TAGUIG CITY UNIVERSITY

School of Graduate Studies

Case Analysis on

“Polytechnic Savings Bank, Inc.: A Failure in Fiduciary Trust”

Submitted to Prof. Marlon B. Raquel, LPT, MBA

In Partial Fulfillment
Of the Requirements for the Course
ENTERPRISE RISK & STRATEGIC MANAGEMENT

By

Hazelene Manalo
Master in Business Administration Student

September 15, 2019

GUIDE QUESTIONS:

1. Is the corporate governance framework of PSBI effective? What

operational policies did its major players adopt property? What

operational system appeared deficient?

ANSWER: Effective corporate governance is critical to the proper functioning of

the banking sector and the economy as a whole. Banks perform a crucial role in

the economy by intermediating funds from savers and depositors to activities that

support enterprise and help drive economic growth. Banks’ safety and

soundness are key to financial stability, and the manner in which they conduct

their business, therefore, is central to economic health. Governance weaknesses

at banks that play a significant role in the financial system can result in the

transmission of problems across the banking sector and the economy as a

whole. The primary objective of corporate governance should be safeguarding

stakeholders’ interest in conformity with public interest on a sustainable basis.

Among stakeholders, particularly with respect to retail banks, shareholders’

interest would be secondary to depositors' interest. Corporate governance

determines the allocation of authority and responsibilities by which the business

and affairs of a bank are carried out by its board and senior management,

including how they: set the bank’s strategy and objectives; select and oversee

personnel; operate the bank’s business on a day-to-day basis; protect the

interests of depositors, meet shareholder obligations, and take into account the
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interests of other recognised stakeholders; align corporate culture, corporate

activities and behaviour with the expectation that the bank will operate in a safe

and sound manner, with integrity and in compliance with applicable laws and

regulations; and establish control functions. The Polytechnic Savings Band Inc

guidance draws from principles of corporate governance published by the

Organisation for Economic Co-operation and Development (OECD). The OECD’s

widely accepted and long-established principles aim to assist governments in

their efforts to evaluate and improve their frameworks for corporate governance

and to provide guidance for participants and regulators of financial markets.

Supervisors have a keen interest in sound corporate governance, as it is an

essential element in the safe and sound functioning of a bank and may adversely

affect the bank’s risk profile if not operating effectively. Well governed banks

contribute to the maintenance of an efficient and cost-effective supervisory

process, as there is less need for supervisory intervention. Sound corporate

governance may permit the supervisor to place more reliance on the bank’s

internal processes. In this regard, supervisory experience underscores the

importance of having the appropriate levels of authority, responsibility,

accountability, and checks and balances within each bank, including those of the

board of directors but also of senior management and the risk, compliance and

internal audit functions.

2. Discuss the OECD principle on corporate disclosure and transparency.

What elements of this principle did the Bank violate? With adequately

implemented and accurate disclosure and transparency policies, would

the Bank still have suffered such a tragic end.

ANSWER: The corporate governance framework must guarantee that timely and

accurate disclosure is made on all substantial matters regarding the corporation,

including the financial condition, presentation, proprietorship, and governance of

the company. Disclosure and transparency would be the foundation of corporate

governance laws and codes. Business administrations should reveal their

economic and functioning outcomes, ensuring that their shareholders and other

stakeholders understand the nature of the organization’s operations, current

state of affairs and future direction in terms of developments. For financial

reporting, most countries now require that listed companies use the International

Financial Reporting Standards (IFRS) as a reporting framework/ guideline. The

board of directors should also disclose the inherent risks and estimates used in

preparing the financial and operating results in order to give investors a clear

understanding of the board and management’s business judgment.

3. Were the action and decisions of the Board in accordance with OECD’s

principle and board responsibilities? What areas were inadequately

covered? What lessons can be learned from these inadequacies?

ANSWERS: Corporate governance requirements and practices are typically

influenced by an array of legal domains, such as company law, securities

regulation, accounting and auditing standards, insolvency law, contract law,

labour law and tax law. Corporate governance practices of individual companies

are also often influenced by human rights and environmental laws. Under these

circumstances, there is a risk that the variety of legal influences may cause

unintentional overlaps and even conflicts, which may frustrate the ability to

pursue key corporate governance objectives. It is important that policy-makers

are aware of this risk and take measures to limit it. Effective enforcement also

requires that the allocation of responsibilities for supervision, implementation and

enforcement among different authorities is clearly defined so that the

competencies of complementary bodies and agencies are respected and used

most effectively. Potentially conflicting objectives, for example where the same

institution is charged with attracting business and sanctioning violations, should

be avoided or managed through clear governance provisions. Overlapping and

perhaps contradictory regulations between jurisdictions is also an issue that

should be monitored so that no regulatory vacuum is allowed to develop (i.e.

issues slipping through in which no authority has explicit responsibility) and to

minimise the cost of compliance with multiple systems by corporations. When

regulatory responsibilities or oversight are delegated to non-public bodies, it is

desirable to explicitly assess why, and under what circumstances, such

delegation is desirable. In addition, the public authority should maintain effective

safeguards to ensure that the delegated authority is applied fairly, consistently,

and in accordance with the law. It is also essential that the governance structure

of any such delegated institution be transparent and encompass the public

interest. Supervisory, regulatory and enforcement responsibilities should be

vested with bodies that are operationally independent and accountable in the

exercise of their functions and powers, have adequate powers, proper resources,

and the capacity to perform their functions and exercise their powers, including

with respect to corporate governance. Many countries have addressed the issue

of political independence of the securities supervisor through the creation of a

formal governing body (a board, council, or commission) whose members are

given fixed terms of appointment. If the appointments are staggered and made

independent from the political calendar, they can further enhance independence.

