Independent directors are appointed, not elected

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EMETERIO SD. PEREZ

THE 10 percent minimum public ownership (MMPO) rule must be amended. Instead of determining public ownership by the number of shares held, it should be measured by the number of board seats in proportion to the shareholdings.

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In turn, the public could vote who should represent them on the board.

Allowing the public to get at least a directorship would create a check-and-balance system inside the boardroom.

The suggestion is meant to democratize the board by letting the public voice their opinion and suggestions instead of relegating them to their participation as active buyers and sellers of listed stocks.

Indeed, democracy inside the boardroom would mean recognizing the role of minority stockholders in making listed companies truly public.

As a matter of fact, the stock market could even do away with MMPO by letting the public elect their nominees to the board as independent directors.

Definition of terms
Does the word “public” refer to anyone as long as he/she is not a significant stockholder of a particular company?

The question also carries another word that should also be defined. Who are significant stockholders? The key word here is “significant,” which the Securities and Exchange Commission (SEC) should explain to the public to enlighten those who are not yet familiar with the market terms.

Who are significant stockholders and who are not?

Again, the question is addressed to the SEC, which, as a regulatory authority, promulgates rules that govern all companies, be they listed or not.

Is a stockholder who has enough holdings to vote himself/herself to the board a significant stockholder? If his/her ownership of shares makes him/her a significant stockholder, it necessarily follows that as one of the public investors, he/she has a right to a board seat.

Ironically, business owners who are the majority stockholders appear to be more generous to their own independent directors.

(Or is it more appropriate to describe them as “charitable” than “generous”?)

Independent director
“A company’s independent director shall serve for a maximum term of nine years.”

This is how the SEC defines the “independence” of independent directors in Memorandum Circular No. 4 Series of 2017. Apparently, it saw the need to limit the number of years an independent director is allowed to serve apparently to curb abuses while holding that board position.

What happens when such term limit is reached?

The SEC has made it very clear in the same circular when it said that after a nine-year term, “the independent director shall be perpetually barred for re-election as such in the same company, but may continue to qualify as a non-independent director.”

Overstaying independent directors have to make a choice. They either get “elected” as a regular director or get off the board when their nine-year terms ends.

By the way, the SEC’s use of “re-election” is probably wrong. Independent directors neither get “elected” nor “re-elected.” They are appointed by the majority stockholders in a system that has been tolerated for years.

Due Diligencer’s take
In its circular, the SEC said that after nine years, an independent director could qualify to be elected as a regular director.

However, as an independent director, he/she may not qualify for a board seat for not owning enough shares to get elected. He/she could be elected by joining the majority and agreeing to be one of the nominees. As overstaying independent directors turned regular members of the board, they could continue receiving million-peso fees that listed companies allocate as their compensation.

To illustrate: Philex Mining Corp. paid its 11-person board, including two independent directors, P11.666 million in 2016; P13.544 million in 2015; and P10.461 million in 2014.

This year, Philex estimated its directors’ fees at P22.79 million, which would mean giving the members of the board P11.124 million more than the P11.666 million the company gave them in 2016. This year’s board’s bonanza would translate to P2.072 million each. Not bad for attending once-a-month meetings.

On top of their compensation,
Some listed companies are even more generous than others by including their independent directors in the employees’ stock option plan.

Ask SEC officials how this has been happening and continues to happen. They might even know who among today’s independent directors are not as independent, that the public think they are but in reality only act as legal consultants for the listed companies.

esdperez@gmail.com

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