Arabia, Duchess Saudia T.

5BSA
BW Resources Corporation: The Scandal That Rocked A Presidency
1. Statement of the Problem
How will the board of directors of BW Company act as a board and apply corporate governance to serve the best
interest of the company, shareholders and stakeholders which would help them get back on their feet after the scandal
that resulted them to be financially infirm?

2. Statement of Facts
Meng, an industrious Filipino-Indian, made a small fortune in the textile trading business. Taking his relatives advice,
he started his venture into the stock exchange on Feb. 3, 1998. He made an initial maximum investment of P1 million
and opted for diversification. By March 31, 1998, he sold everything and made handsome profits. In the process, he
realized that the fundamental objective in playing the market was simply to buy low and sell high, and that sticking to
this entrepreneurial regularity would ensure consistent stock market victory. Rene was the Head of compliance at
surveillance department of the Philippine Stock Exchange (PSE). The PSE surveillance department consists of four
individuals and is tasked to monitor the stock market for trading anomalies. A stock cannot go up 50% and down 40%
in one trading day. An insider trading rule prohibits officers of a company from investing in any stock about which they
have material information that may cause the share price to go up or down. PSE requires companies to disclose any
material information that may affect the trading of its shares. James, the head of research at a local brokerage house.
He did some research and realized that BW company was trading at 18,000x price-earnings ratio (PE) versus the
market PE of less than 20x. In 1995, Gaming Interest and Franchise Technologies, a company primarily engaged in
the lotto business, increased its capital stock from P450 million to P2 billion and change its name to Greater Asia
Resources Corporation (GRC). On 3February 1997, GRC reported an FY 1996 net loss of P3.9 million, which cause
its share price to slightly go down to P2.60 but because of the acquisition of an interest in Alcorn Petroleum & Minerals,
it pushed the share price above P4.00 before tapering off to P1.20 in September of the same year. In February 1999,
GRC changed its names to BR Resources Corp. (BW). The series of name-and-venture changes since 2995 coincided
with frequent movements and changes in ranks of the company’s Board of Directors.
On October 11, 1999, BW reached an all-time high of P107 before closing at P97 with over 32 million shares traded.
The threats of both SEC and PSE investigations dragged BW share prices down to {70 (and below) in the days that
followed 11 Oct. 1999 and decreased to P43.50 on 14 Oct. 1999. After BW’s corporate disclosures, the company’s
shares stabilized at P37. SEC Chairman Perfecto Yasay pointed out two clear examples of price manipulation in the
company: (1) cross sales price were significantly higher than market prices and (2) they were settled directly between
the buyer and the seller, by-passing the PSE settlement procedures. The PSE 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. BW changed its name to Fairmont Holdings (FAIR), hoping to arrest price
decline. The share price of the company in 2003 closed at P0.26. SEC said that BW was financially infirm and could
not satisfy the standard conditions for profitability, liquidity and stability. Meng’s position was liquidated on 2 Dec. 1999.
He was left owing his broker more than P2 million.
3. Guide Questions
3.1) The responsibilities of the board are: (1) Board members should act on a fully informed basis, in good faith, with
diligence and care, and in the best interest of the company and the shareholders (2) Where board decisions may affect
different shareholder groups differently, board should treat all shareholders fairly (3) The board should apply high
ethical standards and should take into account the interests of stakeholders (4.1) Review and guide corporate strategy,
major plans of action, risk policy annual budgets and business plans, setting performance objectives, monitor
implementation and corporate performance and overseeing major capital expenditures, acquisitions and divestitures
(4.2) Monitor effectiveness of the company’s governance practices and making changes if needed (4.3) Selecting,
compensating, monitoring, and, replacing when necessary, executives and overseeing succession planning (4.4)
Aligning key executive and board remuneration with the longer term interests of the company and its shareholders
(4.5) Ensuring a formal and transparent board nomination and election process (4.6) Monitoring and managing potential
conflict of interest and misuse of corporate assets and abuse in related party transactions (4.7) Ensuring the integrity
of the corporation’s accounting and financial reporting systems (4.8) Overseeing the process of disclosure and
communications (5) The board should be able to exercise objective independent judgement on corporate affairs and
(6) Board members should have accurate, relevant and timely information.
Ben was a director of BW. He did not apply the responsibilities of the board as enumerated above. He did not act
in good faith because he is part of the BW saga that committed the biggest stock manipulation scheme in this nation.
He allowed the abusive related party transactions between Rene, James and the company. He did not do his job in
serving the best interest of the company because in the end, because of the disclosed manipulation the company’s
share price fell from P107 to P0.26. He did not take into account the interest of the shareholders and stakeholders
which resulted to Meng being liquidated from his position and Rene resigning as head of surveillance at the PSE. The
board did not apply high ethical standards because Ben did not care if he is doing the wrong thing by manipulating the
stock, as long as he will gain larger profits. The board did not apply corporate governance, because if the board did,
BW would not be financially infirm. Other responsibilities of the board were not given attention such as monitoring and
managing potential conflicts of interest of management and board members and shareholders, including misuse of
corporate assets and abuse in related party transactions, ensuring integrity of the corporation’s accounting and financial
reporting systems and overseeing the process of disclosure and communications.

