Reconstituting the SEC as primary agency to evolve the CG reform in private corporate sector

When we consider that the old Corporation Code operated under the universally accepted principle of “Maximization of Shareholder Value,” it was not surprising that the Security and Exchange Commission (SEC) undertook to pursue corporation governance (CG) reforms under the “no-sanction approach” in the original CG Code, since it was introducing what was then the minority school of thought, “Stakeholder Theory,” and invoking the “State’s policy to actively promote corporate governance reforms aimed to raise investor confidence, develop capital market and help achieve high sustained growth for the corporate sector and the economy.” CG reforms under the old Corporation Code were really an experiment to adjunct the stakeholder theory into the well-established maximization of shareholder value doctrine statutorily embedded in the old Corporation Code.

The Revised Corporation Code embraced many of the CG reforms undertaken by the SEC through its various CG codes and issuances, and constituted the SEC as the primary agency to evolve the reform movement in the private corporate sector, particularly for publicly-held corporations and other corporations the businesses of which are vested with public interests.

Like its counterpart in the public corporate sector, i.e., the GOCC Governance Commission (GCG), the SEC under the Revised Corporation Code has been re-constituted as the “primary regulatory, monitoring and oversight agency, with authority to formulate, implement and coordinate policies to ensure good corporate governance for the private corporate sector,” through the following sections:

(a) SECTION 22: Grants the SEC powers to:

(i) Classify corporations as vested with public interests, after taking into account relevant factors which are germane to the objective and purpose of requiring the election of an independent director, such as the extent of minority ownership, type of financial products or securities issued or offered to investors, public interests involved in the nature of business operations, and other analogous factors; and,

(ii) Issue rules and regulations governing the qualification, disqualifications, voting requirements, duration of term and term limits, maximum number of board memberships of independent directors, and other requirements that SEC will prescribe “to strengthen their independence and align with international best practices”;

(b) SECTION 26: Expressly recognizes the power of the SEC to provide for further qualifications or other disqualifications for directors, trustees and officers under the aegis that the SEC is the “primary regulatory agency” in the promotion of good CG or as a sanction in its administrative proceedings;

(c) SECTION 49: Expressly recognizes the power of the SEC to require other items to be reported by the Board of Directors to stockholders or members at the regular meeting “in the interest of good corporate governance and the protection of minority stockholders;”

(d) SECTIONS 154 TO 156: Grant the SEC investigation and prosecution powers for alleged violation of the RCCP, or of a rule, regulation, or order of the SEC itself, with full authority to administer oaths, issue subpoena of witnesses and documents, as well as issue cease and desist orders;

(e) SECTION 157: Grants the SEC the power to hold, after due notice and hearing, in contempt and impose administrative fines against any person who, without justifiable cause, fails or refuses to comply with any lawful order, decision, or subpoena issued by the SEC;

(f) SECTION 158: Grants to the SEC the power to impose, after due notice and hearing, any of the following administrative sanctions, for violation of any provision of the RCCP, rules or regulations, or any of the SEC’s orders, thus:

(i) Impose a fine ranging from P5,000 to P2 million and not more than P1,000 for each day of continuing violation, but in no case to exceed P2 million;

(ii) Issue a permanent cease and desist order;

(iii) Suspension or revocation of the Certificate of Incorporation; and

(iv) Dissolution of the corporation and forfeiture of its assets under the conditions in Title XIV of the RCCP;

(g) SECTION 178: Grants the SEC “visitorial powers over all corporations,” which powers include the examination and inspection of records, regulation and supervision of activities, enforcement of compliance, and imposition of sanctions in accordance with the Code;

(h) SECTION 179: Includes the following among the powers, functions and jurisdiction of the SEC under the Revised Corporation Code, thus:

(i) Impose sanctions for the violation of the RCCP, its implementing rules and orders of the SEC;

(ii) Promote CG and the protection of minority investors, through, among others, the issuance of rules and regulations consistent with international best practices;

(iii) Prescribe the number of independent directors and the minimum criteria in determining the independence of a director;

(iv) Impose or recommend new modes by which a shareholder, member, director, or trustee may attend meetings or cast their votes, as technology may allow, taking into account the company’s scale, number of shareholders or members, structure, and other factors consistent with the basic right of corporate suffrage; and,

(v) Formulate and enforce standards, guidelines, policies, rules and regulations to carry out the provisions of the RCCP.

In addition, the SEC is granted adjudicative or quasi-judicial powers to summarily rule on the following CG issues, most of which were not found in the old Corporation Code, thus:

(a) SECTION 17: When the corporation fails to comply with SEC’s order to cease and desist from using an unauthorized name, the SEC may hold the corporation and its responsible directors or officers in contempt and/or hold them administratively, civilly and/or criminally liable under the RCCP and other applicable laws, and/or revoke the registration of the corporation.

(b) SECTION 25: In relation to the election of directors or trustees and officers, grants to the SEC the power to:

(i) Summarily order that an election be held if there has been a failure to elect directors or trustees on the schedule or reschedule dates for election;

(ii) Issue such orders as may be appropriate, including orders directing the issuance of a notice stating the time and place of the election, designated presiding officer, and the record date or dates for the determination of shareholders or members entitled to vote.

(c) SECTION 27: In relation to a disqualified director or trustees, granting the SEC —

(i) The power to, motu proprio or upon verified complaint, and after due notice and hearing, order the removal of a director or trustee elected despite the disqualification, or whose disqualification arose or is discovered subsequent to an election;

(ii) Removal of a disqualified director shall be without prejudice to other sanctions that the SEC may impose on the members of the Board of Directors who, with knowledge of the disqualification, failed to remove such director or trustee;

(d) SECTION 73: Within five days from receipt of the report from an aggrieved party who has been denied his right of inspection and/or reproduction, the SEC shall conduct a summary investigation and issue an order directing the inspection or reproduction of the requested records.

The SEC has certainly been granted “awesome powers” to promote good CG. The propensity by which the SEC invokes its awesome regulatory, quasi-legislative and quasi-judicial powers under the Revised Corporation Code vis-à-vis the “comply or explain approach” championed in its 2015 CG Blueprint, will certainly have a great impact on the course of pursuing the CG reform in the private corporate sector of the Philippines.

Preliminarily, it may be noted that under the aegis of the Revised Corporation Code, the SEC, under Chairman Emilio B. Aquino, issued in November 2019, the CG Code for Public Companies and Public Issuers, which retained the same framework as the CG Code for PLCs, including its “comply or explain approach.”

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.

Atty. Cesar L. Villanueva is co-chair for Governance the MAP Committee on ESG, chair of Institute of Corporate Directors (ICD), the first chair of Governance Commission for GOCCs (GCG), former dean of the Ateneo Law School, and founding partner of Villanueva Gabionza & Dy Law Offices.

map@map.org.ph

cvillanueva @vgslaw.com