Yy i prices on bas ic goo b oth house 'S OF f C for
President may freeze congre S $,a fid Provi
f nci ala ndid
and
services. Unde! Philippi e law, the was
i ge nerally: freeee
locala go,
5 vi ernmen ts he el ectio t n
and faiiair, , butOU
of emergency. was marked
services for a period of 90 days under a state
by YS some
¥ some viiolen
violencce andn allegatio ns s of of vote
a by the
privatization program Is
The Philippine government's ictions n er the FINL, Peace talks between the govern
e under the DOF, Apart from restr ment and the Mindanao-based
Privatization Management Offic proc ess Moro Islamic
Liberation Front (MILE) are ongoi
insurgent group
nate against foreign buyers. The bi ding ng. After years of negotiations,
there are no regulations that discrimi twic e over turn ed high -pro file which both sides generally adhered to during
the Supreme Court has a cease-fire, the government and the MILF
appears to be transparent, though ilities a Framework Agreement in October 2 signed
privatization transact ions to forei gn buyers. The Power Sector Assets and Liab ; O12 that appears
e to outline the basis fo
line th
70% of the government-owne Nati d onal solution to the longstanding Conflict between the parties, th = onus le
Management Corporation is required to sell
ough much work remain s to
to transfer 70% of NPC-Independent
be done. As of January 2013, the parties continued to negotiate the modalities for
ng asset s and
Power Corporation’s (NPC) generati implementing a final peace accord.
Power Producer contracts to private companies.
retail competition through _ ate New People's Army (NPA), the military arm of the Communist Party of the
The Philippine government has opened access and aficlals suoibiten and ten
the
ng cross-subsidies, establishing ~~ a Sisturvance through assassinations of public
several measures, including unbundling rates, removi local and, at times,
and privati zing 92% of the NPC’s generation assets as foreign eanesen. requently demands " revolubonary taxes" from
Wholesale Electricity Spot Market - , , and business people. To enforce its demands, the
of 2012. NPA sometimes attacks infrastructure such as power facilities, telecommunications
towers, and bridges, mostly in Mindanao. The National Democratic Front (NDF], an
Corporate Social Responsibility
umbrella organization that includes the Communist Party and its allies, has engaged in
Corporate social responsibility (CSR) constitutes a basic aspect of most significant intermittent peace talks with the Philippine government. The NDF has not targeted
business operations in the Philippines. US companies report strong and favorable foreigners in recent years but could threaten US citizens engaged in business or property
responses to CSR programs among employees and within local communities. Many CSR management activities.
programs focus on poverty alleviation efforts, promoting of the environment, health
initiatives, and education. Under the 2012 IPP, registered enterprises are encouraged to Terrorist groups, including the Abu Sayyaf Group and Jema‘ah Islamiyah,
undertake sustainable CSR projects in the locality where the projects are implemented. periodically attack civilian targets in Mindanao, kidnap civilians for ransom and engage in
In some cases, the Philippine government has compelled its own entities to engage in armed skirmishes with the security forces.
CSR. For example, the Philippine Bases Conversion and Development Authority is
mandated to declare portions of its property in Fort Bonifacio and surrounding areas as Corruption
low-cost housing sites. in the Philippines. Recent
Corruption is a pervasive and long-standing problem
ranking in Transparency International's
Political Violence government efforts have improved the country’s
to 105 (out of 176 economies) in 2012.
Corruption Perceptions Index from 129 in 2011 for doing
Terrorist groups and criminal gangs operate in some regions of the country. The ranked as the most problematic factor
Nevertheless, corruption was still
Department of State publishes a consular information sheet at http://travel.state.gov and l Competitiveness Report.
business in the 2012-2013 Globa
advises all Americans living in or visiting the Philippines to review this information
anti-cor ruption reforms
periodically. The Department strongly encourages visiting and resident Americans in the on c ontinues to implement the
The current administrati -201 6. Its 2012 -201 6 Good Governance
Philippines to register with the Consular Section of the US Embassy in Manila through Development Plan 2011
outlined in the Philippine ifies specific measures to curb
corruption
http://travelregistration.state.gov, the State Department's travel registration website. i i
sactions. Since
Custer Pan aby i government tran
ean ges have been file d against several
Arbitrary, unlawful, and extrajudicial killings by national, provincial, and local giestst Se ies in 2010, corruption char ved the Sa lustice
government actors continue to be a serious problem. The justice system is constrained by
Sircugh
President Aquino took¢ is. In May 2022, the Philippine Senate remo
high-profile Pe otter he was impeached on charges of failing to fulfill wealt
of the Supreme Cou | 9-39
Investm ent, Privatiz
ation and Insolvency Regimes
9-38 | Good Governance and Social Responsibility Foreign Direct
tion have, in general, improved public
disclosure obligations. Efforts to reign in corrup
ious challenge to the Aquino
;
perception, though achieving tangible change remains a ser
administration.
bery Convention. It ratified tre Pursuant to the most favo
The Philippines is not a signatory to the OECD Anti-Bri red nati en clause of the
Philippine-United States
The Philippine Revised Penal Code, the aty, US recipients tax
the UN Convention against Corruption in 2003. Philippine-U
of roya lty income qu alify for the prefe rential rate Provided in the
of Ethical Conduct for Public Officials nited
Anti-Graft and Corrupt Practices Act, and the Code Arab Emir ates tax teeaty. Accordingly, a
