ADOPTING A MODEL FRAMEWORK FOR CORPORATE

GOVERNANCE AT THE PUBLIC SECTOR: ISSUES ON GOOD

GOVERNANCE*

I.

INTRODUCTION

The 2008 Asian Development Bank (ADB) Technical Assistance

Report on Republic of the Philippines: Government Owned or
Controlled Corporations (GOCCs) Reform stated that most GOCCs are
incurring significant financial losses.1 In the past 5 years, there has
been a noticeable increase in the aggregate deficit of the 14 monitored
GOCCS bringing their financial viability into question. Their
consolidated deficit in 2004 was P85.4 billion, a more than a fourfold
increase from the 2000 level of P19.2 billion. 2
The significant financial losses contributed to the public sector
debt, and the issues on the viability of the GOCC have persisted amidst
efforts of the government to improve their financial performance. 3
Even earlier in 2000-2004, Mr. Manasan of the Philippine Institute for
Development Studies (PDIS) found that GOCCs were the primary
culprit in the deteriorating fiscal positions of the non-financial public
sector.4
President Benigno Aquino III highlighted the issues of losses and
indebtedness of the GOCCs in his State of the Nation Addresses
(SONAs). He cited the excessive allowances, bonuses and payroll
abuse in the Metropolitan Water and Sewerage Services (MWSS)
involving P51.4M; the indebtedness and great losses in the sale of
electricity by National Power Corporation (NAPOCOR) in 2004; the over
purchase of rice by the National Food Authority (NFA) resulting in its
indebtedness of P171.6B;5 the grant by the Philippine National
Construction Corporation (PNCC) of excessive benefits, bonuses and
allowances amounting to P320 M from 2005 to 2009 though already
heavily indebted in billion of pesos; 6 the indebtedness and
questionable transactions of the North Rail; and the billions spent on
overpriced coffee by the Philippine Amusement and Gaming
Corporation (PAGCOR).7 President Benigno Aquino then directed the
immediate investigation and prosecution of the officials of the
concerned GOCCs and instituted measures to pursue corporate
governance reforms.8
1

*by: Atty. Rodolfo C. Sabio, Office of the Government Corporate Counsel

ADB Technical Assistance Report on Republic of the Philippines: GOCC Reforms, (2008),
Project No. 39606, June 2006, p.2
2
Ibid.
3
Ibid.
4
Rosario G. Manasan, Fiscal Reform Agenda; Getting Ready for the Bumpy Ride Ahead, PDIS
Paper Series No. 2004-266 (August 2004) cited by Santos, Manuel L. F, at note 24
5
State of the Nation Address (SONA) by Pres. Benigno Aquino III, July 26, 2010
6
SONA, July 25, 2011
7
SONA, July 23, 2012
8
Two of these measures are the issuance of Executive Order no. 7, S. of 2012 rationalizing
the compensation at the GOCCs and Executive Order No. 24 S. 2010, prescribing rules

Page 2 of 10

In the light of these problems and issues on the financial viability

of GOCCs, it is important to revisit the conceptual view of good
governance vis--vis the public corporate sector. In so doing, it is
crucial to discuss the scorecard in good governance practices and the
response made by the government on these challenges; and to identify
the emerging issues on the adoption and implementation of corporate
governance principles.
II.

THE GOCCs STRUCTURE AND MANDATES

A.

