By Cesar L. Villanueva
Recommendation 2.5 of the CG Code for Publicly-Listed Companies (PLCs) covers the issue of proper remuneration for the Board, thus:
The Board should align the remuneration of key officers and board members with the long-term interests of the company. In doing so, it should formulate and adopt a policy specifying the relationship between remuneration and performance. Further, no director should participate in discussions or deliberations involving his/[her] own remuneration.
The Code explains very well the need to change the “compensation framework” for members of the Board of Directors (BOD) from one that presumes their services to be gratuitous and non-compensable, to be properly to one that recognizes that members of the Board should be well compensated for overseeing the affairs of the company, thus:
Companies are able to attract and retain the services of qualified and competent individuals if the level of remuneration is sufficient, in line with the business and risk strategy, objectives, values and incorporate measures to prevent conflicts of interest. Remuneration policies promote a sound risk culture in which risk-taking behavior is appropriate. They also encourage employees to act in the long-term interest of the company as a whole, rather than for themselves or their business lines only. Moreover, it is good practice for the Board to formulate and adopt a policy specifying the relationship between remuneration and performance, which includes specific financial and non-financial metrics to measure performance and set specific provisions for employees with significant influence on the overall risk profile of the corporation.”
Key considerations in determining proper compensation include the following: (1) the level of remuneration is commensurate to the responsibilities of the role; (2) no director should participate in deciding on his/[her] remuneration; and (3) remuneration pay-out schedules should be sensitive to risk outcomes over a multi-year horizon.
For employees in control functions (e.g., risk, compliance and internal audit), their remuneration is determined independent of any business line being overseen, and performance measures are based principally on the achievement of their objectives so as not to compromise their independence.
A close reading of the Code’s Explanation supports a system of professional directors for PLCs which envisions a set of professional managers and directors who spend their careers improving their managerial or industry skills and offering their services to companies whose operations are affected with public interests.
Nonetheless, by reason of the “comply or explain approach” of the CG Code for PLCs, it would mean that any attempt on the part of the BODs of PLCs to develop and adopt a competitive and performance-based remuneration structure for their directors outside of by-law provisions and/or without formal approval by the stockholders owning or representing at least a majority of the outstanding capital stock would be unlawful. On the other hand, even if the CG Code for PLCs expressly empowered Boards of publicly-held companies (PHCs) to set on the basis of the exercise of business judgment the remuneration system to attract and retain competent directors, such provisions would be unlawful and void in the same manner as similar provisions found in the Revised CG Code for being in violation with both the provisions and underlying policy of Section 30 of the Corporation Code.
REVISITING THE PROPOSED ‘BY-LAW ENABLING’ PROVISION
In my early work on the subject, I had discussed a way to empower the Boards of PHCs to provide formal provisions in their by-laws empowering their Board to set compensation framework for directors in order to comply with the express provision in Section 38 that provides that directors may receive remuneration for their services acting “as such” when it is provided for in the by-laws.
I had referred to Supreme Court decisions in Tabang v. NLRC, and in Nacpil v. International Broadcasting Corp., which held that in effect when the Corporation Code requires certain things to be found in the by-laws, then a by-law provision that grants to the Board the power to set such requirement would amount to the exercise of such enabling provision as though it had been provided expressly in the by-law itself. Thus:
The fact that the position of Comptroller is not expressly mentioned in the by-laws does not undermine the appointment to such position since under Section 25 of the Corporation Code, the BOD is authorized to appoint such other officers as it may deem necessary. In this case the by-laws provided ‘and such other officers as the BOD may from time to time deems fit to provide for. Said officers shall be elected by majority vote of the BOD.’ By-laws may and usually do provide for such other officers, and that where a corporate office is not specifically indicated in the roster of corporate offices in the by-laws of a corporation, the BOD may also be empowered under the by-laws to create additional officers as may be necessary.