These bodies should be able to pursue their functions without conflicts of interest

and their decisions should be subject to judicial or administrative review. When

the number of corporate events and the volume of disclosures increase, the

resources of supervisory, regulatory and enforcement authorities may come

under strain. As a result, in order to follow developments, they will have a

significant demand for fully qualified staff to provide effective oversight and

investigative capacity which will need to be appropriately funded. The ability to

attract staff on competitive terms will enhance the quality and independence of

supervision and enforcement.

4. If you were the majority shareholder of PSBI, would you sell the Bank

based on the present valuation or try to rehabilitate it? Is the

rehabilitation feasible? Why or why not?

ANSWERS: It has long been recognised that in companies with dispersed

ownership, individual shareholders might have too small a stake in the company

to warrant the cost of taking action or for making an investment in monitoring

performance. Moreover, if small shareholders did invest resources in such

activities, others would also gain without having contributed (i.e. they are “free

riders”). This effect, which serves to lower incentives for monitoring, is probably

less of a problem for institutions, particularly financial institutions acting in a

fiduciary capacity, in deciding whether to increase their ownership to a significant

stake in individual companies, or to rather simply diversify. However, other costs

with regard to holding a significant stake might still be high. In many instances

institutional investors are prevented from doing this because it is beyond their
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capacity or would require investing more of their assets in one company than

may be prudent. To overcome this asymmetry which favours diversification, they

should be allowed, and even encouraged, to co-operate and co-ordinate their

actions in nominating and electing board members, placing proposals on the

agenda and holding discussions directly with a company in order to improve its

corporate governance. More generally, shareholders should be allowed to

communicate with each other without having to comply with the formalities of

proxy solicitation. It must be recognised, however, that co-operation among

investors could also be used to manipulate markets and to obtain control over a

company without being subject to any takeover or disclosure regulations.

Moreover, co-operation might also be for the purposes of circumventing

competition law. However, if co-operation does not involve issues of corporate

control, or conflict with concerns about market efficiency and fairness, the

benefits of more effective ownership may still be obtained. To provide clarity

among shareholders, regulators may issue guidance on forms of co-ordination

and agreements that do or do not constitute such acting in concert in the context

of takeover and other rules.

5. If you were a member of Board of Directors, what would you do

considering the general scenario depicted in the case? Justify your

consideration to OECD principle on the responsibilities of the board.

ANSWER: The Principles are intended to apply to whatever board structure is

charged with the functions of governing the enterprise and monitoring

management. Together with guiding corporate strategy, the board is chiefly

responsible for monitoring managerial performance and achieving an adequate

return for shareholders, while preventing conflicts of interest and balancing

competing demands on the corporation. In order for boards to effectively fulfil

their responsibilities they must be able to exercise objective and independent

judgement. Another important board responsibility is to oversee the risk

management system and systems designed to ensure that the corporation obeys

applicable laws, including tax, competition, labour, environmental, equal

opportunity, health and safety laws. In some countries, companies have found it

useful to explicitly articulate the responsibilities that the board assumes and

those for which management is accountable. The board is not only accountable

to the company and its shareholders but also has a duty to act in their best

interests. In addition, boards are expected to take due regard of, and deal fairly

with, other stakeholder interests including those of employees, creditors,

customers, suppliers and local communities. Observance of environmental and

social standards is relevant in this context. A. Board members should act on a

fully informed basis, in good faith, with due diligence and care, and in the best

interest of the company and the shareholders. In some countries, the board is

legally required to act in the interest of the company, taking into account the
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interests of shareholders, employees, and the public good. Acting in the best

interest of the company should not permit management to become entrenched.

This principle states the two key elements of the fiduciary duty of board

members: the duty of care and the duty of loyalty. The duty of care requires

board members to act on a fully informed basis, in good faith, with due diligence

and care. In some jurisdictions there is a standard of reference which is the

behaviour that a reasonably prudent person would exercise in similar

circumstances. In nearly all jurisdictions, the duty of care does not extend to

errors of business judgement so long as board members are not grossly

negligent and a decision is made with due diligence, etc. The principle calls for

board members to act on a fully informed basis. Good practice takes this to mean

that they should be satisfied that key corporate information and compliance

systems are fundamentally sound and underpin the key monitoring role of the

board advocated by the Principles. In many jurisdictions this meaning is already

considered an element of the duty of care, while in others it is required by

securities regulation, accounting standards, etc. The duty of loyalty is of central

importance, since it underpins effective implementation of other principles in this

document relating to, for example, the equitable treatment of shareholders,

monitoring of related party transactions and the establishment of remuneration

policy for key executives and board members. It is also a key principle for board

members who are working within the structure of a group of companies: even
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though a company might be controlled by another enterprise, the duty of loyalty

for a board member relates to the company and all its shareholders and not to

the controlling company of the group.