Definition

The GOCCs may be created by special laws through a charter or

by incorporation under the Corporation Code of the Philippines. 9 The
mandates of these GOCCs may include the performance of sociallyoriented responsibilities or the provision of basic services, regulatory or
propriety functions and pioneering activities including financing. 10
A number of laws Executive Orders and Presidential Decrees
were issued to define or clarify the meaning of GOCCs. 11 The latest law
Governance Act of 2011,12 defines GOCC as any agency organized as
a stock or non-stock corporation, vested with functions relating to
public needs whether governmental or proprietary in nature, and
owned by the Government of the Republic of the Philippines directly or
through its instrumentalities either wholly or, where applicable as in
the case of stock corporations, to the extent of at least a majority of its
outstanding capital stock.13 This includes Government Instrumentality
with Corporate Powers (GICP)/ Government Corporate and Entity (GCE)
and Government Financial Institution.14
governing the compensation for the Board members/trustees. See also Galicto V. H. E. B.
Aquino III (GR No. 193978)
9
Batas Pambansa Blg. 68 (1 May 1980). In several cases, the Supreme Court has held that
the Water Districts are GOCCs. See Davao City Water District v. Civil Service Commission
(201 SCRA 593)
10
APEC Economic Policy Report, p. 108
11
Executive Order (EO) No. 596 S. Of 1998; EO 292 S. of 1991; PD 2029 S. of 1996. Cited in
A Guide to Governance Corporations: Laws, Relevant Jurisprudence, Recent OGCC Opinions
(OGCC) pp. 1-10
12
Section 3 (o), RA 10149
13
Ibid
14
Government instrumentalities with corporate powers (GICP) and government corporate
entities (GCE) refer to instrumentalities or agencies of the government, which are neither
corporations nor agencies integrated within the departmental framework, but vested by law
with special functions or jurisdiction, endowed with some if not all corporate powers,
administering special funds, and enjoying operational autonomy usually through a charter.
Section 3(m) of RA 10149 defines GFIs as financial institutions or corporations in which the
government directly or indirectly owns majority of the capital stock and which are either: (1)
registered with or directly supervised by the Bangko Sentral ng Pilipinas; or (2) collecting or
transacting funds or contributions from the public and places them in financial instruments
or assets such as deposits, loans, bonds, and equity including, but not limited to the
Government Service Insurance System and the Social Security System. See the OGCC Rules
on its Duty as Principal Law Office of the GOCCs. (2010)

Page 3 of 10

B.

Test of Economic Viability

The creation by charter of the GOCCs that perform economic or

commercial activities and need to compete in the marketplace must
pass the test of public good and economic viability. Thus, the 1987
Constitution specifically provides:
Sec. 16 The Congress shall not, except by general
law, provide for the formation, organization, or regulation of
private corporations.
Government-owned or controlled
corporations may be created or established by special
charters in the interest of the common good and subject to
the test of economic viability.15 (Underscoring supplied)
In the case of Manila International Airport Authority v.
Court of Appeals 16 the Supreme Court explained that the intent of
the Constitution is to prevent the creation of GOCCs that cannot
survive on their own in the market place and thus merely drain the
public coffers. Constitutional Convention delegate, Blas Ople explained
that the inserted phrase economic viability together with the
common good is a restraint on future enthusiasts for state capitalism
to excuse themselves from the responsibility of meeting the market
test so that they become viable.17 This, according to Fr. Joaquin G.
Bernas, includes the ideas that the corporations must show its capacity
to function efficiently in business and that it should not go into
activities which the private sector can operate better. 18
C.

Role in National Development

It is policy of the State that the corporate form of organization,

when utilized judiciously, is an institutional form thru which the
government may participate in economic and social development. 19
The State recognizes the role of the GOCCs as mechanisms in
delivering essential services to the public at the least cost to the State
and in promoting economic development.20 The corporate organization
is essential to the performance of the OGCCs of their functions as
active partners of the government in national development.21
Section 16, 1987 Constitution of the Philippines, cited in OGCC Guide, op. Cit. @ note
11
16
Manila International Airport Authority v. Court of Appeals (G.R. NO. 155650, 10 July
2006), cited by the OGCC Guide, op. cit. p.1
17
A guide to Government Corporations, op. cit. @ Note 11
18
Joaquin G. Bernas, Constitution of the Philippines: A Commentary, Rex Printing
Company, Inc. (2010), p. 1227
19
Model Code of the Corporate Governance, IPCG, p.5
20
Section 2, RA 10149
21
Ibid
15

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III.

GOOD GOVERNANCE : A CONCEPTUAL VIEW

A.

