Corporate Governance

Ayala remains at the forefront of good corporate governance.

The company has established leadership in good corporate governance in the local and regional setting. This is attested by the recognitions given by various reputable institutions. In 2010, Ayala was cited as Best in Corporate Governance by FinanceAsia and AsiaMoney in their regional polls. Corporate Governance Asia also named Ayala as among the Best in Asia for its adherence to good corporate governance. These citations strengthen our commitment to keep the trust of our stakeholders.

BOARD STRUCTURE AND PROCESS

Key Role and Responsibilities

The Board represents the company and the shareholders and is accountable to them for creating and delivering value, as well as protecting their best interests through effective and good governance.

The Board establishes the vision, strategic objectives, key policies, and procedures of the company, as well as the mechanism to properly monitor and evaluate management performance. The Board also ensures that internal control mechanisms for good governance are adequate.

Composition

The Board is composed of seven directors elected annually by the stockholders.

The Board represents a mix disciplines in the area of business, finance, and legal competencies, with each director capable of adding value and exercising independent judgment. Decision-making at the Board level adheres to a process that fosters the independence and integrity of judgment of each director. The Board structure provides a clear division of responsibilities between the Board and Management.

None of the independent directors owns two or more percent of the outstanding capital stock. The name and profile of each director are found in the Board of Directors section of this annual report on pages 58 and 59. All the directors have attended training on corporate governance.

Independent Directors

Ayala complies with the rules of the Securities and Exchange Commission (SEC) on the qualifications, nomination, and election of independent directors. The seven-member Board includes three independent directors who can effectively exercise their best judgment for the company. The three make up more than 40% of Board membership.

Each of our independent directors has no interest or relationship with the company that may hinder his independence from the company or management or interfere with his exercise of judgment in carrying out his responsibilities as a director. Ramon R. del Rosario, Jr., Xavier P. Loinaz and Antonio Jose U. Periquet sit as the independent directors. Nobuya Ichiki, general manager of Mitsubishi Corporation’s Manila Branch, is a non-executive director.

Chairman and Vice Chairman

The Chairman of the Board is Jaime Augusto Zobel de Ayala, who assumed the position in 2006. Fernando Zobel de Ayala holds the position of Vice Chairman.

Board Performance

Board meetings are held quarterly or as often as necessary. The Board has separate and independent access to theCorporate Secretary, who oversees the adequate flow of information to the Board prior to meetings and advises directors about their duties. Discussions during board meetings are open and independent views are given due consideration. Average attendance in the Board’s seven meetings last year was more than 90%. Five directors, namely, Jaime Augusto Zobel de Ayala, Meneleo J. Carlos, Jr., Xavier P. Loinaz, Ramon R. del Rosario, Jr. and Antonio Jose 2010 Annual Report 51 U. Periquet had perfect attendance during their incumbency. Fernando Zobel de Ayala, Mercedita S. Nolledo and Nobuya Ichiki were absent from one board meeting last year.

Board Committees

The Board has established committees to assist in exercising its authority in monitoring the performance of the business. Four committees, namely, Executive, Compensation, Nomination and the Audit and Risk Committee—provide organized and focused means for directors to achieve specific goals and address issues, including those related to corporate governance.

Executive Committee (ExCom). The ExCom exercises the Board’s powers during the periods between board meetings. The ExCom cannot approve: 1) actions requiring shareholders’ approval; 2) distribution of cash dividends; 3) filling of vacancies in the Board or in the ExCom; 4) amendment or repeal of By-Laws or the adoption of new By-Laws; 5) amendment or repeal of any resolution of theBoard which by its express terms is not so amendable or repealable; and 6) the exercise of powers delegated by the Board exclusively to other committees.

Compensation Committee. The Compensation Committee establishes a policy for a formal and transparent procedure for determining the salaries of officers and directors. It also oversees the pay of senior management and other key personnel. The Compensation Committee had one meetingin 2010, where it approved: 1) the performance bonus for 2009; 2) the 2010 compensation of officers and managers; and 3) the 2010 Executive Stock Option Plan (ESOP); and 3) the compensation of CEO and COO.

Nomination Committee. The Nomination Committee ensures that all nominees to the Board have all the qualifications and none of the disqualifications under the Company’s By-Laws and the Manual of Corporate Governance, as well as under the rules of SEC. The Nomination Committee also reviews the qualifications of all persons nominated to positions requiring appointment by the Board. At two meetings in 2010, the Nomination Committee: 1) approved the final list of nominees for directors for election at the 2010 annual stockholders’ meeting; and 2) endorsed for board approval the appointment of Mr. Delfin C. Gonzalez, Jr., as the company’s Chief Finance Officer and the promotion of Ginaflor C. Oris as Managing Director.

