Public Companies Corporate Governance

ATENEO DE MANILA LAW SCHOOL
CENTER FOR CONTINUING LEGAL EDUCATION
MAKATI, PHILIPPINES
CORPORATE GOVERNANCE:
LISTED AND PUBLIC COMPANIES
[03 SEPTEMBER 2007]

BY
CESAR L. VILLANUEVA, B.S.C., LL.B., C.P.A., LL.M., D.J.S., FAICD

The paper undertakes an evaluation of the duties and responsibilities of the Board of Directors of listed and public companies, the extent of their powers and authority, as well as their personal liability they may incur for corporate transactions and obligations.

Essentially, the discussions will revolve around the issues of “Corporate Governance,” as delineated in the SEC Memorandum Circular No. 2, series 2002 (hereinafter referred to as "CCG"), which defines the term as—

“A SYSTEM WHEREBY SHAREHOLDERS, CREDITORS AND OTHER STAKEHOLDERS OF A CORPORATION ENSURE THAT MANAGEMENT ENHANCES THE VALUE OF THE CORPORATION AS IT COMPETES IN AN INCREASINGLY GLOBAL MARKET PLACE.”

Indeed, at the heart of good corporate governance are the ideals of “responsibility and accountability,” “disclosure and transparency,” and “protection of minority interests.”

The CCG was issued by the SEC in accordance with State’s policy to actively promote corporate governance reforms aimed to:

 RAISE INVESTOR CONFIDENCE

 DEVELOP CAPITAL MARKET

 HELP ACHIEVE HIGH SUSTAINED GROWTH FOR THE CORPORATE SECTOR AND THE ECONOMY

In the Philippine context, the impetus to promote good corporate governance comes from the effects of globalization: that local businesses and industries, whether they like it or not, must now face the onslaught of foreign competition; that reliance upon investments and needed financing even by local companies require the rigors of compliance with good corporate governance practice; and that local companies that have installed and practice good corporate governance, have not only been able to sustain improved operational efficiency, but have gained easier access to financing.

In the end, Philippine companies would need to implement good corporate governance system, and will continue to demand from their financial and legal consultants assistance in such field, simply because the key financial and regulatory agencies of the Government, including the SEC and the Bangko Sentral ng Pilipinas, as well as key foreign lenders and financial providers, such as the ADB, IMF and OECD, demand that Philippine business comply with world-standard corporate governance practice.

Essentially, the recent developments in Corporate Governance do not embody new concepts, for indeed the extent and coverage of corporate governance is as old as Corporation Law itself; what has been the essence of the movement is rather the changing evolution of the regime from principle-basis to rule-basis.

I. COVERAGE OF “PUBLIC COMPANIES”

The paper is limited to coverage of the Board of Directors and key officers of “Public Companies,” which covers:

 CORPORATIONS WHOSE SECURITIES ARE REGISTERED OR LISTED

 WIDELY-HELD PRIVATE CORPORATIONS

 GRANTEES OF SEC PERMITS, LICENSES AND SECONDARY FRANCHISE

 PHILIPPINE BRANCHES OR SUBSIDIARIES OF FOREIGN CORPORATIONS WHOSE
SECURITIES ARE REGISTERED OR LISTED

Aside from banking sector and insurance sectors for which their respective regulatory agencies have issued regulations on corporate governance, public companies represent the greatest commercial and economic impact to society, and thereby necessarily covers an expanded “constituencies” for their Boards of Directors.

II. ROLE AND POWER OF BOARD OF DIRECTORS

To arrive at the proper understanding of the duties and responsibilities of the Board of Directors, it becomes necessary to determine the source of its powers, its constituencies, and the objectives that the Board is mandated to achieve.

1. THE “CORPORATE PACKAGE”

The corporate vehicle has indubitably become the prevalent business medium for important business endeavors in our country because it offers the following features:

 STRONG JURIDICAL PERSONALITY

 LIMITED LIABILITY TO INVESTORS

 CENTRALIZED MANAGEMENT

 FREE-TRANSFERABILITY OF UNITS OF OWNERSHIP

Corporate Governance is essentially based on, and treats of, the corporate feature of “centralized management”.

A corporation's management is centralized in the Board of Directors. Shareholders are not agents of the corporation, nor can they bind the corporations, unlike in a partnership setting, where each partner may bind the partnership, even without the knowledge of the other partners. Therefore, in its legal relationship, a corporation presents a more stable and efficient system of governance and dealings with third parties, since management prerogatives are centralized in its Board.

By imposition of law, and except in particularly designated instances, stockholders are bound by the management decisions and transactions of the board of directors of the corporation, whether they like it or not.

It is actually centralized management (i.e., the severance of management from ownership, and placing it in a professional body) that allows for the feature of limited liability to the equity holders. Thus, in a partnership which also has the feature of separate juridical personality, the partners do not enjoy the features of limited liability (i.e., they become personally liable for the partnership debts), because they are also exercising prerogatives of management.

2. POWER OF BOARD DIRECTLY VESTED BY LAW
Although the Board of Directors of every stock corporation will normally be elected into office by the stockholders, the directors are not agents of the stockholders, nor are the powers of the Board considered to be delegated powers of the stockholders. And although it is true that the Board of Directors, as well as the individual directors themselves, owe fiduciary duties to the stockholders, the corporation as a separate juridical entity separate and distinct from the stockholder, is the true principal of the Board.

This doctrine of "directly vested authority" (as contrasted from "delegated authority"), which considers the Board powers as directly vested by law and not merely being delegated power from the stockholders, is the dominant rule in Philippine Corporate Law, as affirmed by Section 23 of the Corporation Code, thus:

SEC. 23. The Board of Directors or Trustees — Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all businesses conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year and until their successors are elected and qualified. (Emphasis supplied)

The opening phrase of Section 23 “Unless otherwise provided in this Code,” clearly indicates that the section grants the totality of corporate powers to the Board of Directors, namely:

 EXERCISE ALL CORPORATE POWERS

 CONDUCT ALL CORPORATE BUSINESSES

 CONTROL AND HOLD ALL CORPORATE PROPERTY

except only for the particular instances found in the Corporation Code that requires stockholders' ratification.

More importantly, Section 23 denies the suggestion that the Board of Directors act merely as agents of the stockholders who have voted them into power, for it clearly rejects the central doctrine in the Law on Agency that the agent is merely a representative of the principal and acts under the complete will of his principal. In short, the Board of Directors do not act as agents of the stockholders.

In Raminez v. The Orientalist Co., the Supreme Court refused to recognize any veto power on the part of the stockholders vis-à-vis the power of the Board of Directors, thus:

Both upon principle and authority it is clear that any action or resolution of the stockholders on corporate matters should be ignored. The functions of the stockholders of a corporation, it must be remembered, are of limited nature. The theory of a corporation is that the stockholders may have all the profits but shall turn over the complete management of the enterprise to their representatives and agents, called directors. Accordingly, there is little for the stockholders to do beyond electing directors, making by-laws, and exercising certain other special powers defined by law. In conformity with this idea it is settled that contracts between a corporation and third persons must be made by the directors and not by the stockholders. The corporation, in such matters, is represented by the former and not by the latter. This conclusion is entirely accordant with the provisions of [now Sec. 23 of the Corporation Code].