Good Governance and Corporate Governance Dichotomy

Corporate Governance is subsumed within the purview and

context of the broader concept of good governance. Governance in
developing countries has been defined in these approaches: 1)
essentially, it is the manner in which power is exercised in the
management of a countrys economic and social development (World
Bank, 1994); and 2) a form which public or private actors engage in
case or problem solving.22 Good Governance, on the other hand, is a
medium for attaining general well-being.23
The United Nations
Development Program (UNDP), explains that good governance means
that, the government or state is able to define what it must do, what
it can do, and what it wants to do, thereby ascertaining what it will do.
It is participatory, transparent and accountable also effective and
promotes the rule of law.24 It assures that corruption is minimized and
ensures that the political, social and economic priorities are based on
board consensuses in society and that the voices of the poorest and
the most vulnerable are heard in decision making.25
Good governance rests on four pillars of accountability,
transparency, predictability and participation. 26 If observed in the
public corporate sector, it is crucial in ensuring their positive
contribution to the countrys overall economic efficiency and
competitiveness.27 Good governance is one of the key elements in
improving economic efficiency and growth as well as enhancing
investor confidence.28 The UNDP elucidates that absence of good
governance is the reason many countries, especially in the third world,
continue to fail in their efforts at poverty reduction and in their request
for economic and human development.29
Corporate Governance on the other hand is defined by the
Organization for Economic Cooperation and Development (OECD) as
the structures and process for the direction and control of companies.
It concerns the relationships among management, board of Directors,
controlling share holders, minority share holders, and other stake
holders. Good corporate governance contributes to sustainable
economic development by enhancing the performance of companies
Dele Olowu, Governance in Developing Countries:
The Challenge of Multi-Level
Governance, Institute of Social Studies, The Hague, Netherlands.
23
Gerard Acquaah Gaisie, Combating Third World Corruption, p.1
24
A UNDP definition, cited by Manuel F. Santos, Jr., The Imperative of the Pillars of Good
Governance, Towards a More Rational and Effective Monitoring and Coordination of
Government-owned or Controlled Corporations, The IPCG Journal p. 113
25
Ibid.
26
Ibid.
27
OGCC Model Code of Corporate Governance, IPCG, p.3
28
Ria A. Corazon Golez, GOCCs and the challenges of Corporate Governance, IPCG Journal,
p.1
29
Manuel F. Santos op cit at Note 24
22

Page 5 of 10

and increasing their access to outside capital. 30 Weak corporate

governance frameworks reduce investor confidence, and can
discourage outside investment.31
Corporate Governance in the Philippines finds its origin from the
pertinent provisions of the Corporation Law of the Philippines. 32 It
provides for the liability of directors, trustees, Dealings of Directors,
Trustees or Officers, Contracts between Corporations with Interlocking
Directors (Section 33) and Disloyalty of a Director (Section 34). Mr.
Jesus P. Estanislao, of the Institute of Corporate Directors (ICD), 33 in his
paper Conceptual View of a Corporation (In the Light of Corporate
Governance, Ethics and Corporate Social Responsibility) stated that: It
is incumbent upon the corporation that it deals with all its stakeholders
fairly, i.e. in accord with justice. Thus, a corporation is called upon to
give to each of its many stakeholders what is their due. It is dutybound to consider, protect and promote the legitimate claims of all its
different stakeholders in an equitable manner. 34
The underlying principles in these provisions are now reinforced
in the Code of Corporate Governance issued by the Securities and
Exchange Commission (SEC) pursuant to Republic Act 8799. 35 It
enjoins publicly listed companies to observe corporate governance. It
defined corporate governance as a system whereby shareholders,
creditors and other stockholders of a corporation to ensure that
management enhances the value of a corporation as it compete with
the global market.36 The Code likewise prescribes the duties and
responsibilities of corporate boards in ensuring good governance. 37 The
SEC subsequently issued a Revised Code of Corporate Governance. It
redefined Corporate Governance as:
the framework of rules systems and processes in the
corporation that governs performance by the Board of
Directors and Management of their respective duties and
responsibilities to the stockholders.38
While this Code of Corporate Governance is originally intended
for publicly listed companies, the applicable principles may likewise be
implemented to certain GOCCs performing proprietary functions. 39
Pertinent provision of the Corporate Code provides:
The OECD Principles of Corporate Governance provide the framework of the World Bank
Group in this area, identifying the key practical issues: the rights and equitable treatment
of shareholders and other financial stakeholders, the role of non-financial stakeholders,
disclosure and transparency, and the responsibilities of the Board of Directors. Source:
www.worldbank.org/ifa/rosg-cg-phl.07.pdf
31
Ibid
32
Batas Pampansa Blg. 68
33
Jesus P. Estanislao, Conceptual View of Corporation, (In the Light of Corporate Governance
Ethics and Corporate Social Responsibility) Institute of Corporate Directors, p.1
34
Ibid
35
Republic Act (RA) 8799 or the Securities Regulation Code of 2000.
36
Ibid
37
SEC Memorandum Circular No. 2-02
38
SEC Memorandum Circular No. 06-09
39
See Model Code of Corporate Governance, op. cit. p. 3
30

