1 Module 2 – Corporate Governance and Regulatory Environment

2 Module 2 – Corporate Governance and Regulatory Environment

Lesson 2
Legal, Regulatory, and Political Issues

Lesson Learning Outcomes

In this lesson, you should be able to:

1. Analyze key legal, regulatory, and political issues impacting governance.
2. Analyze the interplay between legal, regulatory, and political factors in shaping corporate governance
practices and identify potential ethical conflicts arising from these interactions.

PRE-ASSESSMENT

True or False: Indicate whether each statement is True or False.

1. Legal issues in business are always rooted in values and perceptions of right and wrong,
similar to ethical concerns.
2. The Revised Corporation Code mandates a minimum of two independent directors for a
corporation's board.
3. The Data Privacy Act of 2012 requires the mandatory appointment of a Data Protection
Officer for businesses handling customer data.
4. Political risk is easy to quantify due to extensive historical data on political events.
5. Regulatory capture occurs when regulatory agencies are unduly influenced by the industries
they are supposed to regulate.
6. The "Anglo-American model" of corporate governance primarily emphasizes the interests of
employees and customers over shareholders.
7. The Securities and Exchange Commission (SEC) is the sole regulatory body responsible for
all corporate entities in the Philippines, including banks.
8. The "comply or explain" approach introduced by SEC Memorandum Circular No. 19, series of
2016, means that publicly-listed companies must strictly adhere to all recommendations
without any deviation.
9. Political risk is generally easy to quantify due to the predictable nature of political events and
abundant historical data.
10. Conflicts of interest are only considered an ethical issue if they are explicitly illegal.

LESSON MAP

Legal Issues Impacting Corporate

Governance in the Philippines

The Regulatory Environment and Its

Influence on Corporate Governance

Political Issues Shaping Corporate

Governance

Interplay Between Legal, Regulatory, and

Political Factors

Ethical Conflicts Arising form Legal,

Regulatory, and Political Interactions
3 Module 2 – Corporate Governance and Regulatory Environment

CORE CONTENT
ENGAGE

Briefly explain the following:

1. What is the primary purpose of the "fit and proper" rule enforced by the BSP for trustees and
officers of financial institutions?
2. Provide two examples of common legal challenges faced by businesses in the Philippines, as
discussed in the module.
3. How does the concept of "Creating Shared Value" (Porter & Kramer) differ from traditional
Corporate Social Responsibility (CSR)?

EXPLORE: Reading Concepts

Legal Issues Impacting Corporate Governance in the Philippines

A. Understanding Legal Issues in Business and Compliance

Legal issues in a business context refer to matters, questions, or problems that carry legal implications
and can potentially result in a lawsuit. These issues typically arise when a business fails to adhere to
3

existing laws and regulations. It is essential to distinguish legal issues from ethical concerns. While
3

both are prevalent in business operations, ethical issues are rooted in values and perceptions of right
and wrong, whereas legal issues are directly tied to statutory compliance. Legal problems often take
precedence due to the immediate threat of expensive and protracted lawsuits. 4

Common legal challenges encountered by businesses include employee misclassification, which

involves incorrectly categorizing workers as independent contractors rather than employees, either
inadvertently or intentionally. This can lead to significant fines and penalties. Another frequent issue
4

involves employment law violations, such as non-compliance with weekly rest periods, annual leave
entitlements, legal limits on overtime, or minimum wage requirements. These violations can be
particularly complex for companies with globally distributed teams due to varying jurisdictional labor
codes. 4

The distinction between legal compliance and ethical conduct is a critical aspect for businesses to
understand. Legal compliance often represents a baseline or minimum standard for corporate
operations. A company can meticulously adhere to all laws and regulations, thereby avoiding
penalties and maintaining its legal legitimacy, yet still engage in practices that are widely perceived
as unethical or morally questionable. This highlights an "ethical gap" – the area where legal
obligations end, but moral responsibilities continue. For instance, a company might legally minimize
its tax contributions or exploit legal loopholes, but such actions could be viewed as ethically
problematic if they disproportionately burden society or harm vulnerable groups. True corporate
governance, therefore, extends beyond mere adherence to statutes; it necessitates a proactive
commitment to ethical principles to build long-term trust and ensure societal acceptance.

B. Key Philippine Corporate Laws and Regulations

The corporate governance landscape in the Philippines is significantly shaped by a robust framework
of laws and regulations, primarily enforced by the Securities and Exchange Commission (SEC) and
the Bangko Sentral ng Pilipinas (BSP).
4 Module 2 – Corporate Governance and Regulatory Environment

The Revised Corporation Code (Republic Act No. 11232)

This foundational legislation has introduced substantial reforms aimed at strengthening corporate
governance practices across the Philippines. It mandates the appointment of independent directors
and enhances requirements for financial reporting and disclosure transparency. Under this Code, a
5

corporation's board of directors must comprise a minimum of five (5) and a maximum of fifteen (15)
members, all of whom are elected by the shareholders. A pivotal provision is the requirement for at
6

least two (2) independent directors, or a number constituting at least twenty percent (20%) of the
board members, whichever is lesser, with a strict minimum of two independent directors. The Code 6

also explicitly safeguards fundamental shareholder rights, including voting rights (with cumulative
voting mandated for director elections), pre-emptive rights, the power to inspect corporate books and
records, the right to information, the right to receive dividends, and appraisal rights. 6