This configuration of Board power is also the central theme under the CCG for public companies, which provides 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. As such, it is vitally important that a number of board members be independent from management.

The import of the doctrine of original vested powers ensures that the Board of Directors do not water-down their responsibilities by looking at themselves as merely instrumentalities of others (i.e., the stockholders); to realize that possessing original powers of governance, it becomes their primary duty to exercise it diligently and prudently in favor of their constituencies.

In addition, the CCG also mandates that the Board cannot pass-on its responsibilities to the Management, and that the role of Management over the day-to-day affairs of the company is distinct from the primarily responsibility of the Board for corporate governance, sitting at the apex of the corporate structure. Thus, the Code expressly provides that —

While the management of the day-to-day affairs of the institution is the responsibility of the management team, the Board is, however, responsible for monitoring and overseeing management action.

3. BUSINESS JUDGMENT RULE

From the corporate feature of “centralized management” has evolved the “business judgment rule,” that contains the public policy on corporate governance: A resolution or transaction pursued within the corporate powers and business operations of the corporation, and passed upon in good faith by the Board of Directors, is valid and binding, and generally the courts have no authority to review the same or substitute their own judgment, even when the exercise of such power may cause losses to the corporation or decrease the profits of a department.

a. Rationale for Business Judgment Rule

One of the advantageous features of the corporation is that it acts in the business world through a centralized management, which promotes efficiency and prevents confusions arising from diffused corporate powers, and to allow proper pin-pointing of responsibilities. Investors and creditors of the corporation, as well as those who deal with it, can rely upon the law-directed fact that the corporation shall be bound only through its Board of Directors, or representatives duly authorized by the Board. In any organizational set-up, the congruence of authority and responsibility in the same person, committee, or board always promotes efficiency. This is the rationale for the business judgment rule.

The Board of a corporation has sole authority to determine policy and conduct the ordinary business of the corporation within the scope of its charter. As long as the board acts honestly and the contract does not defraud or abuse the rights of the minority, the courts will not interfere in their judgments and transactions. The minority members of the board and the minority stockholders cannot come to court upon allegations of want of judgment or lack of efficiency on the part of the majority and change the course of the administration of corporate affairs.

Montelibano v. Bacolod-Murcia Milling Co., Inc., had earlier established the principle that when a resolution is “passed in good faith by the board of directors, it is valid and binding, and whether or not it will cause losses or decrease the profits of the central, the court has no authority to review them," adding that "[i]t is a well-known rule of law that questions of policy or management are left solely to the honest decision of officers and directors of a corporation, and the court is without authority to substitute its judgment [for that] of the board of directors; the board is the business manager of the corporation, and so long as it acts in good faith its orders are not reviewable by the courts."

Gamboa v. Victoriano, held that courts cannot supplant the discretion of the Board on administrative matters as to which they have legitimate power of action, and contracts which are intra vires entered into by the Board are binding upon the corporation and courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to a wanton destruction of rights of the minority.

Philippine Stock Exchange, Inc. v. Court of Appeals, also seems to establish another theoretical basis for the business judgment rule vis-à-vis the power of control of the State, based on the recognition of the corporation merely as an association of individuals who, through the Board, do not give up through the medium of the corporation their management prerogatives on business matters, thus:

A corporation is but an association of individuals, allowed to transact under an assumed corporate name, and with a distinct legal personality. In organizing itself as a collective body, it waives no constitutional immunities and perquisites appropriate to such a body. As to its corporate management decision, therefore, the state will generally not interfere with the same. Questions of policy and of management are left to the honest decision of the officers and directors of a corporation, and the courts are without authority to substitute their judgment for the judgment of the board of directors. The board is the business manager of the corporation, and so long as its acts in good faith, its orders are not reviewable by the courts.

In Philippine Stock Exchange, the Supreme Court upheld the management prerogatives of the Board of Directors of the Philippine Stock Exchange as against the control of the SEC, through the reiteration of the business judgment rule, thus:

Questions of policy and of management are left to the honest decision of the officers and directors of a corporation, and the courts are without authority to substitute their judgment for the judgment of the board of directors. The board is the business manager of the corporation, and so long as it acts in good faith, its orders are reviewable by the courts.

The SEC is the entity with the primary say as to whether or not securities, including shares of stock of a corporation, may be traded or not in the stock exchange. This is in line with the SEC’s mission to ensure proper compliance with the laws, such as the Revised Securities Act and to regulate the sale and disposition of securities in the country. . .

Also, as the primary market for securities, the PSE has established its name and goodwill, and it has the right to protect such goodwill by maintaining a reasonable standard of propriety in the entities who chose to transact through its facilities. It was reasonable for the PSE, therefore, to exercise its judgment in the manner it deems appropriate for its business identity, as long as no rights are trampled upon, and public welfare is safeguarded.

The business judgment rule thereby emphasizes not only a point of supreme corporate power, but necessarily also the highest corporate responsibility expected from the Board of Directors.

b. Coverage of Business Judgment Rule

From the foregoing, it can be seen that the business judgment rule actually has two (2) applications, namely:

(a) Resolutions and transactions entered into by the Board of Directors within the powers of the corporation cannot be reversed by the courts not even on the behest of the stockholders of the corporation; and

(b) Directors and officers acting within such business judgment cannot be held personally liable for the consequences of such acts.

The second branch of the business judgment rule is that corporate officers cannot be held personally liable for corporate debts or obligations incurred in the exercise of the business judgment. However, when directors or trustees violate their duties, the can be held personally liable, thus:

(a) When the director willfully and knowingly vote for patently unlawful acts of the corporation;

(b) When he is guilty of gross negligence or bad faith in directing the affairs of the corporation; and

(c) When he acquires any personal or pecuniary interest in conflict with his duty as such directors.

Likewise, the above-enumerated exceptions when directors, trustees and corporate officers may be held personally liable for corporate acts, provide also the three (3) instances when courts are authorized to supplant the decision of the Board, which is deemed to be biased and may prove detrimental to the corporation.

Philippine Stock Exchange defined the meaning and coverage of “bad faith” on the part of the board of directors of a corporation as to warrant an exemption from the business judgment rule, thus: “bad faith does not simply connote bad judgment or negligence, but ‘imports a dishonest purpose or some moral obliquity and conscious doing of wrong. It means a breach of a known duty through some motive or interest of ill will, partaking of the nature of fraud.’”

As will be shown in the discussions hereunder, the CCG now seeks to "re-mold" the second branch of the business judgment rule that tends to shield directors from liability claims.

