The Securities and Exchange Commission has issued a new corporate governance code for publicly listed companies that includes rules setting a nine-year term limit for independent directors, mandates protection for whistle-blowers and incorporates anticorruption measures.
The code revision is part of the SEC’s partnership with International Finance Corp. (IFC) and is aimed at enhancing the country’s regulatory framework and investment climate.
The new code—which took effect on Jan. 1, 2017—aims to improve the functioning of boards, strengthen shareholder protection and promote full disclosure in financial and non-financial reporting.
All publicly listed companies are required to submit a new Manual on Corporate Governance to the SEC on or before May 31, 2017.
By providing guidance to adopt best governance practices, Philippine publicly listed companies are seen to improve their competitiveness and ability to attract foreign investment.
The new code will increase the responsibilities of the board and ensure the competence and commitment of its directors. It adopts a “comply or explain” approach that combines voluntary compliance with mandatory disclosure.
Companies do not have to fully comply with the code, but they must state in their annual corporate governance reports whether they comply with the code provisions, identify any area of non-compliance and explain the reasons for non-compliance.
“The new code is intended to raise the corporate governance standards of Philippine publicly listed corporations to a level at par with its regional and global counterparts,” said SEC Chair Teresita J. Herbosa.
“The adoption of the ‘comply or explain’ approach is hoped to address the perceived overregulation of the SEC.”
“Our global experience has shown that corporate governance codes set a benchmark and encourage companies to adopt effective governance practices,” said Jane Yuan Xu, IFC Philippines country manager. “Improved corporate governance will make Philippine companies more competitive and enhance their ability to attract foreign capital, leading to the development of a vibrant and sustainable private sector.”
Under the code, independent directors of any publicly listed company should serve for a maximum cumulative term of nine years, after which, the independent director should be perpetually barred from reelection as such. However, they may continue to qualify for nomination and election as a non-independent director.
In the instance that a company wants to retain an independent director who has served for nine years, the board should provide meritorious justification/s and seek shareholders’ approval during the annual shareholders’ meeting.
The SEC said service in a board for a long duration might impair a director’s ability to act independently and objectively. Hence, the tenure of an independent director is set to a cumulative term of nine years. The reckoning period will be 2012, in connection with another circular dated 2011.
The new code requires the board to establish a suitable framework for whistleblowing that “allows employees to freely communicate their concerns about illegal or unethical practices.”
The board is mandated to “set the tone and make a stand against corrupt practices by adopting an anticorruption policy and program in its Code of Conduct.”
The code recommends that the positions of chair of the board and chief executive officer be held by separate individuals and each should have clearly defined responsibilities. This is to avoid conflict or a split board and to foster a balance of power, increased accountability and better capacity for independent decision-making.