Meralco | Ang Liwanag ng Bukas

The following are the key players in ensuring the application of good governance practices and policies within Meralco:

1. SHAREHOLDERS
2. BOARD OF DIRECTORS
3. BOARD COMMITTEES
4. MANAGEMENT
5. EXTERNAL AUDITOR
6. INTERNAL AUDITOR
7. EMPLOYEES
8. SUBSIDIARIES
9. OTHER STAKEHOLDERS

A. SHAREHOLDERS

The Company upholds the rights of its shareholders, as well as the general investing public, to obtain relevant information about the Company in a timely and regular basis.

The Company's financial performance and prospects are regularly reported to the SEC and PSE. These reports are immediately made public upon submission to the SEC through press releases and postings in the Company’s website. These include disclosures on related party transactions in compliance with Company policy. No disputes in connection with such related party transactions were reported in the past two years.

Investors' briefings are held quarterly, where equity and credit analysts of both local and foreign-based institutions are invited. Analysts unable to attend in person participate through a teleconference facility with playback feature available up to three days after the event.

Members of Senior Management make themselves available for meetings with institutional investors through Company visits, teleconferences, briefings and attendance in local and international investor conferences. Press/media briefings are likewise held regularly to report on Meralco’s operating and financial results to the various representatives of media, particularly from the broadsheets and wire agencies. The briefings become venues for Management to answer questions and clarify issues prior to the release of information to the public.

Shareholders and investors are provided with adequate facility to communicate with the Company such as telephone, mail, electronic mail, and its website, www.meralco.com.ph. The Investor Relations Office supervises the investors’ briefings and attends to institutional investors’ needs; while the Stockholder Affairs Office attends to the inquiries and other concerns of shareholders, including the distribution of Notice and Agenda of the AGM at least 30 days before the said meeting. For the 2010 AGM, notices were sent on March 30, 2010, 56 days before the AGM on May 25, 2010.

The AGM serves as a venue for the shareholders to clarify Company issues in the presence of the Board, the Chairman, the CEO, Management and external auditors. Shareholders are encouraged to personally attend the AGM and if unable to do so, are advised of their right to appoint a proxy on their behalf. Notarization of a proxy is not required but has to comply with the requirements of law, in particular, the Corporation Code and SRC, pertinent rules and regulations, By-Laws, and rules and policies adopted by the Board.

The voting procedure in the AGM is as follows: (a) the matters in the agenda require the affirmative vote of qualified stockholders. Each common stockholder shall be entitled to one vote for each share; (b) in the election of directors, each qualified stockholder may accumulate and distribute his votes in accordance with the Corporation Code of the Philippines; (c) voting and counting of votes shall be by balloting, show of hands or viva voce. Auditors and inspectors appointed by the Board will be present to canvass and inspect ballots.

During the May 25, 2010 AGM, the shareholders ratified the dividend policy approved by the Board, which called for payment of regular dividends equivalent to 50% of core earnings, which may be supplemented by a special dividend determined on a 'look-back' basis. Any declaration and payment of a special dividend is dependent on the availability of unrestricted retained earnings and cash. Details of the cash dividend pay-outs are contained in the Notes to Consolidated Financial Statements.

Meralco Ownership Structure

The Company ensures that it consistently complies with the required disclosure on shareholdings of its securities. It discloses the top 20 shareholders of its common shares annually. It also provides an annual disclosure of security ownership at certain record and beneficial owners who hold more than 5% of its equity shares. In compliance with the SEC requirements, a quarterly report of the Company’s top 100 shareholders is disclosed in its website.

Based on Meralco’s stock and transfer book, the security ownership as at December 31, 2010 of certain record and beneficial owners of more than 5% of any class of its voting securities is as follows:

Details are found in the "List of Top 100 Stockholders as at December 31, 2010" as disclosed to PSE on January 17, 2011.

The Company’s public ownership level as at December 31, 2010 as posted in the PSE website is at 22%. As of the said date, the outstanding shares of the Employee Stock Options Purchase Plan represents 1.29% of the total capital stock of the Company.

