Good Governance and Social Responsibility

Case Analysis

Submitted by Group IX:

Canoy, Hazel Arianne R.

De la Cruz, Veronica N.
Monterona, Irish S.
Yanuario, Francis Josett B.

Submitted to:

Atty. Farolan

Cases Analysis On:

 BW Resources Corporation
 Central Azucarera Don Pedro
 Case 1 BW Resources Corporation

Summary on the 5 Chapters of the Case:

Company Profile

In 1995, Gaming Interest and Franchise Technologies, a company primarily engaged in the lotto business,
increased its authorized capital stock from P450 million to P2 billion and changed its name to Greater Asia
Resources Corporation (GRC). In 1996, rumors of a Danding Cojuangco but-in into the company, as well as a plan to
take over the development of a property in Boracay, sent the share price up from P1.30 to P3.10.

On 3 February 1997, GRC reported an FY 1996 net loss of P3.9 million, which caused its share price to slightly go
down to P2.60. Rumors of joint ventures with the company (of which none were confirmed) and the announced
acquisition of an interest in Alcorn Petroleum & Minerals (a listed firm) pushed the share price above P4.00 before
tapering off to P1.20 in September of the same year. The roller coaster ride of GRC shares continued for the rest of
1998. From P0.60, it touched P3.00 in December and went down again to P1.68 before the end of the year.

In February 1999, GRC changed its name to BW Resources Corporation (BW). The following month, it announced a
property-for-share swap agreement with Megaworld Properties (another listed firm). The series of name-and-
venture changes since 1995 coincide with frequent movements and changes in the ranks of the company’s Board
of Directors.

The Wild Ride

With no official news and disclosures from BW, share price steadily rose and breached the P10 mark in May 1999.
Merge talks with the sole operator of the computerized online bingo (Best World Gaming and Entertainment
Corporation) pushed share prices higher to over P20. In the next two-and-a-half months, various news and
disclosures about the company were released. Share price moved sideways from P25 to P30.

September was a sizzling month for BW. Reported talks between BW and Macao Gaming Tycoon Stanley Ho
propelled BW share prices to over P48 per share. By 1 October, BW share prices broke P50 and, in another week’s
time, went over P70 per share. The run-up continued unabated even with warnings from the Securities and
Exchange Commission (SEC), which was then already preparing to investigate the metric, phenomenal rise of BW
shares. The momentum continued for BW, and its shares eventually broke the P90 barrier, notwithstanding the
call of the PSE for the company to be investigated.

On 11 October 1999, Stanley Ho, who would assume chairmanship of the company, opened the day’s trading at
the PSE. BW reached an all-time high of P107 before closing at P97 with over 32 million shares traded that day.

The Succeeding Day’s Struggle

The collapse of the single most spectacular rise in share price ever recorded at the PSE happened faster than its
journey upwards. The threats of both SEC and PSE investigations dragged BW share prices down to P70 (and below
in the days that followed 11 October 1999. The announcement of a P8.17 million losses incurred from January to
July 1999 further influenced the decrease in BW share prices as it closed at a lowly P43.50 on 14 October 1999.

On 26 October, The Philippine Star reported that the PSE acknowledge the string of BW activities in the stock
market, as well as its trading trend, as still within the bounds of the known trading rules. PSE President Jose Luis
Yulo was quoted in the same spreadsheet with this assertion: "The trading trend in BW was still within the
 Case 1 BW Resources Corporation

allowable range in terms of price improvement." On 29 October, Senator Raul Roco, Chairman of the Senate’s
Banking Committee, was reported to have aired his suspicion of possible insider trading and price fixing behind the
unusual movements of BW shares. Furthermore, the then Secretary of Finance asserted that Dante Tan (a
business tycoon and major figure in BW) was a "victim" in the BW episode, adding that Tan "lost hundreds of
millions" trying to protect BW share prices.

The following days proved to be hectic for BW as it attempted to justify the value of its shares. In a bid to do just
that, the company made the following announcements to the trading public: (1) BW was currently involved in a
corporate colloquia with Hong Kong’s Crown Investment Ltd. for the lease of portions of Sheraton Marina; (2) BW
intended to operate 20 more bingo halls before the end of the year; (3) it would buy Tivoli Royale’s high-end
housing complex of Crista Monte Realty Development (a 6.7 hectare lot in Quezon City with an appraised value of
P3.46 billion) for P1 billion; and (4) it was negotiating with Rightland Corp. for the purchase of a 50 hectare
property adjacent to the Clark Special Economic Zone in Pampanga, on which the projects subject to the housing
requirements of the employees in the zone would be erected. The above-mentioned corporate disclosures
somehow arrested the sharp decline of BW shares, as it stabilized at P37.

