It is worth pointing out that the Securities and Exchange Commission (SEC), in formally adopting the Corporate Governance (CG) Code for Publicly Listed Companies (PLCs), effectively provides that the Revised Code of CG, “shall remain in effect for other covered companies, when applicable.” There currently exists, therefore, two separate and distinct CG regimes in the Publicly Held Companies (PHC) sector, namely:
• For PLCs, the CG Code for PLCs that sets out Principles which consist of high-level statements on CG practice applicable to all PLCs, broken down into Recommendations providing objective criteria that identify specific features of CG practice, with appropriate Explanations providing additional information on the recommended best practice.
• For Public Companies (PCs), which remain governed by the Revised Code of CG, the provisions of which are mandatory in character.
The study concentrates on the provisions of the CG Code for PLCs since it seeks to evolve a more benign and market-oriented regime of CG, by adopting the “comply or explain approach” which “combines voluntary compliance with mandatory disclosure. Companies do not have to comply with the Code, but they must state in their annual CG reports whether they comply with the Code provisions, identify any areas of non compliance, and explain the reasons for non-compliance.”
Overseeing over the years the CG reforms for the PHC sector under the aegis of the CG Code for PLCs, the SEC would be able to evolve a more Filipino-oriented CG regime based on the actual workings and corporate experience of PHCs, including a better and more evolved framework for the oversight functions of independent directors.
In considering the essence of the fiduciary oversight function of independent directors under the CG Code for PLCs, it is worth considering the shifts in CG paradigms introduced under the “comply or explain approach” of the said CG Code.
1. Hybrid System of CG for PLCs
As discussed in an earlier article, a review of the CG Code for PLCs reveals that it does not formally ascribe to the Stakeholder Theory in place of the Maximization of Shareholder Value — the latter being the prevailing doctrine under the Corporation Code and the SRC; that in essence, the CGC Code for PLCs engrafts both theories into a hybrid system, thus:
“By its Principle 1 under the general heading “The Board’s Governance Responsibilities,” there can be no doubt that the CG Code for PLCs embodies the Maximization of Profits Doctrine as the cornerstone of its CG regime, albeit operating within a greater concentric circle of the Stakeholders Theory, x x x
“Principle 1 therefore sets a hierarchy of priorities for the Board and Management in the fulfillment of their duties and responsibilities to the various stakeholders:
• First and foremost, they must foster the long-term success of the company to sustain its competitiveness and profitability — which thereby place the stockholders [and other investors] in the first rung of stakeholders whose interest must be served;
• Secondly, the manner of pursuing the “foremost objective of maximization of profits” must be consistent with the company’s objectives and long-term best interests of other stakeholders.
“The foregoing governance formula is consistent with the adage that ‘In order that a company can do good in the communities it operates in, it must necessarily do well in its business operations.’ It is also consistent with the PSE’s concept of CG as a framework that governs the ‘performance by the Board of Directors and Management of their respective duties and responsibilities to the stockholders, with due regard to the stakeholders.’
“We can therefore make the preliminary assessment that the SEC, in the exercise of its quasi-legislative powers through the promulgation of the CG Code for PLCs, recognizes that the fiduciary duties of diligence and loyalty (i.e., of governance principles of responsibility and accountability) in the management of the assets and the enterprise of the company are owed primarily to the stockholders under the well-established principle of Maximization of Shareholder Value; that any fiduciary duty that may be owed to other stakeholders in implementation of the Stakeholder Theory is only to the extent that such duties are imposed by law, rules and regulations, and [those that] are voluntarily assumed by the company in its charter documents.”
Unlike the original CG Code, which on principle established a common-law standing on the part of stakeholders (other than stockholders) to “have the right to expect [from the directors] that the institution is being run in a prudent and sound manner,” the CG Code for PLCs contains no standing for other stakeholders, and recognizes only that “The rights of stakeholders established by law, by contractual relations and through voluntary commitments must be respected. Where stakeholders’ rights and/or interests are at stake, stakeholders should have the opportunity to obtain prompt effective redress for the violation of their rights.” Even a review of the section under the heading “Establishing Clear Roles and Responsibilities of the Board,” and other than specifying the key roles in Board Committees, there are no special roles given to independent directors that would draw them apart from regular directors.
The implication under the CG Code for PLCs is that independent directors are bound with the regular directors to be champions for the maximization of shareholders’ value, and are mandated to consider the interests of other stakeholders only insofar that they are provided for in laws, rules and regulations, or those which the PLCs voluntarily assumed in their charters. Since independent directors do not play a separate role vis-à-vis regular directors in promoting the interests of other stakeholders, this essentially reaffirms the central oversight role of independent directors to prevent corporate opportunism on the part of Management and/or the controlling stockholders.