Securities and Exchange Commission (SEC) Issuances

The SEC plays a central role in regulating corporate entities and promoting good governance in the
Philippines.8

SEC Memorandum Circular No. 6, series of 2009 (Revised Code of Corporate Governance)

This Code applies broadly to public companies and other corporations that hold secondary licenses
from the SEC. It defines corporate governance as the comprehensive framework of rules, systems,
5

and processes that guide the performance of the Board of Directors and Management in fulfilling their
duties and responsibilities not only to stockholders but also to a wider array of stakeholders, including
customers, employees, suppliers, financiers, and the community. The Circular underscores the
7

Board's overarching responsibility to foster the corporation's long-term success, competitiveness, and
profitability in a manner consistent with its objectives and the best interests of all its stockholders and
other stakeholders. A critical provision mandates the full and timely disclosure of all material
10

information that could negatively impact the corporation's viability or the interests of its stockholders
and other stakeholders. This includes details on earnings, asset acquisitions or dispositions, off-
balance sheet transactions, related party dealings, and the remuneration of board members and
management. Furthermore, the Code advocates for the separation of the roles of Chairman and
10

Chief Executive Officer (CEO) wherever practicable, to ensure an appropriate balance of power,
enhance accountability, and facilitate more independent decision-making by the Board. It also 6

stipulates the establishment of an effective internal control system to safeguard the integrity of
financial reports and protect corporate assets for the benefit of all stakeholders. 10

SEC Memorandum Circular No. 19, series of 2016 (Code of Corporate Governance for Publicly-Listed
Companies)

This Circular specifically targets companies listed on the Philippine Stock Exchange. A significant
5

innovation introduced by this Code is the "comply or explain" approach. This principle grants a
company's board flexibility in applying the Code's recommendations, but requires that any deviation
from these principles must be clearly disclosed and adequately justified. This approach represents
11

a shift from a rigid, rules-based compliance model to a more principles-based one, encouraging
boards to critically assess the spirit of governance principles rather than simply adhering to a checklist.
It places a greater burden on the board's judgment and integrity, fostering a more mature governance
culture by requiring companies not just to conform, but to articulate
5 Module 2 – Corporate Governance and Regulatory Environment

why their chosen practices are appropriate, even if they diverge from the recommended code. This
can potentially strengthen ethical decision-making by forcing internal reflection and justification,
though it also necessitates rigorous regulatory oversight to scrutinize these explanations.

The Circular also introduced heightened protections for whistleblowers, encouraging the reporting of
irregularities within companies. To promote fresh perspectives and genuine independence, a notable
12

change is the imposition of a nine-year cap on how long a director may be considered independent. 12

For publicly-listed companies, the Code mandates that the board should have at least three (3)
independent directors, or a number constituting at least one-third (1/3) of the board members,
whichever is higher. It recommends the establishment of a Corporate Governance Committee and a
11

formal, transparent board nomination and election policy that facilitates nominations from minority
shareholders. Publicly-listed companies are also effectively required to appoint a Compliance Officer
13

and a Chief Audit Executive to ensure adherence to governance standards. Furthermore, these
13

corporations must adopt a code of business conduct and publish a corporate governance manual
outlining professional and ethical behavior standards. 11

Bangko Sentral ng Pilipinas (BSP) Regulations

The Bangko Sentral ng Pilipinas (BSP) serves as the central monetary authority and a crucial
regulatory body responsible for overseeing corporate governance within the banking sector and other
non-bank financial institutions. The BSP closely monitors bank lending practices, particularly through
8

the implementation of DOSRI (Directors, Officers, Stockholders, and their Related Interests) rules, as
stipulated in Republic Act 337, Chapter IX, Section 83. These rules are designed to ensure that
transactions between banks and their insiders are conducted in the regular course of business and
on terms no less favorable to the bank than those offered to external parties. 14

For Non-Stock Savings and Loan Associations (NSSLAs), the BSP mandates a specific percentage
of independent trustees (directors)—twenty percent (20%) of the board, or no less than two for
complex NSSLAs—to ensure their independence from senior management and to foster an
environment where they can effectively challenge the President/CEO when necessary. The BSP 15

also enforces a "fit and proper" rule for trustees and officers, assessing their integrity, physical and
mental fitness, relevant education, financial literacy, and competencies. First-time trustees are
required to attend special corporate governance seminars. 15

BSP Circular No. 1105, Series of 2020 (Guidelines on the Establishment of Digital Banks)

This circular exemplifies the BSP's proactive stance in regulating emerging financial technologies and
adapting to the evolving financial landscape. It acknowledges the transformative role of digital
platforms in enhancing financial services delivery and expanding reach to underserved markets,
thereby promoting a regulatory environment conducive to responsible innovation and cyber
resilience. The Circular mandates that digital banks must be built upon sound digital governance
16

principles, supported by robust, secure, and resilient technology infrastructure, and guided by
effective data management strategies. 16

Digital banks are subject to specific prudential requirements, including tailored corporate governance
and risk management frameworks. These frameworks pay particular attention to information
technology and cybersecurity, outsourcing arrangements, consumer protection, and anti-money
laundering (AML) and combating the financing of terrorism (CFT) measures, all in line with existing
regulations. A minimum capitalization of PHP 1 Billion is required for digital banks , and they are
16 16

obligated to maintain a principal/head office in the Philippines to serve as the main point of contact
for stakeholders and regulators. Crucially, for digital bank applicants, at least one member of the
16

board of directors and one senior management officer must possess a minimum of three years of
experience and technical knowledge in operating a business in the field of technology or e-
commerce. This regulatory adaptation to technological disruption highlights a broader trend in
16
6 Module 2 – Corporate Governance and Regulatory Environment

corporate governance: the necessity for boards and management to continuously evolve their
expertise and oversight mechanisms to align with technological advancements. It implies that
companies in rapidly changing sectors must anticipate and integrate future regulatory shifts into their
governance strategy to maintain compliance and competitive advantage.