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B. BOARD OF DIRECTORS

The Board of Directors (Board) has the primary responsibility of championing the principles of corporate governance. The Board also oversees the risk management function and the adequacy of internal control mechanisms to ensure the reliability of financial reporting, efficiency and effectiveness in operations, protection of assets and compliance with applicable laws and regulations.

Board Structure and Composition

There are 11 members of the Board with complementing expertise and experience necessary to act on various issues and matters affecting the Company. Of these directors, two (2) are executive directors, two are independent and seven are non-executive directors. The Board structure and practices provide clear division of responsibilities at the top of the corporation – between the Board exercising oversight function and Management discharging its executive responsibilities.

All the directors also fully comply with Energy Regulatory Commission (ERC) Resolution No. 1, Series of 2004, entitled "Program to Promote Good Corporate Governance in Distribution Utility," which requires attendance in seminars on corporate governance.

Board Independence

The elected independent directors for 2010 are retired Chief Justice Artemio V. Panganiban and Mr. Pedro E. Roxas. This is in accordance with the SRC requiring at least two independent directors or 20% of the members of the Board, whichever is lesser. They were nominated and elected in compliance with Rule 38 of the Implementing Rules of the SRC, as amended.

To further strengthen the Board’s independence, the Company separated the posts of the Chairman of the Board from that of the President and the CEO. Each position has distinct and separate duties and responsibilities in accordance with the Company’s amended By-Laws and Revised Manual of Corporate Governance. The Chairman of the Board is Amb. Manuel M. Lopez, while the President and CEO is Mr. Manuel V. Pangilinan.

Election of directors

In accordance with the provisions of the Company’s By-Laws and Revised Manual of Corporate Governance, the Corporation Code of the Philippines and the SRC, nominees to the Board go through a nomination and screening process. The final list of nominees is determined after pre-screening and evaluation of qualifications. The directors are elected by stockholders who are entitled to vote during the Annual General Meeting (AGM). They serve for a period of one year and until their successors are qualified and elected.

Board remuneration

The Company’s directors do not receive any compensation other than the Board-approved per diem for their attendance in Board and Board committee meetings. In 2010, each director was entitled to a director’s fee of Php120,000 for each Board meeting attended. Each member or advisor of the Audit and Risk Management, Compensation and Benefits, Finance, Nomination and Governance Committees was entitled to a fee of Php20,000 for each committee meeting attended. The fees were last adjusted in April 2010.

Board performance

The Board holds monthly meetings and special Board meetings, if so required, with agenda that include updates by the Chairman and the Board committees; reports on financial performance by the Chief Finance Officer; and operational performance by the President and CEO, the Senior Executive Vice President and COO, among other major Company issues.

See Meetings and Seminars section for the attendance of the Board to these meetings.

On February 28, 2011, the directors conducted its Annual Board Self-Assessment to evaluate their specific and overall performance for 2010. Board members assessed their individual and collective performance on Board structures, processes and responsibilities as it has been done in the past years.

The Board also conducted an evaluation of the 2010 performance of the President and CEO in the January 14, 2011 Board meeting as a continuing yearly activity. It was based on the attainment of key corporate goals for 2010, relative to his leadership, management, communication and working relationship with the Board.

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C. BOARD COMMITTEES

The Board of Directors shall form Board Committees to aid in ensuring compliance with the principles of good corporate governance. The members of such Committees shall be appointed by the Board of Directors annually.

The Company’s Board has five standing committees:

1. Executive Committee;
2. Nomination and Governance Committee;
3. Audit and Risk Management Committee;
4. Compensation and Benefits Committee; and
5. Finance Committee.

All committees have approved charters defining and specifying the scope of their responsibilities.

Executive Committee (ExCom) –The ExCom may act, by majority vote of all its members, on such specific matters within the competence of the Board, as may be delegated to it in the By-Laws or on a majority vote of the Board, subject to the limitations provided by the Corporation Code of the Philippines.

See Executive Committee Charter.

The following are the members of the ExCom:

See Meetings and Seminars section for the attendance to the ExCom meetings.

