Corporate governance (CG) was given emphasis once more in the Management Association of the Philippines (MAP)–Financial Executives Institute of the Philippines (Finex) Workshop on August 16. It was the 12th
annual workshop after all.
Security Exchange Commission (SEC) Chairman Teresita J. Herbosa gave a preview of the proposed 2016 CG and major amendments to the Corporation Code and Securities Regulation Code (yes, these are forthcoming soon), and this article will share with the reader some highlights of these proposals. As the principal regulatory authority over corporations, the SEC is eminently the source of initiatives on good corporate governance.
Let us recall. After those disastrous corporate scandals in the 1990’s (think Emron, Worldcom and our own BW phenomenon), the regulatory authorities started to move more protectively. In 2000 the Securities Regulation Code became law, directing the appointment of independent directors. In 2002 the first Code of Corporate Governance was prescribed. In 2009 a Revised Code of Corporate Governance was introduced. And in 2015 a Philippine Corporate Governance Blueprint (PCGB) was adopted. This is a milestone document that (a) identifies the rights of ownership of shareholders; (b) describes the role of institutional investors and financial advisors; (c) underscores duties to other stakeholders; (d) prescribes disclosure and transparency requirements; and (e) defines the roles and responsibilities of the board of directors, all toward a stronger and effective enforcement regime. (Mr. Rex C. Drilon II’s presentation).
And now, an updated 2016 Code of Corporate Governance that the SEC will soon release for comment, then subsequently adopt for wide corporate compliance. “Comply or explain” will be the regulator’s tenor of enforcement.
The new provisions of the Corporate Governance Code are focused on the board of directors, which, after all, is the collective body entrusted with the conduct of the corporation’s business, and has control of all its assets. “Board diversity” is going to be encouraged, with at least three independent directors or at least one-third of the board being independent directors. A balance of non-executive and executive directors will be the standard, with one person designated as lead independent director (a new concept). First-time directors will need to go through an orientation program. To assure a director will have time for his or her duties, there must be a disclosure of how many other directorships is held. Nor can an independent director stay forever—a maximum cumulative term of nine years shall be enforced.
There is the thinking that the ideal number of members of a board is seven to nine (debatable still). In any case, a system of annual assessment by and of the board is expected to be a regular exercise.
In the proposed 2016 Code of Corporate Governance, there will be a requirement to disclose material nonfinancial issues (e.g., major change in ownership); to identify and separate the internal-audit function as well as a risk-management function, and to maintain a risk register. Minority shareholders, it is proposed, should have the opportunity to nominate directors. And on related-party transactions, self-dealings and extraordinary transactions, notice to stockholders will be required. To reinforce further, a “whistle-blower policy” is expected to be part of CG.
So these are some of the highlights of the proposed 2016 Corporate Governance Code. As the SEC chairman says, it’s an evolving landscape, and we shall all have the opportunity to contribute our opinion. This evolving landscape included the concepts of stakeholders, as well as institutional investors (not just shareholders); the notions of sustainability and nonfinancial reporting; the cognizance of gender diversity; and a strong position
against corruption.