The Code of Corporate Governance for Publicly-Listed Companies (SEC Memo Circular No. 19, s. 2016) formally defines “Corporate Governance” as “the system of stewardship and control to guide organizations in fulfilling their long-term economic, moral, legal and social obligations towards their stakeholders.”
As structure, the definition embodies as its capstone the Stakeholder Theory, but with “long-term economic . . . obligations” appearing first in the listing, and therefore emphasizing the point that the foremost obligation of a stock for-profit corporation, especially one whose shares are publicly-listed, is the maximization of profits with an eye towards its sustainability.
We will therefore proceed to discuss how the Corporate Governance (CG) Code for publicly-listed companies (PLC) has managed to handle the “equilibrium problem” besetting the version of the Stakeholders Theory it has adopted that can provide a robust system of corporate governance for publicly-listed companies.
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 corporate governance regime, albeit operating within a greater concentric circle of the Stakeholders Theory, thus:
Principal 1:
The company should be headed by a competent, working board to foster the long-term success of the corporation, and to sustain its competitiveness and profitability in a manner consistent with its corporate objectives and the long-term best interests of its shareholders and other stakeholders.
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 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 corporate governance 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.”
The nature of the rights and legal standing of stockholders and securities-holders in publicly-listed companies, as well as the nature and consequences of the fiduciary duties and responsibilities of their Boards and Managements towards stockholders and securities-holders are well defined both by law (Corporation Code and the Securities Regulation Code) and underlying jurisprudence. There are, however, no clear statutory bases to define the nature of the rights and legal standing of other stakeholders to allow for a proper application of the hybrid corporate governance central principle of “First and foremost, the company must be operated to maximize profits, but in a manner consistent with the long-term best interests of other stakeholders.”
In other words, we must seek from the CG Code for PLCs the answer to the question uppermost in the minds of members of the Board and Management: We know exactly when we are fulfilling our obligation to maximize profits, and how to exercise our business judgment in faithful compliance with such doctrine; but how do we know that we are giving “due regards to the long-term best interests of other stakeholders?
Principle 2 under the heading “Establishing Clear Roles and Responsibilities of the Board,” ought to provide an indication of where the Boards and Management of publicly-listed companies may seek guidance of what may constitute acts that are “with due regards to other stakeholders,” thus:
Principle 2:
The fiduciary roles, responsibilities, and accountabilities of the Board as provided under the law, the company’s articles and by-laws, and other legal pronouncements and guidelines should be clearly made known to all directors as well as to stockholders and other stakeholders.
A close-reading of Principle 2 does not clearly indicate that the SEC is setting forth a fiduciary duties on the part of the Board and Management in relation to stakeholders other than stockholders, but merely imposes an obligation “to know” whatever fiduciary roles, responsibilities, and accountabilities that the Board has to stakeholders (other than stockholders) as they are provided for in law and the company’s charter documents. In other words, Boards and Management of publicly-listed companies do not seem to per se owe fiduciary duties to stakeholders (other than stockholders). Another way of looking at the same concept embodied in Principle 2 is that, stakeholders (other than stockholders) do not by the fact of being such per se assume any right to demand any fiduciary duty from the Board and Management, except only when in instances provided by law, or formally assumed in the company charter documents.
This position is bolstered by language used in Recommendation 2.1 that seems to define the director’s duty of diligence as pertaining only to the company and all shareholders, but not to other stakeholders, thus: “The Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the company and all shareholders”. This seems to imply that when the Board exercises its business judgment, it remains limited to maximization of shareholders’ value. Even underlying Explanation seems to imply that directors of publicly-listed companies do not owe fiduciary duty of loyalty to “any other stakeholder,” thus: “The duty of loyalty is also of central importance; the board member should act in the interest of the company and all its shareholders, and not those of the controlling company of the group or any other stakeholder.”
More telling is the language of Recommendation 2.4 that seems to channel the Board’s responsibility for succession planning program towards the duty of maximization of shareholders value, thus: “The Board should be responsible for ensuring and adopting an effective succession planning program for directors, key officers and management to ensure growth and a continued increase in the shareholders’ value.” In fact, other than in Principle 2 and Recommendation 2.1, there is no other reference to “stakeholders” other than stockholders under the heading “Establishing Clear Roles and Responsibilities of the Board.”
