CHARITY, to use an old saying, begins at home.
But in the case of the Securities and Exchange Commission, this is not a virtue that may be attributed to SEC Chairperson Teresita Herbosa. Rather, it was generosity she exercised in issuing, in December 2011, SEC Memorandum Circular No. 9 on the“term limits for independent directors.”
Certainly, Herbosa signed said circular as SEC head, apparently with the consent of the four commissioners. After all, she is the chief securities industry regulator and what she officially says thru a circular becomes a policy that remains effective unless nullified by the Supreme Court.
(Remember the ownership case involving the Philippine Long Distance Telephone Co.? The SEC has been computing the 60-40 percent ownership rule for Filipinos and foreigners based on PLDT’s entire outstanding capital stock including non-voting preferred shares. Then the High Court ruled three years ago against the SEC’s computation which, it said, should be based only on outstanding voting shares.)
What is SEC Memo No. 9 all about?
Forget the public, who may not be aware at all that Herbosa and company have made independent directors the most expensive commodity that a listed or public company cannot afford not to buy because their appointment is mandatory.
In short, what the law provides, the SEC implements based on its interpretation of such law. Then the SEC, thru Herbosa, came out with Memo Circular No. 9 that does not limit “the number of covered companies that a person may be independent director (ID), except in business conglomerates where an ID can be elected to only five companies of the conglomerate, i.e., parent company, subsidiary or affiliate.”
By not limiting the number of independent directorships a nominee may have, the SEC failed to consider how an independent director could efficiently perform his duties to the public. Yes, an ID is perceived by the public as their representative on the board of listed companies. The perception is correct but only theoretically, which will be taken up in another Due Diligencer piece.
Meanwhile, Due Diligencer is focusing only on the “term limits” of independent directors.” The SEC said “term limits” cover only parents and units belonging to the same group of companies.
The question is, how can an ID attend all the board meetings if he is, say, a member of the board of five parent companies and five subsidiaries of each of them? That’s a total of 30 companies that he or she has to monitor for the public, the very same public that he or she is supposed to represent on the board.
SEC Circular No. 9 limits to five years an ID’s term in business conglomerates, but said ID is eligible for election if he or she “has undergone a ‘cooling off’ period of two years. Then, he or she could begin counting again his or her new five-year board membership. All in all, he or she could have served as an independent director in the same company for 10 years.
“After serving as an ID for 10 years,” the SEC said, “the ID shall be perpetually barred from being elected as such in the same company without prejudice to being elected as ID in other companies of the business conglomerate.”
In other words, it would just be a “merry-go-round” for an ID, who may move to other subsidiaries of the same conglomerates. Happy days never end for IDs, who enjoy the same pay and perks as the regular members of the board do, even if they are not qualified to become director were it not for the law that requires their “election.”
If they continue to be “elected,” it is time to ask the question that no one has dared to ask: What are IDs for?
The answer or answers could come only when the SEC reviews the performance of independent directors to see how they have been doing as the public’s vigilantes in the boardrooms.