Philippine Challenges to Capital Market Development

Washington Sycip Policy Forum

By Dr. Victor S. Limlingan

Asian Institute of Management

22 November 2000

At the outset, I would like to make a full disclosure before this body. Not only am I a Professor of the Asian Institute of Management but I am also Chairman of Regina Capital Development Corporation, a member of the Philippine Stock Exchange. But this is not the embarrassing disclosure; the really embarrassing disclosure is that the one who really runs Regina Capita is my wife Marita who is the President. I could only claim to have the good managerial sense to let her run the brokerage while I spend my time presenting papers in seminars such as this one.

In talking about the Philippine challenges to capital market development, I was sorely tempted to simply interview my wife on her management of Regina Capital as she has been the only broker who has been opening new branches since the Asian crisis.

But this would be too much for the male ego. In discussing, the Philippine challenges to capital market development, I have decided in keeping with the AIM method of instruction to use a case. Although in this particular instance I have decided to cast modesty aside and use as a case study, the Asian Institute of Management.

AIM by all counts is recognized as a world-class, globally competitive institute of management. Right now, by all counts, the Philippine Stock Exchange still has to attain that status. Thus it would be instructive to discover the management principles which AIM adopted in attaining that status.

The first principle that AIM followed was that to be a world-class organization, one must have world-class people. And world-class people do not mean expatriate staff. AIM has always worked on the assumption that world-class professors can be drawn from local sources. All that is needed is to cast aside one’s colonial mentality.

The second principle that AIM followed is that a world-class organization has to be housed in world-class facilities if only to retain its self-respect. In this AIM was fortunate as through the generosity of the Ayala and the Lopez foundations, AIM has been sited here and blessed with world-class facilities.

The third principle that allowed AIM to be world-class is a regulatory agency, the Department of Education (DECS) and later on the Commission on Higher Education (CHED) which immediately granted Self-Regulatory Status or SRO status to AIM. This meant that while DECS (later on CHED) insisted on being kept informed of the programs and progress of AIM, the DECS or CHED has never imposed any regulations that would curtail the managerial flexibility of AIM. Since I joined AIM in 1973, I have never experienced DECS or CHED issuing circulars on the qualifications of our professors, on the content of our courses, on the quality of our students and most of all on the level of our tuition fees.

The Board of Trustees of AIM has followed the same principle. AIM from the outset has been a faculty-run institute. Not only do its professors teach, they also manage. Given this experience, you will understand while I look askance whenever anybody demands that brokers should not manage the stock exchange. Given the management background of the broker-members of PSE, I would say that they have both the interest and the experience to run the exchange by themselves. Please note that PSE did not collapse when Mr. Ramon Garcia, a management practitioner and former broker took over the management.

Given a world-class faculty, world-class facilities, an honest-to-goodness SRO status and a supportive not suffocating Board of
Trustees, AIM has taken off. Faced with stiff competition from its Asian neighbors as well as with its Western rivals, AIM has thrived through innovation and market niching.

For example, AIM fifteen years ago was able to spot a market niche, the need for a Development Management Program for the developing countries of Asia. This was a niche, which its Western rivals were in no position to develop given their pre-occupation with developing programs for the multinational corporations. AIM saw this niche and its competitive advantage in developing this niches and set up the Center for Development Management (CDM). This competitive advantage enabled AIM to win the largest consultancy contract from the Asian Development Bank and beating the Harvard Institute of International Development in the process.

As another example, AIM has recently established the Asian Center of Entrepreneurship. The center was premised on the assumption that Filipino entrepreneurs who have to cope with deficient infrastructure, corrupt government bureaucracies and high cost production inputs have to be the best in Asia. This premise was given a boost when even Singapore felt that the course AIM developed for entrepreneurs would be useful for Singapore entrepreneurs who have no experience or expertise in dealing with economic chaos.

This is not to say that the road to world class status was smooth and easy. Along the way, mistakes were made. Early in our history, we accepted foreign retired professors masquerading as consultants in the hope that they could tell us where the future lay. Unfortunately, they were useless as they could only offer an intimate knowledge of the past and more than us, they had no inkling of the future.

Fortunately, we did not salivate as so many of our government agencies routinely do at grants dangled by multilateral institutions. While we were not too stiff-necked to listen and learn from others, we were proud enough to believe that we could chart our own future.

For we, the faculty of AIM believe that at the core of a world-class institution is the quiet confidence that we are the equal of any in the world. This is the core belief that we infuse in our students as they go and compete is a global economy.

And so with AIM as a case study, I would argue that the Philippine Stock Exchange can also be a world-class institution if it could surmount two major challenges. The first is to change the peculiar mindset of the Securities and Exchange Commission.

