Post on 02-Jun-2018
8/10/2019 Lucio Tan Final
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Ferdinand Marcos
10th
President of thePhilippines
December 30, 1965 –February 25, 1986
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1940: Represented
himself on a court
case and managed to
overturn charge of
murder.
Marcos, in his youth, giving the lawyer face.
LAWYER
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April 5, 1963
– December 30, 1965
Marcos, as a president, giving the duck face.
Senate President
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Lucio Tan (left) and Ferdinand Marcos
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3 main business transactions with
Lucio TanFormation of
cigarette monopoly
Lifted ban on establishment of
beer brewery
Personal involvement in the acquisition of
General Bank and Trust Company
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Nature of Transaction
Lead to the formation of cigarette
monopoly
Formation of Fortune Tobacco in 1966
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Nature of Transaction
Lifted ban on establishment of beerbrewery
Formation of Asia Beer Brewery in 1982
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Nature of Transaction
Acquired General Bank and TrustCompany at PHP310b (S$9.07m)
General Bank and Trust Company isrenamed to Allied Bank, 8th largest
bank in the Philippines
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Lucio Tan’s Prerogatives
•
Tax concessions
• Monopoly
•
Strategic allocationof individuals ingovernmental sectors
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Impact on Competitors and Society
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Formation of Asia Breweryled to direct competition
against San Jose Brewery Welfare
Disadvantaged with highertax rates
Tobacco monopoly drovetobacco prices down,
affecting the livelihood of
farmers
Higher prices for consumers
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Why Did Marcos help Lucio?
He values friendship
Later investigations show that Marcosowned 60% of Lucio Tan’s enterprises
Helping Lucio Tan equates to benefitinghimself
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Lessons Learnt
Having goodrelationships withinfluential people aidbusiness transactions
In order to get licenseto operate, need to
accept the terms of thepolitical establishment
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13th President of thePhilippines
June 30, 1998 –
January 20, 2001
Joseph Estrada
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•
Born on April 19, 1937• Began a career as a drama actor.
•
Estrada is the first celebrity to be a president.
• First mustached president.
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Lucio & Estrada
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Implications for Lucio
• Lucio elected as president of theFederation of Filipino-Chinese
Chambers of Commerce and Industry
•
Tax evasion case against Fortune
Tobacco Firm
•
Hailed as “hero” for keeping
PAL afloat
•
Honoured as major taxpayer
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Impact on Society
•
Lucio distorted the democratic electionprocess with resources given to preferredcandidates
•
Vested interests placed above those of thenation
•
Termination of air agreement caused hugelosses for many; significantly damagedbilateral relations with Taiwan
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Lessons Learnt
• Need for foresight
• Betting on the “Right Horse”
•
Importance of gainingpolitical allies in a system ofpatronage and clientelisticpolicies
• Halting or derailing ofbusiness transactions dueto vested interests
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Lessons Learnt
•
With vested interests,regulatory institutionsbecome susceptible to
reversals & inconsistentpolicies
• Need for businesses to be
exceptionally sensitive insuch politically unstableenvironments
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• December 1998, nine counts oftax evasion was filed under Judge Alex Ruiz against Lucio
Tan,
• 10 officials of his flagship firmFortune Tobacco Corp and 57executives of nine firms which
Tan allegedly used as conduits
to avoid payment of correcttaxes from 1990 to 1992.
Tax Evasion Case
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Favouritism of the Bureau of
Internal Revenue
•
President Estrada allowed Tan to name thenew BIR Commissioner in 1999
• Beethoven Rualo, a close associate of Tanwas chosen for the role.
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In September 1999, Tan fileda motion asking the court todismiss the DOJ’s move on atechnicality- its alleged
failure to file the petition forreview on time.
Government cannot imposeits will in collecting taxes
from major taxpayers in thecountry.
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Lessons Learnt
•
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A common theme emerges from his series of transactions with thegovernment:
• Provides personal benefits to politicians or government officials inreturn for political favours towards his businesses
Key Question:How beneficial is this approach to
Lucio’s firms & what are thealternatives?
