II.     The Board Governance

1.      Composition of Board of Directors

The Board of Directors shall be composed of at least five but not more than fifteen members elected by shareholders.  In addition, any corporation falling under Section 17.2 of the Securities Regulation Code shall have at least two (2) independent directors or such independent directors shall constitute at least twenty percent (20%) of the members of such Board, whichever is the lesser.

The Board may include a balance of executive and non-executive directors (including independent non-executives), having a clear division of responsibilities such that no individual or small group of individuals can dominate the Board’s decision making.

The non-executive directors should be of sufficient qualifications, stature and number to carry significant weight in the Board’s decisions.   Non-executive directors considered by the Board to be independent shall be identified in the annual report.

2.      Multiple Board Seats

The Board may consider guidelines on the number of directorships for its members.  The optimum number is related to the capacity of a director to perform his duties diligently in general. The CEO and other executive directors may submit themselves to a low indicative limit on membership in other corporate Boards.  The same low limit may apply to independent, non-executive directors who serve as full-time executives in other corporations.  In any case, the capacity of directors to serve with diligence shall not be compromised.

3.      The Chairman and the Chief Executive Officer

The roles of the Chairman and the Chief Executive Officer (“CEO”) may be separate to ensure an appropriate balance of power, increased accountability and greater capacity of the Board for independent decision-making. The company shall disclose the relationship between the Chairman and the CEO upon their election.

Where both positions of the Chairman and CEO are unified, there is clearly one leader to provide a single vision and mission. In this instance, checks and balances should be clearly provided to help ensure that independent, outside views, perspectives, and judgments are given proper hearing in the Board.

The Chairman’s responsibilities may include:

a.   schedule meetings to enable the Board to perform its duties responsibly while not interfering with the flow of the company’s operations;

b.   prepare meeting agenda in consultation with the CEO;

c.   exercise control over quality, quantity and timeliness of the flow of   information between Management and the Board; and

d.    assist in ensuring compliance with company’s guidelines on corporate governance.

The responsibilities set out in the above guidelines may pertain only to the Chairman’s role in respect to the Board proceedings.  It should not be taken as a comprehensive list of all the duties and responsibilities of a Chairman.

4.      Qualifications of Directors

Every director shall own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name in the books of the corporation.

The Board may provide for additional qualifications of a director such as but not limited to the following:

a.       Educational attainment/business training

b.      Age requirement

c.       Integrity/probity

d.      Assiduousness 

5.      Disqualification of Directors

The following shall be grounds for the permanent disqualification of a director:

a.   Any person who has been finally convicted by a competent judicial or administrative body of the following:  (i) any crime involving the purchase or sale of securities, e.g., proprietary or non-proprietary membership certificate, commodity futures contract, or interest in a common trust fund, pre-need plan, pension plan or life plan; (ii) any crime arising out of the person’s conduct as an underwriter, broker, dealer, investment company, investment adviser, principal distributor, mutual fund dealer, futures commission merchant, commodity trading advisor, floor broker; and (iii) any crime arising out of his relationship with a bank, quasi-bank, trust company, investment house or as an affiliated person of any of them.

b.   Any person who, by reason of any misconduct, after hearing or trial, is permanently or temporarily enjoined by order, judgment or decree of the Commission or any court or other administrative body of competent jurisdiction from: (i) acting as an underwriter, broker, dealer, investment adviser, principal distributor, mutual fund dealer, futures commission merchant, commodity trading advisor, or a floor broker; (ii) acting as a director or officer of a bank, quasi-bank, trust company, investment house, investment company or an affiliated person of any of them;(iii) engaging in or continuing any conduct or practice in connection with any such activity or willfully violating laws governing securities, and banking activities. Such disqualification shall also apply when such person is currently subject to an effective order of the Commission or any court or other administrative body refusing, revoking or suspending any registration, license or permit issued under the Corporation Code, SRC, or any other law administered by the Commission or Bangko Sentral ng Pilipinas, or under any rule or regulation promulgated by the Commission or Bangko Sentral ng Pilipinas, or otherwise restrained to engage in any activity involving securities and banking. Such person is also disqualified when he is currently subject to an effective order of a self-regulatory organization suspending or expelling him from membership or participation or from associating with a member or participant of the organization.