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 (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 Shareholders’ Value; that any fiduciary duty that may be owed to other stakeholders in implementation of the Stakeholders Theory is only to the extent that such duties are imposed by law, rules and regulations, and what are voluntarily assumed by the company in its charter documents.
What are the fiduciary duties of the Board and Management to stakeholders, other than stockholders, in publicly-listed companies?
We endeavor to answer that question by evaluating Principles 14, 15, and 16 of the CG Code for PLCs under the heading “Duties to Stakeholders” to allow a better understanding of what exactly constitute the rights and legitimate interests of stakeholders, other than stockholders in publicly-listed companies.
It should be borne in mind that the CG Code for PLCs defines “stakeholder” as “any individual, organization or society at large who can either affect and/or be affected by the company’s strategies, policies, business decisions and operations, in general. This includes, among others, customers, creditors, employees, suppliers, investors, as well as the government and community in which it operates.” Yet, it is clear from Principle 14 that the Code does not attempt to formally grant to stakeholders of publicly-listed companies the legal standing to any rights as such other than the rights “established by law, by contractual relations and through voluntary commitments,” thus:
Principle 14:
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.
The obligation of the Board and Management when it comes to the rights of stakeholders “arising from law” is embodied under Article 1158 of the Civil Code that provides: “Obligations derived from law are not presumed. Only those expressly determined in this Code or in special laws are demandable, and shall be regulated by the precepts of the law which establishes them.” In essence, the rights of stakeholders that are “established by law”, will be governed primarily under the establishing statute, e.g., Labor Code for employees, Insurance Code for policyholders, pertinent environmental laws for affected communities, etc., and not under the aegis of corporate governance. Therefore, the stakeholders’ entitlement to “obtain prompt effective redress for the violation of their rights” under Principle 14, would necessarily and legally be dependent on complying with the redress process provided by the establishing law.
Rights of stakeholders “arising from contractual relations”, would be governed by the terms and conditions of each contractual agreement under the aegis of Contract Law that “Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith,” (Article 1159, Civil Code); and that “Contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law,” (Article 1315, Civil Code).
In essence, the rights of stakeholders “arising from contractual relations” create necessarily a corresponding “obligation on the part of the corporation, acting through the Board and Management,” but not necessarily an open-ended “fiduciary duty” that would be within the realm of corporate governance. So also the “prompt redress” principle embodied in Principle 14 should consequently be measured within the enforcement principles for all contractual obligations, i.e., it is fair game for the company, acting through its Board and Management, to insist upon compliance only within the “obligatory force” principle abiding in all contracts—they are bound to comply only with obligations that are clearly established within the four corners of the contract.
It may be argued that rights of stakeholders other than stockholders established “through voluntary commitment” is what would constitute as the adoption of the Stakeholders Theory for publicly-listed companies; yet essentially it is merely an extension of the rights of stakeholders arising from contractual commitment rule. In other words, stakeholders (other than stockholders and securities-holders) of publicly-listed companies do not have any inherent rights as such except to what the company, acting through its Board, voluntarily assumes as part of its corporate vision and mission, as expressed in its corporate charter documents. Such rights are as consequential or inconsequential depending on what the Board formally decides to assume in company charters, or periodically in the exercise of its business judgment in the course of operating the affairs of the company.
To summarize, although Principles 14, 15 and 16 are found under the caption “Duties to Stakeholders”, their language do not exactly establish a fiduciary duty-standing vis-à-vis the Board and Management of publicly-listed companies, under which such stakeholders would have legal standing to demand “good corporate governance” practice and redress, beyond what is provided for by establishing statute, contracts or voluntary commitments on the part of the Board and Management.
In contrast, in Principles 8 to 11 under the heading “Disclosure and Transparency”, the CG Code for PLCs clearly establishes the duty of to report company operations and finances upon the Boards and Management of publicly-listed companies in favor of both stockholders and other stakeholders, which are in addition to the same obligations to report and disclose found in the Securities Regulation Code (SRC), thus:
Principle 8:
The company should establish corporate disclosure policies and procedures that are practical and in accordance with best practices and regulatory expectations.
Principle 9:
The company should establish standards for the appropriate selection of an external auditor, and exercise effective oversight of the same to strengthen the external auditor’s independence and enhance audit quality.
Principle 10:
The company should ensure that material and reportable non-financial and sustainability issues are disclosed.