Other Relevant Laws (e.g., Data Privacy Act of 2012)

Beyond corporate and financial regulations, other laws significantly impact corporate governance.
The Data Privacy Act of 2012 (Republic Act No. 10173) is a prime example, particularly for businesses
that handle customer data. Compliance with this Act includes the mandatory appointment of a Data
Protection Officer and the registration of data processing systems with the National Privacy
Commission. This highlights the increasing importance of data governance as a component of overall
18

corporate governance.

C. Common Legal Challenges and Compliance Requirements for Philippine Businesses

Operating a business in the Philippines involves navigating a multi-layered compliance landscape.

Business Registration and Operation: The initial step for corporations and partnerships involves
registration with the Securities and Exchange Commission (SEC), while sole proprietorships must
register with the Department of Trade and Industry (DTI). Following this, all businesses are required
18

to secure a Tax Identification Number (TIN) from the Bureau of Internal Revenue (BIR) and obtain
necessary clearances from the local barangay (village) and a business permit from the city or
municipal Mayor's Office. 18

Employment Compliance: For companies intending to hire employees, mandatory registration with
several government agencies is essential to comply with labor laws and provide statutory benefits.
These include the Social Security System (SSS) for social security benefits, the Philippine Health
Insurance Corporation (PhilHealth) for health insurance, and the Home Development Mutual Fund
(HDMF or Pag-IBIG Fund) for housing loan benefits. 18

Tax Compliance: Businesses are obligated to register with the BIR and ensure the regular filing and
payment of various taxes, such as Value Added Tax (VAT), income tax, and withholding taxes. 18

Foreign Investment Restrictions: While the Philippines actively seeks to attract foreign
investments, certain sectors remain subject to ownership restrictions under the 1987 Philippine
Constitution and the Foreign Investments Act (FIA). The "60-40 rule," which mandates at least 60%
Filipino ownership, applies to sensitive areas like land ownership, mass media, and traditionally
defined public utilities (e.g., electricity distribution, water). Minimum paid-up capital requirements for
20

foreign-owned corporations vary depending on their target market and activities. For businesses
primarily serving the local market with foreign equity exceeding 40%, a standard minimum paid-up
capital of USD 200,000 (or its Philippine Peso equivalent) is generally required. This threshold may
be reduced to USD 100,000 if the investment involves "advanced technology" or commits to
employing at least 50 direct Filipino employees within the first three years. Conversely, export-
oriented enterprises (those exporting at least 60% of their output) are typically only subject to the
general PHP 5,000 paid-up capital requirement under the Corporation Code. 20

The process of formal compliance in the Philippines often presents a dual challenge for businesses,
as they must navigate not only the letter of the law but also an often-cumbersome bureaucracy. While
the legal requirements for business registration and ongoing operations are clearly articulated across
various agencies, the practical implementation of these laws can be characterized by inefficiency,
slowness, and a lack of transparency. This administrative complexity can significantly increase
operational costs due to delays and the necessity of engaging specialized consultants to navigate the
system. It can also deter potential foreign investors who are accustomed to more streamlined
7 Module 2 – Corporate Governance and Regulatory Environment

regulatory environments. More critically, a cumbersome and opaque bureaucracy can inadvertently
create opportunities for informal payments or corruption, as businesses may feel pressured to offer
inducements to expedite processes. In such an environment, effective corporate governance requires
not only a thorough understanding of legal statutes but also the development of robust internal
processes and strong ethical safeguards to navigate bureaucratic hurdles without compromising
integrity.

The Regulatory Environment and its Influence on Corporate Governance

A. Defining Regulatory Issues and Challenges

Regulatory challenges encompass the multifaceted complexities and difficulties that organizations
encounter when navigating the legal and compliance frameworks established by governing bodies. 23

These issues frequently stem from the dynamic nature of regulations, including their rapid evolution,
variations in rules across different jurisdictions, and the continuous need for businesses to update
their internal policies and practices to maintain compliance. A regulatory issue specifically refers to
23

any set of facts or circumstances where a party's actions lead to a violation of law or create the
likelihood of regulatory action. 24

B. Major Regulatory Bodies in the Philippines and Their Roles

The regulatory landscape in the Philippines is characterized by a multi-agency approach, with different
bodies overseeing specific sectors to ensure adherence to corporate governance standards. This
structure, while allowing for specialized oversight, also presents a fragmented yet interconnected
regulatory environment.