c.   Any person finally convicted judicially or administratively of an offense involving moral turpitude, fraud, embezzlement, theft, estafa, counterfeiting, misappropriation, forgery, bribery, false oath, perjury or other fraudulent act or transactions.

 d.   Any person finally found by the Commission or a court or other administrative body to have willfully violated, or willfully aided, abetted, counseled, induced or procured the violation of, any provision of the SRC, the Corporation Code, or any other law administered by the Commission or Bangko Sentral ng Pilipinas, or any rule, regulation or order of the Commission or Bangko Sentral ng Pilipinas, or who has filed a materially false or misleading application, report or registration statement required by the Commission, or any rule, regulation or order of the Commission.

e.    Any person judicially declared to be insolvent.

f.    Any person finally found guilty by a foreign court or equivalent financial regulatory authority of acts, violations or misconduct similar to any of the acts, violations or misconduct listed in paragraphs (1) to (5) hereof.

g.   Any affiliated person who is ineligible, by reason of paragraphs (1) to (5) hereof to serve or act in the capacities listed in those paragraphs.

h.   Conviction by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of the Corporation Code, committed within five (5) years prior to the date of his election or appointment.

The Board may also provide for the temporary disqualification of a director for the following reasons:

a.   Refusal to fully disclose the extent of his business interest as required under the SRC and its Implementing Rules and Regulations. This disqualification shall be in effect as long as his refusal persists.

b.   Absence or non-participation for whatever reason/s for more than fifty percent (50%) of all meetings, both regular and special, of the Board of directors during his incumbency, or any twelve (12) month period during said incumbency. This disqualification applies for purposes of the succeeding election.

c.   Dismissal/termination from directorship in another listed corporation for cause. This disqualification shall be in effect until he has cleared himself of any involvement in the alleged irregularity.

d.   Being under preventive suspension by the corporation. 

e.   If the independent director becomes an officer or employee of the corporation where he happens to be a director or becomes any of the persons enumerated under Part I of SRC Rule 38.1, he shall be automatically disqualified from being such an independent director.

f.    If the beneficial security ownership of an independent director in the company or in its related companies shall exceed the 10% limit.

g.   Conviction which has not yet become final referred to in the grounds for the disqualification of directors.

6.      Duties, Functions and Responsibilities

It is the Board’s responsibility to foster the long-term success of the corporation and secure its sustained competitiveness in a manner consistent with its fiduciary responsibility, which it should exercise in the best interest of the corporation and its shareholders.

a.   General Responsibility

A director’s office is one of trust and confidence.  He should act in the best interest of the corporation in a manner characterized by transparency, accountability and fairness.  He should exercise leadership, enterprise and integrity in directing the corporation towards sustained progress over the long term. A director assumes certain responsibilities to different constituencies or stakeholders, who have the right to expect that the institution is being run in a prudent and sound manner.

The Board of directors is primarily responsible for the corporate governance of the corporation. To ensure good governance of the corporation, the Board of directors should establish the corporation’s vision and mission, strategic objectives, policies and procedures that may guide and direct the activities of the company and the means to attain the same as well as the mechanism for monitoring management’s performance. While the management of the day-to-day affairs of the institution is the responsibility of the management team, the Board of directors is, however, responsible for monitoring and overseeing management action.

b.   Duties, Functions and Responsibilities

To insure a high standard of best practice for the company and its stakeholders, the Board should conduct itself with utmost honesty and integrity in the discharge of its duties, functions and responsibilities which may include, among others, the following:

i.    Install a process of selection to ensure a mix of competent directors, each of whom can add value and contribute independent judgment to the formulation of sound corporate strategies and policies. Select and appoint the chief executive officer and senior management, who must have the motivation, integrity, competence and professionalism at a very high level. Adopt a professional development program for employees and officers, and succession planning for senior management.

ii.    Determine the corporation’s purpose and value as well as strategies and general policies to ensure that it survives and thrives despite financial crises and its assets and reputation are adequately protected. Provide sound written policies and strategic guidelines to the corporation that will help decide on major capital expenditures. Determine important policies that bear on the character of the corporation with a view towards ensuring its long-term viability and strength. It must periodically evaluate and monitor implementation of such strategies and policies, business plans and operating budgets as well as management’s over-all performance to ensure optimum results.

