Next critical step in corporate governance reforms in the Philippine publicly-held companies sector

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Cesar L. Villanueva

MAP Insights

MANY of the corporate governance (CG) reforms pursued by the Securities and Exchange Commission (SEC) through its CG Codes seek to usher a system of professional directorship into the publicly held companies (PHCs) and publicly listed companies (PLCs). This includes a system of professional directorship, such as granting more supervisory power to the Boards over its composition, and integrity (i.e., qualifications and disqualifications), as well as the competence and diversity of talents and skills of their members, effecting a system of discipline over their members, and providing for competitive levels of remuneration.

We have discussed how the “comply and explain approach” to CG reforms pursued under the CG Code for PLCs has much theoretical merit since it relies upon the disciplining effect of the market to change the behavior of Boards of PLCs to adopt the CG reforms recommended by the Code. We have pointed how the “disciplining effect of the market” may prove illusory in the current state of our PLCs where the public investors really constitute a minority of the so-called “market” which is in fact dominated by majority or controlling stockholders.

We have seen from the discussions the fact that the “mandatory rules-based approach” of the Original and Revised CG Codes can provide a more efficient means to pursue CG reforms in certain critical areas, where the “comply and explain approach” of the CG Code for PLCs would fall short.

In the realm of the proper composition of the Boards of Directors of PHCs and PLCs, there is now universal acknowledgement that there is a need to pursue gender diversity. The SEC, therefore, in the exercise of its quasi-legislative powers, may provide mandatory provisions for gender representation in the Boards, instead of recommending that it would be the Boards themselves that would promote such diversity. That set-up would then provide the Boards the “subsidiary legislation” upon which to actively pursue such Board diversity reforms without their business judgment being challenged by sectors that wish to maintain the status quo.

In the realm of qualifications and disqualifications of directors and officers, there is a universally accepted system of mandatory rules regarding the integrity of directors and senior officers of companies vested with public interests, as can be easily shown by the comparison of the rules of qualifications and disqualifications provided in the Bangko Sentral ng Pilipinas (BSP) CG Circulars, the Insurance Commission (IC) CG Code, and SEC’s Original and Revised CG Codes. Therefore, rather than the present “comply or explain approach” provided for in the CG Code for PLCs that sets general principles of qualifications and disqualification, it should be expected that the SEC should, by the exercise of its quasi-legislative powers, provide specific rules of further qualifications and disqualifications for directors and senior officers that are clearly of universal application to PHCs, and recommend to the Boards further qualifications and disqualifications that may be adopted that would be particular to their industries. The difference between rules-based qualifications and disqualifications from Board adopted-qualifications and disqualifications has a significant legal consequences.

When a clear set of qualifications and disqualifications is set by the SEC through its rules-making powers, the effect is that they have the force and effect of law. Therefore, the Boards of Directors of PHCs are, in fact, duty bound to enforce them, and with the proper exercise of procedural due process, they can disqualify nominees who do not meet such statutory criteria, or declare the termination from office of incumbent directors or senior officers who are disqualified under the rules of the SEC. In contrast, when the Boards seek to enforce a system of qualification or disqualification based on guidelines drawn by themselves, even when the power to draw such guidelines have been granted by SEC rules, the process of enforcing them upon nominees or incumbents would find itself being covered in the realm of “removal from office,” which is fraught with legal landmines provided under the current CG provisions of the Corporation Code. In short, locating a system of qualifications and disqualification within the rule-making powers of the SEC effectively isolates the enforcement thereof by the Board from the realm of “removal from office.”

Finally, we have also seen from the discussions the legal truism that there are areas where the exercise by SEC of its quasi-legislative powers cannot simply overcome remaining obstacles to see a fruition of the CG reforms. One such area would be amending the provisions of the Securities Regulation Code that would increase further the composition of independent directors that would balance the interests of the controlling shareholders and the investing public in PHCs. Another areas would be amending the provisions of the Corporation Code to change the paradigm from “Directors are not generally compensable for their services as such,” to one that allows performance-based compensation for directors who serve with competence and effectiveness.

We conclude with the note that a more vigorous scheme may have to be pursued in CG reform movement to usher into the Philippine public system a professional system of directorship. There is much work to be done in this area.

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


Dean Cesar L. Villanueva is Chair of the MAP Corporate Governance Committee, Founding Partner of the Villanueva Gabionza & Dy Law Offices, and former Chair of the Governance Commission for GOCCs.