The Succeeding Month’s Plunge

The PSE and the SEC intensified their probes concerning the suspected corporate malfeasance in BW. The
following practices were suspected to be prevalent in the company: (1) illegal transactions, (2) "off market"
transfers, (3) wash sales, (4) hype and dump, (5) squeezing the float, and (6) insider trading among its insiders and
brokers. The SEC questioned the failure of the PSE to monitor its ranks with regard to possible violations of
securities laws and issued a warning that it might lose its self-regulatory status. SEC Chairman Perfecto Yasay
pointed out two clear examples of price manipulation in the company: (1) cross sales were significantly higher
than market prices, and (2) they were settled directly between the buyer and seller, by-passing the PSE settlement
procedures. The PSE, in turn, confirmed that Tan entered into "private placements" and "buy-back" arrangements
with several clients of PCCI Securities, Inc., making them commit not to sell their shares anywhere within 60 to 180
days.

By December of the same year, the Senate pursued the BW investigation after the SEC suspended its probe,
allegedly due to the request of "higher-ups." This phenomenon would provide a spark in the build-up of public
disgust that would eventually culminate in "Edsa Dos"

BW in the Year 2000 Onwards

The incessant investigations that hounded BW at the start of the new millennium resulted in a catastrophic
decline in the value of its shares. Hovering at P7 in January, share prices went further down to P3 the following
month. The scandal would indubitably be etched in the annals of the Philippine securities market as the most
brazen manipulative scheme, with over 200 individuals (mostly friends of then President Estrada) involved. In its
final report on the BW saga, the SEC said that BW was financially infirm and could not satisfy the standard
conditions for profitability, liquidity and stability. It posted losses of P10.59 million in 1998, and P10.84 million in
1999. The conclusion was that BW could not pay dividends to shareholders. It could no longer carry out its
obligations with generally acceptable efficacy, and was sustaining business mostly from invested capital. The
company changed its name to Fairmont Holdings (FAIR), hoping to arrest the price decline. The company’s share
price went below P1 before the end of the year. The downward price journey continued as it closed at P0.51 in
2001, P0.30 in 2002, and P0.26 in 2003.
 Case 1 BW Resources Corporation

Guide Questions:
1) Enumerate the responsibilities of the Board of Directors according to the OECD manual. Which particular
responsibilities were not given due and proper attention in the case?

The responsibilities of the Board of Directors according to OECD manual Chapter VI:

 Board members should act on a fully uniformed basis, in good faith, with due diligence and care, and in
the best interest of the company and the shareholders.

 Where board decisions may affect different shareholder groups differently, the board should treat all
shareholders fairly.

 The board should apply high ethical standards. It should take into account the interest of the stakeholders.

 The board should fulfill certain key functions including:

1. Reviewing and guiding corporate strategy, major plans of actions, risk policy, annual budgets and
business plans; setting performance objectives; monitoring implementation and corporate
performance; and overseeing major capital expenditures, acquisitions and divestitures.
2. Monitoring the effectiveness of the company’s governance practices and making changes as
needed.
3. Selecting, compensating, monitoring and, when necessary, replacing key executives and
overseeing succession planning.
4. Aligning key executive and board remuneration with the longer term interests of the company
and its shareholders.
5. Ensuring a formal and transparent board nomination and election process.
6. Monitoring and managing potential conflicts of interest of management, board members and
shareholders, including misuse of corporate assets and abuse in related party transactions.
7. Ensuring the integrity of the corporation’s accounting and financial reporting systems, including
the independent audit, and that appropriate systems of control are in place, in particular, systems
for risk management, financial and operational control, and compliance with the law and relevant
standards.
8. Overseeing the process of disclosure and communications.

 The board should be able to exercise objective independent judgment on corporate affairs.
1. Boards should consider assigning a sufficient number of non-executive board members capable of
exercising independent judgment to tasks where there is a potential for conflict of interest.
Examples of such key responsibilities are ensuring the integrity of financial and non-financial
reporting, the review of related party transactions, nomination of board members and key
executives, and board remuneration.
2. When committees of the board are established, their mandate, composition and working
procedures should be well defined and disclosed by the board.
3. Board members should be able to commit themselves effectively to their responsibilities.