iii.   Ensure that the corporation complies with all relevant   laws, regulations and codes of best business practices.

iv.   Identify the corporation’s major and other stakeholders and formulate a clear policy on communicating or relating with them accurately, effectively and sufficiently.  There must be an accounting rendered to them regularly in order to serve their legitimate interests.

v.    Adopt a system of internal checks and balances, which may be applied in the first instance to the Board.  A regular review of the effectiveness of such system must be conducted so that the decision-making capability and the integrity of corporate operations and reporting systems are maintained at a high level at all times.

vi.   Endeavor to provide for appropriate technology and systems rating into account available resources to ensure a position of a strong and meaningful competitor.  Identify key risk areas and key performance indicators and monitor these factors with due diligence.

vii.  Constitute the following committees: Audit and Compliance, Nomination, and Compensation/ Remuneration.

viii. Properly discharge its functions by meeting regularly.  Independent views during Board meetings should be given due consideration and all such meetings should be duly minuted.

ix.   Keep its authority within the powers of the institution as prescribed in the articles of incorporation, by-laws and in existing laws, rules and regulation.  Conduct and maintain the affairs of the institution within the scope of its authority as prescribed in its charter and in existing laws, rules and regulations.

c.       Specific Duties and Responsibilities of a Director

i.    To conduct fair business transactions with the corporation and to ensure that personal interest does not bias Board decisions. A director should, whenever possible, avoid situations that may give rise to a conflict of interest. If transactions with the corporation cannot be avoided, it may be done in the regular course of business and upon terms not less favorable to the corporation than those offered to others. The basic principle to be observed is that a director should not use his position to make profit or to acquire benefit or advantage for himself and/or his related interests. He should avoid situations that may compromise his impartiality. Where a potential conflict arises, a director must adhere to the procedures provided by law and by the charter of the company for dealing with such problems.  A director who has a continuing conflict of interest of a material nature should consider resigning.

ii.   To devote time and attention necessary to properly discharge his duties and responsibilities. A director should devote sufficient time to familiarize himself with the institution’s business. He should be constantly aware of the institution’s condition and be knowledgeable enough to contribute meaningfully to the Board’s work. He should attend and actively participate in Board and committee meetings, request and review meeting materials, ask questions, and request explanations. 

iii.   To act judiciously.  Before deciding on any matter brought before the Board of directors, every director should thoroughly evaluate the issues, ask questions and seek clarifications when necessary.

iv.   To exercise independent judgment.  A director should view each problem/situation objectively. When a disagreement with others occurs, he should carefully evaluate the situation and state his position. He should not be afraid to take a position even though it might be unpopular. Corollarily, he should support plans and ideas that he thinks are beneficial to the corporation.

v.    To have a working knowledge of the statutory and regulatory requirements affecting the corporation, including the contents of its articles of incorporation and by-laws, the requirements of the Commission, and where applicable, the requirements of other regulatory agencies. A director should also keep himself informed of industry developments and business trends in order to safeguard the corporation’s competitiveness.

vi.   To observe confidentiality. A director should observe the confidentiality of non-public information acquired by reason of his position as director. He should not disclose any information to any other person without the authority of the Board.

vii.  To ensure the continuing soundness, effectiveness and adequacy of the company’s control environment.

d.   Internal Control Responsibilities of the Board

The control environment is composed of: (a) the Board of directors which ensures that the company is appropriately and effectively managed and controlled,  (b) a management that actively manages and operates the company in a sound and prudent manner, (c) the organizational and procedural controls supported by an effective management information system and risk management reporting system, and (c) the independent audit mechanisms to monitor the adequacy and effectiveness of the organization’s governance, operations, information systems, to include reliability and integrity of financial and operational information, effectiveness and efficiency of operations, safeguarding of assets, and compliance with laws, rules, regulations, and contracts.

i.    The minimum internal control mechanisms for the Board’s oversight responsibility may include:

  • Defining the duties and responsibilities of the chief executive officer;

  • Selecting or approving an individual with appropriate ability, integrity, experience to fill the CEO role;

