Toward good corporate governance

The Securities and Exchange Commission has issued the 2016 Code of Corporate Governance for Publicly Listed Companies (PLCs), which took effect last Jan. 1. It is intended to raise the corporate governance standards of Philippine PLCs to a level at par with global and regional standards by increasing the boards’ responsibilities and ensuring the directors’ competencies. It also hopes to strengthen the protection of shareholders and other stakeholders and to promote full disclosure  and transparency in both financial and nonfinancial reporting.

The provisions of the Code are presented as principles, recommendations and explanations. The principles are high-level statements of good corporate governance practices and are applicable to all PLCs. The recommendations are objective criteria that illustrate the principles’ specific features. Alternatives to the recommendations, depending on the specific circumstances of the PLCs, are allowed provided  good governance is achieved.

To avoid the perception of “overregulation,” the Code adopts the “comply or explain” approach. When a recommendation is not complied with, the company must disclose and describe this noncompliance and explain how the overall principle is being achieved. The alternative is expected to be consistent with the overall principle.

In no way does the 2016 Code prescribe a “one size fits all” framework. Though flexibility is allowed, larger PLCs and financial institutions are generally expected to follow most of the Code’s provisions. For smaller PLCs, the provisions’ relevance and cost and benefit considerations would be acceptable reasons for noncompliance.

While the SEC’s intention in adopting the Code is commendable, and most of the principles and recommendations are clearly warranted, including the 9-year maximum cumulative term for independent directors (Recommendation 5.3), there are certain ones that may not achieve the objectives presented.

Here are examples:

Recommendation 1.2: The board majority should be composed of a majority of nonexecutive directors (NEDs), including independent directors. This is to ensure that no director or small group of directors can dominate the decision-making process, thus protecting the company’s interest over that of individual shareholders. But in the Philippines where most listed companies are majority-owned by a family group, having a majority NEDs would not necessarily achieve the mentioned purpose. Moreover, if a company is majority-owned, its interest and that of the majority shareholders is the same. If the intent is to protect the minority shareholders, this is adequately addressed in Recommendation 2.7, which provides for adopting a policy and system governing related-party transactions, and in Recommendation 3.5, which requires establishing a related-party transactions committee.

Recommendation 1.4: The board shall have a diversity policy covering gender, age, ethnicity, culture, skills, competence and knowledge. Increasing the number of female directors, including independent directors, is mentioned as a good gender diversity policy. But it should be noted that while the Code pushes affirmative action for women in the board, Recommendation 2.4 promotes adopting a policy on directors’ retirement age (presumably for effective succession planning and to promote dynamism in the corporation), which some may construe as age discrimination, or directed against very prominent but very senior personalities who sit in many boards.

Recommendation 5.1: The board shall have at least three independent directors, or such number to constitute at least one-third of the members, whichever is higher. The ideal number ranges from one-third to a substantial majority. But substantial majority for independent directors is unrealistic and may be unwise in situations where the company is majority-owned by a family group because it deprives the majority owners of board control of their own company.

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David L. Balangue ([email protected]) is chair of the Philippine Financial Reporting Standards Council, the Philippine Center for Population and Development Inc., and the National Citizens Movement for Free Elections.