JUST what is an independent director? Normally, this would mean a member of the board of directors of a company who brings a unique, unbiased perspective.
The term is commonly used to denote a director who is not an employee of the firm or organization where they serve as a member of the board. They are supposed to be independent of management and free from any business or other relationship which could or could reasonably be received to materially interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
Not all corporations are required to have independent directors and under Section 22 of the Revised Corporation Code and Securities and Exchange Commission (SEC) Memorandum Circular 16 only certain corporations are required to have independent directors such as issuers of registered securities to the public, public companies with assets of at least fifty million pesos, listed companies in the PSE, finance companies, investment companies and houses, brokers and dealers of securities, pre-need companies, stock and other securities exchange/s.
The obvious intent is of course to protect the interest of the shareholders and other stakeholders in these companies, which is indeed a laudable goal. However, is having independent directors actually doing this? Taking into account that independent directors have limited or nominal shares, not part of management and not having any business dealings and/or relationship with the company, they still have a primary interest of receiving fees and other benefits from the company.
In most cases, the compensation and fees received by independent directors are quite substantial and the main business objective of maximization of shareholder wealth is not always consistent with the ideals of an independent director. Perhaps there is no such thing as an independent director since they too have a vested interest. Management will work towards achieving the greatest compensation and/or bonus, shareholders will clamor for maximization of shareholder wealth and employees will always aspire to have higher pay, better benefits and ideal working conditions.
It is only natural that people tend to work for their best interest and it is only under certain conditions that this impartiality may work. I would think that the US jury system is an example where serving citizens do get no more than a basic allowance. Another example would be compulsory military service enforced in other countries. It is difficult to imagine the impartiality of independent directors who get their fees from the company they serve and are selected by the people who are running these companies.
I wonder if the SEC has done a study on how long on average an independent director serves in a board which has a nine year cumulative limit, how many companies on average does an independent director works in simultaneously and what the average aggregate compensation is for these independent directors. Perhaps it is something that the regulators could put a more logical limit, to attract more independence. In addition, there must be some kind of criteria and evaluation of the performance of an independent director to determine if they are indeed doing their function as intended.
The views and comments of Dr. George S. Chua are his own and not of the BusinessMirror or the Financial Executives Institute of the Philippines (Finex). The author was 2016 Finex president, 2010 to 2020 Federation of Philippine Industries president and currently an active entrepreneur with investments in fintech, broadcast, media, telecommunications, properties. He is also a regular member of the National Press Club. Dr. Chua is also a Professorial Lecturer at the University of the Philippines Diliman and BGC Campus. Comments may be sent to firstname.lastname@example.org.