4. OBJECTIVES OF THE BOARD
a. Maximization of Profits

The traditional notion in Corporate Law is that in the performance of its duties and responsibilities, the Board of Directors must be guided by one primary norm, that of improving the bottom line or profitability of the corporation.

Although no specific clause is found in the Corporation Code directly on the matter, the Supreme Court has held that the primary obligation of the directors of a corporation is "to seek the maximum amount of profits for the corporation," and characterized the position as a "position of trust" and that in case a director’s interests conflict with those of the corporation, he cannot sacrifice the latter to his own advantage and benefit. The fiduciary or trust relationship "is not a matter of statutory or technical law. It springs from the fact that directors have the control and guidance of corporate affairs and property and hence of the property interest of the stockholders."

Nevertheless, this traditional view has given way to a more expanded norm of “objectives” of Board of Directors, brought about by the expanded socio-economic role of corporations itself.

b. Enhance of the Value of the Company

The CCG now specifically mandates that good Corporate Governance goes beyond the narrow corridors of maximization of profits, but embodies the Board’s obligation “to ensure that management enhances the value of the corporation,” which looks at long-term goals that seek to address the interests not only of the stockholders, but also of other stakeholders.

Corporate Governance for public companies thereby would require of Boards of Directors and corporate officers a more panoramic approach in decision-making, and greater necessity of balancing the interests of various stakeholders who do not have the same priorities, and gearing the companies towards greater "Corporate Social Responsibility" (CSR). Thus, the CCG delineates the duty of the Board as—
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 interest of the corporation and its shareholders.

III. PRINCIPLE OF “RESPONSIBILITY”:

STATUTORY SAFEGUARDS TO ENFORCE FIDUCIARY ROLE OF DIRECTORS AND OFFICERS

1. OPERATING PARADIGM IN “GENERAL” CORPORATE LAW

The provisions of the CCG are better appreciated when drawn against the general principles of Corporate Law on composition, qualifications, disqualification, and removal of directors of the Corporation Code, and the body of decisions of the Supreme Court that have interpreted them, cover the following basic principles:

(A) THE SIZE AND COMPOSITION OF THE BOARD OF DIRECTORS CAN ONLY BE BASED ON PROVISIONS CONTAINED IN THE CORPORATION'S ARTICLES OF INCORPORATION AND BY-LAWS;

(B) OTHER THAN FOR THOSE CASES SPECIFICALLY PROVIDED BY LAW, ANY QUALIFICATION OR DISQUALIFICATION PERTAINING TO THE BOARD OF DIRECTORS SHALL BE VALID ONLY WHEN EXPRESSLY PROVIDED IN THE CORPORATION'S BY-LAWS;

(C) BOARD HAVE NO POWER TO PROVIDE UNILATERALLY FOR THEIR OWN QUALIFICATIONS AND DISQUALIFICATIONS;

(D) OUTSIDE OF SPECIFIC STATUTORY EMPOWERMENT, THE POWER TO REMOVE ANY MEMBER OF THE BOARD OF DIRECTORS IS VESTED BY LAW WITH THE STOCKHOLDERS

Section 14(6) of the Corporation Code expressly requires as a fundamental content of the articles of incorporation of every corporation "[t]he number of directors or trustees, which shall not be less than five (5) nor more than fifteen (15)."

Section 47(5) of the Corporation Code provides that “Subject to the provisions of the Constitution, this Code, other special laws, and the articles of incorporation, a private corporation may provide in its by laws for . . . . The qualifications, duties and compensation of directors or trustees, officers and employees.” It must be noted that Section 47(7) allows to be provided in the by-laws “The manner of election or appointment and the term of office of all officers other than directors or trustees;” which emphasizes the principle that the manner of election and term of office of directors are mandated by statutory provisions and cannot be amended by provisions in the by-laws of a corporation.

Sections 23 and 27 of the Corporation Code provide for the statutory qualifications and disqualifications of directors, to cover the following:

(a) Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation;

(b) Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director;

(c) No person convicted by final judgment of an offense punishable by imprisonment for a period of exceeding six (6) years, or a violation of this Code, committed within five (5) years prior to the date of his election or appointment, shall qualify as a director of any corporation.

Gokongwei v. SEC, recognized the principle that it is in the by-laws that the corporation may provide for additional qualifications and disqualifications for directors other than those found in the then Corporation Law as such power is given under the then Section 21 of the Corporation Law, now Section 47 of the Corporation Code, thus:

In this jurisdiction, under section 21 of the Corporation Law, a corporation may prescribe in its by-laws “the qualifications, duties and compensation of directors, officers and employees * * *.” This must necessarily refer to a qualification in addition to that specified by section 30 of the Corporation Law, which provides that “every director must own in his right at least one share of the capital stock of the stock corporation of which he is a director * * *.” In Government v. El Hogar, the Court sustained the validity of a provision in the corporate by-law requiring that persons elected to the Board of Directors must be holders f shares of the paid up value of P5,000.00, which shall be held as security for their action, on the ground that section 21 of the Corporation Law expressly gives the power to the corporation to provide in its by-laws for the qualification of directors and is “highly prudent and in conformity with good practice.” (Emphasis supplied)
Section 16 provides that any amendment to the provisions of the articles of incorporation would be valid and effective only upon a resolution by the majority of the Board of Directors and ratified by at least two-thirds (2/3) of the outstanding capital stock, with the amendments to be thereafter approved by the SEC. In turn, Section 48 provides that any amendment of the by-laws would be valid and effective only upon a resolution by the majority of the Board of Directors and ratified by at least a majority of the outstanding capital stock. In short, outside of statutory provisions on the matter, the composition of the Board of Directors, and the qualifications and disqualifications of its members are governed by existing provisions of a corporation's articles of incorporation and by-laws, and cannot be changed by a mere resolution or determination of the Board of Directors. In other words, such matters are not left within the sole business discretion of the Board of Directors.

Section 28 of the Corporation Code provides that the power to remove a director is not within the business judgment capability of the Board of Directors, but is vested only with the stockholders representing two-thirds (2/3) of the outstanding capital stock of the corporation; and that in fact, when it comes to the removal of a director elected through minority cumulative voting, such removal by the stockholders can only for cause.

This principle is emphasized under Section 29 of the Corporation Code which empowers the Board still with quorum to fill-up any vacancy that has occurred “other than by removal by the stockholders,” which confirms that the power to elect, remove and replace a Director lies within the legal prerogative of the stockholders, not the Board.

Removal or suspension of a director does not fall within the legal competence of the Board; and that in fact by-law provisions granting such power to the Board would be void under the principle embodied in Section 47 of the Corporation Code that provisions of the by-laws cannot contravene statutory provisions.