Page 6 of 10

SEC. 4. Corporations created by special laws or

charters Corporations created by special laws or
charters shall be governed primarily by the provisions of
the special law or charter creating them or applicable to
them, supplemental by the provisions of this Code,
insofar as they are applicable.40
It is therefore clear that corporate governance is needed for the
government corporations to be productive and to allow them to fulfil
their mandate and for them to be able to compete with private sector
companies.41
B.

OGCC Model Code of Public Corporate Governance

The Office of the Government Corporate Counsel (OGCC) has

formulated the Model Code of Corporate Governance which integrated
lessons from corporate governance reforms in the private sector, as
well as from international governance. 42 The Model Code provides for
the adoption and observance by the GOCCs of these principles:
(a) Promotion of transparency, accountability and fairness, and
its business shall be conducted strictly in accordance with the rule or
law and shall be supportive of the primary goals and objectives of the
government;
(b) Timely and accurate disclosure shall be made on all material
aspects and development regarding the GC, including its financial
condition, performance, ownership and governance;
(c) The strategic directions of the GC shall be in accord with the
objectives set by the government, the effective monitoring of
Management by the Board and the Boards accountability to the
corporation and the shareholders;
(d) The exercise of shareholders rights, when applicable shall be
protected and facilitated and the corporation shall ensure the equitable
treatment of all shareholders, including minority shareholders; and
(e) Active cooperation between the GC and its stakeholders in
creating wealth, jobs, and the sustainability of a financially sound
enterprise shall be encouraged.
IV.

40
41
42

EARLIER POLICY SUPPORT FOR CORPORATE GOVERNANCE

Section 4, Philippine Corporation Law

Prof. Rodolfo Waga, University of the Philippines
See the OGCC Model Code of Corporate Governance, pp. 5-6

Page 7 of 10

There has always been policy support for corporate governance

as embodied in various Constitutional provisions, statutes, and
executive orders (EOs) and administrative rules, and regulations. 43 With
respect to Public Corporate sector, foremost of these issuances are: 44
1. Executive Order No. 936 (29 February 1984) - created the
Government Corporate Monitoring and Coordinating Committee
(GCMCC) to monitor, coordinate, and evaluate the performance of
GOCCs for the purpose of enhancing the public accountability,
promoting the efficient allocation and use of resources, instilling
financial discipline and promoting financing self-sufficiency;
2. Administrative Order No. 59 (16 February 1988)
Prescribes, among others, corporate governance guidelines on
government intervention in the operation of GOCCs and
responsibilities of the board of GOCCs;
3. Executive Order No. 25 (18 July 2001) - Establishes the
Governance Advisory Council which serves as an advising body to
the President on Corporate Governance issues affecting both
government and private Corporations;
4. Administrative Order No. 7(23 March 2001) - Requires the
GOCCs to observe transparency, impartiability and accountability
in the review and approval of Government contracts;
5. Executive Order No. 40 (8 October 2001) - calls on GOCCs
to apply the principles of transparency, accountability equity and
economy in the government procurement Process;
6. RA 9184 (2003) or the Government Procurement Act prescribes the procedures for procurement of goods, supplies,
materials, services and infrastructure contracts thru the
Government Electronics Procurement System (G-EPS);
7. Administrative Order No. 70 (2003) - requiring government
agencies including GOCCs to install Internal Audit Service (IAS).
V.

