Only nine years, max, for independent directors

The Securities and Exchange Commission has banned independent directors from serving as independent directors in the same listed company after nine years.

SEC chair Francis Lim, the nation’s top securities regulator and business watchdog, has fixed term limits on independent directors – only nine years in the same listed company, not a day longer; but it could be less. After nine years, they can move to other listed companies and do another round of nine-year stint.

The idea is independence, arm’s length wisdom, the sagacity that comes from detachment and cold and blunt analysis, unfettered by coziness and almost incestuous relationships. You know the saying – familiarity breeds contempt. Familiarity in nine years could create an old-boy network that breeds complacency, stunts independence and promotes tolerance of would-be corporate wrongdoing.

But concerned sectors in the business community are concerned. They ask: does limiting tenure actually safeguard independence, or does it weaken boards by discarding experience and the wisdom of time unnecessarily?

SEC’s Memorandum Circular No. 7, Series of 2026 mandates one-year terms for independent directors, subject to a maximum cumulative tenure of nine years in the same company.

After nine years, the director is permanently barred from re-election as an independent director. He can serve thereafter as a non-independent director. The circular is a response to “boardroom entrenchment.” It is an effort to strengthen independence in line with alleged international best practices.

At first glance, this rationale appears sound.

On closer examination, however, the policy rests on an overly simplistic assumption – that tenure alone reliably predicts or promotes independence. Global experience and empirical evidence suggest otherwise.

Tenure could be a weak proxy for independence. The SEC assumes that prolonged service automatically erodes independence.

However, across jurisdictions, there is no consensus that tenure, by itself, compromises a director’s ability to exercise objective judgment.

The OECD Corporate Governance Factbook (2025) reflects a more nuanced reality: independence is typically defined through a combination of factors, including relationships with controlling shareholders, ownership concentration, remuneration structure and institutional safeguards.

Note that the overwhelming majority of jurisdictions focus primarily on economic and relational ties, not length of service.

For example, nearly 90 percent of jurisdictions condition independence on the absence of ties to substantial shareholders. France, Israel and the United States explicitly link independence to a company’s ownership structure rather than director tenure.

This distinction matters acutely in the Philippine context. Philippine listed companies are overwhelmingly characterized by concentrated ownership and dominant controlling shareholders. In such environments, threats to independence arise less from long-serving directors and more from structural power imbalances within the firm. A rigid tenure cap does little to address these realities.

In short, the lack of global consensus – and the Philippine market’s specific ownership dynamics – already cast doubt on the circular’s core premise. The evidence does not support an extreme ceiling.

While extended tenure indeed raises concerns about familiarity or complacency, the evidence is not conclusive that long tenure, standing alone, systematically corrodes independence or oversight.

Research shows the effects of long tenure are context-dependent. In many firms, long-serving independent directors provide robust monitoring, particularly where formal independence safeguards are in place. In contrast, short tenure does not guarantee independence where structural or relational conflicts persist.

By making tenure a decisive, exclusionary rule, the SEC circular risks confusing correlation with causation. Independence is not an ephemeral attribute that withers with time; it is a trifecta of incentives, information, institutional design.

Troubling are the circular’s unintended governance consequences, particularly its imposition of perpetual disqualification.

A forced exit of experienced independent directors could erode institutional memory, firm-specific knowledge and board stability – precisely the attributes that enable effective oversight and good management. Board continuity is not a luxury; it is a governance imperative.

Independence germinates and grows with time. The longer-tenured independent directors are more active and confident during board deliberations, attend more meetings, become stickler for details, serve on more committees and challenge management more effectively, backed as they are by deep knowledge from long service.

By contrast, frequent turnover can weaken boards by producing directors who are formally independent but functionally constrained by information gaps and reliance on management.

Critics say the circular’s approach therefore risks substituting formal independence for effective independence – a trade-off that ultimately undermines, rather than strengthens, governance.

The experience in other countries offers a less blunt and more proportionate tools are available.

In Malaysia, independent directors serving beyond nine years are not automatically disqualified; instead, they are subject to enhanced shareholder approval through a two-tier voting mechanism. Other jurisdictions rely on minimum independence ratios, disclosure-based explanations or shareholder scrutiny – without imposing absolute tenure caps.

Also, several jurisdictions do not link independence to tenure at all. Where tenure is considered, it is treated as a rebuttable factor, not a conclusive bar.

Against this backdrop, the circular’s permanent prohibition stands out as unusually rigid and insufficiently calibrated.

If the SEC’s objective is to strengthen corporate governance, regulation must reflect the complexity of the system it seeks to govern. Independence cannot be reduced to a ticking clock, nor can good governance be achieved by discarding experience wholesale.

A more calibrated framework – one that allows for case-by-case assessment, enhanced disclosure or shareholder validation – would better align with empirical realities, Philippine market conditions and international best practice.

Whether it ultimately strengthens independence will depend on how its costs and benefits play out in practice.

Until then, the question remains unavoidable: in attempting to prevent entrenchment, has the SEC instead entrenched a rule that misunderstands independence itself?

Finally, the largest and most successful Philippine companies are among the oldest. Ayala is 192 years old. Aboitiz claims to be older than their Castillan kin. San Miguel is 136 years old. SM is 68. Many of their owners probably served in the Last Supper. Their secret: long-serving directors. Plus a professional succession plan.

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