Special board election rules

With Ash Wednesday over and the temperature slowly going up, the summer season in the country has started.

In two weeks’ time, most students will put their books aside and enjoy two months of carefree life, unless they have, due to poor grades, to enroll in makeup classes.

For the majority of the country’s corporations, especially public and listed companies, this is the start of the preparations for the annual rite of passage called annual stockholders’ meeting. Once a year, business honchos descend from their lofty corporate perches to rub elbows with the company’s hoi polloi, otherwise known as stockholders. The board of directors, through management, has to report to the stockholders on how they administered the affairs of the company during the preceding year.

If the company posted a healthy bottom line, the directors can expect to receive praises for their excellent choice of managers. If it merely broke even or, worse, showed a negative performance, the blame is usually heaped on the managers. Like sports contests, players (the directors) win games while coaches (the managers) lose them.

Independent

In addition to the reporting obligation, the annual stockholders’ meeting is held to enable the stockholders to elect the members of the board of directors who, in turn, will choose the people who will run the company. If the company’s stocks are listed on the stock market or is classified as a “public company” on account of its asset size (at least P50 million) or number of stockholders (a minimum of 200 stockholders who hold at least 100 shares each), it has to elect, in addition to regular directors, independent directors (IDs).

Simply defined, an ID is a person who has no personal, financial or professional ties with the company that could affect his ability to give objective or unbiased advice on significant business issues. He is supposed to act as “whistle blower” who will remind the company of its obligations to the stockholders and the public, or will raise the alarm bells if the company is about to commit illegal or improper acts.

Under existing regulations, the covered companies should have at least two IDs or such number of IDs that represents 20 percent of the members of the board, whichever is lesser, but in no case less than two. Although limited in number, the IDs are expected, through moral suasion and strength of their personality, to act as counter balance to the regular directors who constitute the majority.

Distinction

On account of their special character, problems sometimes arise on how to elect IDs with the least inconvenience or burden to the regular election process.

Should their election be held on a date different from that of regular directors? Should there be a separate listing for “independents” in the nomination form? How many votes should the latter get to qualify as such? The mechanics for the election of regular and independent directors were the subject of a query with the Securities and Exchange Commission. The company concerned sought the SEC’s clearance on the procedures it drew up to facilitate the election of all directors.

By way of background, the company’s board consists of nine regular directors and two IDs. The number of candidates for regular directors exceeds nine, while only two candidates were nominated for ID. The election process envisions the segregation of the votes cast for regular and independent directors. If one vote is cast for each ID, that would already be sufficient to declare him as duly elected. For regular directors, the nine candidates who get the highest votes cast would be declared duly elected. Any nominee who fails to get into the magic circle cannot be considered elected even if he gets more votes than any of the candidates for ID.

Equitable

The SEC ruled that the company’s election process does not violate the Corporation Code or Securities Regulation Code. It stated that the “segregation of the voting for regular and independent directors is a practical device in order to ensure that at least two independent directors are elected” to the company’s board of directors pursuant to the requirements of the law.

In this regard, it is noteworthy to mention that, for reasons of expediency, most listed and public companies limit the number of candidates for IDs to the number of slots reserved for that position under their bylaws. This way, questions about the number of votes needed to qualify for election as such are avoided, especially for companies that give their directors six-digit allowances for attendance in board meetings.

If a “forced reduction” of the number of aspirants cannot be achieved because, for example, the Nomination Committee cannot decide on who to recommend for inclusion in the slate, or some influential stockholders have their favorites for the position, the company has to come up with procedures that will make the election process for IDs less contentious. After all, they are there for a noble objective.

This may involve, for example, exempting the IDs from the standard election counting process where the number of shares that a director must garner to be elected depends on the proportion of the shares cast in his favor to the subscribed capital stock. Meaning, a lower threshold for share votes is required for their election. Or, more than the required number of IDs can be elected during the stockholders’ meeting on condition that if any of the elected IDs resigns, dies, is incapacitated or disqualified from holding his position, the “surplus” IDs can immediately take over as long they are qualified or not otherwise disqualified. This arrangement will eliminate jockeying for the position when any ID vacancy arises in the middle of the year.

(For feedback, write to <rpalabrica@inquirer. com. ph>.)