Regulatory Body Primary Mandate Key Corporate Governance Responsibilities/Issuances

Issues and enforces corporate governance codes (e.g., Revised

Securities and Primary regulator of
Corporation Code, SEC MC 6 s. 2009, SEC MC 19 s. 2016).
Exchange corporate entities and
Promotes investor confidence, market development, and
Commission the capital market.
sustained economic growth through governance reforms.
(SEC)
Mandates Annual Corporate Governance Reports (ACGR) for
listed companies and registered issuers. 5

Implements corporate governance for the banking sector. Issues

Bangko Sentral Central monetary
and updates the Manual of Regulations for Banks (MORB).
ng Pilipinas authority, responsible
Monitors bank lending practices (DOSRI rules). Sets specific
(BSP) for financial stability and
governance and risk management requirements for digital banks
oversight of banks and
(e.g., BSP Circular No. 1105 s. 2020). Enforces "fit and proper"
non-bank financial
rules for bank directors/officers. 8
institutions.

Registers business names for sole proprietorships. Advances

Department of Promotes trade,
consumer welfare, fair trade practices, and product safety.
Trade and industry, and
Formulates policies for export promotion and implements trade
Industry (DTI) investment; protects
remedy measures. 18
consumer welfare.

Enforces Disclosure Rules among listed companies to ensure a

Philippine Stock Operates the national
fair and efficient market. Actively promotes proper observance of
Exchange (PSE) stock exchange.
Disclosure Rules among listed companies. 8

The fragmented nature of regulatory oversight in the Philippines means that companies often need to
navigate multiple regulatory frameworks depending on their industry and specific activities. For
8 Module 2 – Corporate Governance and Regulatory Environment

instance, a publicly listed digital bank would be subject to regulations from both the SEC (as a publicly
listed company) and the BSP (as a financial institution and a digital bank). While this specialization
can lead to more tailored and effective oversight within specific sectors, it also presents potential
challenges in terms of overlaps, gaps, or even inconsistencies across different regulatory bodies. The
interconnectedness of these regulatory bodies implies that changes or enforcement actions by one
regulator can have ripple effects across the corporate landscape. For example, the BSP's stringent
digital banking regulations necessitate specific SEC registration processes for new digital banks. For
17

businesses, this necessitates a holistic approach to corporate governance and compliance, requiring
strong internal coordination and a deep understanding of the various regulatory demands to ensure
comprehensive adherence and avoid penalties.

C. Navigating Regulatory Complexities and Promoting Compliance

To effectively manage regulatory challenges, businesses must establish robust internal compliance
programs and remain continuously informed about the evolving legal and regulatory landscapes. 23

Compliance involves dedicating sufficient personnel and resources towards understanding,

interpreting, and adhering to all applicable rules, standards, and regulations. The "comply or explain"
29

approach, notably introduced by SEC MC 19, s. 2016 for Publicly-Listed Companies, plays a
significant role in promoting compliance. It encourages companies to internalize governance
principles, allowing for flexibility but demanding transparency and justified explanations for any
deviations. This approach fosters a more thoughtful and proactive engagement with governance
11

standards, pushing companies beyond mere tick-box compliance towards a deeper understanding
and integration of governance principles.

D. Impact of Regulatory Changes on Corporate Governance Practices

Regulatory changes can profoundly reshape corporate governance practices. For example, recent
amendments to the Public Services Act (PSA) have liberalized foreign ownership, allowing up to 100%
foreign control in sectors previously restricted, such as railways, airports, expressways, and
telecommunications. This directly influences the ownership structures and governance practices of
21

companies in these industries, potentially leading to more foreign-led boards and management teams.
Similarly, the enactment of the Corporate Recovery and Tax Incentives for Enterprises (CREATE)
Act, which reduced corporate income tax rates, directly affects corporate profitability and investment
decisions. While not a direct governance regulation, it influences the financial environment in which
22

governance operates, potentially freeing up resources for governance improvements or affecting

strategic priorities.

The Bangko Sentral ng Pilipinas's (BSP) detailed regulations for digital banks signify a forward-looking
shift towards regulating new business models. This necessitates significant adaptations in corporate
governance structures, requiring boards to possess expertise in areas like information technology and
cybersecurity, and to implement robust digital governance frameworks. This demonstrates how
16

regulation acts as a driver of good governance, pushing companies to adopt best practices and adapt
to new realities.

However, regulation can also be a source of friction and cost. The constant need to adapt to new or
changing regulations, such as those for digital banking or foreign investment laws, can be resource-
intensive and require significant investment in compliance infrastructure and expertise. The presence
of "regulatory inconsistencies" and a "cumbersome bureaucracy" can further exacerbate these
challenges, making compliance more complex and costly. For corporate governance, this means
22

that companies must view regulatory engagement not just as a necessary compliance exercise but
as a strategic imperative. Effective governance involves anticipating regulatory shifts, building agile
compliance functions, and leveraging good compliance as a competitive advantage. It also
underscores the ongoing challenge for regulators to balance robust oversight with fostering an
efficient and innovation-friendly business environment.
9 Module 2 – Corporate Governance and Regulatory Environment

Political Issues Shaping Corporate Governance

A. Understanding Political Risk and its Manifestations in Business

Political risk refers to the potential for a business to experience adverse consequences due to
instability or changes in a country's political environment. This risk can manifest in various forms,
30

including conflicts and civil unrest, shifts in government regimes, changes in international policies or
relations between nations, and alterations in domestic policies, business laws, or tax regulations. 30

