Term limits for directors

In the local business scene, election to the board of directors of select companies as an independent director is considered a badge of honor. The law requires the boards of public and listed companies, and corporations earlier authorized by the Securities and Exchange Commission to sell their securities to the public to have such director. Public companies are corporations with assets in excess of P50 million and have 200 or more stockholders at least 200 of whom own a minimum of 100 shares each. Listed companies, on the other hand, are corporations whose shares are traded in the stock market.

The common denominator of these business entities is, they can solicit funds from the public—by selling shares of stocks or debt papers—to sustain their operations. To protect the interests of the public in these companies, at least two independent directors must be elected in their boards to participate in the decision-making process.

As the name denotes, the independent director (ID) is a person who is not an officer or employee of the company or otherwise has any links with it that may interfere with the exercise of his independent judgment in the performance of his duties and responsibilities as a director.

Responsibility

The ID may be likened to a “moral knight” or the person who will see to it that the corporation acts in accordance with existing rules and regulations, and in the best interests of all the stockholders, not only the majority owners.

When a person is elected an ID of a company, the law expects that, in spite of the perks and privileges that accompany the position, he will remain his own person and will live up to the purpose for which his presence in the board has been made mandatory. But thanks to human frailty, that independence is susceptible to compromise or softening through direct or subtle acts.

Thus, for example, after years of service in the board, an ID could find himself standing as godfather in the marriage of a son or daughter of one of the company’s major stockholders. Or, because of common social or business interests, an ID may become the constant companion or business partner of one of the directors.

In the situations mentioned, it is inevitable that the “intimacy” or close interaction by the ID with the major stockholder or fellow director could affect his performance of the responsibilities for which he was elected to the board. More so in this country where the concepts of “pakikisama” (or sense of belonging) and “utang na loob” (or debt of gratitude) are deeply ingrained in our psyche. In our social system, anybody who fails or refuses to abide by these traditional norms could find himself branded an ingrate or unworthy of respect.

Restrictions

Aware of the possible adverse effects of “overstaying” IDs and in order to infuse new blood in the boards of public, listed and mutual fund companies, the SEC recently issued Memorandum Circular No. 9, series of 2011, imposing term limits on their IDs.

Under the circular, a person can be elected an ID in as many companies that may want to have him as such director, provided these companies do not form part of a business conglomerate. If a business conglomerate is involved, the ID can be elected to only five of its companies, i.e., the parent company and any of its subsidiaries and affiliates.

Business conglomerate or not, the ID can serve in that capacity for five consecutive years, with six months of service considered as equivalent to one year, regardless of the manner by which the ID position was relinquished or terminated. After five years, the ID cannot be elected to the same position in the company unless he undergoes a two-year “cooling off” period, subject to the condition that during that period the ID has not done anything that disqualifies him from being elected as ID in the company.

The “cooling off” period is aimed at giving the ID an opportunity to take stock of himself and make an arm’s length re-assessment of his relationship with the company. If, for instance, during the two-year period, the former ID accepts an appointment as officer or consultant of the company, the period of such employment or engagement will be deducted from that period.

Reappointment

In case the ID is reelected in the same company after the “cooling off” period, he can serve for another five consecutive years. The “5-2-5” scheme is similar to the existing rules on the selection of external auditors where the member of an accounting firm assigned to audit a company is rotated every five years and may be reassigned to the same company only after a two-year “cooling off” period.

After serving for a total of 10 years, the ID can no longer be elected as such in the same company any time in the future. He has to give way to new (perhaps, more savvy) blood, so to speak, of which the local business scene has plenty of.

This prohibition, however, does not prevent him from being elected as ID in other companies outside of the business conglomerate, where applicable. Meaning, any company that is not a part of the business conglomerate can take him as an ID despite the 10-year bar. The circular stated that these terms limits will take effect on Jan. 2, 2012. All previous terms served by incumbent IDs shall not be included in the computation of the “5-2-5” scheme.

Thus, there is enough time, between now and April or May next year, which are the traditional months for annual stockholders’ meetings, for the covered companies to take the proper measures to comply with the circular.

(For feedback, write to <rpalabrica@inquirer. com. ph>.)