Audit and Risk Committee. The Audit and Risk Committee oversees the internal control, financial reporting and risk management processes of the company. The Committee held four meetings in 2010, where it reviewed and approved the 2009 consolidated audited financial statements of Ayala as audited by the external auditors Sycip Gorres Velayo & Co. (SGV), the unaudited financial statements of the company for January to September 2010 and the 2010 Internal Audit Plan. The Committee also approved the revisions on the company’s Manual of Corporate Governance pursuant to SEC Memorandum Circular No. 6, series of 2009, the issuance of the P10 Billion Putable Bonds and the SGV work plan for 2010 with the new accounting and auditing standards applied. The Committee likewise recommended the appointment of SGV as the company’s external auditor for 2010 and the approval of the proposed fee of SGV. The activities of the Audit and Risk Committee are further discussed in the Accountability and Audit section on page 53 and the Report of the Audit and Risk Committee to the Board of Directors on page 66.

Director and Senior Executive Compensation

Non-executive directors are Board members who are not officers or consultants of the company and who receive remuneration consisting of a retainer fee of P500,000.00 and per diem of P100,000.00 for each board meeting and P20,000.00 per board committee meeting attended. The remuneration of non-executive directors was ratified during the annual stockholders’ meeting in 2003. None of the non-executive directors has been contracted and compensated by Ayala for services other than services provided as a director.

Ayala adopts a performance-based compensation scheme for its senior executives. As additional incentive to Management, the Board approved stock option plans for officers covering 3% of the company’s authorized capital stock. The grantee is selected based on performance over a three-year period.

The total compensation paid to non-executive directors and officers is disclosed yearly in the Definitive Information Statement sent to shareholders at least 15 business days before the annual stockholders’ meeting. The total annual compensation includes basic salary, guaranteed bonus, and variable pay (i.e., performance-based bonus and gains fromexercise of stock options).

MANAGEMENT

Management is accountable to the Board of Directors for the operations of the company. It puts the company’s targets in concrete terms and formulates the basicstrategies for achieving the targets. Jaime Augusto Zobel de Ayala is the chief executive officer (CEO) and concurrently serves as chairman of the board, while Fernando Zobel de Ayala is the president and chief operating officer (COO).

The respective roles of the CEO and the President/COO are complementary and ensure a strategic distribution of leadership roles with defined accountability. The CEO takes the lead on company strategy, visioning, and developing business partnerships in close coordination with the President/ COO who is primarily responsible for the day-to-day operations, new business initiatives, corporate policy and resource allocation. In all functions and critical issues, both coordinate closely with each other. The Chairman/CEO and President/COO are supported by a management committee composed of key executives who meet twice a month to discuss business performance and other issues critical to the growth of the company. This operating structure with permeable boundaries speeds the flow of strategic and operational information among executive decision makers.

A culture of good governance is fostered throughout the organization, with Management and Board equally responsible in ensuring that the mechanisms and structure for good governance are in place.

The Chairman/CEO, President/COO, and members of the management committee attend the annual stockholders’ meetings.

Enterprise Risk Management

In line with its corporate governance infrastructure, Ayala adopted a group-wide enterprise risk management framework in 2002. The Audit and Risk Committee approved the Enterprise Risk Management Policy in 2003 and regularly reviews and updates it. The policy enhances the risk management process and institutionalizes a focused and disciplined approach to managing the company’s business risks. The risk management policy was updated in 2008 following the framework and standards recommended by the Committee of Sponsoring Organization.

The risk management framework covers the following:

• Identification and assessment of business risks;

• Development of risk management strategies;

• Assessment, design, and implementation of risk management capabilities;

• Monitoring and evaluation of risk mitigation strategies and management performance; and

• Identification of areas and opportunities for improvement in the risk management process.

The Audit and Risk Committee provides oversight of the risk management function.

In 2008, a more focused enterprise risk management framework was rolled out with the help of an external consultant. This included a formal risk-awareness session and self-assessment workshops with the functional units of the company. The Audit and Risk Committee has initiated efforts to institutionalize an enterprise risk management function across all the subsidiaries and affiliates.

In May 2010, the Chief Finance Officer was appointed as the Chief Risk Officer (CRO) in concurrent capacity.

The CRO oversees the risk management function and provides periodic reports on risk management initiatives and mitigation efforts to the Audit and Risk Committee.