•
Termed “rent seeking” model in economics• Capturing economic rent through manipulation of the
economic or political environment, instead of economictransactions and the production of added wealth
Evaluation of Strategy
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Evaluation of Strategy
• Resource dependency theory
• Pfeffer and Salancik argue firms rely on the external environmentfor resources and support to survive
market factors(technology,efficiency)
Non-market factors(social, legal,political)
Influencing gives an opportunity forgain or mitigating harm via policies,laws, court rulings
Controlled by the government/publicbodies
Resources include:
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Incentive present but decision considers the:
In developing countries, tendenciesfor• Extensive, sometimes arbitrary
government intervention• Variable policy decisions (High
uncertainty)
Magnitude of impact of government action onfirm
Benefits of government influence arehigh
Implication:
In developed capitalist countries,tendencies for•
Limited governmentintervention
• High degree in policy
consistency
Benefits of government influence are low
In Lucio’s case, the Philippine'sgovernment clearly falls here
•
Well documented cases of thewealthiest businesses directlybenefiting from links to the politicalelite
Critical for large firms to influence thegovernment
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Government officials expecteconomic rent(inducements) forsupport or typical regulatoryapproval
In developed nations such as
the U.S., lobbying or peakassociations are accepted as acommon routes to influencenational policies
In developing countries likeChina & Russia, formalinstitutions are weak & informalnetworks are essential toeconomic activity.
• Institutional theory
• States complying with norms and routines in the social, politicalcontext provides legitimacy for the firm’s survival
• Varies from country to country
Lucio’s strategy requires anunderstanding of the local socio-
political context
Evaluation of Strategy
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Socio-political structure of Philipines:
During Marcos’ Era (dictatorship)
Legitimacy/License to operate in statecontrolled industries (e.g. tobacco &alcohol) depended on• personal access to Marcos
•
Willingness to make illegal payments toMarcos
Otherwise legitimate private businesseswere eliminated & state monopolies handedto his cronies
From a profit max. viewpoint,• Not only beneficial to gain
personal access to and serveas a client to governmentnorms
• Essential for firm’s survival
Evaluation of Strategy
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Socio-political structure of Philipines:
Post Marcos
State reverted to earlier systemCharacteristics:• Political factions are alliances based on
patron-client, kinship and personal networksinstead of ideology
•
Public office commonly sought for promotingpersonal and factional/patrons’ interests
Elections campaigning•
Patron politics•
Chain of patron-clients down tomunicipal players who can influence localvotes
• Machine politics
Vast financial resources required to maintainloyalty though inducements (e.g. money, political
appointments)
Creates culture of endemiccorruption, prevalentpractice of exchange ofpolitical favours forfinancial gain
From a profit max.
viewpoint,• Wealthiest Filipino
businesses havebenefited from favoursfrom corrupt politicalnorms
Evaluation of Strategy
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Socio-political structure of Philipines:
Downside of Lucio’s approach
Political risks:
Political struggle involves maintaining one’sresources while undermining the resources ofrival faction’s
One’s business fortunes is tied with one’s client
Betting on the wrong politician can be costly•
In 1992 Presidential elections, Luciosupported Ramon Mitra against Fidel Ramos
•
Lucio Tan’s firms were met with hostility fromthe Ramos administration (BIR tax case)
Excessive reliance on
personal access &political favours
Advantages gained may beshort run.
• Limited success abroadfor Lucio Tan
• Failure of Fortune Tabaco or Asia Breweriesto develop strongcompetitive advantages
• Uncompetitive
internationally, hampersexpansionSocial pressure
Lucio’s practices deeply unpopular with public,possible catalyst for crackdown eventually
Evaluation of Strategy
l f
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Socio-political structure of Philipines:
Downside of Lucio’s approach
Ethical dilemmaEven if profitable, compliance with local political normsare ethically undesirable.
Prescription for firm’s in Lucio’s position
Ethics
No unlawful activity
government influence
• Resource dependency theory
Influence government?
Yes
Rely on personal access (legal)?
Engage in illegal political practices
Doubtful
Ethics
Evaluation of Strategy
l i f
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Socio-political structure of Philipines:
Downside of Lucio’s approach
Ethical dilemmaEven if profitable, compliance with local political normsare ethically undesirable.
Prescription for firm’s in Lucio’s position
Legal
• Resource dependency theory
Influence government?
Yes
Rely on personal access (legal)?
Engage in illegal local politicalpractices?
Ethics
Profit
No/Doubtful
Illegal High risk, short
t t
Yes
Firm’s should not neglect theircore function:
• Focus on improving theeconomic competitiveness forsustainable profits
Evaluation of Strategy