  • Reviewing proposed senior management appointments;

  • Ensuring the selection, appointment and retention of qualified and competent management;

  • Reviewing the company’s personnel and human resource policies; reviewing and approving changes to the compensation plan for employees and management; reviewing the company’s management succession plan; reviewing the sufficiency of the company’s human resources.

ii.   The minimum internal control mechanisms for management’s operational responsibility would center on the CEO. The CEO, being ultimately accountable for the company’s organizational and procedural controls, shall:

  • Ensure integrity of internal control activities throughout the company, while continuously setting the tone that will influence the control consciousness of individuals within the organization;

  • Ensure that an effective management team will develop and put in place the detailed procedural and organizational controls that satisfy the objectives of reliability and integrity of financial and operational information, effectiveness and efficiency of operations, safeguarding of assets, and compliance with laws, regulations, and contracts;

  • Ensure that the management team understand their responsibilities and operate the business in a diligent manner, with appropriate reporting of their accountabilities to the CEO;

iii.   The scope and particulars of a system of effective organizational and procedural controls may differ among companies depending on factors such as: the nature and complexity of business and the business culture; the volume, size and complexity of transactions; the degree of risk; the degree of centralization and delegation of authority; the extent and effectiveness of information technology; and the extent of regulatory compliance. To a minimum, the following organizational and procedural controls may be in place:

  • Developing and implementing a code of conduct for the company, and requiring employees and management to sign and acknowledge their awareness of and compliance with the code;

  • Developing, at least annually, a business plan for the company, with monitoring and reporting of the accomplishment of the business plan;

  • Developing a risk identification framework for the company with the intention of maintaining a sound institutional risk profile;

  • Developing appropriate human resource policies and procedures;

  • Developing and maintaining comprehensive documentation of the company’s organizational and procedural controls, delegation of authorities, segregation of functional responsibilities within the company;

  • Implementing appropriate and effective accounting, record-keeping and financial/regulatory reporting systems, sound and conservative valuation policies, as well as procedures for safekeeping and protection of the company’s assets or those of its customers held in the custody of the company;

  • Developing and implementing asset and liability management safeguards and controls for on-balance sheet and off-balance sheet accounts;

  • Developing and implementing sound and up-to-date information technology controls, and effective information systems; and

  • Developing and implementing appropriate business interruption controls.

iv.   Each company may have in place an independent audit function, through which the company’s Board, senior management, and stockholders may be provided with reasonable assurance that its key organizational and procedural controls are effective, appropriate, and complied with. The Board may appoint a chief audit executive to carry out the audit function, and may require the chief audit executive to report to a level within the organization that allows the internal audit activity to fulfill its responsibilities. The independent audit function does not have primary responsibility for establishing or maintaining internal controls. Rather, independent auditors evaluate the effectiveness and adequacy of these controls, thus becoming an integral part of the company’s internal control environment.

7.      Board Meetings and Quorum Requirement

Members of the Board should attend regular and special meetings of the Board in person.   In view of modern technology, however, attendance at Board meeting through teleconference maybe allowed.

An independent director should always be in attendance.  However, the absence of an independent director may not affect the quorum requirements if he is duly notified of the meeting but deliberately and without justifiable cause fails to attend the meeting.  Justifiable causes may only include grave illness or death of immediate family and serious accidents.

To monitor compliance with the above requirement, corporations may at the end of every fiscal year, provide the Commission with a sworn certification that the foregoing requirement has been complied with.  The said certification may be submitted with the company’s current report (SEC Form 17-1) or on a separate filing.

8.      Remuneration of the Members of the Board and Officers

Levels of remuneration maybe sufficient to attract and retain the directors, if any, and officers needed to run the company successfully. Corporations, however, should avoid paying more than what is necessary for this purpose.  A proportion of executive directors’ remuneration may be structured so as to link rewards to corporate and individual performance. 

Corporations, through their respective Compensation/Remuneration Committee may establish a formal and transparent procedure for developing a policy on executive remuneration and for fixing the remuneration packages of individual directors, if any, and officers.  No director should be involved in deciding his or her own remuneration.

