Ayala Land (the real estate arm of Ayala Corporation) has a long-standing commitment to good corporate governance, which is indispensable for creating and sustaining value in the company for all its stakeholders.    

The structure for corporate governance of Ayala Land is principally contained in its Articles of Incorporation and By-Laws and their amendments. Supplementing and complementing these constitutive documents is the Manual of Corporate Governance approved by the Board of Directors, setting forth the principles of good and transparent governance. 

This report summarizes the overall framework for corporate governance and the practices adopted by Ayala Land towards achieving governance excellence.

BOARD STRUCTURE AND PROCESS

Key Roles
Ayala Land is led by a Board which is the highest authority in matters of governance and in managing the regular and ordinary business of the company. 

To ensure good governance, the Board establishes the vision, strategic objectives, key policies, and procedures for the management of the company, as well as the mechanism for monitoring and evaluating Management’s performance. The Board also ensures that adequate internal controls are in place for the preservation and protection of company assets and minimize the risk of losses.

Composition
The Board consists of nine members elected by the stockholders entitled to vote at the annual meeting. The Board members hold office for one year and until their successors are elected and qualified in accordance with the By-Laws of the company.

The Board represents a mix of business, legal, and finance competencies, with each director capable of adding value and rendering independent judgment in relation to the formulation of sound corporate policies. All Board members have participated in training on Corporate Governance. The names and profiles of each individual director are found in the Board of Directors section.

Independent Directors
As a publicly-listed company, Ayala Land conforms with the legal requirement to have at least two independent directors on the Board. Of the nine directors, three are independent directors, namely Corazon S. de la Paz, Francis Estrada and Oscar S. Reyes. Eight of the nine Board members were re-elected during the Annual Stockholders' Meeting held last April 1, 2009 while Mr. Reyes was elected as a replacement of Mr. Ramon R. del Rosario, Jr.

The company defines an independent director as holding no interests or relationships with the Corporation that may hinder their independence from the Corporation or Management which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. If the beneficial ownership of an independent director in the Corporation or in its related companies exceed the 10% limit, or if the director appointed or elected as an independent director subsequently becomes an officer or employee of the Corporation, the director shall cease being characterized as an independent director.

Chairman and Chief Executive Officer
The roles of the Chairman and the Chief Executive Officer are separate to ensure an appropriate balance of power, increased accountability, and greater capacity of the Board for independent decision-making.

The Chairman of the Board is Fernando Zobel de Ayala who assumed the position in 1999. Jaime Augusto Zobel de Ayala II acts as Vice Chairman. Antonino T. Aquino holds the position of President and Chief Executive Officer.

Both the Chairman of the Board and the President / CEO attend all Annual General Meetings.

Board Performance
Full Board meetings are held at least once a quarter. The Board has separate and independent access to the Corporate Secretary who, among other functions, oversees the adequate flow of information to the Board prior to meetings and serves as an adviser to the directors on their responsibilities and obligations. Discussions during Board meetings are open, and independent views are given due consideration.

In 2008, the Board had four regular meetings. The record of attendance of the Company’s directors during the Board meetings held for the year 2008 met the Securities and Exchange Commission’s requirement of more than 50% attendance.

Part of the tools used by the Board to monitor and improve its performance is an annual self-assessment. This is captured in a formal questionnaire that is answered by each member of the Board individually and where members of the Board are able to rate their individual performance and that of the Board as a whole with the results compiled by the Compliance Officer and submitted back to the Board for discussion and appropriate action through the Corporate Secretary. The self-assessment survey questions were reviewed and updated in early 2009 and applied for the 2008 review of performance. 

Nomination Committee.  The Nomination Committee’s main function is to install and maintain a process ensuring that all directors nominated for election at the annual stockholders’ meeting have all the qualifications and none of the disqualifications for directors as stated in the By-Laws and Manual of Corporate Governance. The Committee is also tasked to review the qualifications of executives prior to movement/promotion/hiring.  

During the year, the Nomination Committee held three meetings. In addition to reviewing the profiles of the nominees for directors for the year 2008-2009 and approving the final list of nominees, the Committee approved the appointments/promotions of key officers, including the designation of the Chief Legal Counsel and the Chief Information Officer. 

Personnel and Compensation Committee.  The Personnel & Compensation Committee’s main function is to establish a formal and transparent procedure for developing a policy on executive remuneration packages of corporate officers and directors, and other key personnel.  