Other factors contributing to political risk, often influenced by political decisions, include commodity
price volatility, liquidity crises, and sectoral downturns.
30

Direct examples of political risks impacting business operations include the imposition of foreign trade
policies, tariffs, new legal and regulatory constraints, and changes to labor laws, such as minimum
wage adjustments. Political risks are notoriously challenging to quantify due to the limited historical
30

data and the inherently unpredictable nature of political events. Multinational businesses sometimes
31

purchase political risk insurance to mitigate specific exposures, such as those arising from war or
terrorism. 31

B. Key Political Factors Affecting Corporate Governance in the Philippines

1. Political Stability and Geopolitical Dynamics

The Philippines faces significant governance shortcomings that contribute to political risk, including
persistently high levels of corruption (ranked 114th out of 180 countries in Transparency
International's 2024 Corruption Perceptions Index), widespread patronage, and pervasive red tape. 22

These issues create an unpredictable and often inequitable operating environment for businesses.
The country's legal system and judicial independence are further hampered by a complex, slow,
redundant, and at times corrupt judicial system, which impedes the timely and fair resolution of
commercial disputes. 22

Increased geopolitical tensions, particularly with China in the South China Sea, introduce external
political risks that can affect trade, investment flows, and supply chains. Internally, the Philippines'
32

susceptibility to natural disasters (such as typhoons and volcanic eruptions) and the presence of
terrorism in certain southern regions also contribute to political risk by disrupting business operations
and fostering instability. The influence of quarrels between powerful political clans and large families
32

often perpetuates these political risks, as these groups can exert undue influence over policy and
economic decisions, sometimes prioritizing personal or familial interests over broader societal
welfare. These are not merely transient or episodic issues but appear to be deeply embedded in the
32

country's institutional and socio-political fabric. This suggests that political risk in the Philippines is a
constant and significant factor that companies cannot simply "manage around." Instead, it must be
integrated into the core of their strategic planning, risk management, and corporate governance
frameworks, placing a higher premium on developing robust internal controls, fostering ethical
leadership, and engaging proactively with the political environment to mitigate these pervasive risks.

2. Government Policies (e.g., Foreign Investment, Taxation, Trade)

Government policy decisions directly shape the business environment and, consequently, corporate
governance practices. For example, recent amendments to the Public Services Act (PSA) reflect a
political decision to attract more foreign investment by opening key sectors like railways, airports,
expressways, and telecommunications to 100% foreign ownership. This directly impacts the
21

ownership structures and governance models of companies operating in these industries, potentially
leading to a greater presence of foreign-led boards and management. The enactment of the Corporate
10 Module 2 – Corporate Governance and Regulatory Environment

Recovery and Tax Incentives for Enterprises (CREATE) Act, which reduced corporate income tax
rates, is another policy decision aimed at stimulating economic activity and investment. Conversely,
22

the Foreign Investment Negative List (FINL) reflects political sensitivities by restricting foreign
ownership in certain sectors deemed strategic or protected, such as mass media, small-scale mining,
and land ownership. Ongoing reforms, such as the potential CREATE MORE Act, signal a political
21

commitment to further reduce investment barriers, particularly for green and digital investments,
indicating a dynamic policy landscape that requires continuous monitoring by businesses. 20

3. Socio-Economic Conditions and Public Sentiment

Underlying socio-economic conditions, such as high levels of income inequality and

underemployment, can contribute to social instability, which in turn poses a political risk to businesses
by creating an environment conducive to unrest or policy shifts aimed at addressing these disparities. 30

Public sentiment, particularly concerning issues like corruption, directly impacts investor confidence
and overall economic growth. A pervasive lack of public trust can deter both domestic and foreign
investment, making the business environment less attractive. Conversely, a government's
34

demonstrated commitment to improving governance and implementing robust anti-corruption efforts

can significantly enhance public trust and attract greater investment, thereby fostering a more
favorable operating environment for corporations. 34

C. Governance Shortcomings: Corruption, Red Tape, and Patronage

Corruption remains a deeply entrenched problem in the Philippines, severely hindering business
efficiency. This includes extensive bribery within public administration, as well as vague and complex
laws that render foreign companies vulnerable to extortion and manipulation by public officials. While
22

the Anti-Graft and Corrupt Practices Act criminalizes various forms of corruption, its enforcement is
often weak and inconsistent. The judicial system is considered high-risk for corruption, with common
36

reports of bribes and undue influence by powerful individuals in civil and criminal cases, which
undermines procedural fairness and transparency. The national police force is widely perceived as
36

one of the most corrupt institutions, with widespread reports of police and military involvement in
corruption, extortion, and local rackets.
36

Pervasive red tape and a cumbersome bureaucracy not only increase the cost of doing business but
also create numerous opportunities for corruption, as individuals may resort to paying bribes to
expedite processes. Historically, political appointments to Government-Owned and Controlled
22

Corporations (GOCCs) have led to poor management, significant financial losses, and reported
abuses in procurement, salaries, and bonuses. This pervasive informal system, often referred to as
37

a "shadow economy" of governance, operates alongside the formal legal and regulatory framework.
Decisions and resource allocation may be significantly influenced by personal connections, illicit
payments, or political favors rather than by official procedures, merit, or market forces. For corporate
governance, this environment creates immense pressure and significant ethical dilemmas.
Companies must not only understand and comply with formal laws but also navigate this informal
system, which carries substantial reputational, legal, and operational risks. It underscores the
challenge of fostering a culture of integrity when external pressures incentivize corrupt practices,
making robust internal controls and ethical leadership even more critical for long-term sustainability
and legitimacy.

