The issue of corporate governance in the finance sector is again in the limelight. In the pre-need industry, two corporations – the College Assurance Plans and Pacific Plans, Inc. – are in deep crisis, with their liquid assets deficient to cover current open-ended plans. Questions on transparency have been raised regarding the conduct of these firms.

In the banking sector, the government-controlled United Coconut Planters’ Bank (UCPB) is again seeking the assistance of the Philippine Deposit Insurance Corp. (PDIC). The UCPB is asking the deposit insurer to convert into equity the P12 billion which it lent to the financially troubled bank. Previously, the PDIC assisted UCPB by buying soured loans amounting to P13 billion.

Philippine Veterans Bank, too, has been in hot water as a group of veterans has questioned the eligibility of a director of the bank and his availment of huge loans to benefit his other businesses.

All of these are examples of the firms’ failure to implement prudent corporate governance principles. Issues such as enhancing shareholders’ value, composition and role of board members, disclosure requirements, integrity of accounting principles and internal control systems are part of the scope of corporate governance.

Mismanagement, financial impropriety, and poor investment decisions can be traced to poor corporate governance and, ultimately, lead to a firm’s closure. That banks implement sound corporate governance policies are of utmost importance because of the wide-ranging effects a bank closure has on the economy. Banks, the lifeblood of the economy, are most susceptible to a contagion effect. Just a heightened perception that a single bank is unstable may cause depositors to view other banks the same way, leading to a bank run and eventually putting the economy in financial turmoil.

The role of government then is to maintain a healthy and stable environment for financial institutions to work in. The Monetary Board of the Bangko Sentral ng Pilipinas in October 2004, approved a plan adopting the revised framework of the International Convergence of Capital Measurement and Capital Standards, or what is more popularly known as the Basel 2 accord, by 2007. The Basel 1 and 2 guidelines were issued by the Basel committee on banking supervision, an international group of banking supervisors based at the Bank of International Settlements (BIS) in Basel, Switzerland.

The revision of the 1988 Basel 1 accord is indeed timely, with the diversity of bank products and greater risks these institutions are exposed to. Basel 2 aims to improve on the standards set by Basel 1 by (1) making the required minimum capital requirement of banks more risk-sensitive, reflecting most, if not all, the risks banks are faced with, (2) setting the standards for banks’ risk assessment and management, and (3) improving bank disclosure practices. However, these international banking guidelines would be useless if banks do not adhere to corporate governance policies as well.

Although the government must indeed exercise and implement its supervisory and regulatory powers over banks, depositors have the responsibility of choosing the right bank to patronize. To put the blame solely on government for “not doing its job at implementing the law” has proven to be very costly for those who have been affected by bank closures and corporate bankruptcies.

Even developed countries where governments are perceived to be more efficient in their supervisory and regulatory capacity over financial institutions have not been spared of companies that have erred in the area of implementing prudent corporate governance principles. The glaring difference is that in developed countries, board directors and managers found guilty by the courts are punished and imprisoned. In the Philippines, they get a mere slap on the wrists.

Depositors must be on guard for any news item, good or bad, that may affect the financial institution they patronize. A country such as ours, where a few rich and influential families own banks and, at the same time, engage in other types of businesses, is a breeding ground for related-party lending. A rise in the banks’ non-performing assets and over-exposure to a single industry in terms of lending is also indicative of the board of directors’ failure to exercise vigilance in prudent credit management practices.

Moreover, the practice in which government influences controlled banks to lend to certain companies at “favored” rates is grossly disadvantageous to depositors.

The continued profitability and growth of the banking sector rest on two things: the adherence and implementation of each bank to corporate governance principles and effective government supervision. In addition, depositors must use whatever information is available in analyzing the financial stability of their bank by looking into the following: capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk.

In a world of incomplete information and where markets may not seem to function efficiently, government supervision provides pressure for banks to conduct their business properly. The more informed depositors are, the more empowered they become in making choices about where to deposit their hard-earned money and this means less heartaches experienced in the end.