The Committee approved the grant of the 2008 Executive Stock Ownership Plan (ESOWN) to qualified officers of the Company during its sole meeting on June 3, 2008. A total of 22,956,400 share grants, representing a dilution of less than 0.2% of the Company’s issued and outstanding common shares over a period of ten years, were awarded to qualified employees at a strike price of P9.74 per share. 

Audit Committee.  The Audit Committee provides assistance to the Board of Directors in fulfilling their oversight responsibility relating to the Company’s financial statements and the financial reporting process, the systems of internal and financial reporting controls, internal audit activities, the annual independent audit of the financial statements, and compliance with legal and regulatory matters.  

In 2008, four meetings were held. At these meetings, the Audit Committee reviewed and approved the 2007 Audited Financial Statements of the Company as prepared by the external auditors SyCip, Gorres, Velayo & Co. (SGV), as well as the 1st Quarter, 1st Semester and 3rd Quarter 2008 unaudited financial statements. The Committee likewise gave its recommendation on the appointment of SGV as the Company’s external auditors for 2008 and the proposed remuneration.  

In addition, the Audit Committee reviewed, noted and/or approved presentations by the Internal Audit Division on matters such as its audit plan for 2008, risk-based audit activities and special reviews; as well as presentations by SGV on matters such as its audit plan and an update on IFRIC 15 (Agreements for the Construction of Real Estate). The Audit Committee’s activities are further discussed in its Report to the Board of Directors.

Committee Members
The members of each Committee are set forth in the matrix below.

MANAGEMENT
Management places high importance on having clear policies, best practices and strong internal controls in support of effective corporate governance.

Training in Corporate Governance    

Along with the members of the Board, the Company requires members of the Management Committee and other key officers to receive periodic training in corporate governance. As of year-end 2008, 12 of the 13 members of the Management Committee and an additional nine key officers, including among others the Treasurer, the Deputy Compliance Officer and the Head of Corporate Strategy were certified by the ICD for having attended an accredited corporate governance orientation course. The Company remains committed to periodic upgrading of corporate governance training and intends to broaden the attendance to other members of senior and middle management beginning 2009.

Shareholder Value Creation  

We seek to provide consistent and attractive growth in the value of our shareholders’ investment and, thus, drive consistent growth in the value of our company. Our strategies, business models and operating plans have been geared to ensure consistent progress in the underlying determinants of value. Targets have been set for value growth and are being measured. We continue to place a high importance on Total Shareholder Returns as a key metric in the overall performance scorecards of management which are reviewed by the Board. At the same time, we are also putting more focus on two metrics we consider key to long-term growth and value creation. One is securing the growth pipeline, which includes securing future growth through new growth areas and investments. The second is measuring the success of foundation building initiatives, which include organizational alignment, decision support and project control systems.  

Equally important, we have cascaded these performance targets to our strategic business units, as well as support units and ensured these are embedded in their strategies.

Risk Management

The Board and Management remain firmly committed to the effective management of strategic, operational, financial and compliance-related risks throughout the organization. One of the key responsibilities of the Board is to ensure the presence of adequate and effective organizational and procedural controls, supported by both management information systems and a risk management monitoring and reporting system.

Key risk management initiatives implemented in 2008 focused on the following areas:

Management of Strategic and Operational Risks.  Even before we got hit by the market slowdown in the second half of last year, efforts to continuously improve the management of strategic and operating risks have been implemented. A more rigorous strategic planning and budgeting process has been developed and rolled out across the organization with particular focus on our SBUs to ensure that project proposals undergo stricter financial hurdles and are subject to appropriate downside scenario and sensitivity analyses, and that budgets are screened for the elimination of unnecessary or excessive spending before being passed for Board approval. Part of this process is the active monitoring and management of contingent liabilities, especially for our residential business where the risks are higher. This has resulted in the deliberate deferral of projects or the adjustment in the timing of some launches to take into account shifting market conditions. Related to this was the formation of a separate Investment Committee for further screening of high-value and high-profile projects in conjunction with the need to optimize cash management and capital efficiency.  

Other initiatives implemented in 2008 include the establishment of a Project Control Division whose role is to actively monitor cost, construction and delivery timetables, and adherence to quality standards; a review of Board approval limits for the group; a more rigorous performance management system through more in-depth regular reports on company performance and areas of concern; and the continued implementation of a more risk-based internal audit process that we employ to evaluate and monitor the effectiveness of current risk management practices.