Principle 11:
The company should maintain a comprehensive and cost-efficient communication channel for disseminating relevant information.
This channel is crucial for informed decision-making by investors, stakeholders and other interested users.
A close readings of the Recommendations and Explanations under Principles 8 to 11 would show a constant reference of the duty of transparency to both the “shareholders and other stakeholders.”
The relevant question that arises then is: Why do statutory law (Securities Regulation Code) and the CG Code for PLCs unabashedly impose the fiduciary duty of transparency (or the duty to inform in Corporate Law parlance) on the Boards and Management of publicly-held companies as clearly pertaining to all stakeholders, but not the duties of diligence and loyalty?
It seems to this writer that the best way to appreciate the underlying corporate governance regime of the CG Code for PLCs is to refer to its enforcement mechanism.
The SEC has formally adopted the “comply or explain” approach in the enforcement of the Code, in that companies who do not comply therewith must state in their annual corporate governance reports the areas of non-compliance and explain the reason for such non-compliance. It is the same approach that the PSE earlier adopted for its Corporate Governance Guidelines for its listed companies. The approach brings into the play the disciplining effect of the capital market in that it allows the Boards and Management of publicly-listed companies the ability to gauge the sentiments of the market with respect to innovative measures taken in pursuing corporate governance reforms.
Under the Code’s “comply or explain” approach, the SEC has taken the most reasonable means to be able to tackle the “equilibrium problem” pervading the Stakeholders Theory: It allows the Boards of publicly-listed companies to evolve a hierarchy of stakeholders’ rights based on the prevailing circumstances in each of the industries they operate in, and being shaped by sentiments of the capital market.
The SEC recognizes in the Introduction of the Code that it is impractical to impose specific duties and obligations to properly cover all of the stakeholders within the institution of publicly-listed companies, which admittedly is composed of disparate industries, thus: “This Code does not, in any way, prescribe a ‘one size fits all’ framework. It is designed to allow boards some flexibility in establishing their corporate governance arrangements.” It is a gallant admission that an effective regulatory agency cannot pretend to know more than the managers of companies, how to optimally run the corporate affairs — that the primary job of a regulatory agency is to promote policies, and not to micro-manage the business affairs of the companies it oversees.
Thus, under Principle 2, operating under the aegis of “The Board’s Governance Responsibilities,” the SEC imposes an obligation on the Board of every publicly-listed company to determine and set out the fiduciary roles, responsibilities, and accountabilities of the Board in the company’s articles and by-laws, and to make them known to all directors, as well as to all stakeholders.
Under Principle 14, operating within the aegis of “Duties to Stakeholders,” it becomes more apparent that an overall duty imposed upon the Board of publicly-listed companies is the obligation to identify who their stakeholders are and to determine their legitimate interest. The Code does not dictate the particular process by which this is to be undertaken, but clearly indicates that the failure to so identify who are the company’s stakeholders and the rights owed to them would be a violation of such duty. Thus, Recommendation 14.1 mandates that the Board “should identify the company’s various stakeholders and promote cooperation between them and the company in creating wealth, growth and sustainability.”
In addition, Recommendation 14.2 mandates that the Board “should establish clear policies and programs to provide a mechanism on the fair treatment and protection of stakeholders.” The Code explains that “In instances when stakeholders’ interest are not legislated, companies voluntary commitments ensure the protection of the stakeholders’ rights.”
The whole process by which each Board and Management of a publicly-listed company goes above identifying the stakeholders to whom it voluntarily commits to recognize its “legitimate interests” in the company affairs, has both an “internalizing effect” to directors and senior officers who undertake such process.
Even when the Board and Management decides not to comply, their obligation “to explain” still requires from the directors and senior officers a serious reflection on the company’s reputation and the effect on its operations.
CG Code for PLCs reflects the SEC’s recognition that the Boards and Management of publicly-listed companies must be given a certain level of comfort in the exercise of their business judgment to (a) know that first and foremost their primary fiduciary duty in pursuing the affairs of a stock and for-profit company is the maximization of profits that must serve the best interests of not only the stockholders, but other stakeholders as well; (b) they are in the better position than the SEC to evolve a system of hierarchy of rights among the stakeholders of the company that ensures the long-term success of the company; and (c) they must be allowed the flexibility to evolve their system of corporate governance in accordance with prevailing or evolving circumstances of the markets they operate in.
