Map Insights

1. Hierarchical placement of the SEC’s CG Codes vis-à-vis the Corporation Code and Securities Regulation Code

It would be helpful to discuss briefly the hierarchical value of the SEC Corporate Governance (CG) Codes in relation to the provisions of the Corporation Code (CC) and the Securities Regulation Code (SRC) that actually have within their frameworks systems of CG.
The Original CG Code, the Revised CG Code, and the CG Code for PLCs were promulgated by the SEC in the exercise of its rule-making power, otherwise known in Administrative Law, as its quasi-legislative power, and constitute therefore what is termed “subsidiary legislation.” Section 143 of the CC defines the rule-making power of the SEC, thus:

… The SEC shall have the power and authority to implement the provisions of this Code, and to promulgate rules and regulations reasonably necessary to enable it to perform its duties hereunder, particularly in the prevention of fraud and abuses on the part of the controlling stockholders, members, directors, trustees or officers.

Section 72.1 of the SRC provides for a more expanded authority for the SEC, thus:

… This Code shall be self-executory. To effect the provisions and purposes of this Code, the Commission may issue, amend, and rescind such rules and regulations and orders necessary or appropriate. … For purposes of its rules or regulations, the Commission may classify persons, securities, and other matters, within its jurisdiction, prescribe different requirements for different classes of persons, securities, or matters, and by rule or order, conditionally or unconditionally exempt any person, security, or transaction, or class or classes of persons, securities or transactions, from any or all provisions of this Code.

Failure on the part of the Commission to issue rules and regulations shall not in any manner affect the self-executory nature of this Code.

There is controversy of how much leeway and power can be exercised by the SEC on the basis of the language of Section 72.1 as not to offend well-established principles in Constitutional Law of non-delegation of legislative powers. For example, the power of the SEC under Section 72.1 “by rule or order, conditionally or unconditionally exempt any person, security, or transactions … from any or all provisions of this Code,” is tantamount to granting SEC the discretion to override the prohibitory or mandatory rules of the SRC, which essentially amounts to power to “unmake” the law.
The prevailing theory in our jurisdiction is that the exercise of the quasi-legislative power of any administrative agency like the SEC cannot amount to “law-making” (or unmaking for that matter), but can only cover “law-execution;” that administrative regulations are intended only to implement the law and to carry out the legislative policy, but that “[t]he discretion to determine what the law shall be is exclusively legislative and cannot be delegated.”
No matter what language may be used in statutory provisions defining SEC’s rule-making power, there can be no doubt that SEC has no power to violate constitutional precepts, particularly those found in the Bill of Rights. For example, the Bill of Rights provides for due process and prohibits undue classification: “No person shall be deprived of life, liberty or property without due process of law, nor shall any person be denied equal protection of the law.”
Therefore, although Section 72.1 of the SRC empowers the SEC to “classify persons, securities, and other matters,” for purpose of determining application or non-application of the provisions of the SRC, such provision cannot be used to unreasonably discriminate against a person or class of persons under the principle “that no person or class of persons shall be deprived of the same protection of the laws which is enjoyed by other persons or other classes in the same place and in like circumstances.”
In evaluating therefore the various provisions of the SEC CG Codes that seek to expand the powers of the Boards of Directors over their composition, the manner of election, the providing for additional qualifications and disqualifications, as well as the setting-up of competitive remunerations rates for directors, we shall be guided by the principle that such exercise of SEC’s quasi-legislative power would be illegal and void when they violate or are contrary to the terms of, or the policy behind, the specific statutory provisions, or they extend the coverage thereof beyond the original intention provided under the statutory provisions sought to be implemented.

2. Approaches of the SEC CG Codes in empowering the Boards of Directors of Publicly-Held Companies

a. Original and Revised CG Codes: Mandatory and Rules-Based in Character

When the SEC initiated in 2002 the CG reforms within the entire PHC Sector, the CG principles and best practices contained in the original CG Code were mandatory in character, and yet the only penalty clause referred to the non-submission of the manual of CG, thus:

VIII. Commitment to CG

Corporation shall promulgate and adopt its CG rules and principles in accordance with this Code. Said rules shall be in manual form and available as reference by the directors. It shall be submitted to the Commission, which shall evaluate the same and their compliance with this Code taking into account the size and nature of business. The said manual shall be available for inspection by any stockholder of the corporation at reasonable hours on business days.

IX. Administrative Sanction

Failure to adopt a manual of CG as specified therein shall subject a corporation, after due notice and hearing, to a penalty of P100,000.00.

The enforcement approach of the Original CG Code was to compel publicly-held companies to formally adopt a manual of CG for their particular corporate situation that would become part of the charter and thereby legally enforceable by the SEC and their stakeholders. The adoption and formal registration with the SEC of a manual for CG ensured that every PHC Board and Management reviewed the provisions thereof on the basis of their corporate setting and the unique demands of the industry in which they operate, and thereupon adopt a manual of CG that translates the CG principles and leading practices thereof to their particular corporate situation. The results would be that on the corporate front, each publicly-held company would then begin to “own” the terms of the governance principles and practice which it has on its own adopt under the terms of the manual. The manual itself, being submitted formally with the SEC, serves as a contractual commitment on the part of each publicly-held company, its Board of Directors and Management, to which it can be made accountable, and the failure to comply with its terms and conditions would always be construed against the company itself, for it is the very proponent of the terms thereof.
It was rather curious therefore that in 2009 when the Revised CG Code replaced the Original CG Code, it provided for a penalty clause for non-compliance or violations of the provisions thereof, thus:

Article 11: Administrative Sanctions

A fine of not more than Two Hundred Thousand Pesos (P200,000) shall, after due notice and hearing, be imposed for every year that a covered corporation violates the provisions of this Code, without prejudice to other sanctions that the Commission may be authorized to impose under the law; provided, however, that any violation of the Securities Regulation Code punishable by a specific penalty shall be assessed separately and shall not be covered by the abovementioned fine.

