Corporate Governance’s Principle of Transparency: Disclosure of compensation received by directors or trustees

Recommendation 8.4 of the Corporate Governance (CG) Code for Publicly-Listed Companies (PLCs) is that proper disclosure should be made of the policies and procedures in setting Board remunerations, thus: “The company should provide a clear disclosure of its policies and procedure for setting Board and executive remuneration, as well as the level and mix of the same in the Annual CG Report. Also, companies should disclose the remuneration on an individual basis, including termination and retirement provisions.”

The Explanation to Recommendation 8.4 is to the effect that disclosure of remuneration policies and procedure enables investors to understand the link between the remuneration paid to directors and key management personnel and the company’s performance. It noted that while the 2014 Revised CG Code required only a disclosure of all fixed and variable compensation that may be paid, directly or indirectly, to its directors and top four management officers during the preceding fiscal year, it regarded as good practice mandated in many countries, to disclose board and executive remuneration on an individual basis, including termination and retirement provisions.

The Revised Corporation Code of the Philippines (RCCP) is actually fascinated with the principle of disclosing the compensation received by each director or trustee on an annual basis, and provides for such obligation in three distinct sections, thus:

(a) SECTION 29: Requires that corporations vested with public interests “shall submit to their shareholders and the [SEC] an annual report of the total compensation of each of their directors or trustees;”

(b) SECTION 49: Makes it a mandate for all corporations, not just those vested with public interests, to present to the shareholders or members at the annual meeting, a director or trustee compensation report; and

(c) SECTION 177: Reiterates the obligation of corporations vested with public interests to submit to the SEC a director or trustee compensation report, and adds in addition the submission of “A director or trustees appraisal or performance report and the standards or criteria used to assess each of director or trustee” an obligation to report to the SEC directors’ or trustees’ compensation.

In addition, Section 177 provides that the SEC may place the corporation under delinquent status in case of failure to submit the reportorial requirements three times, consecutively or intermittently, within a period of five years.

Finally, Section 161 imposes a criminal penalty of a fine for the “unjustified failure or refusal by the corporation, or by those responsible for keeping and maintaining corporate records, to comply with” Section 177 of the RCCP.

CG PRINCIPLES OF ‘ACCOUNTABILITY’ AND ‘RESPONSIBILITY’: ASSESSMENT OF THE PERFORMANCE OF DIRECTORS OR TRUSTEES
Principle 6 of the CG Code for PLCs expresses the CG principles of responsibility and accountability by providing that the best measure of the Board’s effectiveness is through an assessment process, thus: “The best measure of the Board’s effectiveness is through an assessment process. The Board should regularly carry out evaluations to appraise its performance as a body, and assess whether it possesses the right mix of backgrounds and competencies.”

Recommendation 6.1 of the CG Code for PLCs recommends that the Board should conduct every three years an annual self-assessment of its performance, including the performance of the Chairperson, individual members and committees, which assessment should be supported by an external facilitator.

Recommendation 6.2 provides that the Board should have in place a system that provides, at the minimum, criteria and processes to determine the performance of the Board, the individual directors, committees, and that such a system should allow for a feedback mechanism from the shareholders.

The RCCP now mandates a system of individual appraisal of directors or trustees in the following manners:

(a) SECTION 49: Provides that at the annual meeting of shareholders or members of all corporations, not just those vested with public interests, the Board of Directors shall endeavor to present to shareholders or members, among others, “(h) Appraisals and performance reports for the board and the criteria and procedure for assessment;” and,

(b) SECTION 177: Provides that corporations vested with public interests must also submit on an annual basis to the SEC, in addition to the GIS and the Audited Financial Statements, “(2) A director or trustee appraisal or performance report and the standards or criteria used to assess each director or trustee.”

In addition, Section 177 provides that the SEC may place the corporation under delinquent status in case of failure to submit the reportorial requirements three times, consecutively or intermittently, within a period of five years.

Finally, Section 161 of the RCCP imposes a criminal penalty of fine the “unjustified failure or refusal by the corporation, or by those responsible for keeping and maintaining corporate records, to comply with” Section 177.

This 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.

Attorney Cesar L. Villanueva is Chair of the MAP Corporate Governance Committee, Trustee of Institute of Corporate Directors (ICD), was the first Chair of Governance Commission for GOCCs (August 2011 to June 2016), was Dean of the Ateneo Law School (2004 to 2011), is author of The Law and Practice in Philippine Corporate Governance and the National Book Board Award-winning Profession, and Founding Partner of Villanueva Gabionza & Dy Law Offices.