The rationale behind the public policy on not allowing the Board of Directors the power to remove any of their members or to suspend, and giving such power solely with the stockholders may be summarized as follows:

(a) It adheres to the principle that each member of the Board is accountable to the entire body of stockholders and not to one another, and therefore they may within the chambers of the Board exercise their business discretion entirely for the benefit of the stockholders;

(b) The one-year limit on the terms of directors, and the submission of their election to the stockholders annually, is considered the main avenue for demanding responsibility and accountability;

(c) Giving the Board power to remove or discipline one of their own would likely undermine the minority representation in the Board, since in all probability the majority members of the Board would use their collective power to ease out minority members;

(d) If a director could be removed or disciplined by the Board, then it would probably make him susceptible to influence by the wishes of the powers-that-be in the Board; but by being immune from internal Board pressures and discipline, a director can go against the wishes of the majority when his business judgment tells him to do so without fear of being sanctioned; and

(e) More importantly, since the Board of Directors is the business manager of the company vested with business discretion, the policy ensures that high-level discussions, negotiation, bargaining and compromise, (and not sanctions) become the basis upon which business consensus and decisions are arrived at.

2. BINDING EFFECT OF THE CCG

The CCG has been promulgated by the SEC in the exercise of its rule-making power, otherwise known in Administrative Law, as its quasi-legislative power, and constitutes therefore what is termed "subsidiary legislation."

Section 143 of the Corporation Code defines the rule-making power of the SEC, thus:
. . . The Securities and Exchange Commission shall have the power and authority to implement the provisions of this Code, and to promulgate rules and regulations reasonably necessary to enable it to perform its duties hereunder, particularly in the prevention of fraud and abuses on the part of the controlling stockholders, members, directors, trustees or officers.

Section 72.1 of the Securities Regulation Code provides for a more expanded authority for the SEC, thus:

. . . This Code shall be self-executory. To effect the provisions and purposes of this Code, the Commission may issue, amend, and rescind such rules and regulations and orders necessary or appropriate. . . For purposes of its rules or regulations, the Commission may classify persons, securities, and other matters, within its jurisdiction, prescribe different requirements for different classes of persons, securities, or matters, and by rule or order, conditionally or unconditionally exempt any person, security, or transaction, or class or classes of persons, securities or transactions, from any or all provisions of this Code.

Failure on the part of the Commission to issue rules and regulations shall not in any manner affect the self-executory nature of this Code.

There is currently much controversy of how much leeway and power can be exercised by SEC on the basis of the language of Section 72.1 as not to offend well-established principles in Constitutional Law of non-delegation of legislative powers. For example, the power of the SEC under Section 72.1 "by rule or order, conditionally or unconditionally exempt any person, security, or transactions . . . from any or all provisions of this Code," is tantamount to granting SEC the discretion to override the prohibitory or mandatory rules of the Securities Regulation Code, which essentially amounts to power to "unmake" a law. In addition, power is now granted to the SEC to suspend the application of the Corporation Code.

The prevailing theory in our jurisdiction is that the exercise of quasi-legislative power of any administrative agency like the SEC cannot amount to "law-making" (or unmaking for that matter), but can only cover "law-execution;" that administrative regulations are intended only to implement the law and to carry out the legislative policy, but that "[t]he discretion to determine what the law shall be is exclusively legislative and cannot be delegated."

No matter what language may be used in a statutory provisions defining SEC's rule-making power, there can be no doubt that SEC has no power to violate constitutional precepts, particularly those found in the Bill of Rights. For example, the Bill of Rights provides for due process and prohibits undue classification: "No person shall be deprived of life, liberty or property without due process of law, nor shall any person be denied equal protection of the law."

Therefore, although Section 72.1 of the Securities Regulation Code empowers the SEC to "classify persons, securities, and other matters," for purpose of determining application or non-application of the provisions of the Securities Regulation Code, such provision cannot be used to unreasonably discriminate against a person or class of persons under the principle "that no person or class of persons shall be deprived of the same protection of the laws which is enjoyed by other persons or other classes in the same place and in like circumstances."

It is now on such bases that we evaluate the "innovative" provisions of the CCG (which are indicated by bold letters).

3. COMPOSITION OF BOARD OF DIRECTORS

• The Board shall be composed of at least five (5) but not more than fifteen (15) members elected by the shareholders

• HOWEVER, FOR PUBLIC COMPANIES:

 The Board shall have at least two (2) independent director or such independent directors shall constitute at least 20% of the Board membership, whichever is lesser;

 The Board may include a balance of executive and non-executive directors (including independent non-executives), having a clear division of responsibilities such that no individual or small group of individuals can dominate the Board's decision-making;

 The non-executive directors should be of sufficient qualifications, stature and number to carry significant weight in the Board's decision, with those considered by the Board to be independent being identified in the annual report;

 The Board may consider guidelines on the number of directorships for its members, which optimum number shall be related to the capacity of a director to perform his duties diligently in general.

ISSUE: The designation of minimum number of independent director merely implements Section 38 of the Securities Regulation Code.

HOWEVER, the actual number of Board seats that may be occupied by executive and non-executive directors, and the determination of what should be "sufficient qualifications, stature and number to carry significant weight in the Board's decisions," for non-executive directors cannot be understood to mean that it is within the power of the Boards of public companies by mere resolution to set the terms thereof that would have binding legal effect during the actual nomination and election process, since the CCG does not give the details as to constitute subsidiary statutory provisions.

The specific composition, qualifications and disqualifications for the Board of Directors must be provided for either by law, including subsidiary legislation like CCG, or in the by-laws. Boards do not have the power and authority to provide for their own composition or qualification, not even by means of a formal resolution adopted for that purpose. The attempt to grant such power and discretion to the Board under the language of the CCG would contravene the well-defined policy under the Corporation Code, and would thus be void.

IT WOULD BE MORE PRUDENT TO CONSTRUE those particular provisions of the CCG as "guidelines" given to the Board of Directors of public companies in undertaking their executive search and recruitment process in filling-in vacancies or effecting changes in the composition of the Board and presenting the list of nominees to the stockholders for election; or to direct them to take appropriate by-law amendments to formally implement such changes.

4. POLICIES ON MULTIPLE BOARD SEATS

• In case of multiple board seats, the Board may consider guidelines on the number of directorships for its members;

• Optimum number is related to the capacity of a director to perform his duties diligently in general;

• The Chief Executive Officer (CEO) and other Executive Directors may submit themselves to a low indicative limit on membership in other corporate Boards;

• The same low limit may apply to independent Non-executive Directors who serve as full-time executives in other corporations; and

• In any case, the capacity of directors to serve with diligence shall not be compromised.

ISSUE: These provisions of the CCG cannot be construed to authorize the Board to disqualify, suspend or even terminate a member of the Board who does not meet with the "guidelines" or "rules" (i.e., resolution) set by the Board on issues relating to multiple board suits, when such "rules" do not find themselves expressed as provisions in the by-laws of the public companies. Boards of Directors do not have the power to set by mere resolution the qualifications and disqualification of their members.