At present, the policy, procedures and processes are under study for further enhancement and a review of the assessment done in 2008 will be undertaken in 2011. The work is in progress and the company shall continue to engage external technical support as it deems necessary to strengthen its Enterprise Risk Management expertise and capabilities.

Ayala’s internal auditors monitor the compliance with risk management policies to ensure that an effective control environment exists within the entire Ayala group.

ACCOUNTABILITY AND AUDIT

The Audit and Risk Committee oversees the performance of external and internal auditors. The roles and responsibilities of the Committee are outlined in the expanded Audit and Risk Committee Charter on the company’s website. The internal audit function is governed by a separate Internal Audit Charter.

Independent Public Accountants

The external auditor of the company is SGV & Co., a member of Ernst and Young. Lucy L. Chan has been the partner-in-charge since 2007.

The Audit and Risk Committee reviews Ayala’s financial reporting to ensure its integrity and oversees the work of the external auditor.

The Committee recommends to the Board and stockholders the appointment of the external auditor and appropriate audit fees.

The company paid or accrued the following fees, including VAT, to its external auditor in the past two years:

In 2010, SGV & Co. billed the company for an aggregate fee of P4.86 million for the following services:

(i) Post review and other procedures to issue the comfort letter for the company and the underwriters for the issuance of the Seven-Year Put Corporate Bonds

(ii) Due diligence for a potential acquisition

(iii) Financial review of operations of a foreign subsidiary

In 2009, SGV & Co. billed an aggregate fee of P1.95 million for the following services:

(i) Completion of the Enterprise-Wide Risk Management;

(ii) Performance of due diligence work related to possible investment; and

(iii) Conduct of seminar on major differences between International Financial Reporting Standards and U.S. Generally Accepted Accounting Principles

No tax consultancy services were secured from SGV &Co.

Internal Audit

The Internal Audit unit independently reviews Ayala’s organizational and operational controls and risk management policies, and compliance. The audit team, consisting of certified public accountants and a certified internal auditor, reports to the Audit and Risk Committee. Business and support units are regularly audited according to annual audit programs approved by the Audit and Risk Committee.

In 2010, the Audit and Risk Commitee received, noted, and/ or approved audit reports from Internal Audit Management according to the approved Internal Audit Plan. The Internal Audit function was rated “Generally Conforms” after a thorough third-party quality assessment review (QAR) by the Institute of Internal Auditors Inc. (USA) in May 2007. The rating, considered the highest possible score in connection with the QAR, confirmed that Internal Audit’s activities conformed with the International Standards for the Professional Practice of Internal Auditing. The QAR has to be undertaken every five (5) years. The company continues to improve the internal audit function by using a risk-based audit approach and by benchmarking against best practices.

Compliance Officer

The Compliance Officer ensures that Ayala adheres to sound corporate governance and best practices. Solomon M. Hermosura, managing director and general counsel, is the Compliance Officer.

The Compliance Officer identifies and manages compliance risks, implements and monitors compliance with the Manual of Corporate Governance; and certifies yearly the extent of Ayala’s compliance with the Manual.

The Compliance Officer conducts a yearly performance assessment of each member of the Board to assess the level of the Board’s compliance with leading practices and principles of good corporate governance. This is a formal self-rating system that takes into account factors such as independence, effectiveness, experience, judgment, knowledge, time commitment and team work, and identifies clear areas for improvement.

DISCLOSURE AND TRANSPARENCY

Ayala is committed to the high standards of disclosure and transparency to give the investing community a true picture of the company’s financial condition and the quality of its corporate governance.

Ayala highly conforms to the best practices set by the Philippine Stock Exchange (PSE) in its Corporate Governance Guidelines which were released in November 2010.

Ownership Structure

Ayala has a transparent ownership structure. It discloses quarterly the Top 100 shareholders of the company. The Definitive Information Statement sent to shareholders discloses the stock ownership of directors and management, as well as of record and beneficial owners of more than 5%. As of December 31, 2010, Mermac Inc. held 253.1 million common shares representing 52.11% of Ayala’s total outstanding common shares. PCD Nominee Corporation held 146.1 million common shares or 30.09% and Mitsubishi Corporation held 52.6 million common shares or 10.82%. Out of the total 486 million outstanding common shares, 165.93 million or 34.17% were beneficially owned by non-Filipinos.

There were 12 million outstanding listed Preferred A shares, 95.78% of which were owned by various holders registered under the PCD Nominee Corporation. Of the outstanding Preferred A shares, 0.16% were beneficially owned by non-Filipinos.