10% tax rate applies with
ve business practices. The Office of respect to most royalties.
aim to combat corruption and related anti-competiti A 19% tax appli es on the remit tance
investigates and prosecdtes cases of branches of US compan of Profits by Philippine
the Ombudsman (http://www.ombudsman.gov.ph) ies to th eir head offices and dividends remitted by Phi
ilippi
against high-ranking Officials subsidiaries of US companies to t heir
alleged graft and corruption involving public officials. Cases parent companies.
Prine
the "Sandiganbayan”. Cases against
are brought before the special anti-corruption court,
Several bills supporting anti- There are issues about the a pplication of
low-ranking officials are filed before regional trial courts. the prefere ntial tax treaty rates on
g freedom of information rights dividends, interests, and
corruption efforts are currently filed in Congress, includin royalt ies pai
, dor payabl e to US residen ts. An entity must obtain
the country’s witness protection program. a tax treaty relief ruling from the
whistle-blower protection, and strengthening BIR to qualify for prefere ntial tax treaty rates and
treatment. However, according to several tax lawyers, the
requirements for tax treaty
Anti-Graft Commission in November relief applicatio ns are burd enso me. aa
President Aquino abolished the Presidential anes regula tions issued in 2010 disqu ifying
and recommendatory functions late atlfilings from availing of the pr
2010 and transferred its investigative, adjudicatory,
eferential tax rates. The volum i
applications also has resulted in Processing delays,
President to directly investigate
directly under his office. This enabled the Office of the pendin
with most el sli
executive branch g for over a year. Some publicl y-liste d compan
and hear administrative cases involving presidential appointees in the ies report edly have opted to
withhold a final 30% withholding tax on dividend payments to foreign investo
controlled corporations. Sol citing/accepting and rs rather
and government-owned and
onment (6 to 15 years), than go through the tedious process of securing tax treaty relief rulings for preferential
offering/giving a bribe are criminal offenses, punishable by impris
s dealings with the tax rates.
a fine, and/or disqualification from public office or busines
government.
The Supreme Court of the Philippines ruled in favor of Deutsche Bank AG Manila
Branch (DB Branch) and held that the failure to strictly comply with the domestic law
Bilateral Investment Agreements
requirement under Revenue Memorandum Order (RMO) No. 1-2000 to file a tax treaty
As of 2012, the Philippines had signed bilateral investment agreements with 40 relief application (TTRA) 15 days prior to the transaction should not deprive a taxpayer of
partner countries (Argentina, Australia, Austria, Bahrain, Bangladesh, Belgium and the benefit of a tax treaty. The Supreme Court reversed the decision of the Court of Tax
Luxembourg, Burma, Cambodia, Canada, Chile, China, the Czech Republic, Denmark, Appeals (CTA) and upheld the provisions of the tax treaty over 2 BIR administrative
Equatorial Guinea, Finland, France, Germany, India, Indonesia, Iran, Italy, Japan, Republic issuance. This is following the time-honored international law principle of
“pacta sunt
of Korea, Kuwait, Laos, Mongolia, Netherlands, Pakistan, Portugal, Romania, Russian servanda” which in English means “agreements must be kept”.
This principle demands
Federation, Spain, Sweden, Switzerland, Syria, Taiwan, Thailand, Turkey, United Kingdom, its treaty obligations in good faith
that all states that enter into treaties must perform
and Vietnam). It has four regional free trade agreements that include an investment of Internal Revenue, G.R. No. 188550,
(Deutsche Bank AG Manila Branch vs. Commissioner
chapter (ASEAN Comprehensive Investment Agreement, ASEAN-Australia-New Zealand
promulgated Aug. 19, 2013).
Free Trade Agreement, Agreement on Investment under the Framework Agreement on
pena —
Comprehensive Economic Cooperation among Governments of ASEAN and Republic of ing its position on tax gains
The BIR appears to be alter Treaty p!
Korea, and Agreement on Investment under the Framework Agreement on Philippine-United States Tax
Previously, it had consistently applied of t from
Comprehensive Economic Cooperation among Governments of ASEAN and China). gains i and d corp orate income tax on profi
n companiei s from capital
i
ing " forei cas .
/subsidiaries being liquidated
Hat iateslt
ppine a affil
Phili‘opine
Serede
the e mptiien on and sale of shares by he that su
.
The Philippines does not have a bilateral investment agreement with the United i
ing g i involving @ foreign company tha we
009 rulin tax. In another case, the BIR ee
States. Howe ver, 3 : e tax but not to capital gains
me iar
dividonends. A number of transactions
sones wer
gain .imee h shar
Were s easl
on mpti
tax rede
to es reportedly are on hold CE chou is Secraat
Taxes/Bilateral Tax Treaty
or full liqui
gains from partial
n lawyers a aintain that 20Y
The Philippines has a tax treaty with the United States for the purposes of issue
ee . Tax
Tax Treaty:
nes-Unites States
avoiding double taxation, providing procedures for resolving interpretative disputes, and under the Philippi 5 il 4
\ 9-41
and Insolvency Regimes
Investment, Privatization
3-40 | Good Governance and Social Responsibility Foreign Direc
irect
———— rll ss—~—“—CS
During the .
.
National Capipital Re reportin
. ; iod the non-apri
& period,
its eee are : Bricultural dailFie id i ;
Arecent BIR ruling also states that a liquidating company and taxes workers receive less. “tare (approximately US$10,37) alata omen nea,
taxable upon distribution of residual assets, but the ruling does not clarify which i + Cost of livi ee Private s
regions set their ne allowances are given across the board. Most other
apply to the liquidation company.
asserting that the stock P199 (US$4.59). Region