The corporations’ annual reports, information and proxy statements shall include a clear, concise and understandable disclosure of all plan and non-plan compensation awarded to, earned by, paid to, or estimated to be paid to, directly or indirectly to all individuals serving as the CEO or acting in a similar capacity during the last completed fiscal year, regardless of the compensation level and the corporation’s four (4) most highly compensated executive officers other than the CEO who were serving as executive officers at the end of the last completed year.

To protect the funds of the corporation, the Commission may regulate the payment by the corporation to directors and officers of compensation, allowance, fees and fringe benefits only in exceptional cases and when the circumstances warrant, e.g., when a corporation is under receivership or rehabilitation.

9.      Board Committees

The Board shall constitute Committees in aid of good corporate governance.

The Audit Committee shall be composed of at least three (3) Board members, preferably with accounting and finance background, one of whom shall be an independent director and another should have related audit experience.  It shall have the following specific functions:

a.       Provide oversight over the senior management’s activities in managing credit, market, liquidity, operational, legal and other risks of the corporation.  This function shall include receiving from senior management periodic information on risk exposures and risk management activities.  However, in consideration of the risk profile of the corporation, the Board may constitute a separate Risk Management Committee to focus on carrying out this oversight role over risk management;

b.   Provide oversight of the corporation’s internal and external auditors;

c.   Consider the appointment of the external auditor, the audit fee, and any questions of resignation or dismissal;

d.   Review and approve audit scope and frequency, and the annual internal audit plan;

e.   Discuss with the external auditor before the audit commences the nature and scope of the audit, and ensure coordination where more than one audit firm is involved;

f.    Responsible for the setting-up of an internal audit department and for the appointment of an internal auditor as well as an independent external auditor;

g.   Monitor and evaluate the adequacy and effectiveness of the corporation’s internal control system;

h.   Receive and review reports of internal and external auditors and regulatory agencies, where applicable and ensure that management is taking appropriate corrective actions, in a timely manner in addressing control and compliance functions with regulatory agencies;

i.    Review the quarterly, half-year and annual financial statements before submission to the Board, focusing particularly on:

  • Any change/s in accounting policies and practices

  •  Major judgmental areas

  • Significant adjustments resulting from the audit

  • Going concern assumption

  • Compliance with accounting standards

  • Compliance with tax, legal, and stock exchange requirements

j.    Responsible for coordinating, monitoring and facilitating compliance with existing laws, rules and regulations.  It may also constitute a Compliance Unit for this purpose.

k.   Keep under review the non-audit fees paid to the external auditor both in relation to their significance to the auditor and in relation to the company’s total expenditure on consultancy. The non-audit work should be disclosed in the annual report and not exceed 40% of the total audit fees.

l.    Establish and identify the reporting line of the chief audit executive so that the reporting level allows the internal audit activity to fulfill its responsibilities. The chief audit executive shall report directly to the Audit Committee functionally.  The Audit Committee shall ensure that the internal auditors shall have free and full access to all the company’s records, properties and personnel relevant to the internal audit activity and that the internal audit activity should be free from interference in determining the scope of internal auditing examinations, performing work, and communicating results, and shall provide a venue for the Audit Committee to review and approve the annual internal audit plan.

The Chairman of this committee should be an independent director. He should be responsible for inculcating in the minds of the Board members of the importance of management responsibilities in maintaining a sound system of internal control and the Board’s oversight responsibility.

The audit committee is not required for Philippine branches or subsidiaries of foreign corporations covered by this Code. Instead, the local audit head for such entities should be independent of the Philippine operations and should report to the regional or corporate headquarters.

The Board may also constitute the following committees:

i.    The Nomination Committee which may be composed of at least three (3) members, one of whom should be an independent director may review and evaluate the qualifications of all persons nominated to the Board as well as those nominated to other positions requiring appointment by the Board and provide assessment on the Board’s effectiveness in directing the process of renewing and replacing Board members.

ii.    The Compensation or Remuneration Committee may be composed of at least three (3) members, one of whom should be an independent director. It may establish a formal and transparent procedure for developing a policy on executive remuneration and for fixing the remuneration packages of corporate officers and directors, if any, and provide oversight over remuneration of senior management and other key personnel ensuring that compensation is consistent with the corporation’s culture, strategy and control environment.

 

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