SCORECARD AND THE GOVERNMENT RESPONSE

Earlier assessment on RPs governance revealed the poor

corporate governance practices among GOCCs/GFIs. Most notable is
the lack of single entity in government that is in control of the
GOCCs45. Although there are more than 700 GOCCs exercising diverse
functions, there is no government entity responsible for monitoring and
coordinating the performance of these GOCCs and ensuring their

APEC 2007 Economic Policy Report p.108

See also Ria Corazon A. Golez, op cit note 30
45
The Corporate Governance Scorecard for GOCCs/GFIs presented by Jonathan Juan DC
Moreno, Executive Director of Institute of Corporate Directors (ICD) at the Asian Round Table
on Corporate Governance in Singapore (15-16 May 2006), cited by Golez, op cit. at p.58
43
44

Page 8 of 10

compliance with corporate governance principles.46 Likewise, there is

no entity tasked to enhance operational public accountability, promote
sufficient allocation and use of resources, instil financial discipline and
promote financial self-sufficiency, integrate the plans and programs of
GOCCs with the requirements and goals of government policy, act as
the policy formulating and recommending body accountable to the
President on matters concerning the government corporate sector. 47
The Response: Creation of Governance Commission for GOCCs
The Government realized that the management, coordination and
monitoring of the performance of GOCCs currently undertaken by the
various Departments and Government Agencies to which they are
attached do not sufficiently ensure that GOCCs, in the performance of
the purposes for which they were established, achieve fiscal viability
and responsibility.48
It anticipates that the lack of centralized
monitoring and supervision of the management and operations of the
GOCCs will further result in the substantial and continued depletion of
the States funds without maximizing the potential of these GOCCs to
achieve their mandates under their charters. 49
In view of this, the Government passed RA 10149, otherwise known
as the Governance Act. The law declares that the State recognizes the
potential of government-owned or controlled corporations (GOCCs) as
significant tools for economic development.50
Consistent with the state policies, the law created the
Governance Commission for GOCCs (GCG) to serve as central advisory,
monitoring, and oversight body with authority to formulate, implement
and coordinate policies.51 The GCG is tasked among others, to:
(a) evaluate the performance and determine the relevance of the
GOCC, to ascertain whether such GOCC should be reorganized,
merged, streamlined, abolished or privatized, in consultation with the
department or agency to which a GOCC is attached;52 and
(b) assess GOCC performance on operations and financial
management; and coordinate and monitor the operations of GOCCs. 53
Fiscal Discipline and Anti-Graft Measures
Corporate governance reforms include the provision for fiscal
discipline in GOCCs. Section 19 of the Governance Act provides for
the fiduciary duties of the Board and Officers: Loyalty, due care,
Ibid
Ibid
48
Explanatory Note Senate Bill No. 2640 (RA 10149)
49
Ibid
50
RA 10149
51
Ibid
52
Section 5(a), RA 10149
53
Section 5(g) Ibid. For detailed functions please see Section 5(a) to Section 5(e)
46
47

Page 9 of 10

avoidance of conflict of interest and sound business principles. 54

Discussion of these measures on accountability and fiscal discipline will
not be complete without tackling the issue of graft and corruption in
government agencies and public corporations. Prof. Leonor MagtolisBriones, former National Treasurer and Author of PNOYs Solution to
Corruption55 stated that good governance is tied down on the issue
on graft and corruption.
Since President Aquino won the last presidential elections on an
anti-corruption platform, the call for action against corruption has been
pursued and strengthened. The enforcement of current anti-graft and
anti-corruption laws was expanded and the conduct of Lifestyle Check
was institutionalized, leading to the legal sanctions of government
officials and employees with unexplained wealth. 56
VI.

