How independent are independent directors?

Emeterio Sd. Perez

Emeterio Sd. Perez

THE so-called independent directors are not elected but selected. In other words, if you go by the number that elects the members of the board, they do not represent any interest, except their fees and their shareholdings, which the rules limit to a maximum of 2 percent of outstanding.

Because they are not significant stockholders, they are virtually strangers, who are unnecessary but regulatory impositions on listed companies. Despite this, everybody complies. Who would defy the Securities and Exchange Commission (SEC)?

If, again, you go by the number, independent directors can be considered elected but only if they accept their nomination as nominees of the majority stockholders.

Simply put, everybody on the list of candidates for directors would all be nominees. Then as preapproved by the majority, 25 percent, or three to four of them acceptable to the management could be prequalified as nominees for independent directors.

Bingo! The selection process would be in accordance with the qualifications provided for in the law.

A number of questions could be raised against the law that requires the “election” of independent directors, who, according to the SEC’s own definition, is free from any interest except from compensation and ownership of shares of stock in the company.

Has any inquiry been made in connection with the “election” of independent directors? Yes, of course.

A few years ago, one such inquiry was filed with the SEC but has never been acted upon. To this day, no one knows what happened to it.

If an independent director would live up to his title, would he or she stay long in the board? Ever heard of one being ousted for going against the majority?

Take the case of one Serafin Feliciano Jr., who filed a complaint with the Philippine Stock Exchange against Dizon Copper Silver Mines Inc. (DCSMI). His first letter, dated May 25, 2006, and addressed to lawyer Francis Ed Lim, then PSE president, “has not been answered” that he followed this up with another one dated September 14, 2006.

Feliciano also sent a similar letter dated October 3, 2006, to the SEC chairperson Fe Barin, who also either failed to act on it or forgot to act on it, that he again wrote her on October 3, 2006. It was also possible that his letter did not reach the chairman’s office.

Feliciano’s letter is now part of the history of Dizon Mining. Although it may have been buried among the SEC dead files, it left an important lesson—more accurately warning—to independent directors who want to keep their job and the remuneration that goes with it.

In his letter, Feliciano told Lim and Barin that he got the ire of Dizon Copper management for questioning “ the present state of affairs of the corporation . . .”

“I left the board meeting of DCSMI on 15 March 2006 after the meeting was concluded and adjourned,” he wrote. “To my dismay, it was subsequently reported to me that the rest of the board supposedly then reconvened the meeting and decided to ‘remove’ me as a minority director.”

What? A minority director is elected because he has the number. In the case of Feliciano, he lost his board seat because he has antagonized the majority.

Is it possible that what happened to Feliciano, a duly elected director, could also happen to independent directors who would dare stand up to the majority?

The answer is certainly, yes. Who would risk losing a huge discount to market when availing himself or herself of a listed company’s management stock option plan? Even if an independent director’s ownership is limited to 2 percent, it is still a huge incentive enjoyed only by a chosen few.

Want to know how much is 2 percent of outstanding? This of course depends on the share price. Let us go big by citing Philippine Long Distance Telephone Co. (PLDT), which has 216.056 million outstanding common shares; 2 percent of which equals 4.321 million.

At PLDT’s low of P2,682, an independent director owning 4.321 million shares would be richer by P11.589 billion. If he had acquired the shares, say at P881 each, then he would be ahead by P1,801 per share, or P7.782 billion.

A warning to aspirants for independent directors: Not all listed companies could be as generous as the PLDT board chaired by Manuel Pangilinan.


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