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Combination of Executive and Non-executive Directors

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Cesar L. Villanueva

MAP Insights

Section II(1)(A) of the Original CG Code has essentially been carried forward into the Revised CG Code which basically empowers the Board to reconstitute the “Composition of the Board” between executive and non-executive directors, thus:

A) Composition of the Board

x x x

The membership of the Board may be a combination of executive and non-executive directors (including independent directors) in order that no director or small group of directors can dominate the decision-making process.

The non-executive directors should possess such qualifications and stature that would enable them to effectively participate in the deliberations of the Board.

x x x




There is no doubt that the intention of the Original and Revised Codes is to grant to the Board of Directors (BOD) of publicly-held companies as much leeway to bring together a team that can best serve the company. However, the actual number of Board seats that may be occupied by executive and non-executive directors, and the determination of what should be “sufficient qualifications, stature and number to carry significant weight in the Board’s decisions,” for non-executive directors cannot be understood to mean that it is within the power of the Boards by mere resolution (that adopts a set of guidelines) to set the terms thereof, for such provisions would be contrary to the provisions of the Corporation Code, which abhors any power being given to the BOD to determine by mere resolution (or by the adoption of guidelines) the composition of the Board and provide additional qualifications and disqualification for directors.

Under the current “corporate governance provisions” of the Corporation Code, the specific composition, qualifications and disqualifications for the BOD must be provided for either by law, including subsidiary legislation like the original and Revised SEC Codes, or in the by-laws. Boards do not have the power and authority to provide for their own composition or qualification, not even by means of a formal resolution adopted for that purpose. Any construction or understanding, that would grant such power and discretion to the BOD of a publicly held company under the language of the SEC CG Codes, would contravene the well-defined policy under the Corporation Code and can be challenged as being ultra vires and void. We will come back to this point in the discussions below.

Multiple Board Seats Rule for Directors and CEO of Publicly Held Companies
Section II(1)(B) of the Original CG Code has essentially been carried forward into the Revised CG Code which covers situation where directors and CEO of a PHC are also holding boards seats in other companies, thus:

x x x

B) Multiple Board Seats

The Board may consider the adoption of guidelines on the number of directorships that its members can hold in stock and non-stock corporations. The optimum number should take into consideration the capacity of a director to diligently and efficiently perform his duties and responsibilities.

The Chief Executive Officer (“CEO”) and other executive directors may be covered by a lower indicative limit for membership in other boards. A similar limit may apply to independent or non-executive directors who, at the same time, serve as full-time executives in other corporations. In any case, the capacity of the directors to diligently and efficiently perform their duties and responsibilities to the boards they serve should not be compromised.

These afore-quoted provisions cannot be construed to authorize the Board to disqualify, suspend or even terminate a member of the Board or the CEO who does not meet the “guidelines” set by the Board on issues relating to multiple board seats, when such “rules” do not find themselves expressed as provisions in the by-laws of publicly held companies. BODs do not have the power to set by mere resolution the qualifications and disqualification of their members. It would be more prudent to construe these particular provisions of the SEC Codes as “guidelines” given to the BOD of publicly held companies in undertaking their executive search and recruitment process in filling in vacancies or effecting changes in the Board’s composition and presenting the list of nominees to the stockholders for election; or to direct them to take appropriate by-law amendments to formally express such requirements as part of the qualifications of members of the Board.

The more appropriate question to ask on the matter is “Whether provisions in the SEC CG Codes clearly limiting the number of board seats that directors and CEO of publicly-held companies can hold in other companies (instead of granting such power on the Board to set) would be lawful exercise of the SEC’s quasi-legislative power?” The answer would have been in the affirmative, for the broad quasi-legislative powers of the SEC under both the Corporation Code and the Securities Regulations Code would mean that such qualifications/ disqualification rule on multiple board seats would have found itself expressed in the law, i.e., in subsidiary legislation.

The follow-up question would then be “Why did the SEC not just provide for a particular rule on multiple board seats in either the Original or Revised CG Codes?”

The answer to that would go into the very reason why the SEC decided to adopt the “comply or explain approach” under the CG Code for PLCs: The companies constituting the PHC sector are varied in their industries, culture and constituencies that it would be difficult for the SEC, as a regulatory agency, to arrive at a setup that would be efficient or effective to all companies within the sector. Thus, both the original and Revised CG Codes came up with an approach to give such power to set up the framework with the Boards of each of their publicly-held companies, who would be in a superior and market-responsive setting to properly set up the parameters. Unfortunately, such Board-enabling powers, when exercised outside of formal by-law provisions, would contravene existing “corporate governance provisions” of the Corporation Code, as discussed previously.

The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or the MAP.

 

Cesar L. Villanueva is Chair of the MAP Corporate Governance Committee, the Founding Partner of the Villanueva Gabionza & Dy Law Offices, and the former Chair of the Governance Commission for GOCCs (GCG).

cvillanueva@vgslaw.com

map@map.org.ph

http://map.org.ph