Nomination and Governance Committee (Nom & GovCom) –is responsible for screening qualified nominees for election as directors; assessing the independence of directors; introducing improvements on Board organization and procedures; setting-up of mechanisms for performance evaluation of the Board and Management; and providing programs for continuing education of the Board.

See Nomination and Governance Committee Charter.

The following are the members of the Nom&GovComm:

In 2010, the Nom & GovCom accomplished the following: review and selection of the nominees for election as members of the Board; review of rules on nomination of candidates, validation of proxies, and appreciation of ballots; proposal of amendments to the Company’s By-Laws; review of revisions to the Manual of Corporate Governance and the Code of Ethics; review of CG policy approval procedures; approval and conduct of the Board self-assessment; assessment of the skills and training needs of the Directors; and approval of the Policy on Solicitation and Acceptance of Gifts.

See Meetings and Seminars section for the attendance to the Nom & GovCom meetings.

Audit and Risk Management Committee (AuditCom) – it assists the Board in its oversight responsibility in the financial reporting process, system of risk management and internal control, audit process, and monitoring compliance with applicable laws, rules and regulations

See Audit and Risk Management Committee Charter.

The AuditCom is composed of the following members:

In 2010, the AuditCom accomplished the: review of the Company’s 2009 audited financial statements and 2010 quarterly financial statements; review of the financial performance of subsidiaries and affiliates; review and approval of the 2009 Audit and Risk Management Committee Report to the Board; endorsement of the nomination of the external auditor for 2010; review and approval of the 2010 internal audit plan, budget and covenant; review of 2009 internal audit performance, approval of external quality assessment review for the internal audit activity; review and approval of external auditor’s 2010 financial statement audit plan and fees; and evaluation of the Company’s risk profile and management structure, systems and processes.

See Meetings and Seminars section for the attendance to the AuditCom meetings.

Compensation and Benefits Committee (Comp & Ben Com) – The Comp & BenCom assists the Board in the development of the Company’s overall compensation and retirement policies and programs based on the Board approved philosophy and budget.

See Compensation and Benefits Committee Charter.

The Comp&BenCom is composed of the following members:

The committee’s major accomplishments for 2010 include the review and endorsement to the Board of the Company’s total compensation policy, philosophy and design; 2009 incentive program; 2009 performance evaluation, results, proposals for the 2010 performance management system and incentive plans and the Company’s balanced scorecard results; 2009 performance evaluation of the Chairman and CEO, and President and COO; nomination and appointments to the pension fund Board of trustees; and review of the Employee Stock Purchase Plan.

See Meetings and Seminars for the attendance to the Comp & BenCom meetings.

Finance Committee (FinCom) – It reviews the financial operations of the Company and matters regarding acquisition of or investments in companies, businesses or projects.

See Finance Committee Charter.

The FinCom is composed of the following members:

Among the accomplishments of the FinCom in 2010 are the approval of the 2011 corporate budget; review and approval of the medium-term financial plans; approval of cash dividend declaration for common and preferred shares; review of financial performance of subsidiaries and investment returns; review of quarterly cash projections and finance operations report; redemption on preferred shares; evaluation of debt refinancing; contribution to the pension fund; divestment of shareholdings in affiliate company; review of major purchases and contracts; and approval of bank accreditation and signing authorities.

See Meetings and Seminars section for the attendance to the FinCom meetings.

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D. MANAGEMENT

Management is primarily accountable to the Board. It is responsible for the Company’s successful implementation of the strategy and direction as approved by the Board. Management is represented by a Management Committee (ManCom) composed of the corporate officers and executives headed by the President and CEO, or in his absence, the Senior Executive Vice President and COO. Weekly meetings are conducted by the ManCom to ensure implementation of major policies and directions governing the Company and its subsidiaries. It reports to the Board during regular Board meetings or during special meetings through the President and CEO and/or the Senior Executive Vice President and COO.

The annual performance of Management is assessed through the achievement of the Company’s established Balanced Scorecard indicators. To ensure continued success in managing Company operations, Management attended a structured executive training and development, including training on compensation and benefit plans and on succession planning. In addition, similar training programs were provided for senior management and the executive levels.

