Inconsistencies, contradictions in SEC ruling on stock option plans

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Emeterio Sd. Perez

Emeterio Sd. Perez

IT is about time that the Securities and Exchange Commission (SEC) also adopt for itself and its officials the policy of transparency that it wants companies listed on the Philippine Stock Exchange to strictly observe for the sake of the public.

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Full disclosure would erase any doubt or suspicion that the SEC’s ruling reversing the agency’s own corporation finance department (CFD) was programmed to favor former Chief Justice Artemio Panganiban.

The CFD, headed by director Justina Fernandez Callangan, did not allow the participation of Panganiban and two other independent directors of Metro Pacific Investments Corp. (MPIC) in the company’s executive stock option plans. It, in effect, opted for the eradication of conflict of interest in the boardroom.

But then, SEC Chairperson Teresita Herbosa and Commissioners Manuel Huberto Gaite and Eladio Jala saw things differently. They found nothing wrong in allowing independent directors to avail themselves of stock options. So they argued well and hard and ruled in favor of Panganiban. To them, Callangan’s CFD was wrong.

By the way, MPIC’s two other independent directors did not join Panganiban in his appeal to the commission proper although the CFD’s ruling also covered them.

What transpired while the commission was taking up Panganiban’s appeal against CFD will never be known unless Herbosa and company agree to lift the veil on the secrecy of the events that led to their ruling, which they issued on July 5, 2012. I am suggesting that the SEC make public the minutes of the commission meetings that led to the preservation of conflict of interest in a listed company’s board.

Of course, I do not expect the SEC’s top regulators to take up my challenge for them to “open the books,” so to speak, and defend their ruling. The truth and a satisfactory explanation should be told based on a few questions, such as:

1. When did the commission approve SEC Resolution No. 296 “allowing the participation of independent directors in the executive or employee stock option or stock ownership plans?” Who voted for it?

2. Did the commission pass the said resolution before CFD came out with its ruling? If it did not, then is it only a coincidence that Herbosa, Gaite and Jala found Panganiban’s appeal meritorious because of SEC Resolution No. 296?

3. Who authored or initiated the filing of said resolution? Who voted for it? Who did not?

4. Was it only a coincidence that the commission came out with SEC Resolution No. 296 during Panganiban’s appeal If not, without it, would the commission find Panganiban’s appeal meritorious?

5. Why did Herbosa and company interpret the “acquisition” of shares of stock by independent directors as including stock options? Should not the “acquisition” refer to “buying” in the open market so that the rule could cover listed companies that do not sell shares to insiders under stock option plans?

Will Herbosa, Gaite and Jala explain their conclusion that “there is a substantial distinction between a regular and an independent director” while agreeing with Panganiban that “there is no real and tangible difference between an independent director and non-independent director, one that will warrant their exclusion from stock option plans.”

Of course there are differences, such as:

1. An independent director is not an executive and thus should not be allowed to participate in an executive stock option plan of a listed company.

Even in compensation filings, some listed companies refer to insider directors as “executive directors.” What does this make of an independent director? Intruder will be too harsh a word to apply to him or her.

2. An independent director does not own enough number of voting shares to get elected. Thus, he or she is selected and/or appointed.

Then Herbosa, Gaite and Jala also wrote: “Thus, an independent director is expected to check the management and controlling stockholders, and to provide a neutral and non-partisan view in overseeing corporate affairs, and in effect, safeguard the interest of all stockholders by reducing insider control, large shareholder manipulation and managerial opportunism in the form of excessive compensation.”

Such a nice play of words! An independent director can never do any of these as long as he or she is beholden to the majority. He or she, in fact, should pass the closest scrutiny of the majority stockholders before he or she could claim his or her right to a board seat.

Finally, I tried but failed to find SEC Resolution No. 296 in www.sec.gov.ph because the minutes of commission meetings, being confidential, are never posted on the SEC’s website. Despite this restriction, I continued searching until I found SEC Memorandum Circular No. 5 Series of 2012, which could be the final product of SEC Resolution No. 296.

Said circular, which replaced the SEC’s policy outlawing conflict of interest, gave a new definition for members of the board. “Both independent and regular directors are expected to work to increase the company’s firm value.”

Incidentally, the SEC issued Memo Circular No. 5 on July 13, 2012, eight days after Herbosa, Gaite and Jala signed on July 5, 2012 their decision against Callangan and her CFD’s examiners. What a coincidence!

esdperez@gmail.com

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