Prudent rule on independent directors
Finally, after several abortive attempts in the past (which included political pressure), the Securities and Exchange Commission (SEC) was able to rationalize the period of engagement of independent directors (ID) in publicly listed companies.
In a recent memorandum circular, the SEC barred, effective Feb. 1, IDs who have already served for the maximum cumulative period of nine years from reelection in the same company.
SEC chair Francis Lim said the stricter term limits were necessary to preserve the independence and objectivity of directors, which are essential to effective corporate governance, transparency and accountability.
Well said!
In the context of Filipino culture, an ID who owes his or her position to the good graces of the majority stockholders and has been a recipient of lucrative perks and privileges may develop a “sense of gratitude” to that company.
Wittingly or unwittingly, that feeling could affect the exercise of objectivity or independent judgment on some issues presented to the board of directors for its consideration or approval.
Rocking the boat, so to speak, on issues that the majority stockholders have already decided on in private may not sit well with them and may make them rethink the merits of maintaining his or her presence in the boardroom when the stockholders convene at the annual meeting.
The perpetual cap on ID reelection imposed by the SEC would, in a manner of speaking, help minimize the subtle development of what may look like an “old boys club” in companies where IDs, on account of their long years of engagement, are often looked at and treated as regular directors.
In the process, it sometimes becomes inevitable for them to act as such and unconsciously forget the purpose for which they were elected.
Although the SEC was silent about it, aside from the corporate independence and objectivity angles, the term limits would pave the way for the emergence of new faces on the boards of listed companies.
As things stand at present, the same personalities practically rotate, like a revolving door, as IDs in companies that the law requires to have them on their boards. That gives the impression that there is a dearth of competent Filipino men and women who can act as IDs, which is absolutely false.
With the term limits, an opportunity is created for the listed companies concerned to throw a wider net in the search for competent new IDs, which the country has an abundance of, who will replace the “graduating” IDs.
In this age of AI (artificial intelligence), rapid changes in technology and innovative means of doing business, a younger generation of IDs would be advantageous and beneficial to companies that want to expand their market share.
Note that, at present, several iconic companies of the country are transitioning their leadership positions to allow the next generation to assume additional duties and responsibilities, a process which has been described as future-proofing.
This way, the companies are assured of a smooth transition of power when the existing leadership believes that the time has come for them to transfer the baton to their successor.
The same approach should apply to the selection and election of new IDs.
Some corporate systems that worked in the past may no longer be useful at present. The business world has evolved so fast in a manner that has not been foreseen by economic experts.
Between now and the intervening years that would trigger the nine-year cap set by the SEC, the affected companies have sufficient time to effect the transition of their present IDs to new ones who possess the qualifications that can meet the challenges of the coming years.
To date, only listed companies are covered by the SEC’s order on term limits for IDs. Hopefully, a similar rule will later be applied to companies whose stocks are not traded in the stock market, but whose operations are imbued with public interest.
For comments, please send your email to raul.palabrica@inquirer.net.
