Tectonic shifts involving corporate boards

Much of the discussion about corporate governance focuses on issues relating to boards of directors, and for good reason. Boards have oversight and control functions that serve to guard the interests of the stakeholders. The significance of these roles necessarily means that companies are expected to check the list of best practices in filling up their boards.

For publicly listed companies, the list of best practices just grew longer.

Two weeks ago, the SEC posted on its website a November 2016 memo announcing the new Code of Corporate Governance for Publicly Listed Companies (CG Code for PLCs), which took effect from the beginning of this year.

The new code consists of 67 recommendations of good CG practices, each of which has a defined principle and a thorough explanation. Its use of a “comply or explain” approach, which combines voluntary compliance with mandatory disclosure, is both instructive and refreshing. When PLCs do not comply with the Code’s recommendations, they must state in their annual corporate governance reports these areas of non-compliance, the reasons for non-compliance and disclosures on how the related principles are still being achieved.

The SEC used globally recognized standards as key reference materials in developing the new CG Code. While this means that multinationals will not be surprised with the new pronouncement, Philippine companies might consider some of the CG recommendations as tectonic shifts in the way they organize their boards. Some of the newer and more significant ones are:

Boards should be composed of a majority of non-executive directors (or those who do not perform any work related to the operations of the PLC).

A PLC’s corporate secretary and compliance officer should be separate individuals and should not be members of the board. They are accountable to the corporation and its shareholders, not to the chairman or president. Additionally, the compliance officer should have a rank of senior vice president.

PLCs should have a policy on board diversity. Diversity extends to gender, age, culture, skills and competence.

The changes in the rules on independent directors are quite significant. The recommended number is now a minimum of three (previously, two) or a higher number representing at least a third of the board (previously, a fifth of the board). Also, independent directors should not have been previous directors or employees of the PLC or its related parties, and should only serve a maximum cumulative term of nine years. Non-executive directors (which include independent directors) can sit on the boards of a maximum of five PLCs only. The new CG code supersedes SEC Memorandum Circular 9-2011, which previously allowed independent directors to sit in the boards of any number of unrelated PLCs, or up to five companies within a conglomerate.

The new CG code recommends a number of board committees to support the effective performance of the boards. Committees for audit, corporate governance, board risk oversight, and related party transactions should be established and their compositions and functions laid out in a publicly available committee charter.

So, how ready are PLCs in adopting some of these recommendations? For this, let’s look at the boards of the 30 companies comprising the PSEi, which rank among the top listed companies based on liquidity and market capitalization:

Only 40 percent of PSEi companies have three independent directors comprising at least a third of their respective boards.

Majority of the companies in the index have at least one independent director exceeding the maximum nine-year tenure. Actually, on average, independent directors of PSEi companies are on their eighth year of service to their boards. The SEC’s confirmation that the maximum nine-year term starts in 2012 may be of comfort to long-serving independent directors as they can technically hold on to their seats up to at least 2020. It is good to note, however, that the SEC relaxed the rule on the nine-year tenure only. The other recommendations remain in place—including the prohibition on independent directors to hold seats in related companies; and on the maximum PLCs that a non-executive director can hold board seats.

Ninety percent of the board seats are held by men. Only four PLCs have more than two female board members. While the SEC clarified that diversity is not limited to gender, this is a quick check on how diversified the boards are. Increasing the boards’ diversity is not political correctness but a realization that an effective board is open to different ways of thinking and points of view.

Only eight PLCs, four of them banks, are in compliance with the board committees recommended by the new CG Code.

While the good practices listed in the new CG code are mere recommendations, we can expect PLCs to adopt most, if not all, of them in the very near future. The CG train has left the station and only ill-advised PLCs will accept missing the opportunity of showcasing their companies’ adoption of globally recognized best practices. The importance of the selection and appointment of the members of the Board of Directors will continue to be the focus of companies and regulators as it plays a critical role in the corporate governance process.

Renan Piamonte, is the Risk Management partner of P&A Grant Thornton. P&A Grant Thornton is one of the leading audit, tax, advisory and outsourcing firms in the Philippines, with 21 partners and over 800 staff members. For comments, please email renan.piamonte@ph.gt.com or pagrantthornton.marketscomm@ph.gt.com. Visit our Website: www.grantthorn.com.ph; Twitter: pagrantthornton, and FB: P&A Grant Thornton