All over the world, regulatory agencies operate under the full disclosure and transparency rules. This principle assumes that investors must be treated as adults. This means that for so long as they are fully informed of all the relevant facts about the company, then the decision to invest or not is left to them. For example, in cases of potential conflicts of interest, which unfortunately occur too frequently in our interconnected world, all that is necessary is to reveal this completely and openly. If one of the directors of a company is also a director of a supplier company, all that is necessary is to make a full disclosure and leave it to the investors to decide if such interlocking directorship is beneficial or detrimental to the company.

Unfortunately our Securities and Exchange Commission still operates under the antiquated “widows and orphans rule” where the agency works on the premise that investors need protection rather than information in making investment decisions. It should be apparent to anybody in this age of information overflow that the spectacle of a regulatory agency trying to screen the data flowing from the Internet and the mass media is a pathetic sight.

Going back to AIM and PSE, we would argue that like AIM, PSE has world-class members. Like AIM, PSE has world-class facilities. All that is needed is a foresighted SEC and a superior Strategy.

I realize that just a few hours ago, the Honorable Lilia R. Bautista, the Chairperson of the Securities and Exchange Commission has again proclaimed as she has often done that the PSE has SRO status. But this is preaching, not practicing.

Immediately after stating that, she immediately went into SEC-imposed qualifications for being a member of the PSE. The DECS never told AIM on what are the qualifications of an AIM Professor such as a doctorate degree, so why should the SEC tell PSE what the qualifications of a PSE Member such as minimum capital should be.

And yet this is not the only instance of the SEC violating the SRO status of the PSE. The DECS never told AIM on what information it should have on its students. The DECS assumes that AIM can design its own Student Information Sheet. The SEC on the other hand imposes the exact format for the PSE Client Information Sheet. Any information such as net income and net worth has to be filled up even if not applicable. Failure to do so results in immediate fine with no recourse as the SEC acts as both prosecutor and judge. As my wife said, if Mr. Henry Sy were my client and refuses to divulge his net income and net worth, should I then reject him as a client since he did not give me this information?

Another instance where the SEC violates the SRO status of the PSE is in the commission structure. The SEC in its obsession to protect the small investors insists that the PSE cannot offer rebates or discounts to large and valued customers. But rebates to valued clients are simply a recognition of market forces. Again, the DECS has never insisted that AIM not give discounts to companies who send several participants to their programs. In fact the DECS has never interfered in the fee structure of AIM. So why should the SEC interfere in the commission structure of the PSE. At a time when all the regulatory agencies in the world are deregulating the commission structure of the securities industry, our SEC wants our PSE to be retrogressive.

In discussing the similarity of the PSE and AIM, some SEC officials argue that the PSE brokers are not as world-class as the AIM professors. On behalf on my wife, I would disagree. One sure indication that our PSE brokers are world-class is their ability to compete with the rest of the world. This they have done without any “protectionist” support from the SEC.

Thus when Merrill Lynch, the biggest broker in the world decided to operate in the Philippines, the SEC unlike so many of our regulatory agencies did not to its credit protect the brokers. Merrill Lynch was able to operate without local partners being imposed as a condition, without local managers being required to be hired and without local branches being required to be opened and without local clients required to be serviced. And yet, despite this unfettered competition, I would suggest that many local brokers are now doing better than Merrill Lynch. If this is not being globally competitive, then what is?

Assuming that the PSE is successful in this difficult but hopefully not impossible task of being set free from the suffocating micro-management of the SEC, it can now face the daunting challenge of finding a competitive niche for itself in the globally competitive world of stock exchanges.

I will leave the challenge of finding this competitive niche to the PSE. I will however cite another inspiring instance where being from a Third World country actually makes one highly competitive.

I am connected with a resort which was approach by RCI, a time-sharing exchange provider. RCI is a sort of Amazon.com. It owns no resorts, the way Amazon owns no bookstores. It main asset is a comprehensive database and a sophisticated computer system.

RCI proposal was for our resort to sell to our members’ two weeks usage of our facilities. With this as their bargaining chip, they could then join the RCI system and swap these two weeks in our resort for two weeks stay in the over 10,000 member resorts of RCI which are located all over the world.

Out of curiosity, I asked the RCI representative who their most successful resort member is. Surprisingly, he named a resort located in Goa, India. And the reason is simple. A lot of people who had no interest in going to Goa were buying into the resort because it was the cheapest way to enter the RCI portal. In other words, in the world of cyberspace, once entry is achieved, then one could go anywhere.

In a world of Internet linked stock exchanges, it may be possible that the Philippine Stock Exchange could be the most competitive portal of all. For example, investors in Canada could choose to trade their shares in Sun Life in the Philippine Stock Exchange rather than the Toronto Stock Exchange.

The supreme challenge for both the PSE and the SEC is make it so.

We close with this challenge, we at AIM are getting lonely at being one of the few world-class institutions in the Philippines. We look forward to being joined by the PSE once the SEC treats them like adults.

For this I am even willing to admit that my wife Marita and her colleagues at the PSE can make the PSE more globally competitive than AIM presently is.

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