OTHER GOOD GOVERNANCE ISSUES

Republic Act No. 10149 mandates the Governance Commission

for GOCCs (GCG) to adopt an ownership manual and Government
Corporate Standards governing GOCCs.57 This will include the adoption
of the Code of Corporate Governance for GOCCs. The Code, therefore,
should, as much as possible, embody the same framework for
Corporate Governance earlier defined to ensure the achievement of
the GOCCs main thrust of financial viability, fiscal discipline and
ensuring that these corporations would be responsive to public
needs.58 It is clear that under the powers of the Board it can exercise
its best judgment to sustain financial viability. There are cases,
however, that the best judgment could not be exercised due to the
constraints of adherence to rules and rigid policies. This makes
accountability difficult to enforce.
As observed by Mr. Cesar L.
Villanueva, (now Chairman of GCG) in his paper, Philippine Corporate
Governance: Legal Framework and Regulatory Issues, 59 stated:
The problem, however, with mixing of the principlebase and the rule-base systems is that accountability may
in fact become difficult to enforce. This would happen when
the rule-base provisions on Corporate Governance are
deemed to be the whole embodiment of the principles in
Corporate Governance for public corporations, in that it is so
easy to argue that as long as the rules are followed, then
the principles are fulfilled, and what is not covered by the
rules would therefore be beyond the coverage of the
principles.
It may also give Boards collectively, and
directors, individually, the notion that by closely adhering to
Section 19, RA 10149
Leonor Magtolis Briones, PNOY SOLUTION TO GRAFT AND CORRUPTION, (For Publication),
2012
56
Ibid
57
Section 5 (c) RA 10149
58
RA 10149, Ibid
59
Cesar L. Villanueva, Philippine Corporate Governance, Legal Framework and Regulatory
Issues, ICD. p.33
54
55

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the letter of GCG, then they are doing good Corporate

Governance, leaving wholly the moving spirit behind
good Corporate Governance.60
Furthermore, in a related study61 it is observed that: a review of
the above-cited laws which enforce good governance reveals that the
good governance laws continue to move toward a more
private/business corporation model of accountability that emphasizes
the duties of loyalty and care through audits and other formal financial
controls and that focuses enforcement on financial wrongdoing by
directors and managers as well as their misuse of public funds.
Indeed, financial controls such as audit committees or mandated
audits, would improve the reliability of the information available to
regulators and the general public, and eradicating stealing, excessive
compensation, and misdealing within organizations, is undeniably a
worthy goal.
There are advantages to adopting corporate law
standards for GOCCs and GIs, and where obligations are comparable,
courts or supervising agencies should use corporate law standards in
determining expected behaviour for GOCCs and GIs. But there are
many situations in which the rules applicable to business organizations
fail to capture the needs of GOCCs/GIs, and a specific legal regime is
necessary.
These issues therefore, should be considered in the adoption of
the Model Framework for Corporate Governance for the GOCCs.
VII.

CONCLUSION AND RECOMMENDATION

With the passage of the Governance Act, it is anticipated that the

Government-Owned or Controlled Corporations will operate profitably
and will significantly contribute to the income of the State thereby
improving the quality of public services rendered and effectively
perform their role in national development.
To make the GOCCs financially viable and more responsive to the
needs of the public it is recommended that the Governance
Commission for the GOCCs immediately implement or adopt a Model
Framework for Corporate Governance taking into consideration the
respective mandates of the GOCCs.
Finally, to address the issue of graft and corruption, the
Government should further strengthen the enforcement of laws on
Anti-Graft and Corruption through the institutionalization of internal
control systems in GOCCs and by increasing the public awareness and
involvement of all stakeholders in these issues.
#
Ibid
Jeremy Wan, Philippines, Inc. Highlighting the Need for the Regulation of a Duty of
Obedience in Corporatized Governance, IPCG Journal, p. 57
60
61