Fixing the unfixable?

by Christopher Leahy, ACGA

23 September 2021

Corporate governance in Indonesia and the Philippines is once again at risk of going backwards. What can be done?

Rating corporate governance standards in Indonesia and the Philippines can at times be a Sisyphean task. In the 20 years since ACGA started ranking the macro quality of Asian corporate governance, neither market has placed higher in our surveys than last or second last. Other Asian markets have achieved progress in raising standards, but Indonesia and the Philippines suffer from a combination of underfunded regulators, stunted domestic institutions and a complacent business elite that does not need to follow international standards. Progress in one area is too often undermined by regress in another, with regulators lacking the political ability and incentives to make fundamental change. Indeed, the structure of the equities market in both places mitigates against it. Can anything be done?

Not in the short term, it would seem, since nothing encourages revisionist regulators like a roaring stock market. But we have some suggestions for the longer term.

Markets up

In common with global markets, the first half of 2021 saw record capital raising in Indonesia and the Philippines. On 29 July, Otoritas Jasa Keuangan (OJK), the Indonesian securities commission, announced that funds raised on the local bourse year to date were IDR117 trillion (around US$8.2 billion), up 211% over the equivalent period last year. A pipeline of 86 new issues, including 40 more IPOs, that is likely to bring in an additional IDR54.2 trillion (US$3.8 billion) pretty much guarantees an all-time record for the year.

It is a similar picture in the Philippines. On 1 July the Philippine Stock Exchange CEO, Ramon Manzon, announced first-half capital raised of PHP122.5 billion (US$2.5 billion) exceeded that for the whole of 2020. The IPO of food group Monde Nissin Corporation raised US$1 billion alone, the largest ever local IPO. According to Manzon, IPOs slated for the second half, including Del Monte Philippines and several major REITs, are expected to contribute to a total for the year of PHP250 billion (US$5 billion), which would comfortably exceed the previous 2012 record.

Governance down

While new and secondary capital markets activity is clearly healthy, the same cannot be said for corporate governance standards. While local regulators have introduced some new rules aimed at supporting rights for minority investors—the OJK now requires listed companies to produce a sustainability report as part of its annual report and the SEC clarified minority investors’ rights to call a special general meeting (but not if it is to remove a director!)—fundamental shareholder rights, especially for new issues, remain far behind best practice.

Recent capital calls from Indonesian companies have included a placement of 70% of share capital at a steep discount with no pre-emption at PT Acset Indonesia and a rights issue of 200% of issued share capital at a huge discount to the prevailing share price at PT Zebra Nusantara. In the Philippines, while pre-emption rights are enshrined in the revised Corporation Code, in practice they can be removed if companies so deem in their articles, which of course is what happens.

While fundamental minority shareholder protections in both countries are already weak, they are likely to get weaker. Plans are well advanced in Indonesia to introduce dual-class shares and legislation to permit Special Purpose Acquisition Companies (SPACs) may not be far behind. Sources at OJK confirmed to ACGA that dual-class share legislation is awaiting OJK approval and may well be issued this year, while the Indonesian Stock Exchange (IDX) is reviewing draft rules for SPACs. While SPACs may be some way off in the Philippines, dual-class shares have been used for years to concentrate control into the hands of founding families or close-knit investor groups.

The underlying problem

Both IDX and PSE have trumpeted strong growth in retail participation in their domestic stock markets and, like most stock markets globally, growth in new retail accounts has surged during the Covid-19 pandemic. IDX’s 2020 annual report states that total individual retail accounts now amount to 3.9 million. The PSE’s 2019 annual report (its latest) puts the number of retail accounts at 1.2 million.

Although these numbers sound impressive, they in fact represent tiny percentages of overall populations: 1.4% for Indonesia; 1.1% for the Philippines. And of course, the number of active accounts in each market is smaller still. Among individuals stock market investment remains the privilege of the wealthy few and upper middle-class urbanites.

The statistics also explain why the securities commissions in both countries have weak stock market enforcement: protecting retail investors in stock markets simply isn’t their chief priority. Indonesia and the Philippines suffer badly from massive fraud and Ponzi schemes that target the impressionable (and usually poorer) and both the OJK and the SEC expend significant effort and resource trying to shut down new schemes, which reappear at alarming rates. Their problems are exacerbated by huge and growing populations, a lack of financial sophistication and vast archipelagos that make country-wide enforcement more difficult.

A solution?

Playing regulatory whack-a-mole with unscrupulous fraudsters isn’t the only challenge facing Indonesia and the Philippines. Both nations also suffer from the same chronic under development of their domestic institutional investor bases. Both have witnessed appalling scandals at several state-controlled pension schemes and insurance companies that dissipated already woefully inadequate funds due to embezzlement, misuse and maladministration, while privately-controlled domestic institutions are few in number. 

As idealistic as it may seem, finding ways to make the institutional investor base in Indonesia and the Philippines a force for better corporate governance may be one of the few cards both can still play. There is clearly a need for higher standards of fund governance. Well-run and cost-effective pension systems are helping to transform the relationship between investors and listed companies in other markets. The adoption of “stewardship codes”, which put the onus on investors to step up and be counted from an ESG point of view, is starting to work in other parts of Southeast Asia. Why not Indonesia and the Philippines too? (In fact, the SEC first raised this topic in its Philippine CG Blueprint 2015.) And the increasingly important role that finance is playing in the transition to a lower carbon economy around the world has relevance for both markets. 

It may well be that cultural and political forces ultimately stymy the development of a more activist institutional investor base in both Indonesia and the Philippines. But since this is one idea still in its infancy, why not give it a try?

About the Author(s)

Christopher Leahy
Research Director, Indonesia & the Philippines, ACGA

Christopher Leahy
 is a founder of Blackpeak, a leading investigative research and advisory firm founded in Asia. Prior to working in the investigative field, he was a journalist, holding positions as Asian Editor for Euromoney and a contributing editor for AsiamoneyChris began writing for ACGA in 2003, specialising on Southeast Asia. He has written the Indonesia and Philippines chapters in ACGA’s CG Watch report since 2007 and has contributed to other markets as well, including Malaysia, Thailand and Singapore.

Chiu Ying Wong, N/A, Metro Manila, Philippines commented on 16 December 2021
In developing countries like the Philippines and Indonesia, public institutions like are often weak. The burden of upholding the standards of corporate gove
ance that falls mostly on institutional investors. Active engagement may be the most effective means of getting results in ESG matters.
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