PSE opposes SEC rule on independent directorships

The Philippine Stock Exchange (PSE) is opposing a recent decision by the Securities and Exchange Commission (SEC), disqualifying a stock broker from sitting as an independent director of a listed corporation.

"Totally banning stock brokers as independent directors seems to be unfair," said PSE president Francis Lim.

"As long as brokers are not disqualified under the provision on independent directors under the Corporate Governance Code then they should be allowed to sit as independent directors," he added.

The SEC’s Corporation Finance Department earlier said a stock broker who has been elected as an independent director of a listed corporation should not be allowed to trade shares of other companies that are owned or affiliated with the listed stock to avoid conflict of interest.

Under the Securities Regulation Code, an independent director should not be an officer or a substantial shareholder of a corporation or its related companies.

He or she should also not be a relative of any director, officer or substantial shareholder of the corporation.

"The interference with the exercise of independent judgment sought to be prevented by the rule on independent director would be easily circumvented if a stock broker is allowed to sit as an independent director of another corporation which belongs to the same group considering that both corporations are entities which are controlled by a parent corporation," the CFD said.

According to the CFD, the transfer of material information from one to another is inevitable because of the legal bond that links one subsidiary/affiliate to the other.

Being also privately interested in earning commissions from his activity as a broker, he might make use of his directorship to gain material information from other corporations, the CFD said.

"As an independent director of a subsidiary/affiliate, it is possible for him to obtain material information directly from other corporations owned/controlled by the parent company by reason of his position," the CFD said.

"There is also the possibility of indirectly gaining material information from the other corporations within the group. It is not difficult to imagine that a material information is shared within the group or that a material information on subsidiary/affiliate is passed on by the parent company to the other subsidiary/affiliate or vice-versa during a casual conversation between or while in a formal meeting of the directors and officers," the CFD added.

An outside director is expected to ensure that the board members act on a fully informed basis, in good faith with due diligence and care and in the best interest of the company, the CFD noted.

The proposal is line with efforts to improve corporate governance by enhancing the independence and effectiveness of boards of directors of listed corporations.