In defense of our regulators
On April 15, 2015, the Department of Finance issued Order No. 054-2015 (DO), prescribing a fit-and-proper rule for independent directors of publicly listed and insurance companies.
The DO sets an ideal term limit for independent directors, based on the “5-2-5” rule. This rule provides for a term limit of five years, followed by a cooling period of two years, and a final term of another five years, or a total maximum term of 10 years as independent director in the same firm.
Some personalities are raising a howl over the “5-2-5” rule contained in the DO. Setting aside legalities which can be a separate subject of this column, the contention seems to be that there is no empirical proof that term limits improve board effectiveness and that is an insufficient local pool of independent directors.
Word is spreading that the PSE is being asked by some groups to join them in taking issue on the matter before the DOF and the SEC. As former president of the exchange, I’m keeping my fingers crossed that the PSE will not do it. It will send a wrong message to the market. The PSE should not also lose sight of the fact that it has big-ticket issues pending with the DOF and SEC. To use a cliché, don’t fight City Hall.
I am an independent director of several companies and I continue to receive offers from other companies. The rule will adversely affect me but I fully support our regulators—the BSP, DOF, IC and SEC—on the matter.
Term limits for independent directors is a best practice not only in Western countries but also in the Asean. It is one of the criteria under the Asean Corporate Governance Scorecard (ACGS). Our term limit even falls below the ACGS standard, which follows the “5-2-4” rule or 9-year maximum term limit. (To give credit to them, I would like to mention that the Sy-led China Banking Corp. and MVP-led Philex Mining Corp. has adopted the “5-2-4” rule).
The scorecard is the product of studies by corporate governance experts and reflects the prevailing best practices in corporate governance globally and in the region. The scorecard has been adopted and endorsed by the Asean Capital Markets Forum which represents regulators from all participating member countries.
On the so-called dearth of independent directors, we have about 100 million Filipinos. I find it hard to believe that there are no equally experienced, hardworking and effective people who can fill in the shoes of our high profile personalities now serving as independent directors. We have businessmen, professionals and former highly respected government officials—active and retired—who have distinguished themselves in their respective fields. I am a fellow in the Institute of Corporate Directors (ICD) and I know that ICD alone has certified 300 people to be qualified as independent directors. Some of them are already serving as such in some public companies. Indeed, saying that there is a dearth of independent directors is an insult to the Filipino. There is no monopoly of talent, so to speak.
It is significant to point out that SEC Memorandum Circular No. 9, series of 2011, does not prohibit an independent director from being elected as independent director of other member-companies of the same conglomerate after his stint as independent director of one member company of the conglomerate. The only limitation is that an independent director cannot serve in more than five companies of the same conglomerate. Neither do the rules prohibit an independent director of one conglomerate from being elected as independent director of another conglomerate. Equally significant is that none of the rules prohibit his election in a company not belonging to any conglomerate.
Note also that the DO does not prohibit an independent director from being elected as a regular director for the same company during the two-year cooling off period. If our incumbent independent directors are really indispensable as some seem to portray, the shareholders can nominate and elect them as regular directors.
Based on the language of the DO, it can be argued that he can thereafter be elected as independent director for the same company. The DO is only recommendatory, leaving it up to the company whether to comply with the “5-2-5” rule.
In other words, our country will not be deprived of the services of our incumbent independent directors even if term limits continue to be implemented.
As a final note, the Philippines has been scoring low in corporate governance surveys—regionally and globally—over the years. For example, in the last Corporate Governance Watch (CG Watch) by the Asian Corporate Governance Association, the Philippines is cellar-dweller in the CG rating. Other Asean countries like Malaysia, Thailand and Singapore have badly beaten us. The comment against us is that we are slow in reform. We badly need drastic regulations to catch up with our Asean neighbors. Kudos to Secretary Purisima for taking the cudgels on the matter.
Some quarters have asked me whether the objection is simply motivated by a desire to perpetuate oneself in one’s juicy post as independent director and to continue enjoying the perks that go with it. Why are some people willing to sacrifice the national interest for their individual good? Otherwise stated as we lawyers say, is the objection motivated more by self-interest than anything else?
My answer is: everybody is important but nobody is indispensable.
(The author, former president of the Philippine Stock Exchange, is the president of the Shareholders’ Association of the Philippines (SharePHIL). His views in this column are solely his. He can be reached at [email protected])
