Around this time of the year, publicly listed companies (PLCs) usually hold their annual stockholders’ meetings and elect their boards of directors, including independent directors. I was fortunate to have been reelected as an independent director of three PLCs engaged in energy, exploration and real estate.
We often hear about them but what exactly are independent directors (IDs)? What do they contribute to corporate boards? What roles do they play? These are questions I will seek to answer in this article.
Who are independent directors?
Let’s begin with the statutory definition of IDs. Title III, Section 22 of the Revised Corporation Code (Republic Act No. 11232) provides the following definition: “An independent director is a person who, apart from shareholdings and fees received from the corporation, is independent of management and free from any business or other relationship.”
It further states that corporations vested with public interest such as those whose
“(1) Securities are registered with the Securities and Exchange Commission (SEC), or listed with an exchange, have assets of at least P50 million and have 200 or more shareholders; (2) banks and quasi banks, savings and loan associations, pawnshops, money services, preneed, trust and insurance companies and other financial intermediaries; and (3) other corporations engaged in businesses vested with public interest as may be determined by the SEC, should have independent directors constituting at least 20 percent of such board.”
An ID, also referred to as a nonexecutive director (NED), is not part of the executive team and typically does not engage in the day-to-day management of the organization.
What value do IDs provide?
IDs are appointed to a board to bring:
Independence: Usually drawn from a pool of professionals who have had wide industry experience and are qualified to sit on the boards of companies. IDs can bring the much-needed perspective that is objective and balanced since they are not connected to the company nor its management and hence do not have hidden agendas. Because they are independent of company management and other “interested parties,” they can bring a degree of objectivity to the board’s deliberations and play a valuable role in monitoring executive management.
Impartiality: Since they do not hold C-level or managerial positions, IDs are thought to understand the interests of the company with greater objectivity than the executive directors, who may have a conflict of interest between management and stockholders or other stakeholders.
Wide experience: All directors should be capable of seeing company and business issues from a broad perspective, IDs are usually chosen because they have a breadth of experience with an appropriate level of caliber.
Special knowledge: Being individuals with wide experience as CEOs or directors in other boards, they have special knowledge, professional, industry, understanding of trends and developments, among others, that will provide the board with valuable insights.
Personal qualities: IDs may sometimes be installed on a firm’s board to boost the image of the company for public relations reasons. For example: a particular ID’s community standing, a record of philanthropy and prior experience could provide positive exposure and symbolic value for the firm.
Networks: A company and its board can benefit from outside contacts of IDs as they can help connect the business and board with networks of potentially useful people and organizations.
What is the role of IDs?
“Protector,” “Watchdog,” “Adviser,” “Auditor”: these are some of the terms that have been used to describe IDs.
From the point of view of stakeholders, IDs symbolize the presence or absence of “good corporate governance.” As the vanguard of good governance, IDs are expected to be responsible for upholding minority rights and creating the key balance so that the majority shareholder or management of a company does not have the unfair benefit of being in control.
IDs can provide chairpersons and chief executives with counsel and advice—and a different perspective—on matters of concern. Providing an “outsider’s perspective” gives a clearer or wider view of external factors than the executive directors. They could also offer insights into unseen problems or external factors that may negatively affect the business and its profitability.
IDs should take responsibility for monitoring the performance of the company, as well as its executive management, especially with regard to the progress made toward achieving the determined company strategy and objectives.
IDs should satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and defensible. An ID must also ensure that the company accounts properly to its shareholders by presenting a true and fair reflection of its actions and financial performance and that the necessary internal control systems are put into place and monitored regularly and rigorously.
Because IDs are equally liable for the success or failure of a business, as outlined by statutory requirements and tax laws, they are also expected to commit a significant amount of time in fulfilling their board commitments, especially if they serve on several boards. Transparency is expected from IDs in disclosing whether they are serving on several boards and whether possible conflicts of interest may arise due to multiple board seats.
All being said, an ID is a “creative contributor” to the board, providing independent oversight and constructive challenge to the executive directors and management.
Is an ID a “Protector,” “Watchdog,” “Adviser,” “Auditor”? What do you think? I leave that to your judgment and invite you to join the MAP General Membership Meeting (GMM) on July 13, Tuesday, from 12:30 p.m. to 2:30 p.m. for a discussion by experienced board directors and governance champions on “How Independent Directors Create Value.” Featured speakers are Nenet Lavares of Metrobank and Prulife UK; Flor Tarriela of PNB; Fred Pascual of the SM Investments Corp.; Roman Zyla of International Finance Corp. (IFC) and JJ Moreno of the Metro Retail Group as moderator. The MAP GMM will be streamed live through the MAP Facebook page. INQ
This article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or MAP. The author is member of the MAP Corporate Governance Committee, and the MAP Diversity and Inclusion Committee. She is president of MAGEO Consulting Inc., a company providing corporate finance advisory and consulting services.