August 2019

SGV thought leadership on pressing issues faced by chief executives in today’s economic landscape. Articles are published every Monday in the Economy section of the BusinessWorld newspaper.
27 August 2019 Cecille S. Visto

Redefining corporate rules Part 1

First of two parts For nearly 40 years, Batas Pambansa 68 or the old Corporation Code governed the way corporations operate in the Philippines. While the Code has been interpreted by jurisprudence and has been complemented by the Securities Regulations Code (SRC), the Revised Code of Corporate Governance, and the Foreign Investments Act, among others, it has taken nearly four decades to overhaul its provisions. In a recent study by the World Bank on the ease of doing business across 190 countries, the Philippines ranked 124th, lagging way behind its Southeast Asian neighbors like Malaysia (15th), Thailand (27th), and Vietnam (69th). In the 2019 World Competitiveness Report of the Swiss-based International Institute for Management Development (IMD), the Philippines ranked 46th out of 63 economies. While it improved its standing from 50th in 2018, the Philippines still ranked 13th out of 14 countries in the Asia Pacific Region alone, beating only Mongolia. Republic Act (RA) 112321 or the Revised Corporation Code of the Philippines (RCC), signed into law by President Rodrigo R. Duterte on Feb. 20, has redefined the corporate rules to promote ease of doing business, foster flexibility, and take full advantage of technological innovation. This article will discuss the key provisions, which are either new or are amendments to the old Corporation Code, making RA 112321 relevant, timely and more in step with the changing global business landscape. RELAXING THE MINIMUM NUMBER OF INCORPORATORS, RESIDENCY RULES In the past, one of the main concerns of foreign investors in establishing a local subsidiary was the difficulty in complying with incorporator-related requirements under the old Corporation Code. Prior to the RCC, the minimum requirements for incorporation included the participation of at least five incorporators, all of whom are natural persons. These requirements appeared simple, but often proved difficult for a foreign investor who did not have the ready support of another incorporator, let alone four others. Another concern was the need for majority of these incorporators, along with the directors, to be residents of the Philippines. In SEC-OGC Opinion No. 04-18 dated March 19, 2018, the Securities and Exchange Commission (SEC) said the residency requirement, particularly for directors, is mainly for the protection of stockholders “against inactivity of the board where no quorum can be mustered due to repeated absence of a director who resides abroad.” Legislators, however, recognized that with advances in technology, foreign investors and multinational companies can continue to conduct their business in the Philippines even if they are not physically present all the time. Aside from natural persons, a partnership, association, corporation, trust or estate are now allowed in the RCC to act an as incorporator, subject to the compliance with certain requirements, including the approval of their respective boards or members to invest in the corporation. INTRODUCTION OF THE ONE-PERSON CORPORATION (OPC) With the relaxed minimum number of incorporators, it follows that the RCC allows the formation of an OPC, which is a corporation with a sole stockholder having a legal personality separate and distinct from that of such sole stockholder. The SEC issued the guidelines for incorporation of OPCs and began accepting applications on May 6. It approved the first OPC application a day after. OPCs are only required to submit Articles of Incorporation (AOI) but can forego the standard submission of the By-Laws. The OPC is a welcome development, particularly for entrepreneurs without business partners but who would like to set up an entity. Even a foreign natural person may put up an OPC, subject to the applicable capital requirements, as well as the constitutional and statutory restrictions on foreign participation in certain investment areas or activities. As to liability, the sole stockholder in an OPC can claim limited liability, provided he is able to prove that the corporation is adequately financed. Otherwise, the stockholder becomes jointly and severally liable with the OPC for the latter’s debts and other liabilities. Moreover, if the sole stockholder serves as the corporation’s concurrent treasurer, he is required to post a bond of at least P1 million. The rule on the “piercing of the corporate veil,” which holds a corporation’s shareholders personally liable for the corporation’s actions or debt in lieu of limited liability, is applied with equal force to an OPC as with other corporations. An ordinary stock corporation may apply for conversion to OPC when a single stockholder acquires all the stock of such a corporation, with the OPC succeeding the ordinary stock corporation in the outstanding liabilities as of the date of conversion. Conversely, the OPC may also be converted into a stock corporation after compliance with the requirements provided by law. In next week’s article, we will continue the discussion on the changes brought by the RCC, looking closely at three other important provisions, namely the corporate term, the use of arbitration and guidelines on appointing an emergency board, and the more effective use of technology to comply with regulatory requirements. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Cecille S. Visto is a Senior Tax Director of SGV & Co.

