M. A. P. Insights

In the private corporate sector as currently governed by common law developments under the Corporation Code, the “business judgment rule” pervades in defining the duties, responsibilities, and liability of directors, trustees and officers. The rule proceeds from the corporate set-up of Centralized Management which grants to the Board the sole authority to determine policy and conduct the ordinary business of the corporation within the scope of its charter. As long as the Board acts honestly and in good faith, the courts will not interfere in their judgments and transactions; and that minority members of the Board and the stockholders cannot come to the courts to change the course of the administration of the corporate affairs.
In the Law on Private Corporations, it has been well-established that when resolutions or transactions are “passed in good faith by the board of directors, it is valid and binding, and whether or not it will cause losses or decrease the profits of the [company], the court has no authority to review them. … It is a well-known rule of law that questions of policy or management are left solely to the honest decision of officers and directors of a corporation, and the court is without authority to substitute its judgment [for that] of the board of directors; the board is the business manager of the corporation and so long as it acts in good faith its orders are not reviewable by the courts.”
For purpose of corporate governance, it should be noted that the second part of the business judgment rule provides that directors, trustees, and officers cannot be held personally liable for corporate losses sustained and liabilities incurred by the corporation in the exercise of their business judgment. This principle of “non-personal liability” is now embodied in Section 31 of the Corporation Code which provides that directors or trustees shall be held liable for damages resulting in directing the affairs of the corporation on when the “willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith.” The general rule of “not being personally liable for corporate losses and liabilities,” unless it is proven that a director, trustee, or officer has acted unlawfully, with gross negligence, fraud or bad faith, has been upheld in an unbroken string of decisions of the Supreme Court.
The concept of business judgment rule as to shield directors, trustees, and officers in the private corporate sector from personal liability for the losses sustained by the corporation in the conduct of its affairs is generally inapplicable to their counterparts in the GOCC Sector.
Under the GOCC Governance Act, any form of negligence (not “gross negligence” as required in the private sector) means a breach of the fiduciary duty of GOCC directors, trustees, and officers to act with extraordinary diligence; and that in fact, all that has to be proven is that the GOCC incurred losses or damage in the conduct of its affairs, and the presumption is that the acting directors, trustees or officers have not discharged their obligations to “Act with due care, extraordinary diligence, skill and good faith in the conduct of the business of the GOCC.”
Section 21 of the GOCC Governance Act requires that “The members of the Board and the Officers must exercise extraordinary diligence in the conduct of the business and in dealing with properties of the GOCC. Such degree of diligence requires using the utmost diligence of [a] very cautious person with due regard for all circumstances.”
It is not the GOCC Governance Act that raised for the first time the standard of diligence for directors, trustees, and officers of GOCC to the “extraordinary diligence,” since it is the Code of Conduct and Ethical Standards for Public Officials and Employees that expressly includes within its coverage officials in GOCCs, which under the aegis of “Professionalism,” provides that “Public officials and employees shall perform and discharge their duties with the highest degree of excellence, professionalism, intelligence and skill.”
Prior to the enactment of the GOCC Governance Act, while there was little doubt that all members of the Governing Boards of Chartered GOCCs were deemed to be public officers as they were expressly covered by the Civil Service system under the 1987 Constitution, those in the nonchartered GOCCs considered themselves and were treated to a great extent as private sector directors/trustees and not as public officials. This practice was borne out of the understanding that nonchartered GOCC are “private corporations” and not government corporations, having been organized under the Corporation Code, and that the members of their Boards of Directors/Trustees were nominated and elected into office by the stockholders, and do not receive any appointment from the government that would make them public officers or government appointees.
To remove all doubts as to the status of Board Members of GOCCs as public officials, Section 15 of R.A. 10149 mandates that every “Appointive Director shall be appointed by the President of the Philippines from a short list prepared by the GCG.” In other words, no Appointive Director in the GOCC Sector covered by R.A. 10149 would enter upon his duties except pursuant to an appointment from the President of the Philippines. Furthermore, R.A. 10149 unified the duties, obligations and responsibilities of all Directors and Officers, as public officials, in all GOCCs, chartered and nonchartered, and made a single standard applicable to all as provided in Section 12 of the Act.
While breaches of the fiduciary duties of directors, trustees, and officers in the private corporate sector would expose them to civil liabilities, those in public corporate sector are liable to criminal prosecution as well.
To illustrate, when through gross negligence, fraud, or bad faith, a director/trustee or officer in the private sector causes losses to the company, Section 31 of the Corporation Code simply makes them personally liable for the losses sustained by the corporation or the damages incurred to person who deal with the corporation. In contrast, that same situation makes the GOCC director, trustee or officer criminally liable under Section 2 of the Anti-Graft and Corrupt Practices Act, falling in either of the following punishable acts:
(e) Causing any undue injury to any party, including the Government, or giving any private party any unwarranted benefits, advantage or preference in the discharge of his official administrative . . . functions through manifest partiality, evidence bad faith or gross inexcusable negligence. …
(g) Entering, on behalf of the Government, into any contract or transaction manifestly and grossly disadvantageous to the same, whether or not the public officer profited or will profit thereby.
GOCC Directorship Raised to the Highest Order of Fitness and Qualifications
The GOCC Governance Act provides that “All members of the Board, the CEO and other officers of the GOCCs including appointive directors in subsidiaries and affiliate corporations shall be qualified by the Fit and Proper Rule to be determined by the GCG in consultation and coordination with the relevant government agencies to which the GOCC is attached and approved by the President.” The Fit and Proper Rule was duly promulgated as one of the organic documents in the GOCC Sector, and provides for the qualifications and disqualifications for nominees or appointees to the Governing Boards of GOCCs.
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 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.