The BIR has issued rulings involving non-US investors
depending on the type of indu
transfer tax is an ad valorem transactional tax—dif
ferent from the capital gains tax—and stry and number of emplexceptions to the minimum wage,
oyees at a given firm
sale of publicly -listed shares in the stock exchange. These rulings
therefore, applies on the
tax by virtue of bilateral tax
contradicted previous exemptions from the stock transfer ee Literacy in bot i ieee
fetus ee Filipino is relatively high, although there have been
nationals from tax on capital gains. This
treaty provisions exempting foreign
resolution of similar tax treaty relief decline. The Department of ed — communities that English proficiency was on the
interpretation could complicate the processing and continues its efforts to « ucation, under its National English Proficiency Program
applications by US and other foreign investors. emtorind Beigtatas | Fengthen English language training, including <choolhased
‘ Betas ° for public elementary and secondary school teachers aj
that renders services to Philippine improving their English language skills. eaters Sane
A foreign company without a branch office
is liable to pay Philippine taxes if its
clients is considered a permanent establishment and
days for the same or a connected project soe Violation anibue
eames of mini n standards isi common, especially non-payment of
personnel stay in the country for more than 183 eae
on the taxation of permanent sereeheeiewenst
in a twelve-month period. However, BIR rulings - uses, and overtime. Philippine law provides for a
them as resident or non- eto Occupational safety and health standards, although
establishments have been inconsistent on whether to treat have a legally-protected right to remove themselves from
workers do not
resident foreign corporations. dangerous work situations
without risking loss of employment. The Department of Labor and
Employment (DOLE)
(http://www.dole.gov.ph) has responsibility for safety inspection, but a severe
OPIC and Other Investment Insurance Programs shortage
of inspectors makes enforcement extremely difficult.
The Philippine government currently does not provide guarantees against losses
Private
due to inconvertibility of currency or damage caused by war. The Overseas The Philippine Constitution enshrines the right of workers to form and join trade
Investment Corporation (OPIC) can provide US investors with political risk insurance
unions. The mainstream trade union movement recognizes that its members’ welfare is
against risks of expropriation, inconvertibility and transfer, and political violence, tied to the productivity of the economy and competitiveness of firms; frequent plant
pursuant to the US-Philippines Investment Incentive Agreement that enables OPIC to closures have made many unions even more willing to accept productivity-based
support investment in the country. The Philippines is a member of the Multilateral employment packages. The trend among firms of using temporary contract labor
Investment Guaranty Agency.
continues to grow. During the reporting period, DOLE reported one strike involving 20
workers. The DOLE Secretary has the authority to end strikes and mandate a settlement
Labor can include cases
between the parties in cases involving the national interest, which
in their industries. In
Managers of US-based companies widely report that Philippine labor is relatively where companies face strong economic or competitive pressures
and 16,647 private sector unions. The
low cost and motivated. In addition, the Philippine labor force possesses strong English 2012, there were 135 registered labor federations of
approximately 3.4% of the total workforce
language skills. As of October 2012, the Philippine labor force was estimated at 40.4 1.38 million union members represented
typically enjoy good working relationships
million, with an unemployment rate at 7%. This figure includes employment in the 40.4 million. Mainstream union federations
