SEC to companies: Don’t overpay your board

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EMETERIO SD. PEREZ

EMETERIO SD. PEREZ

PERHAPS largely unbeknown to the public is a legal opinion issued recently by the Securities and Exchange Commission (SEC) limiting the allowable compensation for the boards of directors of companies, whether listed or not on the Philippine Stock Exchange.

Although lawyer Camilo S. Correa, the SEC’s general counsel, answered only the query on the matter posed by a non-stock savings and loan association, his opinion, nevertheless, covers even stock corporations registered with the commission.

A legal opinion issued by the SEC becomes part of the policy of the commission, unless questioned and eventually nullified or voided by the court.

Yet, as he has always done in the past, Correa also concluded his latest issuance with similar caution that “the foregoing opinion is rendered based solely on the facts disclosed in the query and relevant solely to the particular issues raised therein and shall not be used in the nature of a standing rule binding upon the courts, or upon the commission in other cases of similar or dissimilar circumstances.”


At the same time, the SEC also warned against the use of fraud in seeking its legal opinion. “If upon investigation it will be disclosed that the facts relied upon are different,” it said, “this opinion shall be rendered null and void.”

Despite these precautionary measures, the public should appreciate Correa’s legal opinion on the compensation of the board because Opinion No. 15-12 of the SEC-OGC (Securities and Exchange Commission-Office of General Counsel) is a must-read for investors who trade in PSE-listed stocks.

Legal poser
Capt. Eusebio V. Perez (ret.), president of the Cavite Naval Base Savings and Loan Association Inc. (CNBSLAI) of Fort San Felipe, Cavite City, has raised a timely legal poser in his letter to the SEC.

(Due Diligencer does not have a copy of Capt. Perez’s letter to the SEC but has the commission’s answer, which was dated Sept. 22, 2015, to the association’s legal poser.)

In his response, Correa quoted Perez’s letter: “Specifically,” he said, “you ask whether or not CNBSLAI should deduct the proposed honorarium of its trustees in the net income of the previous year before computing the 10 percent allowable honorarium to be given to its Board of Trustees for the current year.”

Citing the provisions of existing laws to justify his legal opinion, Correa pointed to Section 30 of the Corporation Code, which among others, provides that “in no case shall the total yearly compensation of directors as such directors, exceed ten percent (10percent) of the net income before income tax of the corporation during the preceding year.”

Quoting from the Corporation Code, Correa said the law’s provision “is likewise applicable to non-stock corporations.” He commented that, “in general, the trustees of non-stock non-profit corporations can be given compensation, aside from reasonable per diems.” But, he added, such payment of compensation should be provided for in the by-laws fixing their compensation, and at the same time approved by the majority of the members.

Incidentally, the SEC found the association to have been overpaying its board of trustees. It noted that CNBSLAI’s by-laws prescribed the compensation of its board “not to exceed 33 percent of the gross income of the association,” which stands far beyond the legal limit of 10 percent.

How does a corporation compute such board compensation?

According to Correa, the computation should be based on “net income before income tax of the corporation during the preceding year.” He explained that such compensation “shall be based on the net income tax of the year during which the directors have served as such.”

Citing as basis the legislative deliberation, Correa elaborated: “As explained by the lawmakers, the compensation paid to the directors . . . will be considered as an expense during the year and, therefore, deducted from gross income in order to produce the net income before tax.”

Certainly, one cannot establish the amount of compensation based on “net income before tax” when the audit for the same year has yet to be made.

In this case, Correa again pointed to the explanation of “Mr. Abello,” who told a Congress hearing the following scenario: Let us suppose that a person serves as director of a corporation, the year being 1979. He is not paid any compensation during 1979, except reasonable per diems, because the yearly net income cannot be determined until the end of the year.

“So, here comes 1980, when the net income for 1979 has been determined by not only the executives of the corporation but also by the internal and external auditors of the corporation . . .’”

As to the accounting entry of such compensation expense, Correa, who was referring to then SEC Chairman Manuel Abello, explained that it should be carried over to the following year, and in the case of Abello’s theoretical presentation to Congress, should have been in 1980.

“It is a basic accounting rule that an expense should be recognized as an expense on the period it was incurred,” Correa explained.

According to Correa, non-stock savings and loan associations are under the regulatory supervision of the Bangko Sentral ng Pilipinas. They are only registered with the SEC to give them “judicial personality.

esdperez@gmail.com

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1 Comment

  1. There appears to be a misquoted portion of the opinion.

    Its “… shall be computed based on the ‘net income before income tax of the year during which the directors have served as such,” NOT “shall be based on the net income tax of the year during which the directors have served as such.”

    Thank you for finding interest and disseminating to the public the latest issuances of the Commission.