Out of the 58 million outstanding listed Preferred B shares, 30 million shares or 51.65% were owned by various owners registered under the PCD Nominee Corporation and about 0.34% were owned by foreigners.

Of the 756 million total issued and outstanding common and preferred shares of the company, 200.4 million common and preferred shares or 26.53% were owned by foreigners.

As of the end of the fiscal year December 2010, 44.02% of Ayala’s listed common and preferred shares were owned by the public.

There were no cross or pyramid shareholdings.

Content and Timing of Disclosures

Ayala updates the investing public with strategic, operating, and financial information through adequate and timely disclosures filed with the SEC and PSE which are readily available on the company’s website. www.ayala.com.ph

Aside from compliance with periodic reportorial requirements, Ayala punctually discloses major and marketsensitive information such as dividend declarations, joint ventures and acquisitions, the sale and disposition of significant assets, as well as other material information that may affect the decision of the investing public.

In 2010, the company filed unstructured disclosures involving the amendment of the company’s Articles of Incorporation on the reclassification of shares; the interest in the participation in the privatization of the Angat Hydroelectric Power Plant; SEC approval of bonds; election of an additional independent director; participation in the BPI stock rights offer; results of the voting preferred shares offered to the common shareholders; the share buy-back program; and senior executive movements.

Consolidated audited financial statements for the latest financial year were submitted to the SEC by the April 15 deadline, while the audited annual report was submitted at least 15 working days before the annual stockholders’ meeting.

In 2010, the audited financial statements as contained in the Definitive Information Statement were submitted to the SEC and PSE on March 17, 2010 and to the PSE on the same day, more than three weeks before the April 16, 2010 annual stockholders’ meeting.

Interim or quarterly financial statements were released between 30 to 45 days from the end of the financial period. The results were disclosed to the regulators within 24 hours from the time the Audit Committee met to accept the results. The results were also provided to financial and stock market analysts during an analysts’ briefing, where members of senior management presented the results personally, as well as through the company website as soon as the SEC received the statements.

Financial Reporting

Ayala’s financial statements comply with Philippine Accounting Standards and Philippine Financial Reporting Standards.

The annual consolidated financial statements break down total assets, total liabilities and equity, revenues, costs and expenses, income before income tax, net income attributable to equity holders of Ayala and noncontrolling interests, and earnings per share.

A more comprehensive disclosure of business segment results is provided to help shareholders appreciate the various businesses and their impact on overall value enhancement. The following are disclosed in the note on Business Segments, pages 149 to 151: 1) total revenue, 2) operating profit, 3) net income, 4) segment assets, 5) investments in associates and jointly controlled entities, 6) segment liabilities, and 7) depreciation and amortization.

A section on Geographical Segment includes the following information: 1) Revenue, 2) Segment Assets, and 3) Investment Properties.

Transactions entered into with associates and other related parties are on an arm’s length basis. Sales and purchases of goods and services to and from related parties are in accordance with market prices. Related party transactions are discussed and quantified in the Notes to the Consolidated Financial Statements on pages 153 to 155.

Information on Ayala’s financial instruments is guided by the company’s risk management objectives and policies to allow a better assessment of financial performance and cash flows. Significant accounting judgments and estimates are also disclosed.

DEALINGS IN SECURITIES

Ayala has adopted a policy on stock transactions to ensure compliance with the government regulations against insider trading.

Reporting of Transactions

Ayala complies with the requirement for directors and principal officers to report to the SEC and the PSE within five trading days any acquisition or disposal, or change in their shareholdings in the company.

Ayala has expanded coverage of this requirement to include members of the Management Committee and all the managing directors. All other officers must submit a quarterly report on their trades of company shares to the Compliance Officer.

Trading Blackouts

The company has adopted a policy on insider trading, which covers directors, officers and employees, consultants, members of key officers’ immediate families, and all other employees who have knowledge of material facts or changes in the affairs of Ayala which have not been disclosed to the public. Covered persons are prohibited from buying or selling the company’s securities during trading blackouts. The policy covers the company’s shares of stock, options to purchase stocks, bonds, and other evidence of indebtedness.

During the year, notices of trading blackouts for structured disclosures were issued for a period covering ten (10) trading days before and three (3) trading days after the disclosure of quarterly and annual financial results. The company strictly enforces compliance with these trading blackout periods and there have been no violations of the company’s policy on insider trading.

STAKEHOLDER RELATIONS

Ayala adheres to a high level of moral standards and fairness in dealing with all its shareholders, customers, employees, and business partners to lay down the foundation for long-term, beneficial relationships.

