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Most likely non-businessmen Filipinos have not ever given a thought
to the term “independent director.” It became prominent these
last few days as a result of the war for control of the Manila
Electric Company board of directors between GSIS President Winston
Garcia and the Lopezes.
Whoever has more board members in a corporation
ends up controlling it – by having the power to set its policies
and appoint its management.
In the Meralco fight, the Lopez Group succeeded
in electing five directors while the GSIS-Winston Garcia side got
four.
Two independent directors were nominated and
elected—former Chief Justice Artemio Panganiban and Vicente
Panlilio.
The Securities and Exchange Commission, which
has regulatory powers over companies, issued Memorandum Circular No.
16, in 2002, giving “Guidelines on the Nomination and Election of
Independent Directors.”
The law (Securities Regulation Code) requires at
least two independent directors—or 20 percent of the total number
of directors—in public companies and any company, whether publicly
listed or not, that issue registered securities. Also required to
have independent directors are finance companies, investment houses
and companies, brokers and dealers of securities, pre-need
companies, subsidiaries or branches of foreign corporations
operating in the Philippines and are listed in the Philippine Stock
Exchange, and stock and other securities exchanges.
What an independent director is
He (or she) is, apart from his fee as a director
and his having only minimal shareholding in the company, independent
of the management and free from any business or other relationship
which could, or could reasonably be perceived to, materially
interfere with his (or her) exercise of independent judgment in
carrying out his responsibilities as a director.
He (or she) is not a director, officer or
substantial stockholder of any of the corporation’s related
companies; is not a relative of any director, officer or substantial
shareholder of the corporation or any of its related companies.
There are many other prohibitions, including not having been engaged
in any transaction with the corporation or with any of its related
companies or with any of its substantial shareholders, whether by
himself or with other persons or through a firm of which he is a
partner or a company of which he is a director or substantial
shareholder.
Independent directors play an important role in
good corporate governance. Their main task is to represent, protect
and defend the interests of the minority shareholders. Major or
controlling shareholders always have the power to appoint their
chosen directors. Minority shareholders do not. Independent
directors are also expected to be the conscience of the board.
But they have the same obligation as the other
directors to protect and help maximize and perpetuate the value of
the company.
It can happen that an independent director whose
correct observations are being ignored by the majority of the
directors. He may have been making calls for the board to observe
SEC rules, the Code of Corporate Governance and the Securities Code
itself. Then it is the obligation of the independent director to go
the SEC and complain against his corporation. He has a duty, in
effect, to be a whistleblower.
Yet, he (or she) has to be careful. He must act
in wisdom and integrity with prudence. He must not act precipitately
– by going to the media, for example—and cause his
corporation’s value to sink in the stock market.
Institute of Corporate Directors
Corporations in the more mature economies than
ours have been governed by good corporate governance codes. That
does not guarantee that shenanigans don’t happen in their stock
exchanges and in their boards.
Remember the Enron scandal? It was one of the
world’s leading electricity, natural gas, pulp and paper, and
communications companies, with claimed revenues of $111 billion in
2000. Fortune magazine named Enron “America’s Most Innovative
Company” for six consecutive years. The scandal revealed at the
end of 2001 that its publicized financial success was a mirage
created by institutionalized, systematic, and creatively planned
accounting fraud. The scandal brought down with it some of the most
respected names in US auditing and accountancy. Every so often we
also learn of other cases of corporate corruption in Western Europe.
The discovery of these occasional scandals—and
the coming to grief of the perpetrators—show that good governance
codes do work.
Former Finance Secretary Jesus Estanislao
brought the good corporate governance culture to the Philippines. He
and his professional associates in the Institute of Corporate
Directors, which he founded, worked to make it a serious element in
banks and publicly listed companies. One of the ICD’s core
objectives is “To raise the standards for the professional
practice of corporate directorship, and to work with partners in a
joint pursuit of systemic corporate governance reforms in the
Philippines and the East Asian region.”
ICD works closely with the Organization for
Economic Cooperation and Development, the Global Corporate
Governance Forum, and International Corporate Governance Network on
improving actual boardroom practices—“moving away from
principles into actual practices.”
ICD chairs the Task Force on Corporate
Governance of the Capital Market Development Council. It works
closely with key government regulators directly and immediately
concerned with good corporate governance: the Bangko Sentral ng
Pilipinas, the Energy Regulatory Commission, the Securities and
Exchange Commission and the Insurance Commission.
Supported by a Memorandum of Agreement with the
Philippine Stock Exchange, ICD has been monitoring the publicly
listed companies’ annual “Corporate Governance Scorecards”
since 2005. With BSP, SEC and Insurance Commission support, ICD has
also been monitoring scorecards of the government financial
institutions (GFIs) and government owned and controlled corporations
(GOCCs) since 2006.
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