Lucio Tan Final

8/10/2019 Lucio Tan Final

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Ferdinand Marcos

President of thePhilippines

December 30, 1965 –February 25, 1986

1940: Represented

himself on a court

case and managed to

overturn charge of

murder.

Marcos, in his youth, giving the lawyer face.

LAWYER

April 5, 1963

– December 30, 1965

Marcos, as a president, giving the duck face.

Senate President

Lucio Tan (left) and Ferdinand Marcos

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

Nature of Transaction

Lead to the formation of cigarette

monopoly

Formation of Fortune Tobacco in 1966

Lifted ban on establishment of beerbrewery

Formation of Asia Beer Brewery in 1982

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

Lucio Tan’s Prerogatives

Tax concessions

• Monopoly

Strategic allocationof individuals ingovernmental sectors

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

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

Lessons Learnt

Having goodrelationships withinfluential people aidbusiness transactions

In order to get licenseto operate, need to

accept the terms of thepolitical establishment

13th President of thePhilippines

June 30, 1998 –

January 20, 2001

Joseph Estrada

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

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

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

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

Lessons Learnt

With vested interests,regulatory institutionsbecome susceptible to

reversals & inconsistentpolicies

• Need for businesses to be

exceptionally sensitive insuch politically unstableenvironments

• December 1998, nine counts oftax evasion was filed under Judge Alex Ruiz against Lucio

• 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.

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.

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

• 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:

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

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

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

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

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

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

Influence government?

Rely on personal access (legal)?

Engage in illegal political practices

Doubtful

Ethics

Ethical dilemmaEven if profitable, compliance with local political normsare ethically undesirable.

Prescription for firm’s in Lucio’s position

Influence government?

Rely on personal access (legal)?

Engage in illegal local politicalpractices?

Ethics

Profit

No/Doubtful

Illegal High risk, short

Firm’s should not neglect theircore function:

• Focus on improving theeconomic competitiveness forsustainable profits

Lucio Tan Final

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