3.2) The rights of shareholders include: (1) secure methods of ownership registration, transfer shares, obtain relevant
and timely info on a timely and regular basis., vote and participate in gen. shareholder meetings, elect and remove
members of the board and share in the profits. (2) participate and be sufficiently informed on decisions concerning
fundamental corporate changes (3) opportunity to participate effectively and vote in general shareholder meetings (4)
obtain a degree of control disproportionate to their equity ownership should be disclosed (5) Markets for corporate
control should be allowed to function in an efficient and transparent manner (6) exercise of ownership rights by all
shareholders and institutional investors should be facilitated and they should be allowed to consult with each other on
issues concerning their shareholder rights. Rights that were at issue are the following: (1) Basic shareholder right to
obtain relevant and material information on the corporation on a timely and regular basis. BW did not disclose the
cause of the steady increase in their stock prices on a timely basis as the official news was released after two and a
half months- since the news was long overdue, it is irrelevant. (2) Markets for corporate control should be allowed to
function in an efficient and transparent manner. Mergers and acquisitions done by BW should not be used to shield
management from accountability. This was done to justify the value of BW’s shares.

3.3) The roles of the stakeholders in corporate governance include: (1) rights established by law or through mutual
agreements are to be respected (2) opportunity to obtain effective redress in violation of rights (3) performance-
enhancing mechanisms for employee participation should be permitted to develop (4) access to relevant, sufficient and
reliable information (5) freely communicate their concerns about illegal or unethical practices to the board and (6)
corporate governance framework should be complemented by an effective, efficient insolvency framework and by
effective enforcement of creditor rights. To safeguard BW’s stakeholders and players, the company should implement
an effective risk management program or strategies. Risk management is an essential business process that evaluates
risks associated with certain investments and identifies critical factors that can mitigate damages incurred. Because of
management of risk, management can discern potential threats to the company and be able to prepare of formulate
strategies that would reduce the damage done. In implementing a risk management program, the company must first
set goals for risk management like protection against downside risks, manage volatility around business and financial
results and optimize risk and return. Second, the company should then define risk tolerance. Third, BW should assess
risks continuously to treat unwanted risks and seize emerging opportunities. Fourth, to report risk information by
reporting to the executives and board of directors to be able to incorporate strategic and operational planning.

3.4) If I were Ben, I wouldn’t have traded BW shares while simultaneously assuming the directorship of the same
company because he will gain personal benefit from actions or decisions made in his official capacity- conflict of
interest. He can possibly corrupt the motivation or decision-making that would affect the company because of his
personal interest. It is unethical and this act is therefore not permissible because instead of acting in the best interest
of the company, he will decide for his own personal benefit. In the OECD principle of responsibilities of the boar, he
violated the responsibility of (1) applying high ethical standards because his action resulted to conflicts of interest, (2)
ensuring integrity and systems for risk management because there was no risk management since the company fell
due to not being able to plan and prepare actions for possible threats for every decision done and (3) managing
conflicts of interest because he trades shares and is in the position of a board director in which he is supposed to be
objective.

3.5) After the BW scandal, PSE and the Philippine capital markets became even more strict and monitored intensely
the practices by companies that may be done with corporate malfeasance. They learned their lesson when the required
procedures were by-passed by BW. They valued the importance of disclosure more than ever. Transparency is
essential in providing shareholders with financial information because this can reduce the risk of misappropriation and
mismanagement of company assets. The implementation of rules and regulations especially the compliance of the
corporate governance code should be improved to protect the public.

3.6) The principle of disclosure and transparency explains that timely and accurate disclosure must be made on all
material matters regarding the corporation, including the financial situation, performance, ownership and governance
of the company. Disclosure should include material information on financial and operating results of the company,
company objectives, major share ownership and voting rights, remuneration policy for members of the board and key
executives, related party transactions, foreseeable risk factors, issues regarding employees and other stakeholders
and governance structures and policies. Information should be prepared and disclosed in accordance with high quality
standards and of accounting and financial and non-financial disclosure. An annual audit should be conducted by an
independent, competent and qualified auditor in order to provide an external land objective assurance to the board and
shareholders. 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. Users should obtain equal, timely and cost-efficient access to relevant
information. The corporate governance framework should be complemented by an effective approach that addresses
and promotes the provision of analysis or advice. To ensure an adequate and accurate disclosure and transparency
policy, BW should implement the code of corporate governance. The principles of corporate governance discuss the
responsibilities of the board such as monitoring managerial performance and achieving an adequate return for
shareholders while preventing conflicts of interest and achieving the best interest of the company and
shareholders/stakeholders, performance of the Board and management should also be regularly evaluated. Open and
honest communications support the decision to trust. Lack of communication and transparency creates suspicion.
Transparency happens only when an institution creates a culture of candor and respect, stakeholders feel free to speak
the truth to the board and management. There should be a meeting once every week with the representatives of
stakeholders and general shareholders meeting which should be done every week or depending on the situation of the
company. Annual audit should be conducted and there should be many external independent auditors to provide an
objective assurance to the board and shareholders that the financial statements fairly represent the financial position
performance of the company in all material aspects.