Only ‘fit, proper’ need apply

The Department of Finance (DOF) has ordered public as well as insurance firms to institutionalize the “fit and proper rule” in taking on company directors.

Under the rule, the minimum qualifications of potential directors have been tightened while their respective tenure shortened.

Last April 15, Finance Secretary Cesar V. Purisima signed Department Order (DO) No. 54-2015, mandating two DOF attached agencies—the Insurance Commission (IC) as well as the Securities and Exchange Commission (SEC)—to “implement a system for ranking insurance companies and public companies, respectively, in terms of company practices employed in ensuring that directors are fit and proper to hold such position.”

According to the Finance department, the guidelines to be promulgated by the IC and the SEC in this regard should “include criteria on integrity, experience, education, training and competence.”

In a statement on Friday, the DOF pointed out that companies having directors who are fit and proper in assuming their posts would help build a “strong and stable financial system by virtue of upholding the highest standards” in corporate governance.

“Good governance extends to corporate governance. We want our insurance and public companies to reflect the highest corporate standards of integrity and excellence. For company directors in the country to be ‘fit and proper’ is a given; this rule merely enforces good practice,” Purisima explained.

Under DO 54-2015, the IC and the SEC will put in place an annual ranking system among insurance and public firms, which will be “used as basis for recognizing [companies] employing the highest standards in ensuring that their directors are fit and proper.”

The “ideal minimum qualifications of a director” under DO 54-2015 are as follows: At least 25 years old at the time of appointment or election; at least a college graduate or has at least five years of experience in business; has attended an IC—or SEC-accredited or—conducted special seminar on corporate governance for board of directors; and must have competence, diligence, experience/knowledge, integrity/probity, financial literacy training/relevant education, as well as mental and physical fitness.

As for independent directors, DO 54-2015 has a longer list of “ideal qualifications,” as follows: Not more than 80 years old, “unless otherwise found fit to continue serving” by the IC or the SEC; has not been a member of the executive committee of the board of directors or an officer or employee of the covered entity, its subsidiaries, affiliates or related companies during the three years immediately preceding the date of his election; and not a director, officer or employee of companies related to the firm’s majority shareholders.

Also, an independent director should not be a “substantial shareholder” or does not hold/own shares of stock sufficient to elect one seat in the board of directors of the covered entity, its subsidiaries, affiliates or any related companies of its majority corporate shareholders.

An independent director must neither be a relative within the fourth degree of consanguinity or affinity, legitimate or otherwise, nor acting as a nominee or representative of any director or substantial shareholder of the covered entity or any of its related companies.

DO 54-2015 also mandates that independent directors must have been “not retained, within the three years immediately preceding the date of his election, either in his personal capacity or through a firm, as a professional adviser, consultant, agent or counsel of the covered entity, any of its related companies or substantial shareholders; is otherwise independent of management and free from any business or other relationship within the three years immediately preceding the date of his election.”

Ideally, independent directors should also be those who “[do] not engage or has not engaged, whether by himself or with other persons or through a firm of which he is a partner, director or substantial shareholder, in any transaction with the covered entity or any of its related companies or substantial shareholders, other than such transactions that are conducted at arm’s length and could not materially interfere with or influence the exercise of his judgment.”

DO 54-2015 also prescribed the ideal minimum number of independent directors as “at least 20 percent but not less than two members of the board of directors.”

“For publicly listed corporations, the number of independent directors must be proportionate to the percentage of shares held by the public,” the DO stated.

The order also prescribed an “ideal tenure” for independent directors of five consecutive years, after which their reelection would be possible only after a two-year “cooling period,” provided that “during such period, he has not engaged in any activity that, under existing rules, disqualifies a person from being elected as independent director in the same entity.”

As for directors’ “ideal remuneration,” DO 54-2015 noted that “[a] fixed amount of remuneration shall ideally be given to independent directors at the level sufficient to attract and retain the quality of directors to run the company successfully.”

“Entitlement to such fixed amount shall ideally be based on the results of an independent ratings mechanism, which shall be established for purposes of evaluating the performance of independent directors. Stock options and performance benefits of any kind shall ideally not be included in their remuneration package,” the order showed.

“It is high time for corporations in the Philippines to take a step up in terms of governance standards. I welcome this DO from the DOF outlining what our ideal directors and independent directors should be like,” Teresita J. Herbosa, SEC chair, was quoted by the DOF as saying.

Also Insurance Commissioner Emmanuel F. Dooc remarked that, by prescribing what is fit and proper for directors of insurance companies, we will be “one step closer to having world-class insurance companies in the country run, with the highest standards of competence.”