Fines and other penalties imposed by the SEC are serious matters, not only because of the pecuniary burdens placed on the company, but more importantly, under the CC, and in the Revised SEC Code itself, a violation may constitute as a ground for the disqualification of a director, or constitute as “proper cause,” for his removal by the requisite vote of stockholders.
Although there is no doubt that the failure to comply with the requirement of filing the manual is punishable under Article 11 of the Revised CG Code, it seems difficult to see how any other “violation” thereof may be properly punished by a fine of P200,000 “for every year that a covered corporation violates the provisions of this Code.”
Firstly, instead of the fine being imposed on every violation of the provisions of the Revised CG Code, the penalty that is imposable is limited to “P200,000 every year.” This would come to the dubious end that a covered corporation may commit various infractions under the Code, and only be liable to a maximum penalty of “P200,000 per year.”
Secondly, CG principles and best practices are primarily to be followed or practiced by the directors and key officers of a covered corporation, and the infraction would be a personal liability on their part. Yet the provisions of Article 11 of the Revised CG Code apply the penalty only to a violation by the “covered corporation,” and not the director or officer guilty of an offense under the Code.
Thirdly, although the non-filing of the manual on CG constitutes a situation that “a covered corporation violates the provisions of this Code,” simply because the original provisions of the original SEC Code specifically covered only such violation, it is not clear what other violations may be punishable under Article 11 of the Revised CG Code.
The then SEC Secretary, Atty. Gerard M. Lukban, was quoted as saying that “The previous code had provisions that use ‘may’. … Here some were changed to ‘shall’ so they are no longer just recommendatory.” That would mean that every provision that imposes an obligation with the use of the word “shall” would be a violation of the Revised CG Code that would be punishable with the fine under Article 11 thereof.
For example, under Art. 2(F), it is provided that “The Board should formulate the corporation’s vision, mission, strategic objectives, policies and procedures that shall guide its activities, including the means to effectively monitor Management’s performance.” Obviously, compliance with such duty may find its expression in the manual of CG submitted with the SEC. But if the manual duly submitted does not contain one or some of the items enumerated, or what are submitted are not effective or complete, does that constitute a violation of the Revised CG Code, triggering the imposition, after notice and hearing, of the P200,000 fine? Who is to judge what is “effective”?
Another example would Article 6(B) of the Revised CG Code which reads —

B) The Board should be transparent and fair in the conduct of the annual and special stockholders’ meetings of the corporation. The stockholders should be encouraged to personally attend such meetings. If they cannot attend, they should be apprised ahead of time of their right to appoint a proxy. Subject to the requirements of the bylaws, the exercise of that right shall not be unduly restricted and any doubt about the validity of a proxy should be resolved in the stockholder’s favor.

In a situation where there are issues in the implementation of by-law provisions on proxy, and the Board, upon advice of counsel, takes a position which is deemed restricted of the right of a stockholder, would that trigger the imposition of the penalty under Article 11 of the Code? Would the fine be imposable against the covered corporation or against the members of the Board? Who is to say what is “unduly restrictive”?
If we were to presume that the clear intention under Article 11 of the Revised CG Code is that the penalty imposed would be personally against the offending director or officer, it would have a chilling effect on the exercise of business judgment on the part of the Board of Directors, and would even discourage qualified professional directors to accept appointment to publicly-held companies simply because they are not certain exactly what action or inaction would constitute punishable offense under said provision.
In any event, what is important to consider is that the net effect of the changes introduced by the Revised CG Code was to make the provisions thereof mandatory to publicly-held companies, and non-compliance therewith may involve the imposition of administrative and penal sanctions. Such penalty provisions are often necessary to get any system going, but effective only when they are evenly enforced. However, the use of coercive measures in fact misses the whole point of what CG reform movement is all about — it is meant to show to businessmen that doing good is consistent with doing well in business. As they say, piety obtained out of fear is mere pretense.
The second important feature of both the Original and Revised CG Codes is that they both presented with the same format: they start each section by stating the CG principle in a certain area of concern, and then provide under each principle a set of duties and responsibilities or best practices that would enforce the principle highlighted. In short, both SEC CG Codes are “rules-based” codes, as contrasted from “principles-based” approach in CG reforms.
The main objection against rules-based codes, especially those that carry sanctions, is that they do not promote a “change of hearts and minds,” in the sense that they merely impel directors and officers to right away refer the matters to their legal counsel, and the organization ends up with “ticking the boxes,” to ensure compliance with the required or indicated measures of the code.
In addition, since a rules-based code cannot possibly anticipate all situations that may occur in the corporate setting, then pursuit of CG reforms ends up with the Board and Management looking for loopholes, or of pursuit a set of actions that are not clearly within the mandatory coverage of the rules or measures indicated in the code.
Finally, CG codes that are the product of the exercise by the supervising agency of its quasi-legislative powers tend to be challenged by covered companies as being unlawful when the area covered is clearly not within the powers of the agency to promulgate or tend to conflict with existing statutory provisions on the matter.
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).