D. Government Initiatives for Good Governance and Anti-Corruption Efforts

Despite the challenges, the Philippine government has undertaken various initiatives to improve
governance and combat corruption. The current Marcos Jr. administration has articulated a strong
drive for improved governance, emphasizing unity and enhanced government performance
11 Module 2 – Corporate Governance and Regulatory Environment

throughout its term. Key milestones in anti-corruption efforts include the Philippines' removal from
35

the Financial Action Task Force's (FATF) grey list, signaling progress in anti-money laundering
measures. The New Government Procurement Act, signed in July 2024, represents a significant
34

reform, requiring full public disclosure of procurement documents across all stages and agencies, and
supporting digitalization through enhancements to the Philippine Government Electronic Procurement
System. Executive Order No. 31 institutionalized the Philippine Open Government Partnership,
34

embedding open government values such as transparency, accountability, and citizen participation
into government policies. 34

Various government agencies, such as the Philippine Guarantee Corporation (PhilGuarantee) and
the Civil Aviation Authority of the Philippines (CAAP), have implemented their own corporate
governance initiatives. These include establishing codes of ethics, forming board-level committees
(e.g., Corporate Governance Committee, Audit Committee, Risk Oversight Committee), and
developing robust risk management systems. The Institute of Corporate Directors (ICD) actively
39

collaborates with international bodies like the Organisation for Economic Co-operation and
Development (OECD) to enhance boardroom practices and offers professional directorship and
advanced corporate governance training programs to bolster the capabilities of corporate leaders. 8

These initiatives demonstrate the government's stated commitment to improving governance.

However, the effectiveness of these efforts is often challenged by persistent systemic issues. There
exists a dynamic interplay between the government's policy intent and the realities of implementation.
For example, while new laws and regulations are enacted to promote transparency and accountability,
the pervasive issues of corruption, red tape, and patronage can undermine their full impact. This
highlights that sustainable governance reforms require not only strong political will but also the
strengthening of institutional capacity and a sustained commitment to enforcement. The success of
these initiatives ultimately depends on the ability to overcome deeply entrenched structural challenges
and foster a culture of integrity across all levels of government and the private sector.

Interplay Between Legal, Regulatory, and Political Factors

The legal, regulatory, and political environments in the Philippines are not isolated but intricately
interwoven, with each factor significantly influencing and shaping the others, particularly in the realm
of corporate governance.

A. Legal-Regulatory Interplay

The legal framework provides the foundation upon which the regulatory system is built. Laws such as
the Corporation Code and the General Banking Act define the scope and authority of regulatory
bodies like the SEC and BSP, respectively. Regulations, in turn, operationalize these laws by
8

providing detailed rules, guidelines, and standards. For example, the SEC's Codes of Corporate
Governance (MC 6 and MC 19) elaborate on the broad principles established in the Revised
Corporation Code, translating legal mandates into actionable governance practices for corporations. 5

Effective regulatory enforcement then serves to strengthen legal compliance, ensuring that
businesses adhere to the letter and spirit of the law, thereby contributing to overall good governance. 2

This relationship is symbiotic: robust laws empower regulators, and effective regulation reinforces
legal adherence.

B. Regulatory-Political Interplay

The political landscape significantly influences the regulatory environment. Political will, or its
absence, directly impacts the effectiveness of regulatory bodies. For instance, strong political
commitment to anti-corruption efforts can lead to more vigorous enforcement of corporate governance
12 Module 2 – Corporate Governance and Regulatory Environment

codes and other regulations. Conversely, a lack of political will can result in weak enforcement,
34

allowing non-compliance and unethical practices to persist.

A critical dynamic in this interplay is "regulatory capture," a form of corruption where a political entity,
policymaker, or regulator is co-opted to serve the commercial, ideological, or political interests of a
specific constituency, such as a particular industry, rather than the general public. This can occur
29

through various means, including bribery, the "revolving door" phenomenon (where individuals move
between industry and regulatory positions), political donations, or even a dependency on industry
experts for specialized knowledge. When regulatory capture occurs, the special interests of a few
29

are prioritized over the broader public good, leading to a net loss for society. 42

Lobbying, while a legitimate activity in democratic systems, can also become problematic. In the
Philippines, lobbying is often characterized by elite domination, the exclusion of the poor, and a severe
lack of regulation, reporting, and monitoring, creating an environment ripe for corruption and undue
influence over policy and regulation. This allows powerful groups to shape legislation and regulations
43

to their advantage, potentially at the expense of fair competition and public welfare. Furthermore,
significant policy changes are often driven by political agendas, such as the liberalization of foreign
investment through amendments to the Public Services Act, which directly alters the regulatory
landscape for entire sectors. 20

C. Political-Legal Interplay

Political decisions are often the impetus for new laws or amendments to existing ones. For example,
the political objective to attract more foreign investment led to the amendments in the Public Services
Act, which liberalized foreign ownership in key sectors. Conversely, the legal system, particularly the
21

judiciary, plays a crucial role in interpreting and enforcing these laws. However, the effectiveness of
this enforcement can be significantly influenced by political factors, including corruption and
inefficiency within the judicial system itself. This creates a complex cycle where political will is needed
22

to enact laws, but the integrity and independence of legal institutions are essential for those laws to
be effectively applied and to genuinely foster good corporate governance.