Management of Risks to Financial Assets.  Exposure to liquidity, credit, interest rate, currency and equity risks arise in the normal course of our business activities. The main financial risk management objectives are: to identify and monitor such risks on an ongoing basis; minimize and mitigate such risks; and, provide a degree of certainty about costs.  

Our Treasury Group operates as a centralized service for managing financial risks and activities, as well as providing optimum investment yield and cost-efficient funding.

Over the past years, and critically in the last few months, various initiatives were undertaken to strengthen the balance sheet to enable the Company to weather the possibility of a protracted industry slowdown. These initiatives were undertaken along the following balance sheet items: cash, debt, accounts receivable, equity capital, contingent liabilities and the sale of non-core assets. More details on the Company’s efforts to effectively manage financial risks are discussed in the Notes to Financial Statements.

Management of Risks to Property/Physical Assets.  We recognize our inherent exposure to both natural and operational perils, and, as such, responsibly employ pure risk assessment processes to identify and apply proper risk control, mitigation and transfer measures at optimized levels of cost.  

Catastrophe risk modeling of international industry underwriters are validated using the latest catastrophe studies of government agencies to ensure that the Company gets natural peril cover based on scientific approaches to risk management. Furthermore, internal processes in the management of loss recovery and claims handling have been reviewed and updated to ensure better reporting and tracking of claims and have led to faster recovery and restitution of losses.  

The Company also recognizes the need to establish long term relationships with the international insurance markets. Hence, an Insurance Road Show was conducted in collaboration with the Company’s broker and lead insurers to promote Ayala Land as a responsible risk partner. This initiative furthered market confidence in Ayala Land, and immediately translated to improved coverage and rationalized premium arrangements.

Management of Risks in Supply Chain Managament.  As supply chain organizations gravitate toward a “build anywhere, source from anywhere” mindset, the risks associated with procurement and managing supply assume greater proportions. Examples of realworld procurement risks include long-term contracts at volatile prices, excessive dependence on one geography or supplier, supply disruptions (assurance of supply) due to natural disasters and supplier performance/quality. Proactive management of supply risk often requires a continuous evaluation of risk factors across the organization.  

From an operational standpoint, procurement risk management begins with the design of the supply network. Our definition of design encompasses the identification of suppliers, the design of the sourcing protocols/controls as well as the definition of contract terms. Although most discussions of risk center on supply volumes, price volatility is an important consideration as well and may require the use of financial strategies and tools.

The following are some of the initiatives we implemented in 2008:  

Assurance of Supply   

* Supplier Accreditation Process. Ensures that the Company and its subsidiaries deal only with vendors that complied with pre-qualification requirements and procedures of our Supply Chain Management Division (SCMD). It also limits the award of contracts to all pre-qualified vendors according to their specific classification or commodity grouping. This facilitates the shortlisting and sourcing process of vendors prior to bidding/purchase of goods and services.

* Financial background check of vendors/ contractors prior to awarding of contracts. This is usually a part of the Vendor Pre-qualification process which involves the financial evaluation of the vendor using various financial ratios, including the Altman Z score, and Gross Financial Contracting Capacity (GFCC) and Net Financial Contracting Capacity (NFCC) based on the submitted audited financial statements. A third party credit rating agency is also contracted to prepare a separate vendor evaluation report which includes credit investigation, financial standing and feedback from other companies.

Supplier Quality/Service Support/After Sales

* Supplier Performance Management. This ensures that the Company and its subsidiaries deal only with the most reliable and capable suppliers. Vendor performance is evaluated using vendor performance evaluation reports and incident reports that is required from project proponents or end-users before payments are released. An incident report is prepared by the project proponent as end-users encounter incidents that transpire before, during or after contract/project implementation/execution that have significant negative impact to the company or project. This assists vendors in improving their products and services by providing them feedback on their performance.

Annual General Meeting. Shareholder meeting and voting procedures are an important component of the framework established to safeguard the rights and interests of our shareholders.

Stockholders are informed at least fifteen (15) business days in advance of the scheduled date of the general meetings. Notices of regular or special meetings contain, in addition to the date, hour and place of the meeting, a statement of the matters to be transacted at each meeting. The notice to stockholders also set the date, time and place of the validation of proxies which is prescribed to be no less than five business days prior to the annual stockholders’ meeting.

Each share of stock entitles the person in whose name it is registered in the books of the Corporation to one vote, provided the conditions as regards payment have been complied with.