Primacy of the board of directors in corporate governance

(Part 5)

Although Section 23 of the old Corporation Code provided for the doctrine of centralized management that vested directly in the Board of Directors all corporate powers, all corporate properties, and all corporate business, nonetheless, the practice was more to the effect that the Board was essentially a policy-determining body, and its was primarily with Management, headed by the President/CEO, by which corporate powers were to be exercised, and on Management’s shoulders by which corporate properties and business were to be managed. It was the old mantra that it was not good business practice for the Board to involve itself in “management prerogatives.”

The position of Chairman of the Board did not even have any statutory basis under the old Corporation Code, as, in fact, the default rule under Section 54 was that it shall be the President — who must be a member of the Board — who shall preside at all meetings of directors or trustees, as well as of the shareholders or members, unless the bylaws provide otherwise. Under Section 53, it was the President who had the power to call a special meeting of the Board.

The original Corporate Governance (CG) Code sought to re-instill the primacy of the Board of Directors in the governance of the corporation, and to emphasize the legal truism that Management and all Senior Officers are appointed by the Board essentially as its agents to handle the day-to-day affairs of the corporation. It provided, under the heading “The Board Governance,” that “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. It is the Board’s responsibility to foster the long-term success of the corporation and secure its sustained competitiveness in a manner consistent with its fiduciary responsibility, which it should exercise in the best interests of the corporation and its shareholders. …”

The original CG Code also provided, under the heading “Accountability and Audit,” the proper designation of the fiduciary duty of governance to be with the Board of Directors, thus: … The Board is primarily accountable to the shareholders and Management is primarily accountable to the Board. The Board should provide the shareholders with a balanced and understandable assessment of the corporation’s performance, position and prospects on a quarterly basis. The Management should provide all members of the Board with a balanced and understandable account of the corporation’s performance, position and prospects on a monthly basis. …

The same policy framework has been preserved in the CG Code for PLCs, albeit with less dramatic language than that contained in the original CG Code. Thus, under heading of “Establishing a Competent Board,” Principle 1 reads:

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.

Under the heading “Establishing Clear Roles and Responsibilities of the Board,” Principle 2 reads:

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 shareholders and other stakeholders.

Recommendation 2.2 embodies the primacy of the Board of Directors when it provides that “The Board should oversee the development of and approve the company’s business objectives and strategy, and monitor their implementation, in order to sustain the company’s long-term viability.”

In turn, Recommendation 2.3 provides that “The Board should be headed by a competent and qualified Chairperson.” The Explanation provides for the roles and responsibilities of the Chairperson as the quarterback for the Board in pursuing its primary role in corporate affairs, thus:

a. Makes certain that the meeting agenda focuses on strategic matters, including the overall risk appetite of the corporation, considering the developments in the business and regulatory environments, key governance concerns, and contentious issues that will significantly affect operations;

b. Guarantees that the Board receives accurate, timely, relevant, insightful, concise, and clear information to enable it to make sound decisions;

c. Facilitates discussions on key issues by fostering an environment conducive for constructive debate and leveraging on the skills and expertise of individual directors;

d. Ensures that the Board sufficiently challenges and inquires on reports submitted and representations made by Management;

e. Assures the availability of proper orientation for first-time directors and continuing training opportunities for all directors; and,

f. Makes sure that performance of the Board is evaluated at least once a year and discussed/followed up on.

The Revised Corporation Code (of the Philippines, RCCP) retains under Section 22 the same forceful language of the attribute of centralized management governing the corporate set-up, i.e., that unless otherwise provided in the RCCP, all corporate powers, all corporate properties, and all corporate business are vested directly with the Board of Directors. In turn, Section 23 of the RCCP has introduced a new paragraph to install formally the primacy role of the Board of Directors in pursuing corporate governance in the corporate set-up, thus: “The directors or trustees elected shall perform their duties as prescribed by law, rules of good CG, and bylaws of the corporation.”

The Revised Corporation Code has retained under Section 24 the legal structure that all corporate officers, including the President, are agents of the Board, by maintaining the provision that immediately after their election, the Board must organize itself and elect the President, the Corporate Secretary, the Treasurer, and such other officers as may be provided in the bylaws. The primary CG reform introduced under Section 24 of the RCCP is the amendment of its last paragraph to place into statutory language the duty of obedience that officers owed to both the corporation and its Board of Directors, thus: “The officers shall manage the corporation and perform such duties as may be provided in the bylaws and/or as resolved by the board of directors.”

More importantly, the Revised Corporation Code has, under Section 53, formally recognized the Chairman of the Board as a statutory officer, and placed in such office the prerogatives that were with the President under the old Corporation Code, thus: “The chairman or, in his absence, the president, shall preside at all meetings of the directors or trustees as well as of stockholders of members, unless the bylaws provide otherwise.”

Unfortunately, the RCCP has not pursued the reforms so to the extent of expressly providing that the positions of Chairman and President should not be occupied by the same individual. In addition, there has been a lapse in updating the other provisions of the old Corporation Code that recognized the President as having prerogative in calling special meetings, namely:

SECTION 27: The stockholders’ meeting to be held to remove a member of the Board must still be called by the Corporate Secretary on order of the President;

SECTION 52: Special meetings of the Board may be held at any time upon the call of the President.

There is no doubt that more fine-tuning of the CG provisions of the Revised Corporation Code should be made, which can be expected to happen in jurisprudence as the Supreme Court addresses issues arising from the fiduciary duty of directors and trustees to pursue “good CG,” pursuant to the centerpiece CG principle: “Although the day-to-day management of the corporate business enterprise is with the Management, headed by the President/CEO; nonetheless, Management remains accountable to the Board of Directors, headed by the Chairman, in whom all corporate powers, all corporate properties and all corporate business is directly vested by law, and who are directly accountable to the stockholders and other stakeholders of the corporation.” n

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 MAP Corporate Governance Committee, trustee of the Institute of Corporate Directors, former Chair of Governance Commission for GOCCs (August 2011 to June 2016), Dean of the Ateneo Law School (April 2004 to September 2011), author of the book The Law and Practice in Philippine Corporate Governance and the National Book Board Award-winning Profession, and founding partner of the Villanueva Gabionza & Dy Law Offices.