The year 2016 will be a period in history when we see the changing of the guards. We should be ready for the new administration at the end of next month. And in a parallel world of corporate finance, the listed or public companies in the country shall witness changes in their Independent Directors (IDs) if they start implementing the new rules regarding these officials.
In December 2011, the Securities and Exchange Commission (SEC) issued Memorandum Circular (MC) 9, which, among others, limits the term of the independent directors to a total of 10 years, with two years of a “cooling-off” period between two terms of five consecutive years for listed, public and mutual fund companies. As 2016 is the fifth year of effectivity for the Circular, we should start seeing its implementation in the coming months.
The rule on term limits is actually timely. Of the 30 companies comprising the PSEi, IDs hold about 30 percent of the more than 300 available board seats; much higher than the 20 percent minimum composition required by the SEC. However, a closer look at the details will also show that 80 percent of PSEi companies have at least one ID serving for at least five years.
The said Circular took effect January 2012 and all previous terms served by IDs are not included in the application of the term limits. Had the application of the MC been retroactive, more than half of the PSEi companies would need to replace at least one ID who had already reached the 10-year aggregate limit.
It is fairly easy to see the wisdom behind this Circular. Being a director for some period of time can breed familiarity and makes it relatively more difficult to be truly independent. IDs play a significant role in the board of directors, especially on matters requiring oversight of management or the demand for independence relative to management. Thus, certain board committees such as audit, risk management and governance are required to be chaired or have members made up of IDs. As pointed out by researches among US and European companies, there is value in the differences in points of view as they improve the way an organization functions.
The said Circular, therefore, is an exciting step toward further improving corporate governance in the Philippines as it aims to enhance the effectiveness of IDs and encourage the infusion of fresh ideas into the boards of directors.
However, about a month ago, the SEC released an advisory stating that “if there are no suitable replacements,” the IDs may be reelected in 2017 until 2021, at which time the 10-year limit kicks in. This advisory practically does away with the two-year cooling-off period.
This action is a step back and appears contrary to the very objectives of the Circular. Firstly, the Circular has been around for more than four years and public corporations should have had enough time to consider its effects and plan for its implementation in 2017. Also, if the purpose is simply to provide relief in seeking “suitable candidates,” a five-year period may seem too long, especially since directors of public companies are elected on an annual basis. If there really is a need to provide more time for companies to look for replacements, the SEC could have decided to simply defer the implementation of the cooling-off period for a year or two.
The advisory requires that “re-election in 2017 until 2021 shall be with prior written notice and justification to the Commission addressed to the Corporate Governance and Finance Department.” We should look forward to a very interesting read.
Admittedly, though, the rules are still there and the term limit will still be implemented in the coming years. The option to delay the cooling-off period is but a small blot in the larger picture of corporate governance improvements spearheaded by both the SEC and the private sector. The SEC, for example, has been very active in promoting the Asean Corporate Governance Scorecard (ACGS) initiative and should be credited for influencing more and more public companies in adopting international best practices in this area. The ACGS has five governance categories and the area of Responsibilities of the Board is a unique feature for the Philippines. In the latest scorecard, this is where the highest increase in points was observed, but it is also where the highest potential source of improvements can come in.
The board of directors, as a collegial body, is responsible for making decisions in behalf of the company. The board must be organized in a manner that encourages independence, discussions and active participation to arrive at an informed decision. Thus, independent directors have critical and important functions to perform on the board—they have to be independent and yet collaborative. The more perceptive companies and independent directors recognize these qualities and should find merit in the Memorandum Circular.
Renan Piamonte, Partner, Audit & Assurance of P&A Grant Thornton. P&A Grant Thornton is one of the leading Audit, Tax, Advisory, and Outsourcing firm in the Philippines, with 20 Partners and over 700 staff members.