 In order to fulfill their responsibilities, board members should have access to accurate, relevant and timely
information
 Case 1 BW Resources Corporation

The particular responsibilities that the Board of Directors of BW Resources Corporation did not give due and
proper attention in the case were the fulfillment of certain key functions including:

 Monitoring and managing potential conflicts of interest of management, board members and
shareholders, including misuse of corporate assets and abuse in related party transactions.
 Ensuring the integrity of the corporation’s accounting and financial reporting systems, including the
independent audit, and that appropriate systems of control are in place, in particular, systems for risk
management, financial and operational control, and compliance with the law and relevant standards.
 Overseeing the process of disclosure and communications.

The case showed BW Resources’ and its stockbrokers’ manipulation of the gaming company’s stock prices that
skyrocketed to over P100 per share from just less than P1 over a one-year period, which resulted to one of the
largest corporate scandals in the Philippines, which roots it’s management’s desire to project a false picture of
performance, with the aim of driving up the value of the corporation in a competitive global market. All because of
the inefficiency of the board to fulfill the functions stated above.

2) The OECD presents a consensus on the rights of the shareholders. What are these rights? What particular
rights were at the issue in the case?

The rights of shareholders according to the OECD consensus were:

 Basic shareholder rights should include the right to: 1) secure methods of ownership registration; 2)
convey or transfer shares; 3) obtain relevant and material information on the corporation on a timely and
regular basis; 4) participate and vote in general shareholder meetings; 5) elect and remove members of
the board; and 6) share in the profits of the corporation.
 The right to participate in and be sufficiently informed on decisions concerning fundamental corporate
changes.
 The right to participate effectively and vote in general shareholder meetings and to be informed of the
rules; including voting procedures, that govern these meetings
 Capital structures and arrangements that enable certain shareholders to obtain a degree of control
disproportionate to their equity ownership should be disclosed.
 Markets for corporate control should be allowed to function in an efficient and transparent manner.
 Institutional investors should consider the cost and benefits of exercising their voting rights.

The BW Resources violated the following particular rights:

 Basic shareholder right to obtain relevant and material information on the corporation on a timely
regular basis. This is an issue in the case because the BW Resources share prices steadily rose on May
1999 with no official news and disclosures, and though disclosures are made later on in the case they were
not made on a regular and timely basis.
 Capital structures and arrangements that enable certain shareholders to obtain a degree of control
disproportionate to their equity ownership should be disclosed. This right was at issue because BW
Resources management did pursue an unbridled, opportunistic behavior shielded by the takeover market
through anti-take over devices. Regulations for take-overs generally aim at ensuring equal treatment of
shareholders in the process of a change of control.
 Case 1 BW Resources Corporation

3) What are the roles of the stakeholders in corporate governance? What fundamental measures should have
been done in BW to safeguard its stakeholders and players?

The roles of the stakeholders in corporate governance according to OECD principles were:

The corporate governance framework should recognize the rights of stakeholders established by law or through
mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth,
jobs, and the sustainability of financially sound enterprises.

a) The rights of stakeholders that are established by law or through mutual agreements are to be
respected.
b) Where stakeholder interests are protected by law, stakeholders should have the opportunity to obtain
effective redress for violation of their rights.
c) Performance-enhancing mechanisms for employee participation should be permitted to develop.
d) Where stakeholders participate in the corporate governance process, they should have access to
relevant, sufficient and reliable information on a timely and regular basis.
e) Stakeholders, including individual employees and their representative bodies, should be able to freely
communicate their concerns about illegal or unethical practices to the board and their rights should
not be compromised for doing this.
f) The corporate governance framework should be complemented by an effective, efficient insolvency
framework and by effective enforcement of creditor rights.

The fundamental measures that the BW Resources should have taken to safeguard its stakeholders and players
would be effective risk management, it is because risk Management is a key business process within both the
private and public sectors around the world. Effective risk management and the resulting controlled environment
are central to sound corporate governance and for this reason, much of the law that has been created in response
to corporate collapses and scandals, now requires effective risk management. Evaluating risks and identifying the
critical factors to manage the range of potential future outcomes is often overlooked. With scenario-based
planning however, risk management can yield insights on emerging dangers and make upfront mitigation
strategies possible. For this to become a reality, organizations need the capacity and intelligent monitors in place
to foresee unacceptable levels of risk and prepare for what might be.