AGAIN, IT WOULD BE MORE PRUDENT TO CONSTRUE these particular provisions of the CCG as "guidelines" given to the Board of Directors of public companies in undertaking their executive search and recruitment process in filling-in vacancies or effecting changes in the composition of the Board and presenting the list of nominees to the stockholders for election; or to direct them to take appropriate by-law amendments to formally express such requirements as part of the qualifications of members of the Board.

5. CHAIRMAN AND CHIEF EXECUTIVE OFFICER

• The roles of Chairman and CEO may be separate to ensure:

 An appropriate balance of power;

 Increased accountability; and

 Greater capacity of the Board for independent decision-making.

• The company shall disclose the relationship between the Chairman and the CEO upon their election.

• Where both positions of Chairman and CEO are unified, there is clearly one leader to provide a single vision and mission:

 In this instance, checks and balances should be clearly provided to help ensure that independent, outside views, perspectives, and judgments are given proper hearing in the Board.

• The Chairman’s responsibilities may include:

 Schedule meetings to enable the Board to perform its duties responsibly while not interfering with the flow of the company’s operations;

 Prepare meeting agenda in consultation with CEO;

 Exercise control over quality, quantity and timeliness of the flow of information between Management and the Board; and

 Assist in ensuring compliance with company’s guidelines on corporate governance.
NOTE: The responsibilities set out above may pertain only to the Chairman’s role in respect to the Board proceedings, and not as a comprehensive list of all the duties and responsibilities of a Chairman. Section VIII (Commitment to Corporate Governance) of CCG mandates not merely the role of assistance to the Chairman, but in fact specifically tasks the Chairman “with the responsibility of ensuring adherence to the corporate governance code and practices.”

The legal significance of these provisions of the CCG is that they provide for detailed responsibilities of the Chairmen of public companies, the non-compliance of which may constitute "breach."

6. QUALIFICATION AND DISQUALIFICATION RULES

A. QUALIFICATIONS:

• Every director shall own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name in the books of the corporation.

• The Board may provide for additional qualifications of a director such as, but not limited to, the following:

 Educational attainment

 Adequate competency and understanding of business

 Age requirement

 Integrity/probity

 Assiduousness

ISSUE: The language of these particular provisions of CCG seem to grant to the Board of Directors of each public companies the power to set additional qualifications without going through a formal amendment of the by-laws. As discussed previously, the Supreme Court has ruled that the Board of Directors cannot on their own, even by formal resolution, provide for qualifications and disqualifications of directors, which are not found in the by-laws.

The enumerations of additional qualifications are very subjective and susceptible of varying degrees of interpretation and application even if they were included formally into the by-laws of a public companies. If by mere resolution the Board would have the power to adopt such subjective qualifications as and when they please, that would actually be contrary to Corporate Governance principle, since they can "lord over" the Board for many years to come without accountability by adopting qualifications that exclude so many capable candidates, or to "disqualify" incumbents who are deemed to be "difficult".


These "empowering" provisions of the CCG would unnecessarily open to constitutional challenges the exercise of such rights by the Boards of public companies, which would only serve to dissipate the Board's attention and resources.
IT IS MORE REASONABLE TO CONSTRUE such provisions of the CCG as encouraging the Boards of Directors of public companies to consider such qualifications when undertaking executive search and recruitment process, so that as much as possible the candidates presented for nomination and election to the stockholders would fit into the targeted profile.

B. DISQUALIFICATIONS FOR DIRECTORS

• Any person who has been finally convicted by a competent judicial or administrative body of the following crimes:

 Involving purchase or sale of securities;

 Arising out of the person’s conduct as an underwriter, broker, dealer, investment company, investment adviser, principal distributor, mutual fund dealer, futures commission merchant, commodity trading advisor, floor broker; and

 Arising out of his relationship with a bank, quasi-bank, trust company, investment house or as an affiliated person of any of them.

• Any person who, by reason of any misconduct is permanently or temporarily enjoined by order, judgment or decree SEC or any court or other administrative body from:
 Acting as underwriter, broker, dealer, investment adviser, principal distributor, mutual fund dealer, futures commission merchant, commodity trading advisor, or a floor broker;

 Acting as director or officer of bank, quasi-bank, trust company, investment house, investment company or an affiliated person of any of them;

 Engaging in or continuing any conduct or practice in connection with any such activity or willfully violating laws governing securities, and banking activities (but also includes when covered by an effective interim order);

 Such person is also disqualified when he is currently subject to an effective order of a self-regulatory organization suspending or expelling him from membership or participation or from associating with a member or participant of the organization.

• Any person finally convicted judicially or administratively of an offense involving moral turpitude, fraud, embezzlement, theft, estafa, counterfeiting, misappropriation, forgery, bribery, false oath, perjury or other fraudulent act or transgressions.

• Any person finally found by SEC or a court or other administrative body to have willfully violated, or willfully aided, abetted, counseled, induced or procured the violation of, any provision of Securities Regulation Code, Corporation Code, or any other law administered by SEC or BSP, or any rule, regulation or order of SEC or BSP, or by a foreign court or equivalent financial regulatory of similar acts.

• Any person judicially declared to be insolvent, whether locally or in a foreign jurisdiction.

• Any affiliated person who is ineligible, by reason of paragraphs (a) to (e) hereof to serve or act in the capacities listed in those paragraphs.

• Conviction by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of Corporation Code, committed within five (5) years prior to the date of his election or appointment.

NOTE: The listing of additional disqualifications for directors for public companies under these provisions of the CCG would constitute a valid exercise of SEC's quasi-legislative power, and have the effects of law. Therefore, such disqualifications are in addition to those included in their specific by-laws, and those provided in the Corporation Code and Securities Regulations Code.

C. TEMPORARY DISQUALIFICATIONS — "The Board may also provide for the temporary disqualification of a director for the following reasons:"

• Refusal to fully disclose the extent of his business interest as required under Securities Regulation Code and its IRR, which shall be in effect as long as his refusal persists;

• Absence or non-participation for whatever reason/s for more than 50% of all meetings, both regular and special, of the Board during his incumbency, or any twelve (12) month period during said incumbency;

• Dismissal/termination from directorship in another listed corporation for cause, which shall be in effect until he has cleared himself of any involvement in the alleged irregularity;

• Being under preventive suspension by the corporation;

• If Independent Director becomes an officer or employee of the same corporation;

• If beneficial security ownership of Independent Director in the company or in its related companies shall exceed the 10% limit; and

• Conviction that has not yet become final referred to in the grounds for the disqualification of directors.

ISSUE 1: Under the Corporation Code, the Board has no power to remove any of its members. Under Section 28 of the Corporation Code the power to remove a director or trustee is vested with the stockholders or members, by a vote of two-thirds (2/3) of the outstanding capital stock or two-thirds (2/3) of the membership, as the case may be, which may be with or without cause; but that if the director to be removed has been elected through cumulative voting of the minority stockholders, he can only be removed for cause.

