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Corporate governance for GOCCs and listed companies

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Cesar L. Villanueva

M. A. P. Insights

The GOCC Governance Act formally characterizes the members of the Governing Boards and Officers of GOCCs as “fiduciaries of the State” with “the legal obligation and duty to always act in the best interests of the GOCC, with utmost good faith in all its dealings with the property and monies of the GOCC.”

As fiduciaries of the State, the Act imposes the following duties of accountability, responsibility, and transparencies on directors and officers within the GOCC Sector, thus:

Duty of Loyalty: Act with utmost and undivided loyalty to the GOCC;

Duty of Diligence: Act with due care, extraordinary diligence, skill and good faith in the conduct of the business of the GOCC;

Duty of Loyalty: Avoid conflicts of interest and declare any interest they may have in any particular matter before the Board;

Duty of Care: Apply sound business principles to ensure the financial soundness of the GOCC; and

Duty to Appoint Competent Officers: Elect and/or employ only Officers who are fit and proper to hold such office with due regard to the qualifications, competence, experience and integrity.

DUTY TO EXERCISE EXTRAORDINARY DILIGENCE
Unlike in the private sector where directors, trustees, and officers are mandated to act with due diligence of a prudent individual, R.A. 10149 imposes upon directors, trustees, and officers in the GOCC Sector to exercise extraordinary diligence in pursuing the affairs of their respective GOCCs, thus:

a. As “fiduciaries of the State,” they have “the legal obligation and duty to always act in the best interests of the GOCC, with utmost good faith in all its dealings with the property and monies of the GOCC.”

b. They “must exercise extraordinary diligence in the conduct of the business and in dealing with the properties of the GOCC. Such degree of diligence requires using the utmost diligence of very cautious person with due regard for all the circumstances.”

The GOCC Code of Corporate Governance defines “extraordinary diligence” as the “measure of care and diligence that must be exercised by Directors and Officers in discharging their functions, in conducting the business and dealing with the properties and monies of GOCCs, which is deemed met when Directors and Officers act using the utmost diligence of a very cautious person taking into serious consideration all the prevailing circumstances and Material Facts, giving due regard to the legitimate interests of all affected Stakeholders.”

In law, whenever the standard of diligence required of a person or entity is “extraordinary diligence,” then whenever any wrong or damage is sustained by the sector to whom such fiduciary duty is owed, then the presumption is that the fiduciary is remiss is his duty.

Take the case of the Law on Common Carriers, which mandates that “Common carriers, from the nature of their business and for reasons of public policy, are bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers transported by them, according to all the circumstances of each case.”

In case of death of or injuries to passengers, or there is loss, damage, or deterioration of the cargo, the mere proof thereof raises the presumption that the common carrier is at fault, and it has the very heavy burden of proof to show that it has exercised extraordinary diligence in the conduct of its business and in the selection and supervisions of its officers and employees. A common carrier cannot even raise the defense of force majeure to avoid liability when it can be shown that it is of such a nature that should been foreseen, the common carrier had not exercise due diligence to prevent, minimize the losses before, during, and after the event.

The same doctrine applies in the banking industry which the Supreme Court had declared to be “impressed with public interest”, which requires a bank to assume a degree of diligence higher than that of a good father of a family.

The fiduciary obligation of banks to act with extraordinary diligence in their dealings with the public, makes them liable for the negligent or fraudulent acts of their officers and employees, for they must ensure that their officers and employees must also act with “high standards of integrity and performance,” because this is the only way to ensure that the banks will comply with their own fiduciary duty to the public.

The legal implication of the prevailing doctrines applicable to the duty to exercise extraordinary diligence is that directors and officers of GOCCs, when by their acts or contracts they have caused loss or damage to any of the various stakeholders, the injured parties need only to show the nature of the loss or injury sustained, and thereafter the acting director or officer shall be presumed to have complied with his duty of diligence, and the burden of proof is upon such director or officer to escape personal liability is to show that he has so exercise extraordinary diligence under the circumstances.

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

 

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

cvillanueva@vgslaw.com

map@map.org.ph

http://map.org.ph





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