Promoting Corporate Governance Under the Revised Corporation Code

MAP Insights

(First of three parts)

This is an abridged version of the talk I recently gave to the MAP Corporate Governance Committee officers and members on the Revised Corporation Code which was enacted into law on Feb. 20, 2019.

It had been almost 40 years since the old Corporation Code was enacted thus it became inevitable and imperative that the Philippines align with the rest of the world by updating its general law on corporations. Each amendment in the Code may fall under one or more of these objectives:

1. the adoption of international best practices on Corporate Governance (CG);
2. the use of technology for more ease of doing business;
3. the protection of minority stockholders rights;
4. the management and reduction of corporate risks; and
5. the inclusion of specific and effective enforcement provisions to:
6. enhance compliance; and
7. avoid regulatory capture.

I will deal with amendments under the first, third and fifth objectives as they relate to CG and how the Securities and Exchange Commission (SEC) can promote and enforce it. At the outset, the Code is replete with references to CG. For example:

In Sec 46 Contents of By-laws, private corporations are encouraged to include in their bylaws “(k) such other matters as may be necessary for the proper or convenient transaction of its corporate affairs for the promotion of good governance and anti-graft and corruption measures.” In Sec 179 (d) among the powers and functions of the SEC is precisely to “Promote corporate governance and the protection of minority investors, through among others, the issuance of rules and regulations consistent with international best practices.”

CORPORATIONS VESTED WITH PUBLIC INTEREST
The first major amendment concerning CG is in Sec. 22 where the term “corporations vested with public interest” first appears followed by this enumeration:

1. corporations covered by the Securities Regulation Code in Sec. 17.2:
2. whose securities are registered with SEC (publicly listed companies or those that have registered/issued shares/bonds to the public),
3. with assets of at least P50 million and having 200 or more holders of shares with 100 shares at least each (public companies);
4. banks and quasi-banks, non-stock savings and loan associations, pawnshops, money service business, pre-need trust and insurance and other financial intermediaries; and
5. other corporations engaged in businesses vested with public interest similar to the above, as may be determined by the SEC after taking into account relevant factors which are germane to the objective and purpose of requiring the election of an independent director.

Some provisions in the Code particularly apply to “corporations vested with public interest”: 1. Sec. 22 seeks to reinforce the meaningful presence of independent directors by requiring the “corporations vested with public interest” (to) “have independent directors constituting at least 20% percent.” Take note that in Sec. 179 (m), the SEC shall “(m) prescribe the number of independent directors and minimum criteria in determining the independence of a director.” Further, Sec. 22 elaborates that “independent directors shall be subject to rules and regulations governing their qualifications, disqualifications, voting requirements, duration of term and term limit, maximum number of board memberships and others requirements that the Commission will prescribe to strengthen their independence and align with international best practices.” Relatedly, Sec. 46 (f) states that bylaws may prescribe “the maximum number of other board representations that an independent director or trustee may have which shall, in no case, be more than the number prescribed by the Commission.”

2. Sec. 24 on Corporate Officers requires that “if the corporation is vested with public interest, the board shall also elect a compliance officer.”
3. Sec. 29 requires that corporations vested with public interest shall submit to their shareholders and the SEC, an annual report of the total compensation of each of their directors or trustees.
4. Sec. 31 provides that in case of a corporation vested with public interest, material contracts or related party transactions involving a self dealing director must be approved by at least two-thirds of the entire membership of the board, with at least a majority of the independent directors voting to approve.
5. Sec. 23 on Election of Directors or Trustees provides for voting through remote communication or in absentia in corporations vested with pubic interest notwithstanding the absence of a provision in the bylaws.
6. In Sec. 177, corporations vested with public interest shall submit to the SEC in addition, a director or trustee compensation report and a director or trustee appraisal or performance report and the standards or criteria used to assess each director or trustee.
7. Under Sec. 73, the SEC may require stock corporations which transfer and/or trade stocks in secondary markets to have an independent transfer agent.

DISQUALIFICATION, COMPENSATION AND OTHER PROVISIONS AFFECTING DIRECTORS OR TRUSTEES
Corporate Governance is essentially about the board of directors or trustees as the governing body of a corporation. Among the amendments to raise its level of performance is the expansion of Sec. 26 with more grounds for the disqualification of a director or trustee. In the old Code (Sec. 27), the grounds were limited to having been convicted by final judgment of an offense punishable by imprisonment exceeding six years, or a violation of the Code committed within five years prior to date of election or appointment. Retaining the five year-period, but changing the reckoning to date of conviction or administrative judgment, the grounds are:

1. Convicted by final judgment: of (1) an offense punishable by imprisonment for a period more than six years, (2) violation of the Revised Corporation Code, (3) violation of the SRC;
2. Found administratively liable for any offense involving fraudulent acts; and,
3. By a foreign court or equivalent foreign regulatory authority for acts, violations or misconduct similar to those enumerated in paragraphs (a) and (b).

Further, the last paragraph of Sec. 26 says — “The foregoing is without prejudice to qualifications or other disqualifications, which the Commission, the primary regulatory agency, or the Philippine Competition Commission may impose in its promotion of good corporate governance or as a sanction in its administrative proceedings.” Notably, Sec. 27 provides that “The Commission shall, motu proprio or upon verified complaint, and after due notice and hearing, order the removal of a director or trustee elected despite the disqualification, or whose disqualification arose or is discovered subsequent to an election. The removal of a disqualified director shall be without prejudice to other sanctions that the Commission may impose on the board of directors or trustees who, with knowledge of the disqualification failed to remove such director or trustee.”

Moreover, Sec. 160 makes Violation of Disqualification Provision; (Penalties) a criminal offense punishable by a fine ranging from P10,000 to P200,000 at the discretion of the court, and permanent disqualification from being a director, trustee or officer of any corporation. When the violation is injurious or detrimental to the public, its from P20,000 to P400,000.

In order not to disrupt board actions, Sec. 28, second paragraph, fixes a definite period or date when replacement of an end of term, removed, resigned or departed director should take place.

Regarding compensation, initially the by-laws should fix directors or trustees compensation. Otherwise, only stockholders representing the majority of outstanding capital stock or the majority of the members can fix the compensation of directors or trustees, at the meeting for this purpose, not exceeding 10% of net income before income tax. However, under Sec. 29, the directors or trustees cannot take part in the determination of their own per diems or compensation. Sec. 34 which allows the board, even without any by-law provision, to create special committees may offer a solution. Since the board is empowered to determine whether the committee is permanent or temporary in nature as well as its composition, a special committee composed of directors who are no longer up for reelection and top officers may be created to make the proper recommendation (directly to the stockholders) on per diems and compensation to be applied prospectively.

The Code modified Sec. 31 regarding self-dealing directors, trustees or officers.

Spouses and relatives within the fourth civil degree of consanguinity or affinity of any director, trustee or officer who may be involved in any transaction with the latter’s corporation, qualify said director, trustee or officer as self-dealing.

Moreover, Sec. 52 mandates that “A director or trustee who has a potential interest in any related party transaction must recuse from voting in the approval of the related party transaction without prejudice to compliance with the requirements of Sec. 31.” My view is that a director who does not recuse himself or herself may be subject to a sanction but the transaction would still be valid if compliant with all the conditions therefore.

To be continued