The intricate relationship between political will and institutional strength presents a complex
challenge, often appearing as a "chicken-and-egg" problem. Weak institutions, characterized by
corruption and inefficiency, can enable political patronage and illicit activities, which in turn can
diminish the political will to implement genuine reforms. Conversely, a strong political commitment to
good governance can drive institutional strengthening, making it harder for corruption to thrive. This
suggests a cyclical dynamic where the absence of one reinforces the weakness of the other. For
sustainable corporate governance, it is imperative to address both political commitment and
institutional capacity simultaneously. Without strong, independent institutions, even well-intentioned
political reforms may falter, and without sustained political will, institutional reforms may lack the
necessary impetus or be undermined by entrenched interests.

Ethical Conflicts Arising from Legal, Regulatory, and Political Interactions

The complex interplay of legal, regulatory, and political factors in the Philippines creates a fertile
ground for various ethical conflicts within corporate governance. Ethical conflicts arise when moral
principles clash, leading to difficult choices where adhering to one principle might compromise
another.

A. Common Ethical Conflicts

1. Conflicts of Interest
13 Module 2 – Corporate Governance and Regulatory Environment

Conflicts of interest occur when personal interests, particularly those of directors, officers, or their
relatives, clash with the best interests of the corporation. This is a particularly prevalent issue in the
45

Philippines, especially within family-owned corporations, where personal relationships and familial
ties are often deeply intertwined with corporate decisions. Such situations can lead to issues like
45

self-dealing, the misuse of corporate resources for personal gain, or the oppression of minority
shareholders who lack the power to challenge the controlling family's decisions. In the public sector,
45

conflicts of interest manifest when government officials hold business interests in entities that are
regulated by or transact with their agencies, compromising impartiality and fair competition. 46

2. Lobbying and Regulatory Capture

Lobbying, when conducted transparently and ethically, is a legitimate means for stakeholders to
influence policy. However, in the Philippine context, lobbying is often characterized by elite
domination, the exclusion of marginalized groups, and a notable absence of regulation, reporting, or
monitoring, creating an environment susceptible to corruption and undue influence. This allows 43

powerful business interests to shape legislation and regulations to their advantage, potentially at the
expense of public welfare or fair market competition.

Relatedly, "regulatory capture" is a significant ethical concern. This phenomenon occurs when
regulatory agencies, intended to act in the public interest, become unduly influenced or controlled by
the very industries they are tasked with regulating. This can happen through various mechanisms,
29

including the "revolving door" (where former industry executives take on regulatory roles, and vice
versa), financial inducements, or the inherent reliance of regulators on industry experts due to
specialized knowledge requirements. When regulatory capture takes place, the regulatory
29

framework may inadvertently serve to protect incumbent firms' profits rather than promoting social
welfare or competition. 42

3. Corruption and Bribery

Corruption, including bribery, is a pervasive ethical and legal challenge in the Philippines, significantly
impacting corporate governance. It is widely reported that bribery is extensive within public
administration, the judiciary, and even the police force. This creates an environment where
36

businesses might feel compelled to engage in illicit payments to navigate bureaucratic hurdles, secure
contracts, or resolve disputes.

Historical cases highlight the severe consequences of such corruption. The Bataan Nuclear Power
Plant (BNPP) scandal during the Marcos era is a stark example. The project, built between 1976 and
1983 at a cost of USD 2.2 billion, was plagued by allegations of overpricing, kickbacks, and cronyism. 41

The plant was never operated due to safety concerns and corruption issues, becoming a significant
burden on the Philippine economy and its external debt. The Supreme Court later ordered a Marcos
48

crony to repay substantial commissions earned from the deal. 48

Another prominent case is the National Broadband Network (NBN)-ZTE scandal in 2007. This
involved allegations of corruption in the awarding of a US$329 million contract to a Chinese
telecommunications firm, ZTE, for a proposed government-managed broadband network. The 49

controversy implicated high-ranking government officials and involved alleged bribery attempts,
leading to the cancellation of the project by then-President Gloria Macapagal Arroyo. These cases
49

illustrate how corruption can lead to significant financial losses, undermine public trust, and distort
economic development priorities.

4. Transparency and Disclosure Issues

14 Module 2 – Corporate Governance and Regulatory Environment

A lack of transparency and inadequate disclosure practices can conceal misconduct and facilitate
ethical breaches. While Philippine corporate governance codes emphasize full and timely disclosure
of material information, including related party transactions and executive remuneration , weak 10

enforcement capacity of regulators can undermine these requirements. This can lead to information
14

asymmetry, where controlling shareholders or management benefit at the expense of minority

shareholders or other stakeholders, as seen in cases where related-party transactions are not
adequately scrutinized. 51

5. Stakeholder vs. Shareholder Primacy

A recurring ethical conflict in corporate governance is the tension between maximizing shareholder
profit and fulfilling broader responsibilities to other stakeholders, including employees, customers, the
community, and the environment. While traditional corporate finance often emphasizes shareholder
1

primacy, modern corporate governance increasingly recognizes the importance of a multi-stakeholder

approach.

