MAP Insights
By Cesar L. Villanueva
Qualifications and disqualifications of directors
The Original CG Code provides for the following qualifications of directors for publicly held companies (PHCs), thus:
1. Qualifications of Directors
Every director shall own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name in the books of the corporation.
The Board may provide for additional qualifications of a director such as, but not limited to, the following:
a. Educational attainment
b. Adequate competency and understanding of business
c. Age requirement
d. Integrity/probity
e. Assiduousness
The Revised CG Code has tempered such provision and provides for the following qualifications of directors, thus:
D) Qualifications of Directors
In addition to the qualifications for membership in the Board provided for in the Corporation Code, Securities Regulation Code and other relevant laws, the Board may provide for additional qualifications which include, among others, the following:
(i) College education or equivalent academic degree;
(ii) Practical understanding of the business of the corporation;
(iii) Membership in good standing in relevant industry, business or professional organizations; and
(iv) Previous business experience.
There are two outstanding features of the afore-quoted provisions of the Original and Revised CG Codes, namely: (a) There is an attempt to empower the Board of Directors of PHCs “to provide for additional qualifications of a director;” and (b) There is a thrust towards providing for “subjective or value-laden” qualifications for directors, such as possessing virtues of integrity, probity or assiduousness.
The Board-empowering language used in the Original and Revised CG Codes is in stark contrast to the “additional qualifications” provisions of BSP CG Circulars, particularly Section 3 of BSP Circular No. 296, s. 2001, which provides:
Qualification of Director – A director shall have the following minimum qualifications:
1. He shall be at least twenty-five (25) years of age at the time of his election or appointment;
2. He shall be at least a college graduate or have at least five (5) years experience in business;
3. He must have attended a special seminar for Board of Directors conducted or accredited by the BSP x x x ;
4. He must be fit and proper for the position of a director of the bank/quasi-bank/trust entity. In determining whether a person is fit and proper for the position of a director, the following matters must be considered:
• integrity/probity;
• competence;
• education;
• diligence; and
• experience/training
The foregoing qualifications for directors shall be in addition to those required or prescribed under R.A. No. 8791 and other existing applicable laws and regulations.
There is no attempt under the BSP CG Circulars to grant to the Board of Directors of banking institutions the power to provide for additional qualifications for bank directors in the exercise of the business judgment. In addition, although the BSP CG Circulars provide for “subjective or value-laden” qualifications, such as integrity, probity, and diligence, such matters fall within the administrative powers of the BSP to enforce under its “fit-and-proper” rules.
The IC Code also follows the approach of the BSP CG Circulars, when it comes to the qualifications and disqualifications of directors, thus:
E. Members of the Board
x x x
A. Qualifications
• Directors
• Directors sitting on the board in any insurance entity shall be possessed of the necessary skills, competence and experience, in terms of management capabilities, preferably in the field of insurance or insurance-related disciplines. In view of the judiciary nature of insurance obligations, directors shall also be persons of integrity and credibility.
• Every director shall own at least one (1) share of the capital stock of the corporation whose share should be in his name and recorded in the books of the corporations.
• Each director shall be at least twenty-five (25) years of age at the time of his appointment
• Each director must have attended a special seminar on corporate governance conducted by a training provider accredited by the Insurance Commission.
Note must be taken of the difference in approach between the BSP CG Circulars and IC Code on the one hand, and the SEC CG Codes on the other, in that while the former would impose the enumerated qualifications as applicable to directors of their covered institutions, the latter would provide only general guidelines of what those additional qualification would be and seems to grant to the Boards of Directors of PHCs the power to adopt such additional qualifications as would pertain to their particular corporate circumstances.
The difference in approach is understandable: the BSP and the IC each oversee industries that are highly specialized, and their history of supervision over such companies have given them both background, experience and resources of what additional qualifications they would impose on directors of such companies. On the other hand, the SEC is overseeing various sectors of PHCs, engaged in various business enterprises, as varied and as contrasting as businessmen’s imagination and the entrepreneurial spirit can bring them.
The SEC seems to consider itself without the proper means to evolve a set of qualifications and disqualifications that “fits all,” and it would have been foolish to do so. It therefore attempted to achieve the next best thing: to empower the Board of Directors of every PHC, on whom so much responsibility is now placed, to be able to look at their particular industry and company settings and circumstances by which to provide, and periodically revise, the set of qualifications and disqualifications that would allow the company to be able to recruit and retain the most competent members into their Board and Management.
The language of these particular provisions of SEC CG Codes unmistakably seeks to grant to the Board of Directors of each PHC the power to set additional qualifications without going through a formal amendment of the by-laws. As discussed previously, the Supreme Court in Gokongwei, Jr. v. SEC had ruled that the Board of Directors cannot on their own, even by formal resolution, provide for qualifications and disqualifications of directors, which are not found in the by-laws.
The enumerations of additional qualifications are very subjective and susceptible of varying degrees of interpretation and application even if they were included formally into the by-laws of PHCs. If by mere resolution the Board would have the power to adopt such subjective qualifications as and when they please, that would actually be contrary to the existing “corporate governance principle” of the Corporation Code that the Boards cannot have power to set-up on the exercise of business judgment the qualifications and/or disqualifications of directors or to be able to remove them from office (by the process of disqualification). Otherwise, the Boards of PHCs can “lord over” the Board and the company for without accountability by adopting qualifications that exclude so many capable candidates, or to “disqualify” incumbents who are deemed to be “difficult,” based on their own interpretation of the applicability or inapplicability of “subjective or value-laden” qualifications or disqualification rules.
These “empowering” provisions of the SEC CG Codes would unnecessarily open to legal challenges the exercise of such rights by some members of the Boards of PHCs, which would only serve to dissipate the Board’s attention and resources.
It would be more prudent to construe those particular provisions of the SEC CG Codes as “internal guidelines” given to the Boards of Directors of PHCs in undertaking their executive search and recruitment process in filling in vacancies or effecting changes in the composition of the Board and presenting the list of nominees to the stockholders for election; or to direct them to take appropriate by-law amendments to formally implement such changes. However, being mere guidelines, they cannot be enforced to disqualify from nomination and/or election of candidates who do not possess the set of qualifications that do not find themselves expressed the by-laws.
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).
