SOMETIME in 2002, Chairperson Lilia Bautista of the Securities and Exchange Commission signed SEC Memorandum Circular 16 to guide companies in the nomination and election of independent directors. She, however, failed to define such independence of the members of the board, who are chosen, appointed, and elected by the majority stockholders.
Because the SEC did not define the “independence” of certain members of the board, the public has no way of differentiating them from regular directors. How could the SEC correct this omission?
Why not redefine the functions of independent directors in such a way that the public could easily identify them? Otherwise, regulatory authorities should do away with the nomination and appointment of independent directors, who, instead, should be elected as regular nominees.
It is also about time SEC officials led by Chairperson Teresita Herbosa audit the performance of independent directors. Their audit should focus more on how they have expressed their independence on issues taken up inside the boardroom. In this way, she would know if, as the law provides, an independent director has been carrying out the responsibilities of a director.
In an SEC opinion, lawyer Vernette G. Umali-Paco, then SEC general counsel, emphasized the responsibility of independent directors. “In the language of the Code of Corporate Governance,” she said, “independent directors serve as an independent check on management.”
Really? Do independent directors perform their assigned task as “independent check on management?” Perhaps this is true only in theory but not in practice.
Chairperson Herbosa either did not, or failed to appreciate Umali-Paco’s opinion that she and her fellow SEC commissioners voided an SEC policy that used to “prohibit independent directors from participating in employee or executive stock option plans of covered or related companies.”
(Note: The word the SEC used was “abandoned” in a 2012 en banc decision allowing retired Chief Justice Artemio Panganiban to avail himself of the executive stock option offered by Metro Pacific Investment Corp. the policy was “abandoned.”)
With this SEC ruling, independent directors should be categorized as nominees for regular members of the board. After all, like the other directors, they work for the companies’ profitability because their loyalty is to the owners and to the stocks that they own.
How can independent directors serve the interest of the public when they monitor the price of the listed stocks that they own? They would not do anything to hurt the market performance of their holdings. If allowed to own up to two percent of outstanding common shares, they would not turn against the stocks that they hold only for the sake of the public.
Luckily for independent directors, the SEC has been perpetuating their election. Instead of reviewing their functions, its officials believe more in their membership in the board of listed companies. Here is the commission’s latest advisory on “term limits for independent directors.”
Signed by Chairperson Herbosa on March 31, the advisory cited SEC Memorandum Circular Bo. 9, Series of 2011 and SEC advisory dated March 15, 2015. As provided for in said earlier circular, “independent directors (IDs) elected in 2012 may be elected as such until 2017, when the two-year cooling off period shall commence.”
“However, if there are no replacements,” the SEC said in the advisory,” said IDs may be reelected in 2017 until 2021, at which time, they may no longer be qualified as IDs for the same companies.”
Is the SEC really serious in putting a limit to the re-election of independent directors? Better wait for the time when listed companies seek exemption from the rules.
Said “re-election in 2017 until 2021,” Herbosa said in the circular, “shall be with prior written notice and justification to the Commission addressed to the Corporate Governance and Finance Department.”
By extending their terms, does the SEC mean listed companies have run out of nominees for independent directors, who may be their former top executives?
Of course, there is nothing wrong with rewarding retired insiders by electing them to the board. The question is not about their competence but about their independence. Even if they have been out of the company for many years, still their loyalty lies with the owners of the companies they have faithfully served for decades.