4) If you were Ben, would you still have traded BW shares while simultaneously assuming the directorship of
the same company? What ethical, technical and legal considerations would (and/or would not) render this act
permissible? Discuss these considerations in view of OECD principles on key ownership functions and the
responsibilities of the board.

If I were Ben, I would not have traded the BW shares while simultaneously assuming the directorship on the same
company because there would be conflict of interest. This could corrupt the motivation for an act of the other
interest. Simultaneously trading share and assuming directorship falls under the insider trading cases at SEC,
where corporate officers, directors, and employees who traded the corporation's securities after learning of
significant, confidential corporate developments.

In view on the OECD principles on key ownership functions and the responsibilities of the board, what Ben did was
against the OECD principles which states that “the complexity of managing the corporation’s affairs in fast moving
and ever changing markets, shareholders are not expected to assume responsibility for managing corporate
activities”, and Mr. Ben did simultaneously assumed the directorship or managing corporate activities as a director
of BW and managing the corporation’s affairs in fast moving and ever changing markets through engaging in trade
of the BW shares of stocks.
 Case 1 BW Resources Corporation

5) What are the long-term implications of the BW scandal on the PSE and the Philippine Capital markets?

The long-term implications of the BW scandal on the PSE and the Philippine Capital markets was that, disclosure is
vital and dominant, the more transparent the internal workings of the company and cash flows, the more difficult
it will be for management and controlling shareholders to misappropriate or mismanage company assets; the SEC
and the Philippine Capital markets should be very efficient in monitoring and act in compliance with the duties and
responsibilities to protect the market from trading anomalies; and comply with the corporate governance code
enforcing penalties on delinquent entities. Furthermore, efficient risk management is also needed because the
failure of oversight and accountability, like what the clients of James did when they ignored his advice to stay
away from the stocks of BW, that just harm them as individuals involved plus it created an impact which almost
devastate our entire economy.

6) Discuss the OECD principle on disclosures and transparency. What measures should have been taken with BW
to ensure an adequate and accurate disclosure and transparency policy?

The OECD principle on disclosures and transparency was that the corporate governance framework should ensure
that timely and accurate disclosure is made on all material matters regarding the corporation, including the
financial situation, performance, ownership, and governance of the company.

A. Disclosure should include, but not be limited to, material information on:

a. The financial and operating results of the company.

b. Company objectives.
c. Major share ownership and voting rights.
d. Remuneration policy for members of the board and key executives, and information about board
members, including their qualifications, the selection process, other company directorships and
whether they are regarded as independent by the board.
e. Related party transactions.
f. Foreseeable risk factors.
g. Issues regarding employees and other stakeholders.
h. Governance structures and policies, in particular, the content of any corporate governance code
or policy and the process by which it is implemented.

B. Information should be prepared and disclosed in accordance with high quality standards of accounting and
financial and non-financial disclosure.

C. An annual audit should be conducted by an independent, competent and qualified, auditor in order to provide
an external and objective assurance to the board and shareholders that the financial statements fairly represent
the financial position and performance of the company in all material respects.

D. External auditors should be accountable to the shareholders and owe a duty to the company to exercise due
professional care in the conduct of the audit.

E. Channels for disseminating information should provide for equal, timely and cost-efficient access to relevant
information by users.
 Case 1 BW Resources Corporation

F. The corporate governance framework should be complemented by an effective approach that addresses and
promotes the provision of analysis or advice by analysts, brokers, rating agencies and others, that is relevant to
decisions by investors, free from material conflicts of interest that might compromise the integrity of their analysis
or advice.

The BW Resources should have taken precautionary measures such as prescribing a code that the Board of
Directors should be primarily responsible for the governance of the corporation. The Board should establish the
corporation’s vision and mission, strategic objectives, policies and procedures that guide and direct the activities
of the company, and the mechanism for monitoring management’s performance and in order for them to do their
responsibilities well they should be provided with complete, adequate and timely information prior to Board
meetings on an on-going basis. Adequate and accurate disclosure and transparency policy should be well
implanted as well because this will minimize or eliminate the projection of a false picture of performance of the
company and other misappropriate and mismanagement of the company’s real financial position.BW may also
establish a performance evaluation system to measure the performance of the Board and top-level management
of the corporation.