DOF’s ‘fit and proper’ rules opposed

Eight of the country’s most influential business groups have collectively appealed to the Department of Finance (DOF) to defer an order that weeds out long-tenured independent directors and prevents them from holding more than a handful of directorship across related companies.

The business groups, at the very least, sought the deferment of the five-year term limit and the five-corporation (among related entities) limit for independent directors of insurance and publicly listed companies, citing the need for “wider consultation and a more thorough study.”

Proposed as an alternative to the postponement would be to extend the proposed term limit from five to nine years alongside a possible relaxation of the five-corporation limit.

The groups that appealed to the DOF are Bankers Association of the Philippines, the Philippine Stock Exchange, the Makati Business Club, Employers Confederation of the Philippines, Federation of Filipino-Chinese Chambers of Commerce and Industry Inc., Management Association of the Philippines, Philippine Chamber of Commerce and Industry, and Philippine Franchise Association.

In a letter addressed to Finance Secretary Cesar Purisima dated June 9, the groups, through their respective heads, said they agreed with the basic premise of DOF order No. 054-2015 dated April 15, 2015 on the adoption of “fit and proper” rules for directors of insurance and public companies.

“However, may we respectfully state our position that term limits on directors, despite widespread recommendations and legislated limits in other countries, especially those espousing Western corporate governance principles, have not been empirically and conclusively proven to improve board effectiveness,” the letter said.

The business group cited one recent study that concluded that having more experienced directors may be more beneficial for companies, because long-tenured directors tended to show greater commitment, such as by attending board meetings and joining board committees.  The same study added that long-tenured directors have the advantage of experience working with different kinds of CEOs, having deeper knowledge of the company and its operations and being in a stronger position to balance the power of the chief executive officer, the group said.

“It can be further argued that other regulatory restrictions on directors, such as on the manner of compensation and minimum qualifications, may likewise disallow or discourage otherwise effective and experienced directors from seeking such roles in our publicly listed companies.”

The groups refuted arguments that independent directors represented only the minority shareholders of a corporation.

“Rather, it is the duty of independent directors, in fact, of the whole board, to see to it that the corporation observes the law and practices good governance,” the letter said.

The letter also cited legal opinions that the DOF order may be akin to usurpation of legislative power by the DOF and the Securities and Exchange Commission.

The groups said the Corporation Code and Securities Regulation Code granted stockholders the right to vote and be voted as directors.

“Neither the DOF nor the SEC can change the requirements under the Corporation Code; only Congress has legislative powers,” the letter said.

Having said that, the groups also noted that good corporate governance cannot be legislated.

“We note that the Philippines is exceptional in the Asean (Association of Southeast Asian Nations), the OECD (Organization for Economic Cooperation and Development—a forum of developed countries) or anywhere else in mandating such (five year-term and five-corporation) limits by regulatory fiat,” the letter said.

The business groups also raised concern on what they described as the lack in depth of the local pool of independent directors, thus warning of insufficient number of trained independent directors to potentially replace those retiring as a result of the term limits.

The business groups also proposed to conduct a study on how more Asian or Asean-centric corporate governance practices could be adopted versus Western models of corporate governance, citing the need to come up with more “realistic, relevant and effective guidelines.”

“Truly effective and independent board governance rests on an internal corporate governance culture that seeks to raise governance practices beyond compliance to a level where the spirit and not just the letter of corporate governance principles are embraced and practiced for the good of a company, its shareholders and other stakeholders, and the Philippine market as a whole,” the groups explained.  Doris Dumlao-Abadilla