Nacpil therefore confirms that an enabling clause in the by-laws of the corporation that expressly empower the BOD to create such other offices not enumerated therein, when properly invoked by the Board, makes the appointment fall under the legal definition of “corporate officer” and not entitled to the security tenure clause and all issues arising from such relationship would be cognizable by the RTC Special Commercial Courts as an intra-corporate dispute, and not within the jurisdiction of the NLRC.
The Revised SEC Code recognizes that in order to build a system of professional directors, PHCs must be able to properly offer competitive remuneration packages to those who they perceived are the best and brightest nominees available in the market, under the aegis “Quality directorship requires quality pay.” Thus, Article 3(J) of the Revised SEC Code provides that “The levels of remuneration of the corporation should be sufficient to be able to attract and retain the services of qualified and competent directors and officers. A portion of the remuneration of executive directors may be structured or be based on corporate and individual performance.”
The language in both the Original and Revised SEC Code indicate that at the cornerstone of evolving a system of professional directorship for PHCs is the need to empower their BODs to undertake and adopt competitive remuneration schemes; and that the agency code language presumes matter-of-factly that directors, both executive and non-executive, would be entitled to remuneration properly “structured or be based on corporate and individual performance.”
Yet, the scheme under the Corporation Code is that the hard work that directors as members of the BOD is non-remunerative; and that if directors are to be compensated for their work that they do as directors, the same may only be allowed by a formal resolution adopted by stockholders in a meeting called for the purpose covering a vote of at least a majority of the outstanding capital stock; or that the same be specifically provided for in the by-laws. In practical terms, public corporations do not operate under such settings, since the range of competitive remuneration is market driven and cannot be anticipated to be stable range.
In order to meet such an imperative need, and to allow BODs of PHCs to have the flexibility of being able to compete with the market for quality talents to be recruited in the Board, I had suggested that the key is to institute in their by-laws a well-worded “enabling clause” which recognizes that director’s position shall be remunerative and that the Board is granted specific power to provide for various levels and range of remuneration for directors acting in such capacity, subject always to proper disclosure and reporting to the stockholders not only in the annual report of the company, but also as an integral part of process of completing every particular remunerative resolution. However, I had cautioned in that work as follows:
This course of action however, is not without risks. Even if an enabling infrastructure for directors’ compensation is instituted into the by-laws of the corporation, it would necessarily be in static language as to provide for specific measures by which directors’ compensation may set (e.g., a range of numerals, or a certain percentage of the earnings). In other words, a general clause that would grant to the BOD the power to adopt a system of directors’ compensation even when placed in the by-laws of the company may itself be subject to vulnerability to legal attack (e.g., “The BOD are granted the power to provide by formal resolution for the compensation of directors to ensure that the corporation is able to attract and retain competent directors needed to run the company successfully.”).
The reason for this is the well-established principle in Philippine jurisprudence that any provision in the by-laws which contravene the law or public policy would be void. Therefore, a by-law provision which seeks to place power into the BOD to provide in the exercise of its business judgment to provide for compensation of directors as such, would contravene the public policy behind Section 38 of the Corporation Code, and therefore would be void.
The afore-quoted caveat has proven to the providential as affirmed in the fairly recent decision in Matling Industrial and Commercial Corp. v. Coros, where the by-laws expressly provided that the BOD “shall have full power to create new offices and to appoint the officers thereto,” and the Vice President for Finance and Administration was created pursuant to said enabling clause. The Supreme Court ruled that any officer appointed to such position does not become a “corporate officer”, but is an employee and the determination of the rights and liabilities relating to his removal are within the jurisdiction of the NLRC, and do not constitute intra-corporate controversies, thus: “A different interpretation can easily leave the way open for the BOD to circumvent the constitutionally guaranteed security of tenure of the employee by the expedient inclusion in the By-Laws of an enabling clause on the creation of just any corporate officer position.” The Court therefore ruled that “Considering that the observations earlier made herein show that the soundness of their dicta is not unassailable, Tabang and Nacpil should no longer be controlling.”
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).