More importantly, the CG Code for PLCs puts in place a superior “principle-based” (as contrasted from a “rules-based”) system by which to cover the fiduciary duties of diligence and loyalty as they are owed to stakeholders, other than stockholders, and to the country as well.
Under Principle 7 under the heading “Strengthening Board Ethics,” the Code does impose a clear, albeit open-ended, duty upon the Board of a publicly-listed companies that is owed to “all stakeholders,” which is to act with “high ethical standards” in pursuing the company’s affairs, thus:
Principle 7:
Members of the Board are duty-bound to apply high ethical standards, taking into account the interests of all stakeholders.
The Code mandates the Board to adopt, implement and monitor a Code of Business Conduct and Ethics, without dictating its contents, but rather recommending the parameters that it should cover: “Code of Business Conduct and Ethics, [should] provide standards for professional and ethical behavior, as well as articulate acceptable and unacceptable conduct and practices in internal and external dealings.”
The Code mandates that the Code should properly be disseminated to the Board, Management, and employees and be disclosed and made available to the public through the company websites. It explains that “A company’s ethics policy can be made effective and inculcated in the company culture through a communication and awareness campaign, continuous training to reinforce the code, strict monitoring and implementation and setting in place proper avenues where issues may be raised and addressed without fear of retribution.”
Under Recommendation 14.2, which mandates the Board to establish clear policies and programs to provide a mechanism on the fair treatment and protection of stakeholders, the Code explains that “The company’s Code of Conduct ideally includes provisions on the company’s policies and procedures on dealing with various stakeholders. The company’s stakeholders include its customers, resource providers, creditors and the community in which it operates. Fair, professional and objective dealings as well as clear, timely and regular communication with the various stakeholders ensure their fair treatment and better protection of their rights.”
A company’s set of ethical standards has therefore the potency of evolving a corporate culture that is internally adhered to as a matter of principle; it provides a legal standing on the part of all stakeholders to expect, and in certain instances, to demand, compliance therewith from the responsible fiduciary agencies within the company.
That brings us therefore to the very last Principle 16 under the heading “Encouraging Sustainability and Social Responsibility” mandates (not obligates) the highest form of ethical values — Good Corporate Citizenship — from the Board and Management of publicly-listed companies.
Principle 16:
The company should be socially responsible in all its dealings with the communities where it operates. It should ensure that its interactions serve its environment and stakeholders in a positive and progressive manner that is fully supportive of its comprehensive and balanced development.
Under Recommendation 16.1, the Code mandates (not obligates) that every publicly-listed company whose business is inherently vested with public interests, “should recognize and place an importance on the interdependence between business and society, and promote a mutually beneficial relationship that allows the company to grow its business, while contributing to the advancement of the society where it operates.”
The Code further explains that “Sustainable development means that the company not only complies with existing regulations, but also voluntarily employs value chain processes that takes into consideration economic, environmental, social and governance issues and concerns. In considering sustainability concerns, the company plays an indispensable role alongside the government and civil society in contributing solutions to complex global challenges like poverty, inequality, unemployment and climate change.”
Therefore, the Code seeks to invoke from the Board and Management of publicly-listed companies a sense of “corporate patriotism” and what carries them forward towards ethical corporate behavior would come not from a deep sense of “going above and beyond the call of duty.”
We come to the proposition, if not our conclusion, that the underlying principles upon which the CG Code for PLCs operates are these:
That an effective corporate governance regime goes beyond what is “legal” but seeks to achieve what is “ethical”, since that which is ethical promotes the best interests for the company, its fiduciaries, the various stakeholders, and society as a whole.
That true ethical corporate behavior happens not solely under a regime of regulator-imposed standards, but proceeds with greater fervor from a “corporate culture” developed by the corporate fiduciaries themselves, and continually evolved in the course of interactions with the various stakeholders.
That the disciplining effect of the market under a regime of full transparency, is the best driver for ethical corporate behavior and conveys more efficiently the sentiments of the stakeholders.
(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 M.A.P.)
CESAR L. VILLANUEVA is a member of the Management Association of the Philippines (M.A.P.), the former Chair of the Governance Commission for GOCCs and the Founding Partner of the Villanueva Gabionza & Dy Law Offices.
cvillanueva@vgslaw.com
map@map.org.ph
http://map.org.ph