informal sector and does not capture the substantial underemployment in the country. with employers.
centers to assist
ones often offer on-site labor
Multinational managers report that total compensation packages tend to be Special econo mic zones or ecoz with DOLE ach a
These centers coordinate
comparable with those in neighboring countries. In the call center industry, the average investors with recruitment. ee
bo dispi utes. . Although
ating labor
labor laws
labor cost is between USS$2.22 and USS3.74 per hour (Source: Business Process and can offer serv i
ices $ uch as mediiati insid e
Agency, some difficulty organizing
Association of the Philippines). Regional Wage and Productivity Boards meet periodically , unions have noted
apoly equally to ecozones
in each of the country's 16 administrative regions to determine minimum wages, with the with human
in connection
rts of forced labor industries.
National Capital Board setting the national trend.
There have been some Tepe sticic se service, agrg icu Iture, and fishing
dome
commerciali sex,
trafficking in the
imess | | 9-43
ency Regime
Inv ‘m
est men zatition and Insolv
vatiiza
t, priPr! vat
n i r e c t ect
9-42 | Good Governance and Social Responsibility Foreign Dir
tot i |
Labor Organization (ILO) (about US§3. 39 billi
Philippines is a signatory to all International .
The
conventions on worker rights, but has faced challenges enforcing them. Dolan allege that
for the same periodillion), 10.30%
in 2011.0 0
high
han the P125.104 billion (about US$3.07 billion)
companies or local officials use illegal tactics to prevent them from we alice Workers,
The quasi-judicial National Labor Relations Commission reviews allegations of Inform
ation techno logy
gelspar’ Sorcerers house PEZA-registered
intimidation and discrimination in connection with union activities. In September 2009, export IT-enabled acti
vitsid orchiewsae enterprises that
Ware development,
the government cooperated with a high-level ILO mission to investigate labor rights
animation, engineering multimedia graphics,
a : ral designs, iT research
Encoding, transcribing,
violations in the country. The ILO mission noted issues relating to violence, intimidation,
and development, data
centers, and other business
to Process outsourcing (BPO)
threat, and harassment of trade wnionists and the absence of convictions in relation
knowledge process out Sourci and
ng (KPO) activities. | Wormation
those crimes. It also observed obstacles to the effective exercise in practice of
trade union are not allowed to hos t manu
techC nol Ogy parks or centers
acturi 8 activities.
rights. In response to ILO mission recommendations, the government constituted the ’ ‘
of international labor Bases Conversion Development Auth
Tripartite Industrial Peace Council (TIPC) to monitor the application ority
standards and has proposed several legislative measures to address weaknesses in the The ecozo —
Labor Code. and to ee
subject bela
iheep//urarw inside former US military bases are independent of PEZA
€ Bases Conversion and Development Authority (BCDA)
which provides more Ps . ‘B0v.ph). BCDA-administered zones include the Clark Freeport Zone
Congress passed the Kasambahay Bill in September 2012, ee les Cit jeroita ee the John Hay Special Economic Zone
benefits and protection to domesti c workers. This legislati on came on the heels of the p
(Baguio), the Poro Point
a Union), and, the Bataan Technology Park
Work for Domesti c Workers and the (Morong, Bataan). The BCDA
Senate ratification of the ILO Convent ion on Decent also oversees the Subic Bay Freeport Zone
ld workers (Subic Bay, Zambales).
Maritime Labor Convention, the “bill of rights” for almost 2.5 million househo
and 400,000 seafarers worldwide. 7 These ecozones offer incentives comparable
to those offered by PEZA.
Additionally, both Clark and Subic have their own international airports,
power plants,
Foreign Trade Zones/Free Ports telecommunications networks, housing complexes, and tourist facilities.
Enterprises enjoy preferential tax treatment when located in export processing