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E. EXTERNAL AUDITOR

SyCip Gorres Velayo & Co. (SGV & Co.) was reappointed as the independent external auditor of the Company, through the approval of the shareholders in the Annual General Meeting.

The engagement partner assigned to the Company since 2008 is Mr. Gemilo J. San Pedro, who has extensive accounting and auditing experience. The appointment is in accordance with the SEC regulation that the audit partner principally handling the Company’s account is rotated every five years or sooner. In addition to serving as external auditor, SGV & Co. was engaged to provide non-audit services that included information and communication technology (ICT) security risk assessment in 2010, and for agreed upon procedures for the stockholders’ meeting in 2009.

The following consolidated fees (exclusive of VAT) were incurred by the Company and its subsidiaries for SGV & Co.’s services:

Other audit-related services in 2009 referred to under external auditors’ services are in relation to the Company’s filing of the Business Separation and Unbundling Plan Report and the Annual Report required by the ERC.

There has been no disagreement with the independent auditors on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure

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F. INTERNAL AUDITOR

The Company has an independent internal audit organization, which provides objective assurance and consulting services designed to add value and improve the organization’s operations. It helps organizations by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management in the Company, control and governance processes.

Internal Audit conducts its activities guided by the Institute of Internal Auditors’ (IIA) Professional Practices Framework primarily consisting of the International Standards, the Definition of Internal Auditing and the Code of Ethics, and the Company’s Code of Ethics. In the last quarter of 2010,

Internal Audit subjected its activities to an External Quality Assessment Review (EQAR) as part of its quality assurance and improvement program and as prescribed by the Standards. Punongbayan and Araullo (P&A) performed the EQAR and declared that the Corporate Audits of Meralco “generally conforms” to the IIA Standards. This further validates that these internal audit activities were in accordance with the International Standards for the Professional Practice of Internal Auditing (ISPPIA). The head of Corporate Audits reports functionally to the Audit and Risk Management Committee and administratively to the President and CEO.

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G. EMPLOYEES

The Company is committed to the development and welfare of its employees. All personnel and staff are properly informed, trained and empowered to perform well, in the spirit of malasakit and teamwork/collegiality. They are engaged and compensated based on qualifications, merit and performance.

Their professional growth and career advancement are ensured through the development and implementation of competency-based training, skills enrichment opportunities, and performance evaluation and job promotion plans and programs. Adequate provisions for medical and health support, essential benefits, rewards and recognition, and workplace safety are constantly provided for their protection, well-being and motivation. Uprightness and impartiality are observed in the resolution of conflicts. Management promotes openness and encourages employees to give suggestions and comments on corporate, administrative and operational improvements. Click link to Revised Manual of Corporate Governance for details.

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H. SUBSIDIARIES

The contribution of Meralco’s subsidiaries has always been significant in boosting shareholder value. The Subsidiary Management Policy continues to be the standard set of rules for creating and managing subsidiaries based on the criteria and principles embodied in the Company’s Manual of Corporate Governance, Code of Ethics, and existing laws, rules and regulations. In 2010, the Company introduced policy changes to strengthen good governance practice of subsidiaries. Specifically, a transparent process for the nomination and selection of Board members in subsidiaries was defined, ensuring that the criteria for Board directorship are followed including qualifications, composition and conflict of interest situations. The Company also encourages its subsidiaries to adopt their own Manual of Corporate Governance and Code of Ethics.

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I. OTHER STAKEHOLDERS

Meralco seriously considers the impact of business decisions on the interests of its shareholders and other stakeholders. The Declaration of Corporate Principle of the Company’s Revised Manual of Corporate Governance specifically mentions: "The Company…uphold(s) an ethical culture that will protect and promote the best interest of the Company for the common benefit of the Company’s stockholders and other stakeholders." The Company also protects and maintains good relations with its suppliers and creditors based on mutual respect and benefit. The Company strives to foster long-term stability, direct and open relation, and continuous development with suppliers to attain quality, competitiveness, process efficiency and performance reliability; foster governance principles in all of its business dealings with them; and seek, encourage and prefer

Revised Manual of Corporate Governance