Shareholder Meeting and Voting Procedures

Stockholders are informed at least fifteen (15) business days in advance of the scheduled date of their meetings. The notice of regular or special meetings contains the agenda and sets the date, time and place for validating proxies, which must be done at least five business days prior to the annual stockholders’ meeting. Each outstanding common and voting preferred shares of stock entitles the registered holder to one vote.

Shareholder and Investor Relations

Ayala believes that open and transparent communication is needed to sustain growth and build investor confidence. Our investor communications program promotes greater understanding of the company’s long-term proposition to create value.

The company, through its Investor Relations Unit under Corporate Strategy and Development, addresses the various information requirements of the investing public and minority shareholders by fully disclosing these in a timely manner to the local bourse, as well as via quarterly briefings, annual stockholders’ meetings, one-on-one meetings, conference calls, road shows and investor conferences, website, and e-mails or telephone calls.

The company holds regular briefings and meetings with analysts, including financial analysts from the banking community. In 2010, four briefings were held announcing the 2009 year-end results and 2010 first quarter, first semester, and third quarter results. Analysts were also given access to senior management during these briefings.

Ayala has updated the Investor Relations section of its website to include the organizational structure, performance, ownership and governance of the company. The section is updated as disclosures to the regulators are made, while presentations at analysts’ briefings are immediately made available on the Web to provide easy access for the investing community.

Employee Relations

Ayala is committed to promoting the safety and welfare of its employees. It believes in inspiring its employees, developing their talents, and recognizing their needs as business partners. Strong and open lines of communication are maintained to relay the company’s concern for their welfare and safety, and deepen their understanding of the company’s business directions. The company encourages employees to participate in various company-sponsored interest groups, sports programs,volunteerism opportunities and social events to fostercamaraderie and engagement.

CODE OF ETHICAL BEHAVIOR

Ayala strongly believes in, and adopts as part of its basic operating principles, the primacy of the person, shared values and the empowerment of people. The company and its employees are guided by four core values: integrity, long-term vision, empowering leadership, and commitment to national development. These values are expressed in the company’s Code of Ethical Behavior, which outlines the general expectations of, and sets standards for employee behavior and ethical conduct. It is in conjunction with the company’s human resources policies, which includes the Code of Conduct governing acceptable behavior to ensure orderly company operations and protect the rights, safety, and work for the benefit of the employee force. Company employees are required to disclose any businessand family-related transactions to ensure that potential conflicts of interest are brought to management attention.

Recognitions

In 2010, various organizations recognized the company’s governance practices. FinanceAsia ranked Ayala 1st overall in the Philippines in its Best Managed Companies Poll, as well as Best in Corporate Governance, 1st for Best for Corporate Social Responsibility, and 2nd for Investor Relations. The company also topped Asiamoney’s Corporate Governance Poll, while Corporate Governance Asia cited Ayala as the Best in Asia for the sixth consecutive year.

OTHERS

Anti-Money Laundering. As a holding company, Ayala does not face issues on anti-money laundering. The company strictly complies with the provisions of the Anti-Money Laundering law.

WEBSITE

Additional information on the company’s corporate governance initiatives may be viewed at www.ayala.com.ph.

OUR CORE VALUES

Values drive behavior in an organization. Over the years, the corporate character of Ayala has not substantially changed in nature and orientation. It has evolved only to become stronger. These are the four core values that guide the way Ayala citizens work in all aspects of the business and this interaction with various stakeholders:

Integrity

Integrity means “doing the right thing” - being held accountable for all our actions. Doing the right thing has earned Ayala a position of trust among its stakeholders.

Long-Term Vision

Ayala’s track record of success was built by looking to the future. In banking, real estate,telecommunications, and utilities, our CEOs had a vision that they transformed into reality by fostering the spirit of entrepreneurship, excellence and synergy and by rewarding intelligent risk-taking while holding each one accountable for doing the best thing today in order to reap tomorrow’s rewards.

Empowering Leadership

At Ayala, we realize that leaders today need to manage a whole range of issues in increasingly complex situations. These challenges can only be met by empowering people at all levels of the organization to make decisions and to take action, within the framework of a shared vision and a shared corporate culture of innovation, responsibility and accountability.

Commitment to National Development

We take seriously our responsibilities as corporate citizens over and above compliance with the rule of law. We believe that beyond our business objectives, we must also do our share in nation building through programs in corporate social responsibility that help develop individuals, communities, and thecountry as a whole. By remaining true to these values, keeping them vibrant and relevant, and using them to bring out the best in its people, partners and other stakeholders, Ayala can count on keeping its position of trust and leadership for years to come.