Other Zones
zones, free trade zones, and certain industrial estates, collectively known as economic
zones, or "“ecozones." Enterprises located in ecozones are considered to be outside the The Phividec Industrial Estate (Misamis Oriental, Mindanao) is governed by the
customs territory and are allowed to import capital equipment and raw material free from Phividec Industrial Authority, a government-owned and controlled corporation.
customs duties, taxes, and other import restrictions. Goods imported into free trade Incentives available to investors are comparable to those offered by PEZA and also include
zones may be stored, repacked, mixed, or otherwise manipulated without being subject special low rates for land lease. Two lesser-known ecozones are the Zamboanga City
to import duties and are exempt from the GPH's Selective Pre-shipment Advance Economic Zone and Freeport (Zamboanga City, Mindanao) and the Cagayan Special
to
Classification Scheme. While some ecozones have been designated as both export Economic Zone and Freeport (Santa Ana, Cagayan Province). The incentives available
processing zones and free trade zones, individual businesses within them are only these zones are very similar to PEZA incentives but are administered
investors in
permitted to receive incentives under a single category. the Cagayan Economic Zone
independently. In addition to offering export incentives,
licenses.
Authority is authorized by law to grant gaming
Philippine Economic Zone Authority (PEZA)
There are 273 operating ecozones in PEZA, composed primarily of manufacturing, Foreign Direct Investment Statistics
Authority (NEDA)
IT parks and centers, tourism, medical tourism parks and agro-industrial ecozones. Of nal Economic and Development
The Philippine SEC, BOI, Natio rate i estmen t
i ct inv
dire
gene
these 273 operating ecozones, PEZA manages three government-owned export-
www .ne da. gov -ph ), and the Central Bank each
-// ovals. The Corte Ea
cle
processing zones (Mactan, Baguio, and Cavite) and administers incentives to enterprises
SEC, BO! and NED A record investment appr bi e H
ae im ts methodology, at
men
located: in the other 270 privately-owned and operated ecozones. Any person, ed on the balance of pay
partnership, corporation, or business organization, regardless of nationality, control ae al i vestments bas are wide ly used as a reasonably reli
k data
Osi olla la r terms. . Central Ban estment flo ws.
and/or ownership, may register as an export, IT, tourism, medical tourism, or agro-
stock and foreign inv
industrial enterprise with PEZA, provided that the enterprise physically locates its activity foreign investment
I) stock
n di rect investment (FD
inside any of the proclaimed ecozones. PEZA administrators have earned a reputation for Ta bl e 1 be lo w refer to foreig ntr y and by industry
maintaining a clear and predictable investment environment within the zones of their The figures in re gation i of ne t FDI flow
s by cou
vestors
Ban k. Di i
sa gg a list of top for eig n in
rt ed by the Central 4p ovidides
authority. As of October 2012, PEZA reported investments amounting to P137.9 billion re po ve ly
res|ie} ect
ab le
2 af d3,
ables 5
esentedi Regimes | \ 9-4
Reg
Sp
attiion
ivatiziza and Insolvenneycy
t Investment, Pr
“9-44 | Good Governance and Social Responsibility re eign Diri ec
Fi ‘or
i ion from the SEC. Some Wholesale and
in the Philippines, using the latest available published informatio flect updated and Motoreycl Retail Trade: Repairof Motor Vehicles 32.39 30.64
figures indicated in earlier Investment Climate Statement were revised to reflect update cles
Central Bank data. Accommodation and F i Activities -
od Service 105.67 a
Transportation and Storage ;
Tabl 1 Foreign Direct Investment
Table toc (US. Millions)
Stock Mining and Quarrying .103.90 08a a ie
1 82.08 -240.43 | ca
2008 2009 2010 2011p Information and Communication oat . ! -
a Al 261.85
“EDI Stock 21,746 i 22, 931 25, 896 28,230 Agriculture, Forestry and Fishing 37 :
nisirereme —~+. 7 Z 3 3.97
Fol Stock as % of oP 12. 5 13. 6 129 12.5 Water Supply: Sewerage, Waste Management and j
i ~ SERRA 7 Remediation Activities 0.99 0.00
“pe - Preliminary
Source: Bangko Sentral ng Pilipinas (Central Bank) Professional, Scientific and Technical Activities nen jan p
0.10 5
7 rae ~ ‘Administrative and $ i os {
“Table es Net Foreign Direct Investment Flows By InInvestor Country (us Millons)* i— - UPpor Secvice Activities 2.05 8.91 ;
ee seers it i
i Public Administration and Defense: + Compul
pulsory Social I
Security 0.00 9.00
2008 sitedaare 2009 a 2010
Japan 59.39 { 826. 03 a 246.5:53 Education 0.68 cas
‘United States pa Becta 22017 sca 74 90 sk Human Health andSocial Work Activities / 0.00 14.35
Hon Kong _ _ 408. 2 _ ‘Arts, Entertainment‘and Recreation 104.14 |
Malaysia c — :
. Other Service Activities S57 0.91
Republic of Korea _
Activities of Households as Employers; Undifferentiat ed - sore
Singapore Goods and Services 200 aa
Taiwan/ROC Acti ties of xraterrtoral Organizations and Bodies 0.00 ¢.co
Germany Others 13.27

