Workshop on Social Market Economy:

Corporate Governance and the Role of the State in Regulating National and International Financial Markets

A workshop for government agencies, relevant private institutions, select academe, and media to discuss previous and current experiences in corporate governance in financial markets


Former spokesperson of the Frankfurt Stock Exchange Prof. Dr. Rüdiger von Rosen lectured at a workshop on Corporate Governance and the Role of the State in Regulating National and International Financial Markets on August 26 – 27 at the Asian Institute of Management Conference Center, Makati City. This high profile workshop was organized by the Asian Institute of Management Policy Center.

During the said workshop, the professor emphasized that for a nation to have a strong economy, there is the need to stop monopolies and break the cartels. The Managing Director of the Deutsches Aktieninstitut discussed with heads of relevant government agencies and private institutions the European Union experience, particularly the Federal Republic of Germany. He shared that although Europe was not spared by the 2008/2009 financial crisis, the German Social Market Economy can be looked at as a success.

In Social Market Economy, predetermined rules (called Ordndungspolitik in German) control the markets, thus creating economic order that is likelier to be accepted by the key stakeholders. He cited that Social Market Economy is a strong factor which ensures political and economic stability in Germany. He also emphasized that in Germany the disparity between high and low income earners is relatively small and that their economy is built on the small and medium enterprises, stressing the strength of the middle class.

In his second lecture, the professor articulated corporate governance and the role of the state in regulating national and international financial markets. He shared how the financial crisis was a mixture of market and government failure: 1) subprime mortgages boom was due to financial innovations and the American monetary policy to boost home ownership; 2) rating agencies acted as both external credit assessors as well as regulators; 3) privately and publicly owned banks failure to protect themselves; 4) due to short term lending incentives, banks engaged in too risky investments inspite of capital requirements which should have acted as a deterent; 5) the complex rules overstrain the market participants and regulators as opposed to supporting the ever increasing variety of financial markets and businesses.

Chairman Fe Barin of the Securities and Exchange Commission shared the history and stages of development of financial markets. She introduced some important milestones in the Philippine financial markets: enactment of the Insurance Code as early as 1914; enactment of the Securities Act and the creation of the Securities and Exchange Commission (1936); in 1949 operation of the Bangko Sentral ng Pilipinas (Philippine Central Bank); enactment of the Rural Banks Act (1952); in 1963 enactment of the Savings and Loan Associations Act; deregulation of interest rates, starting with deposit rates (1974); introduction of universal banking in 1980; liberalization of entry of foreign banks in 1994; in 2004 enactment of the Securitization Law; in 2007-2009 approval of the Lending Company Regulation Act of 2008, Personal Equity and Retirement Account Act, Credit Information System Act, Pre-Need Code; and this year approval of the Philippine Dealing and Exchange Corporation (PDEx) Rules for the fixed income securities market and issuance of the Code of Ethics Governing Financial Market Activities. According to Chairperson Barin, the Philippine financial markets are regulated and supervised by the Bangko Sentral ng Pilipinas, the Securities and Exchange Commission, and the Insurance Commission. Fragmentation developed, she stated, thus, the Financial Sector Forum (FSF) was formed in 2004 allowing the three government agencies and the Philippine Deposit and Insurance Corporation a means to share information, coordinate, cooperate and address supervisory and regulatory inconsistencies.

Treasurer Roberto Tan of the Bureau of Treasury stated the position of the new administration in state regulations and interventions in financial markets. He presented that the Bureau of Treasury aims at containing and protecting three focus areas: “(1) investor protection through regulated market intermediaries; (2) information to manage the issue’s liquidity and leverage; (3) and sound market processes and structures.” This will support the Department of Finance’s vision of: “a strong economy with stable prices and strong growth, a stable fiscal situation with adequate resources for government projects… a borrowing program that is able to avoid the crowding-out effect on the private sector, and minimizes cost, a public sector debt profile with long maturities and an optimum mix of currencies… (and) a strong economic growth with equity and productivity.”

In addition to this workshop, members of an integrity initiative, organized by the European Chamber of Commerce of the Philippines and the Makati Business Club which promotes and supports transparent corporate governance in the Philippines, listened to the professor lecture on Corporate Governance and Compliance – Lessons from Europe. This forum held at the Dusit Thani Hotel, Makati City on August 26, Thursday, addressed reasons for anti-corruption measures in Europe, its implementation in compliance systems and enforcement. Twenty-five top executives of companies discussed these European experiences.

As part of the KAS Philippine program, Prof. Dr. von Rosen discussed Corporate Governance in the Financial Sector – the European Discussion and its Implications for Asia on August 26 at the Asian Development Bank (ADB), Pasig City with experts, consultants and staff of the ADB. He differentiated between self regulation and formal law in corporate governance rulemaking. For self regulation, he cited the example of the Corporate Governance Code for stock listed companies which addressed various aspects of corporate governance. Examples of some of the concerns: the lack of transparency in German corporate governance, the need for more independence of the German supervisory boards, the need to focus on the shareholders’ interests more, the lack of independence of auditors of financial statements, to name a few. This flexible instrument of self regulation and market control is generally widely acceptance among companies and investors, according to the professor.

Based on Prof. von Rosen’s presentation, the Philippines is one of the first in the region to enact a Code of Corporate Governance (2002), behind China (2001), but followed by South Korea (2003), Japan (2004), Hong Kong (2004), Thailand (2006), Malaysia (2007), Indonesia (2007) and India (2009).

This first time visitor to the Philippines shared the German trend to reduce self regulation with the implementation of more formal laws. However, he reminded everyone of the consequence of reduced flexibility, increased administrative costs and yet no “real” benefit to the investors. He recommended, “As little formal law as necessary, as much self regulation as possible.”

The last of the many lectures was part of an economic forum on August 27, at the German Club, Makati City on Developments at the International Financial Markets: the European View organized by the Embassy of the Federal Republic of Germany and the German-Philippine Chamber of Commerce and Industry for the international business community. The exchange revolved around the necessity of the unprecedented fiscal stimulus to avoid “economic and political disturbances” thus resulting to the subprime crisis becoming a sovereign debt crisis.

Select members of Centrist Democratic Movement Davao and Manila groups were given an opportunity to discuss with the professor corporate governance, the international financial market, the role the finance sector plays in the Philippines and related themes during dinner dialogues on August 22 in Davao City and August 25 in Metro Manila, respectively.

On August 27, Friday, the professor finished his visit with a live interview by Miaki Oreta on Business Nightly, a cable television show examining national and world economies for those in or interested in business.