COME July 15, the Revised Code of Corporate Governance will take effect.

It was issued last week by the Securities and Exchange Commission as Memorandum Circular No. 6, series of 2009.

The code, which amends the 2002 version, reflects some of the suggestions of the affected companies and changes in the regulatory environment.

For the time being, the code applies only to registered corporations and branches or subsidiaries of foreign companies operating in the country that:

Sell securities that are required to be registered with the SEC, or

Have assets over P50 million and at least 200 stockholders who each own at least 100 shares, or

Whose stocks are listed in a stock exchange, or

Are grantees of secondary licenses from the SEC.

The common denominator of these companies is they solicit investments from the public to help sustain their operation. Hence, their activities are considered imbued with public interest.

The code consists of compulsory and recommendatory guidelines for the protection of the interests of the stockholders and other investors of covered companies.

Compliance

Unlike before, when the responsibility of “enforcing” corporate governance rules was given to a compliance officer, the code makes the board of directors primarily responsible for that task.

In addition, the board’s traditional policymaking role in the company has been expanded to include providing an independent check on management, or “the body given the authority by the board of directors to implement the policies it has laid down in the conduct of the business of the corporation.”

The monthly routine of directors meeting on a pre-arranged date, skimming the agenda, receiving their per diem and rubber-stamping management’s proposals is no longer acceptable.

This time, the members of the board, collectively and in their individual capacity, have to be pro-active. They should speak up when the circumstances call for such action and the proper avenues for that purpose are specified in the code.

For the same reason, the code underscores the importance of having independent directors in the board.

The companies are required to have at least two independent directors or such number of independent directors that constitute 20 percent of the board membership, whichever is lesser but in no case less than two.

The mandatory minimum number was spelled out to avoid a recurrence of the practice in the past of some companies juggling the number of their directors to justify the election of just one independent director or, possibly, none at all.

Qualifications

In a break from the past, the code has changed the status of the chair of a corporation from ceremonial to meaningful.

On him now rests the responsibility of seeing to it that board meetings are held in accordance with the by-laws or on times that he may deem necessary.

Corollary to that assignment, the chair has to supervise the preparation of the agenda in coordination with the corporate secretary, taking into consideration the suggestions of the chief executive officer, management and other directors.

He is also tasked with maintaining “qualitative and timely lines of communication between the board and management.”

In other words, the chair has to earn his keep and do justice to the perch he occupies at the top of the corporate hierarchy.

For corporations whose chair also wears the CEO hat, the code recommends that the two positions be separated.

The division would “foster an appropriate balance of power, increased accountability and better capacity for independent decision-making by the board.”

If the combination cannot be avoided, the proper checks and balance should be laid down to ensure that the board gets the benefit of independent views and perspectives.

Directors

In line with its requirement that directors go beyond warming their seats in board meetings, the Code encourages the companies to provide additional qualifications for their election.

On top of the qualifications for directorship required under existing laws (e.g., for banks and insurance companies), companies may require their directors to, among others, have a practical understanding of the business or membership in a relevant professional organization.

But what’s the use of having highly qualified and experienced directors in the board if, due to other professional commitments, they are unable to attend the meetings of the board?

On this point, the code urges the board to adopt guidelines on the number of directorships that its members can hold in stock and non-stock companies.

Whatever that number may be, it “should take into consideration the capacity of a director to diligently and efficiently perform his duties and responsibilities.”

The rationale behind this criterion is simple: There are limits to a person’s physical capabilities, no matter how brilliant and talented he may be.

I shall discuss the other significant features of the code in future articles.

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