In fact, Section V(1) of the CCG provides that "Shareholders have the right to elect, remove and replace directors and vote on certain corporate acts in accordance with the Corporation Code."

Consequently, Boards of Directors do not have power to remove, whether permanently or temporarily, or much less suspend, one of their members based on grounds that they may choose from. If the grounds enumerated in these particular provisions of the CCG are deemed to be "disqualifications," then by their occurrence or existence, the culprit director would then cease to be a member of the Board. And yet, the language used ("The board may also") actually grants the Board the ability to not suspend an erring member.

Some of the grounds given to the Board to effect temporary disqualification should operate to disqualify a member from even being nominated or elected into the Board in the first place, such as the nondisclosure of business interests as required under the Securities Regulation Code and its Implementing Rules and Regulations." Other grounds should operate by operation of law to effectively terminate a director from his position as director of the public companies since they constitute outright disqualification, such as when an independent director no longer fulfills the requirement having to commercial ties with the public companies. In such event, he ceases to be a director and it would even be anomalous to empower the Board to merely temporarily suspend him from the Board.

ISSUE 2: If the grounds exist by which the a member of the Board is subject to temporary disqualification, and yet the Board did not exercise it CCG-given power to suspend him, is the Board then deemed to have been remised and thereby incur collective and individual personal liability?

IT WOULD BE MORE REASONABLE TO CONSTRUE these particular provisions of the CCG as mandating an obligation to the Board to use internal measures to convince an erring member of the Board to take a leave or excuss himself from participating from Board activities until he "corrects" the error under clear warning that if no remedy is taken, then proper administrative action shall be taken by the Board to have him declared disqualified by the SEC or other appropriate agency.

IV. PRINCIPLE OF “ACCOUNTABILITY”:

A. DUTIES AND LIABILITIES OF DIRECTORS UNDER GENERAL CORPORATE LAW

1. GENERAL RULE ON DUTIES AND LIABILITIES

The general rule is that members of the Board and officers of a corporation who purport to act for and in behalf of the corporation, keep within the lawful scope of their authority in so acting, and act in good faith, do not become liable, whether civilly or otherwise, for the consequences of their acts. Those acts, when they are such a nature and are done under such circumstances, are properly attributed to the corporation alone and no personal liability is incurred by such officers and Board members.

The proper appreciation of the director's role and function would require that although a director may have been voted into office by a block of shareholders, it is the director's duty to vote according to his own independent judgment and his own conscience as to what is in the best interests of the corporation.

2. DUTY OF OBEDIENCE

Since the Corporation Code still adheres to the ultra vires doctrine, then the Board of Directors or Trustees of a corporation are bound to observe the duty of obedience, which means that they will direct the affairs of the corporation only in accordance with the purposes for which it was organized. Section 26 of the Corporation Code expressly provides that “directors or trustees and officers to be elected shall perform the duties enjoined on them by law and by the by-laws of the corporation.”

As one author has said: "Although the corporate powers of private corporations organized under the Corporation Law are exercised and controlled by a board of directors, yet these powers of the board are necessarily limited, because all the limitations imposed by law on private corporation are necessarily imposed also on the board of directors who act in behalf of the corporation. In other words, what is ultra vires or beyond the power on the part of the corporation must also be ultra vires or beyond the power on the part of its board of directors."

3. DUTY OF DILIGENCE

Under Section 31 of the Corporation Code, directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation, shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.

The liability of guilty directors shall be jointly and severally; the solidary obligation is available not only to the corporation but also to stockholders and others who might suffer from such wrongful act.

The liability is such that a director needs to have voted for in order to be liable, but mere assent to a wrongful act or contract would make him liable. Therefore, when an unlawful act or contract is for decision of the board, it is not enough that the director abstains from voting; i is important to cast a negative vote and allow such to be placed of record in order to escape liability.

When it comes to the acts and contracts of the board of directors and officers of the corporation, Board of Liquidators v. Kalaw, defined the meaning and coverage of "bad faith," thus:

Rightfully had it been said that bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty thru some motive or interest or ill will; it partakes of the nature of fraud. Applying this precept to the given facts herein, we find that there was no "dishonest purpose," or "some moral obliquity," or "conscious doing of wrong," or "breach of a known duty," or "some motive or interest or ill will:” that "partakes of the nature of fraud.”

4. DUTY OF LOYALTY; CORPORATE OPPORTUNITY DOCTRINE

Under Section 31 of the Corporation Code, directors or trustees who acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.

When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a liability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation.
On the other hand, under Section 34, where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits which should belong to the corporation, he must "account to the latter for all such profits by refunding the same, unless his act has been ratified by a vote of the "stockholders" owning or representing at least two-thirds (2/3) of the outstanding capital stock. This provision shall be applicable, notwithstanding the fact that the director risked his own funds in the venture.

5. SUMMARY OF LIABILITY RULES FOR DIRECTORS

Tramat Mercantile, Inc. v. Court of Appeals, holds that personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when:

(a) He assents:

(i) to a patently unlawful act of the corporation;

(ii) for bad faith or gross negligence in directing its affairs;

(iii) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons (Section 31, Corporation Code);

(b) He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto (Section 65, Corporation Code);

(c) He agrees to hold himself personally and solidarily liable with the corporation (De Asis & Co., Inc. v. Court of Appeals, 136 SCRA 599 [1985]);

(d) He is made, by a specific provision of law, to personally answer for his corporate action (Exemplified in Section 144, Corporation Code; also Section 13, Pres. Decree No. 115, or the Trust Receipts Law).

In addition, jurisprudence has also held that the officer of the corporation can be held solidarily liable with the corporation for simulated or fraudulent contracts entered into in behalf of the corporation.

As can be concluded from the foregoing, the defining of the duties of directors and the consequent liabilities arising from the breach of such duties, are principle-based, rather than rule-based. The general policy behind the Corporation Code is that directors are elected on the basis of their business reputation and competence, and vested with operating the business of the corporate enterprise in accordance with their best judgment and guided by general principles of good governance. If fastidious rules are enacted, defining and detailing how the Board should act and govern, then it may serve more to unduly cramp their style and business judgment. In addition, if the detailing of their manner of governance becomes the norm, then directors may have to spend an enormous amount of time and resources making sure that they comply with the details, rather than being able to concentrate of pursuing profitable business ventures. Finally, detailed rules tend to be subjected to various interpretations and to be used to ascribe breach and personal liability on directors.

The provisions of the CCG constitute a shift in Corporate Governance in that they are rule-based and detail and expand the duties of directors in public companies.

6. DUTY OF DIRECTORS TO CREDITORS

There is no express duty of directors or trustees to the corporate creditors under principles of Corporate Law. The relationship of corporate creditors with the corporation is one based mainly on Contract Law.

However, it has been established that upon insolvency of the corporation, the board of directors of a corporation are duty bound to hold the assets of the corporation primarily first for the payment of the corporation's liabilities.