Archie B. Carroll's Pyramid of Corporate Social Responsibility (CSR) provides a framework for
understanding these responsibilities, categorizing them into economic, legal, ethical, and
philanthropic layers, with economic responsibility forming the base. R. Edward Freeman's
53

Stakeholder Theory argues that a company's long-term success fundamentally depends on satisfying
all its stakeholders, as these groups are essential for the organization's continued existence and value
creation. Furthermore, Michael E. Porter and Mark R. Kramer's concept of "Creating Shared Value"
52

proposes that businesses can generate economic value in a way that also creates value for society
by addressing its needs and challenges, moving beyond traditional CSR to integrate social impact
into core business strategy. Andrew Crane, Dirk Matten, and Laura Spence's work on Business
56

Ethics further explores corporate responsibility, stakeholders, and corporate citizenship, emphasizing
the ethical challenges in a globalized world. These theories collectively highlight an evolving
57

understanding of corporate responsibility beyond mere profit maximization, advocating for a more
holistic approach to value creation that considers broader societal benefits.

In a high-corruption environment like the Philippines, companies often find themselves walking an
"ethical tightrope." There can be immense pressure, both internal and external, to engage in unethical
practices—such as offering bribes to secure permits or contracts, or leveraging political connections
for favorable treatment—to gain a competitive advantage or simply to survive. However, succumbing
to these pressures carries significant long-term costs, including severe reputational damage,
substantial legal penalties, and the erosion of trust among legitimate investors, employees, and the
public. Companies that prioritize ethical conduct and robust governance, even in challenging
environments, are better positioned to build sustainable value, attract responsible capital, and
maintain their social license to operate. This underscores the critical importance of strong ethical
leadership and an unwavering commitment to integrity, even when faced with systemic pressures that
incentivize illicit behavior.

EXTEND: Regulatory Maze Challenge

Instructions: Read the following scenario and answer the questions that follow.

Scenario: You are a consultant for "TechInnovate Inc.," a promising startup from Singapore that
wants to establish a digital bank in the Philippines. TechInnovate Inc. is excited about the potential of
the Philippine market but is unfamiliar with the local legal, regulatory, and political landscape. They
have heard about the recent changes in foreign investment laws and the BSP's focus on digital
banking.

Questions:
15 Module 2 – Corporate Governance and Regulatory Environment

1. Identify Key Regulatory Bodies: Which two primary Philippine regulatory bodies will
TechInnovate Inc. need to engage with most closely for their digital bank application and
operations? Briefly explain each body's relevance to this specific business.
2. Legal and Regulatory Requirements: Based on the module, what are three (3) specific legal or
regulatory requirements or considerations that TechInnovate Inc. must address when setting
up their digital bank in the Philippines?
3. Political Landscape Considerations: Identify two (2) significant political factors in the
Philippines that TechInnovate Inc. should be aware of, and explain how each could potentially
impact their operations or corporate governance strategy.
4. Interplay and Initial Advice: Explain how the legal, regulatory, and political factors you identified
might interplay in TechInnovate Inc.'s journey. Provide one piece of initial strategic advice to
TechInnovate Inc. on navigating this complex environment.

EVALUATE: Ethical Dilemma Resolution

Instructions: Read the following case study and provide a comprehensive analysis, addressing all
questions.

Case Study: The "Green Harvest" Project

"AgriCorp Philippines," a large, publicly-listed agricultural company, plans a major expansion project
called "Green Harvest" in a rural province. This project promises significant economic benefits,
including job creation and increased agricultural output, aligning with the government's push for rural
development. However, the project requires converting a large tract of land, which is currently
occupied by a small, indigenous community with ancestral claims, though these claims are not yet
formally recognized by law.

During the permitting process, AgriCorp's CEO, Mr. Reyes, is approached by a local government
official, Mayor Santos, who suggests that a "facilitation fee" (bribe) would significantly expedite the
necessary local permits and ensure "smooth community relations." Mayor Santos hints that without
this fee, the process could face "unforeseen delays" and "community resistance," potentially costing
AgriCorp more in the long run. Mr. Reyes is aware that AgriCorp's internal Code of Business Conduct
strictly prohibits bribery and emphasizes ethical conduct and respect for all stakeholders. However,
he also knows that the company is under immense pressure from shareholders to deliver the project
quickly and profitably. AgriCorp's board includes several independent directors who are keen on
upholding the company's reputation and compliance standards.

Questions:

1. Identify the Core Ethical Dilemma: What is the primary ethical dilemma faced by Mr. Reyes
and AgriCorp in this scenario? Explain why it is an ethical dilemma, not just a legal or business
problem.
2. Apply Ethical Frameworks:
o How would Archie B. Carroll's Pyramid of Corporate Social Responsibility (CSR) apply
to AgriCorp's situation? Discuss each level (economic, legal, ethical, philanthropic) in
relation to the dilemma.
o Using R. Edward Freeman's Stakeholder Theory, identify the key stakeholders in this
scenario and explain how their interests conflict.
3. Propose a Resolution and Justify: What course of action should Mr. Reyes and AgriCorp
take to resolve this ethical dilemma? Justify your proposed resolution, considering the
principles of good corporate governance and the long-term implications for AgriCorp's
reputation and sustainability in the Philippine context.
16 Module 2 – Corporate Governance and Regulatory Environment

TOPIC SUMMARY

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