2. Obligation “To Exercise Independent Judgment” Is Expressly Imposed Upon the Entire Board
The CG Code for PLCs under the heading “Reinforcing Board Independence” provides that “The Board should endeavor to exercise objective and independent judgment on all corporate affairs.” In other words, the CG Code imposes the duty to act independently on the entire Board, and not just on the independent directors. This is perhaps in refutation to the criticism under the SRC that seems to impose primarily the duty to “exercise independent judgment” on the independent directors.
The obvious question that arises from such principle is “What is the nature and scope of the Board’s mandate ‘to exercise objective and independent judgment on all corporate affairs’?” While that question is easier to answer when it comes to the independent directors — to act and vote against corporate opportunism on the part of the controlling stockholders; it is harder to fathom what that means when it comes to regular directors. Such obligation when imposed upon regular directors could not possibly mean that they act against the self-interests of the stockholders as against those of other stakeholders, for that would be contrary to the hybrid CG principle adopted under the CG Code, which makes it the primary duty of all directors to seek the maximization of stockholders’ value.
The true meaning of such an obligation “to exercise objective and independent judgment on all corporate affairs” on the part of regular directors is to chose against their self-interests, and always promote the interests of all stockholders, including the minority stockholders, in pursuing corporate affairs. Such an obligation is not new in Philippine Corporate Law, for indeed the prevailing doctrines on the duty of loyalty as it applies to all directors prohibit and punish directors/trustees and officers from acting for their benefit to the detriment of the corporation (and all the stockholders to whom the increase in the value of the corporation pertains to) in all conflicts-of-interest situations.
In the end, it is really the independent directors — who by definition and qualification are never in a conflict-of-interest situation — who can consistently exercise objective and independent judgment in corporate affairs, since they are utterly lacking in business, professional or filial connection with the company or its controlling shareholders. This truism can be deduced from the CG Code’s recommendation that “The Board should have at least three  independent directors, or such number as to constitute at least one-third of the members of the Board, whichever is higher.” This formula is a shift from the implied doctrine under the SRC that independent directors have oversight functions as such, and are not intended to dictate the exercise of the Board’s business judgment over corporate matters, which usually is expressed by the prevailing vote of the majority directors.
In a 5-person PHC Board — the smallest Board size allowed for PHCs — the independent directors would constitute the majority under the “whichever is higher” formula mandated under the CG Code. In a 7-person PHC Board, the three (3) independent directors would constitute higher than one-third (1/3) of the entire Board, under the “whichever is higher” rule. In a 9-person PHC Board, there can be no doubt that the three (3) independent directors would constitute one-third (1/3) of the entire Board. In a 15-man Board, the largest Board size allowed for PHCs, the independent directors would constitute five (5) members or one-third (1/3) of the entire Board as mandated under the “whichever is higher” formula.
The point being made is that it seems to be the CG Code’s intention for independent directors to have a great sway and influence in the Board’s exercise of its business judgment even in situations where there is no conflict-of-interest besetting the directors representing the majority stockholders. Such perception can be drawn out from the explanation given the CG Code on its recommended “whichever is higher” formula, thus: “The presence of independent directors in the Board is to ensure the exercise of independent judgment on corporate affairs and proper oversight of managerial performance, including prevention of conflict of interests and balancing of competing demands of the corporation. There is increasing global recognition that more independent directors in the Board lead to more objective decision-making, particularly in conflict of interest situations. In addition, experts have recognized that there are varying opinions on the optimal number of independent directors in the board. However, the ideal number ranges from one-third to a substantial majority.”
Such language is a clear acknowledgment that although all the members of the Board are mandated to exercise independent judgment, regular directors are expected to fail in such endeavor — that they will decide consciously or unconsciously for their self-serving interests as being the direct representatives of the majority and minority stockholders versus other stakeholders.
The recommended “increased presence” of independent directors in PHC Boards runs in tandem with directors who are elected by cumulative voting into the Board representing the minority shareholders. The size of the independent directors and minority directors in PHC Board could effectively take control of management of PHC away from the majority shareholders of such companies, which seems not to be consistent with the nature of an overwhelming majority of our PHCs being “controlled companies,” or those which are under the control of a family group.
These provisions of the CG Code for PLCs have in fact deflected the primary role of the PHC Boards under the original CG Code and the Revised CG Code for PCs, both of which mandate that the Board must provide an “independent check on Management” as the central role of the Board. The original CG reform was to emphasize the primary role of the Board in PHCs to be ultimately responsible for the long-term success of the company, as expressed in the language of the original CG Code: “The Board of Directors (Board) is primarily responsible for the governance of the corporation. It needs to be structured so that it provides an independent check on management. As such, it is vitally important that a number of board members be independent from management.” Such dilution of a central CG reform is further discussed immediately hereunder.n
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).