Under Section 65 of the Corporation Code, any director or officer of a corporation consenting to the issuance of stocks for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value, or who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the corporate secretary, shall be solidarily liable with the stockholder concerned to the corporation and its creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same.

More importantly, the CCG now clearly mandates that Boards of Directors of public companies do have constituencies beyond the company and its stockholders and provides:

• Identify company’s major and other stakeholders

• Formulate a clear policy on communicating or relating with them accurately, effectively and sufficiently

• Render a fair accounting to them regularly in order to serve their legitimate interests

• Develop an investor relations program that reaches out to all shareholders and fully inform them of corporate activities

Individually, the CCG provides that a Director assumes certain responsibilities to different constituencies or stakeholders to the public corporation “who have the right to expect that the institution is being run in a prudent and sound manner.

B. DUTIES, FUNCTIONS AND RESPONSIBILITIES OF DIRECTORS OF PUBLIC COMPANIES UNDER CCG

1. GENERAL RESPONSIBILITY OF THE BOARD:

• Director’s office is one of trust and confidence.

• They should act in the best interest of the corporation in a manner characterized by transparency, accountability and fairness.

• They should exercise leadership, prudence and integrity in directing the corporation towards sustained progress over the long term.

• Director assumes certain responsibilities to different constituencies or stakeholders, who have the right to expect that the institution is being run in a prudent and sound manner.

• They shall ensure good governance of the corporation, by establishing the corporation’s vision and mission, strategic objectives, policies and procedures that may guide and direct the activities of the company and the means to attain the same as well as the mechanism for monitoring management’s performance.

• While the management of the day-to-day affairs of the institution is the responsibility of Management, the Board is, however, responsible for monitoring and overseeing Management action.

2. SPECIFIC DUTIES AND FUNCTIONS OF THE BOARD:

To insure a high standard of best practice for the company and its stakeholders, the Board should conduct itself with utmost honesty and integrity in the discharge of its duties, functions and responsibilities which include, among others, the following:

• Install a process of selection to ensure a mix of competent directors, each of whom can add value and contribute independent judgment to the formulation of sound corporate strategies and policies.

 Select and appoint the CEO and other senior officers, who must have the motivation, integrity, competence and professionalism at a very high level;

 Adopt a professional development program for employees and officers, and succession planning for senior management.

• Determine corporation’s purpose and value as well as strategies and general policies to ensure that it survives and thrives despite financial crises and its assets and reputation are adequately protected.

 Provide sound written policies and strategic guidelines that will help decide on major capital expenditures;

 Determine important policies that bear on the character of the corporation, ensuring its long-term viability and strength;

 Periodically evaluate and monitor implementation of such strategies and policies, business plans and operating budgets as well as Management’s over-all performance to ensure optimum results.

• Ensure that the corporation complies with all relevant laws, regulations and codes of best business practices.

• Identify corporation’s major and other stakeholders and formulate a clear policy on communicating or relating with them accurately, effectively and sufficiently.

 There must be an accounting rendered to them regularly in order to serve their legitimate interests;

 An investor relations program that reaches out to all shareholders and fully informs them of corporate activities should be developed;

 As a best practice, the CEO and CFO should have oversight of this program and should actively participate in public activities.

• Adopt a system of internal checks and balances, which may be applied in the first instance to the Board.

 A regular review of the effectiveness of such system must be conducted so that the decision-making capability and the integrity of corporate operations and reporting systems are maintained at a high level at all times.

• Endeavor to provide appropriate technology and systems rating to account for available resources to ensure a position of a strong and meaningful competitor.

 Identify key risk areas and key performance indicators and monitor these factors with due diligence.

• Constitute an Audit and Compliance Committee.

• Properly discharge Board functions by meeting regularly.

 Independent views during Board meetings should be given due consideration and such meetings should be minuted.

• Keep Board authority within the powers of the institution as prescribed in the articles of incorporation, by-laws and in existing laws, rules and regulation.

 Conduct and maintain the affairs of the institution within the scope of its authority as prescribed in its charter and in existing laws, rules and regulations.
The CCG provide expressly that a director of a public corporation "assumes certain responsibilities to different constituencies or stakeholders, who have the right to expect that the institution is being run in a prudent and sound manner;" and the Board should "Identify the corporation's major and other stakeholders and formulate a clear policy on communicating or relating with them accurately, effectively and sufficiently. There must be an accounting rendered to them regularly in order to serve their legitimate interests."

The use of the terms "stakeholders" and "other stakeholders" is clearly intended to recognize Director's duties and responsibilities to extend beyond the "shareholders" (a term it uses clearly in contradiction), and would be in recognition of the socio-economic role that public companies play in the Philippine setting. The other stakeholders can cover the creditors, employees, and the public which are affected by the operations of the company.

By confirming that the Board of Directors have "duties and responsibilities" towards other stakeholders of the company would constitute a statutory recognition of the legal standing of such parties to demand accounting and accountability. One such standing they have under the CCG is the right to expect and therefore demand that "the institution is being run in a prudent and sound manner." The other standing that other stakeholders have under the CCG is the right to expect and therefore demand "communication" and "accounting" of corporate matters that "serve their legitimate interests."

3. SPECIFIC DUTIES AND RESPONSIBILITIES OF A DIRECTOR:

• To conduct fair business transactions with the corporation and to ensure that personal interest does not bias Board decisions.

 The basic principle to be observed is that a director should not use his position to make profit or to acquire benefit or advantage for himself and/or his related interests

 He should avoid situations that may compromise his impartiality

 If an actual or potential conflict of interest should arise on the part of directors or senior executives, it should be fully disclosed and the concerned director should not participate in the decision making

 A director who has a continuing conflict of interest of a material nature should consider resigning

• To devote time and attention necessary to properly discharge his duties and responsibilities.

 A director should devote sufficient time to familiarize himself with the institution’s business.

 He should be constantly aware of the institution’s condition and be knowledgeable enough to contribute meaningfully to the Board’s work.

 He should attend and actively participate in Board and committee meetings, request and review meeting materials, ask questions, and request explanations.
• To act judiciously.

 Before deciding on any matter brought before the Board of directors, every director should thoroughly evaluate the issues, ask questions and seek clarifications when necessary.

• To exercise independent judgment.

 A director should view each problem/situation objectively. When a disagreement with others occurs, he should carefully evaluate the situation and state his position.

 He should not be afraid to take a position even though it might be unpopular.

 Corollarily, he should support plans and ideas that he thinks are beneficial to the corporation.

• To have a working knowledge of the statutory and regulatory requirements affecting the corporation, including the contents of its articles of incorporation and by-laws, the requirements of SEC, and where applicable, the requirements of other regulatory agencies.

 A director should also keep himself informed of industry developments and business trends in order to safeguard the corporation’s competitiveness.

• To observe confidentiality.