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15 August 2019 Evert De Bock

Project management in the transformative age

New platforms and drivers of productivity are creating new possibilities at unprecedented speeds, with steady advances in robotics, cognitive technologies and intelligent automation. To remain relevant and competitive, businesses are looking to implement digital strategies to keep up with the speed of change. However, while disruption has become the new buzzword to reflect the new trends challenging traditional business paradigms, the truth is that the fundamental changes in business models across industries convey a deeper shift that can be better described as “transformative” instead of disruptive. One of the defining traits of the transformative age besides the speed of change is the increasing dependence on connectivity. As Norman Lonergan, EY Global Vice Chair of Advisory puts it, “the transformative age goes beyond mere disruption, and is instead about being connected, whether to interfaces, data, experiences, or people.” Local businesses are already being recognized for using digital technologies that have transformed the market and for leadership in their digital transformation efforts, such as through the International Data Corp. (IDC) Digital Transformation Awards. Efforts are being taken to address the technological needs of many organizations and future-proof various businesses ranging from real estate, hospitality, restaurants, and infrastructure. A Microsoft/IDC Asia Pacific white paper, ‘Unlocking the Economic Impact of Digital Transformation in Asia Pacific,’ predicts that by 2021, digital transformation will add an estimated $8 billion to the Philippines’ GDP and increase its annual growth rate by 0.4%. CHALLENGES OF DIGITAL TRANSFORMATION To successfully lead their organizations through digital transformation, leaders will need to be well-versed in all aspects of the business environment, have the foresight to anticipate change, and integrate the disparate parts of a company. It’s certainly no easy feat. While 80% of organizations are undergoing digital transformations, only 25% of digital transformation projects result in real benefits. This is according to the Project Management Institute (PMI), a leading non-profit professional association. Since ownership of digital efforts should cut across the C-Suite and the different groups within a company, company leaders, IT, and project managers must all partner for optimum results while maintaining a broad view of the organization. Digital transformation projects can be especially challenging for global organizations or financial services companies. These often have legacy technology, third-party partners that contribute to the company’s complexity, and ingrained ways of conducting business. While smaller, digital-oriented startups merely have to execute their digital strategy, larger companies will need to take extensive current operations through digital transformation. Some of the challenges that arise due to the nature of transformation projects are resource allocation and priority in staff selection when weighed against ongoing operations. Another one is the impact of the transformation on the organization’s people, of whom many will be participants in the transformation effort. Transformation projects may result in changes to an organization’s structure, business processes, workplace location, or workforce, which, in turn, may trigger a natural human tendency to resist change. Addressing this human side of change is a key factor in ensuring that the results of any transformation project will endure. Further challenge comes from the scale of transformation projects, with diverse stakeholders both internal and external that will have varied, and sometimes, competing interests. STRATEGIES FOR SUCCESSFUL TRANSFORMATION These challenges can be addressed through the principles used to manage a transformation journey. By choosing the approach that best addresses the needs of the project, organizations will help minimize risks, control costs, and increase value. Murat Bicak, PMI senior vice president of strategy, shares the following strategies for successful digital transformation. Set clear goals and ROI metrics. There are several organizations that may still be confused about what it means to transform into digital. The effort encompasses more than the IT organization, and involves more than just digitization, according to Bicak. It is more about the business-wide use of emerging digital technologies to transform business processes and bring more value to both stakeholders and customers. Ensure that C-Suite sponsors are actively involved in projects. Inadequate sponsor support is one of the leading causes of project failure, according to the PMI. Conversely, the most common reason that transformative strategies succeed is strong support and buy-in from leadership. Executives can be more effective by staying connected with the program, helping navigate challenges, communicating its role, and advocating the program. Elevate the role of the project manager. The project manager role is evolving from that of an operational role to a strategy delivery role. Project managers are expected to bring forward expertise on innovation, strategy, and communication. Bicak adds that technical skills are only part of what project managers will need to lead digital transformation efforts, along with strategic business management and leadership. The essence of project management is the application of knowledge, skills, tools, and techniques to project activities in order to meet project requirements. It can be said that the rigor, discipline, standardized methodologies, and common language for complex change initiatives from project management can help increase the odds of success when applied to digital transformation. Investing in project management professionals by providing them with the tools, training, and skills they need to make their organizations as effective as possible will be key to driving the value delivery mindset needed for a successful project. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co. Evert De Bock is an Advisory Principal from SGV & Co.

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