THE Insurance Commission (IC) has revised the rules on the appointment of independent directors of insurance companies, insurance brokers, mutual benefit associations, preneed companies and health maintenance organizations (HMOs) to avoid mismanagement in the respective companies.
The IC issued Circular Letter 2018-36, which sets new minimum qualification requirements of independent directors, requiring that the person be at least a college graduate or have been engaged or exposed to the business of the corporation for at least five years.
Another requirement is that he or she shall possess proven integrity, probity and
independence.
“One of the main reasons for the failure of companies is mismanagement, especially in the management of the financial affairs of the company. In the end, it is not only the company that suffers, but even more, their clients who have invested their hard-earned money in products offered by these companies. Thus, we promulgated the revised rules on independent directors in line with our intention to promote board independence and ensure good governance,” said Insurance Commissioner Dennis B. Funa.
One of the salient features of the new circular letter is the setting of additional limitations on who may be qualified as independent directors.
The additional limitations include limitations on stock ownership, prior and present relationship and transactions with the company, and affiliation in nonprofit organization that receives significant funding from the company or any of its related companies or substantial shareholders.
The amendment changed the rule, allowing independent directors to serve as such for two terms of five consecutive years provided that there shall be a two-year “cooling period” between two terms.
Under the revised rule, an independent director shall be allowed to serve for a maximum cumulative term of nine years. Thereafter, he or she shall be perpetually barred from any re-election in the same company as an independent director, but may continue to serve as a regular director.
Under the revised rules, sanctions may now be imposed by the IC for failure of any of its regulated entities to comply with the requirements on independent directors.
The penalty for noncompliance is in the amount of P200,000 per calendar year of noncompliance. In addition, failure to comply with the minimum number of qualified independent directors or non-payment of the penalty imposed for violation of the circular letter shall be taken into account in the renewal of the certificate of authority.
“While the insurance, preneed and HMO industries are essentially business ventures, there is an inevitable public responsibility in these type of businesses.
The engagement of independent directors would encourage objectivity in the decision-making process of a corporation,” he added.