M. A. P. Insights

In a previous article entitled “Fiduciary Duties of the Board of Directors and Management under SEC’s Codes of Corporate Governance,” we discussed how the corporate governance reforms undertaken by the Securities and Exchange Commission (SEC) in the sector of publicly held and publicly listed companies have expanded the duties and obligations placed upon the Board of Directors and Management and formally increased the constituencies they serve, beyond just the stockholders, thereby subjecting directors and senior officers to greater personal liabilities for misfeasance and nonfeasance in relation to such fiduciary duties and obligations. It is fitting, therefore, that in the face of such increased professional and personal responsibilities, SEC has, in tandem, increased the powers of administrative supervision of the Boards over their members to ensure that directors act with full transparency, responsibility and accountability, with the utmost degree of professionalism and effectiveness.
We discuss in this article how the Revised Code of Corporate Governance (“Revised CG Code”) and the Code of Corporate Governance for Public Listed Companies (“CG Code for PLCs”), have pursued the original agenda of the SEC since it first promulgated in 2002 the original Code of Corporate Governance (“Original CG Code”) to empower the Boards of Directors of publicly held companies to take a more dynamic stance in how they are constituted, in the manner by which they seek out and retain talents by providing, among others, for attractive compensation packages, and in how they should be able to instill within their ranks a high sense of independence, professionalism, responsibility and accountability.
In essence, we discuss how the SEC CG Codes have sought to pursue and evolve a system of “Professional Directorship” which provides to publicly held and publicly listed companies a set of very talented men and women, who endeavor, in their careers, responsible stewardship for the companies they serve and dispense a deep sense of “public service” in an important area of the private sector.
The technical term “Corporate Governance” (CG) is of recent vintage, yet its underlying principles are as old as Corporate Law itself, if given a contemporary twist to meet society’s changing demands. In the Philippine context, CG reforms seek to achieve three objectives:
First, to reiterate and place special emphasis on the doctrinal value of the corporate attribute of “Centralized Management,” which under Section 23 of the Corporation Code provides that outside of specified instances enumerated in the law where a ratificatory vote by stockholders is required, all corporate powers, all corporate property, and, thereby, the management and control of all the corporate business is granted directly by law, as an exercise by the State of its police power, to the Board of Directors, for the benefit of the stockholders.
Necessarily, the proprietary and management relationship established under the doctrine of centralized management set-up brings about a fiduciary relationship between the Board of Directors, on the one hand, and the stockholders, on the other hand, and creates a hierarchical set of duties and responsibilities on the Board as headed by the Chairman, and its sub-agent, the Management, which is headed by the CEO.
Second, CG principles adhere to the policy that when the business enterprise and operations of a corporation affect public interests, public safety and welfare, such corporation must behave in a socially acceptable way — to be a good corporate citizen. Consequently, CG principles seek to expand the coverage of the duties and responsibilities of the Boards of Directors of corporations vested with public interest, to apply beyond their stockholders, and to include all parties who are affected by their operations — termed as the “stakeholders.” The stakeholders of publicly held companies thereof are beginning to be recognized to have both social and legal standing to demand from the Boards and Management to operate the company, taking their interests into consideration in the exercise of their business judgment.
Third, CG principles operate under the credo that Boards of Directors of companies whose business enterprise are deemed to be vested with public interests have a heightened set of duties and responsibilities to society, and in turn vigilant stakeholders in such companies would constitute the strongest incentive for their Boards to adhere to good governance principles. Good governance principles seek to promote the corporate virtues of “transparency,” “accountability,” “responsibility,” “competence,” and “independence,” as well as to operationalize such CG principles through “a system of direction, feedback, and control, using regulations, performance standards, and ethical guidelines to hold the members of the Board and Management accountable for ensuring ethical behavior — reconciling long-term customer satisfaction with shareholder value — to the benefit of all stakeholders and society.”
In order to fully understand how the Original CG Code, the Revised CG Code, and the CG Code for PLCs seek to effect a fundamental shift in the effecting the CG pillars of transparency, accountability, responsibility, competence, and independence, it is best to review the statutory principles provided by the Corporation Code, the Securities Regulation Code and related jurisprudence relating to what is now referred to as “CG.”
The Securities Regulation Code (SRC) was promulgated with specific coverage over publicly-held companies (PHCs), with the avowed purposes to: promote the development of the capital market; establish a socially-conscious free market that regulates itself; enhance democratization of wealth by encouraging the widest participation of ownership in enterprises; and protect investors and ensure full and fair disclosure about securities. Publicly-held companies therefore are deemed to be companies “vested with public interests” since they affect the investments and savings of the public, and fall within the realm of the State’s police power to regulate for the public good.
The SRC promotes the CG pillars of transparency and accountability within the PHC sector by providing the following mandatory requirements, violations of which are subject to administrative and/or civil sanctions, and criminal penalties, thus:

(a) No securities shall be issued, sold, or distributed, or even offered for sale or distribution, without prior registration with the SEC that would constitute public records by which investors would be able to make an informed decision on making an investment into PHCs;

(b) Imposes mandatory reports on the operations of PHCs, changes in their business enterprises, or changes in the equity control over such PHCs; and

(c) Protects shareholders’ interests by providing mandatory tender offers, regulating proxy solicitations, and prohibiting and punishing manipulative practices and insider trading.

On the other hand, the Securities Regulation Code promotes the CG pillar of “independence” by mandating the system of “Independent Directors” on all publicly held companies. Evaluation of the system of independent directors has already been covered by an earlier article entitled “Revisiting the Efficacy of the Oversight Functions of Independent Directors for PLCs.” What needs to be emphasized in this paper is the fact that the imposition of independent directors on publicly-held companies is an exercise of the State’s coercive police power against the proprietary rights of the majority or controlling stockholders to elect their own nominees to manage the company’s affairs. Since our Legislature is the policy determining body in our system of government, then it can be seen that the current provisions of the SRC on the number and qualifications of independent directors in publicly held companies constitute the current State policy on the matter as to promote the CG principle of “independence.”
Another CG hallmark of the Securities Regulation Code is providing for a system of “Self-Regulatory Organizations” (SRO) among the key players in our securities markets, like stock exchanges, associations of brokers, dealers and agents, and other securities-related organizations. The outstanding feature of a securities-related associations being granted “SRO status” is that they are able to operate with greater independence from SEC’s regulatory powers, when they are organized and operated in a manner that:

(a) They become responsible for administration and enforcement of relevant provisions of SRC, its IRR, their own rules, as necessary and appropriate for the protection of investors and public interests;

(b) With full powers to: (i) deny membership, barring any person from becoming associated with their members; and (ii) discipline their members and persons associated with their members under fair procedures.

The system of “SRO” promotes the CG pillar of “responsibility” within the PHC Sector by encouraging the key players in the securities market to properly organize themselves into appropriate associations to be able to police their own ranks. The SRO system operates within a framework that recognizes that responsible market players, rather than a government agency, are in a better position to determine and meet the challenges imposed by the market, and to develop a culture of good CG compliance within the market.
(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 CG Committee of the MAP, the founding partner of the Villanueva Gabionza & Dy Law Offices, and the former Chair of the Governance Commission for GOCCs (GCG).