SEC Chairperson Lilia R. Bautista said the Commission wants to insert a provision that will require the application of the fit-and-proper rule in the selection of public company directors to ensure higher levels of competence and professionalism.
The move is part of hard-line efforts of the SEC to pursue corporate governance reforms which are crucial in reclaiming investors’ confidence and priming the corporate sector and the rest of the economy for the demands of globalization.
By applying the fit-and-proper rule, the SEC will have the authority to approve or reject the appointment of any director and will have vast powers to discipline erring officials.
Bautista said the SEC is working double time to finalize its proposed fit-and-proper standards for officers and directors of regulated entities. The agency is expected to submit by the end of this month its final draft to the Capital Markets Development Council (CMDC) for endorsement to Congress.
The adoption of the fit-and-proper rule was also one of the pre-conditions set by the Asian Development Bank prior to the release of the first tranche of the $150-million loan intended for the development of the non-bank financial sector.
The fit-and-proper standards, according to the ADB, must be comparable to the General Banking Act, whereby the SEC shall be able to prescribe and review the qualifications of elected directors.
Apart from this, the SEC is currently drafting rules on the election or appointment of outside directors to ensure fairness and prevent possible conflicts of interests.
Under the src, all listed corporations must have at least two outside directors who are independent of management and free from any business or other relationship which could be perceived to interfere with the ability to act in the best interest of a public company.
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 SEC is considering whether a minority shareholder can be appointed as independent director in a listed corporation to ensure that the interest of minority stockholders are represented.
Independence is a difficult concept to understand and implement in a corporate culture dominated by family members. 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.
It is also looking at increasing the number of outside directors in boards of listed corporations to further safeguard the interests of minority shareholders. The Commission wants independent directors to make up for one third of the members of the board of a listed company.
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.
The dominating factor in corporate governance in the Philippines is the large shareholders 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 financial 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.