 A director should observe the confidentiality of non-public information acquired by reason of his position as director.

 He should not disclose any information to any other person without the authority of the Board.

• To ensure the continuing soundness, effectiveness and adequacy of the company’s Internal Control Environment.

The CCG then proceeds to lay down detailed rules on how the Board of Directors of the Corporation would comply with its duties and responsibilities. The move of the CCG therefore is not to supplant the principle-based system of the exercise of power and business discretion of the Board of Directors, and the delineation of their duties, responsibilities and consequent liabilities that would arise from breach thereof; but rather to place on top existing infrastructure, a rule-based system to ensure that there is a set of checklist from which the Boards themselves, the company’s various stakeholders, and the monitoring agencies of government, may be able to demand accountability and results.

V. PRINCIPLE OF “DISCLOSURE AND TRANSPARENCY”:

A dominant theme in all issues related to Corporate Governance is the vital importance of disclosure. The theory is that the more transparent the internal workings of the company and cash flows, the more difficult it will be for Management and controlling shareholders to misappropriate company assets or mismanage the company.

Under the CCG the principle is that the most basic and all encompassing disclosure requirement is that all material information, i.e., any thing that could potentially affect share price, should be publicly disclosed.

(a) Such information would include earnings results, acquisition or disposal of assets, board changes, related party transactions, shareholdings of directors and changes to ownership.

(b) Other information that should always be disclosed includes remuneration (including stock options) of all directors and senior management corporate strategy, and off balance sheet transactions.

(c) All disclosed information should be released via the approved stock exchange procedure for company announcements as well as through the annual report.

The Board shall therefore, commit at all times to full disclosure of material information dealings. It shall cause the filing of all required information for the interest of the stakeholders.

1. DUTY TO SUPPLY INFORMATION UNDER THE CCG:

a. Policy –

 In order to fulfill their responsibilities, Board members, should be provided with complete, adequate and timely information prior to Board meetings on an on-going basis

 Reliance purely on what is volunteered by Management in unlikely to be enough in all circumstances and further inquiries may be required if the particular director is to fulfill his or her duties properly

b. Obligation of Board –

 Should provide Shareholders with a balanced and understandable assessment of Compant’s performance, position and prospects on a quarterly basis

c. Obligation of Management –

 To supply to the Board with complete adequate information in a timely manner

 Board may have separate and independent access to the company’s senior management

 Provide all Board members with a balanced and understandable account of the corporation’s performance, position and prospects on a monthly basis

d. Nature of Information —

 Information may include the background or explanatory information relating to matters to be brought before the Board, copies of disclosure documents, budgets, forecasts and monthly internal financial statements

 With respect to the budget, any variance between the projections and actual results should also be discussed and explained.

e. Access Right of Directors

 Directors should also have a separate and independent access to the Corporate Secretary

 Board should have a procedure for directors, either individually or as a group, in the furtherance of their duties, to take independent professional advice, if necessary, at the corporation’s expense

VI. PRINCIPLE ON “PROTECTION OF MINORITY STOCKHOLDERS’ INTERESTS.

Although the CCG provides for recognition of and strengthening of the rights of minority stockholders, a review of its provisions on this area shows that CCG have really not broken into new grounds. The CCG provisions are merely reiteration of the statutory and common law rights of stockholders as they are found in the Corporation Code, which may be enumerated as follows:

• CUMULATIVE VOTING

• RATIFICATORY VOTES ON KEY CORPORATE ACTIONS

• RIGHT TO EXAMINE AND INSPECT

• RIGHT TO LATEST AUDITED FINANCIAL STATEMENTS

• PRE-EMPTIVE RIGHT

• APPRAISAL RIGHT

Although two “innovations” are found in the CCG on “upgrading” the rights of minority stockholders, as follows:

• The minority shareholders should be granted the right to propose the holding of a meeting, and the right to propose items in the agenda of the meeting, provided the
items are for legitimate business purposes.

• The minority shareholders should have access to any and all information relating to matters for which the Management is accountable for and to those relating to matters for which the management should include such information and, if not included, then the minority shareholders can propose to include such matters in the agenda of stockholders’ meeting, being within the definition of “legitimate purposes”.

VI. COMMITMENT TO CORPORATE GOVERNANCE

1. MANUAL OF CORPORATE GOVERNANCE

CCG requires that all covered Public Companies shall promulgate and adopt its Corporate Governance Rules and Principles in accordance with this Code and formally submit copies thereof with the SEC. The manual shall then be made available:

(a) As reference by the directors;

(b) For inspection by any stockholder of the corporation at reasonable hours on business days.

All covered corporations shall submit their manual by 1 July 2002, to be effective 1 January 2003. Draft model manual available on 15 May 2002 in SEC web page.

The Manual shall be submitted to SEC, which shall evaluate the same and their compliance with this Code taking into account the size and nature of business.
The Chairman of the Board shall be specifically tasked with the responsibility of ensuring adherence to the corporate governance code and practices.

The submission by each covered Public Company of the manual on corporate governance serves to achieve two important ends. Firstly, the manual allows the company to “individualize” the principles and rules under CCG to the peculiar circumstances of their corporate setting and circumstances. Consequently, each Public Company will tend to implement corporate governance principles that they find relevant, meaningful and effective in their circumstances.

Secondly, by the process of formal adoption of a manual of corporate governance and its submission with the SEC, the process creates a legal basis by which the SEC can legally enforce good governance principles upon every covered Public Company, since they legally bound themselves to the terms and conditions thereof through the formal adoption and filing process.

2. ADMINISTRATIVE SANCTION

The CCG provides that the failure to adopt a Manual of Corporate Governance as specified therein shall subject a covered corporation, after due notice and hearing, to a penalty of P100,000.00.

Unlike the BSP Circulars providing for corporate governance principles for banking industry, the CCG provides for no administrative penalties against Public Companies, their Boards and officers for failing to comply with the provisions thereof.

VIII. EPILOGUE

The legal consequences of the provisions in the CCG is truly a shift in paradigm: whereas under general principles of Corporate Law, directors have duties and responsibilities only towards the corporation and it stockholders, now such duties and responsibilities extend to non-corporate parties. Consequently, the exercise of business judgment by the Boards of Directors of public companies goes beyond determining what is best for the company and their shareholders, but must seek a balance or consideration of the interests of other stakeholders affected by the business decisions.

The problem, however, with mixing of the principle-base and the rule-base systems is that accountability may in fact become difficult to enforce. This would happen when the rule-base provisions on Corporate Governance are deemed to be the whole embodiment of the principles in Corporate Governance for public companies, in that it is so easy to argue that as long as the rules are followed, then the principles are fulfilled, and what is not covered by the rules would therefore be beyond the coverage of the principles. It may also give Boards collectively, and directors, individually, the notion that by closely adhering to the letter of CCG, then they are “doing good Corporate Governance,” leaving wholly the “moving spirit” behind good Corporate Governance.
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