lcctisadena “p-Preliminry = itti—<—S~s~s~S~S :
Switzerland pS teed Source: Bangko Sentral ng Pilipinas (Central Bank)
Australia and New Zealand Source of Data: Philippine Securities and Exchange Commissi
— a Philippines, Volume 26 (Business World Publishing Corporati
China
Denmark
United Kingdom
Ki
Netherlands |
*Ranked by 2011 flows

~~ p=Preliminar
Source: Bangko Sentral ng Pilipinas (Central Bank)
Table 3 Net Foreign Direct Investment Flows by Industy/Sector (Us Milions
2010
‘Manufacturing : nd [ : “1275.19.
19
“Electricity, Gas, Steam
te 1 and Air Conditioning Supply 7 “14.82
‘Financial anand Insurance Activities T [ _ 59.62

‘RealEstate : 53
Construction = SSS ggg
| 9-47
y Regimes
ization and insolvenc
tment, aprivat
ect Inves'
in Dirrect
Foreig

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cence

NAME: casnsessent SCORE:

T 4. Generally, social responsibility does not cost money.

T 5. Social responsibility is good business but it does cost money.

T 8. When translated, caveat emptor means “let the buyer beware.”

Ty 12, Corporate social responsibility addresses the social commitment of companies to

r 13. With no focus on that issue and attention being paid to

7-24 | Good Governance and Social Responsibility

7 1. : d should not be dismissed lightly,

icle where the emploploye yee makes

If CSR is to have potential as a way to address social and environmental challenges, it

Pursuing a mission of sustainable development can make our firms mor

Corporate Social responsibility and Corruption in a Global Context

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to-day business wes aimed

a. non-payment of income taxes.

sibility report for the

in the previous two years,

b. This year marked a 200% increase in the number of

Which of the following statements reflects the socioeconomic model of social

a. “I did it my way!”- Frank Sinatra

7-26 | Good Governance and Social Responsibility

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G5. Long-distance providers are becoming increasingly concerned about certain

Which one of the following is an argument for increased social responsibilities?

Because business is part of our society, it cannot ignore social issues.

a. maximize shareholders wealth.

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for increased social responsibilities?

ety, it cannot ignore social issues.

Management must be concerned with

discloses the true cost of borrowing with

the content of its

7-28 | Good Governance and Social Responsibility

‘a. be treated fairly

The right to choose

The right to safety

‘past several decades, concern for the environment has

refully handled by businesses because they are the primary source of

mitted by smoke stacks combines with moisture in the atmosphere to

‘ocial Responsibility and Corruption in a Global Context | 7-29

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B 21. Asocial audit is a

review of the costs of operating a social program.

A 23. A program to implement social responsibility in business begins with

total commitment of top management.

a global level is complex because

consumers in most countries do not care about social responsibility. -

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T. Corporate governance Is a process that aims to allocate corporate resources in a

ence has not

tant role facilitating effective

the underlying assumption that

evolved over the years into a

ries not committed to democracy

Ion mata.cat woranna. » ~-dtaaal Initinsin. 1_aan

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are created as legal persons by the laws and regulations of a particular

4. It is an investment account open to a narrow range of investors that take a wide

Governance and Social Responsibility

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money market trading

g, It is another institutional investor that is Professionally managed type of collective

Good Gov 7-9 With Q&A

Good Gov 7-9 With Q&A