SEC mulls outside directors holding majority in listed firms

The Securities and Exchange Commission (SEC) is looking at increasing the number of outside directors (SEC) to a majority of the boards of listed corporations to ensure better management and greater transparency and fairness in operations.

SEC said the current regulation requiring two independent directors in every board of listed company is not enough to safeguard the interest of minority shareholders.

SEC chairperson Lilia R. Bautista said the proposal is not entirely a new thing as the New York Stock Exchange (NYSE) requires boards of listed corporations to comprise majority of outside directors.

Bautista said the SEC is inviting the public to submit comments on its proposal.

An outside director is defined under the Securities Regulation Code as a person who is independent of management, and free from any relationship which would materially interfere with his exercise of independent judgment in carrying out his responsibilities as director of a corporation.

The outside director must not have been employed in any executive capacity by that public company, any of its related companies or substantial shareholders within the last five years.

Also, the outside director must not be a relative of any director, officer or substantial shareholder of that public company. Relatives in this case include spouse, parent, child, brother, sister and spouse of such child, brother or sister.

The board of a typical large public company is composed of between 12 to 15 members representing the largest shareholders of the firm. There is no requirement or practice of representing stakeholders on boards. Members of the board are elected on the basis of their relationship with the controlling stockholder, percentage shareholdings and professional expertise.

In most government-owned or controlled corporations, board seats are given to friends, loyalists and people to whom debts are still owed. In blue-chip companies, board seats are offered to friendly CEOs who belong to the same business club.

In some companies, owners bring in prominent political or civic leaders into their board with the intention of improving the visibility of the board rather than to improve the quality of board decisions.

The SEC said corporate directors and other officers must place the interests of the corporation over any personal interest, which means that a conflict can arise when directors are on both sides of a transaction, or they stand to derive some personal benefit from the transaction.

The dominating factor in corporate governance in the Philippines is the large shareholder and family-based ownership of firms.

Controlling shareholders erode the rights of small shareholders in practice by not encouraging discussions of management actions during annual meetings.

They can expropriate wealth from minority shareholders through inadequate disclosures, insider information, self-dealing and risky investing and financing decisions.

Despite the fact that corporate directors are legally responsible to the shareholders, they are not necessarily motivated to put much importance on maximizing shareholder value.

The proposal, however, has received mixed reactions from the private sector. A lawyer said raising the required number of independent directors from the current two will entail adding on directors unfamiliar with the business.

One listed firm said independent directors are ineffective in performing their functions in boards of listed corporations. It cited the fact that independent directors can never be on equal footing with a director who owns a substantial portion of the company.

An analyst at a local brokerage house, however, said the plan would ensure greater protection of minority shareholders from companies that do a lot of self-dealings.

Other companies said the plan requires further study, to ensure a comprehensive approach to transparency and good governance.