THE Securities and Exchange Commission (SEC)—in its en banc meeting on November 10, 2016—approved the Code of Corporate Governance for Publicly Listed Companies. Pursuant to SEC Memorandum Circular 19, the code took effect on January 1, 2016. All publicly listed companies are required to submit a new manual on corporate governance to the SEC on or before May 31, 2017. The draft of the code was released by the SEC on September 22, 2016, with feedback period until October 14, 2016. Precursor was the Philippine Corporate Governance Blueprint of 2015.
The Code of Corporate Governance is intended to raise the corporate governance standards of Philippine corporations to a level on a par with its regional and global counterparts. The latest G-20/Organisation for Economic Co-operation and Development Principles of Corporate Governance and the Asean Corporate Governance Scorecard were used as key reference materials in the drafting of the code.
The code defines “corporate governance” as “the system of stewardship and control to guide organizations in fulfilling their long-term economic, moral, legal and social obligations toward their stakeholders. It is a system of direction, feedback and control using regulations, performance standards and ethical guidelines to hold the board and senior management accountable for ensuring ethical behavior—reconciling long-term customer satisfaction with shareholder value—to the benefit of all stakeholders and society. Its purpose is to maximize the organization’s long-term success, creating sustainable value for its shareholders, stakeholders and the nation.”
The code adopts the “Comply or Explain” approach. This approach combines voluntary compliance with mandatory disclosure. Companies do not have to comply with the code, but they must state in their annual corporate governance reports whether they comply with the code provisions, identify any areas of noncompliance and explain the reasons for noncompliance.
The code does not, in any way, prescribe a “one-size-fits-all” framework. It is designed to allow boards some flexibility in establishing their corporate governance arrangements. Larger companies and financial institutions would generally be expected to follow most of the provisions. Smaller companies may decide that the cost of some of the provisions outweigh the benefits, or are less relevant in their case. Hence, the “Principle of Proportionality” is considered in the application of its provisions.
The code is arranged into Principles, Recommendations and Explanations. According to the SEC, the Principles can be considered as high-level statements of corporate governance good practice, and are applicable to all companies. The Recommendations are objective criteria that are intended to identify the specific features of corporate governance good practice that are recommended for companies operating according to the code. Alternatives to a Recommendation may be justified in particular circumstances if good governance can be achieved by other means. When a Recommendation is not complied with, the company must disclose and describe this noncompliance, and explain how the overall principle is being achieved. The alternative should be consistent with the overall Principle. Description and explanations should be written in plain language and in a clear, complete, objective and precise manner so that shareholders and other stakeholders can assess the company’s governance framework.
Quoted hereunder are the 16 Principles listed in the code:
The board’s governance responsibilities
- Principle 1: The company should be headed by a competent, working board to foster the long-term success of the corporation, and to sustain its competitiveness and profitability in a manner consistent with its corporate objectives and the long-term best interest of its shareholders and other stakeholders.
- Principle 2: The fiduciary roles, responsibilities and accountabilities of the Board as provided under the law, the company’s articles and bylaws, and other legal pronouncements and guidelines should be clearly made known to all directors, as well as to stockholders and other stakeholders.
- Principle 3: Board committees should be set up to the extent possible to support the effective performance of the Board’s functions, particularly with respect to audit, risk management, related party transactions and other key corporate governance concerns, such as nomination and renumeration. The composition, functions and responsibilities of all committees established should be contained in a publicly available Committee Charter.
- Principle 4: To show full commitment to the company, the directors should devote the time and attention necessary to properly and effectively perform their duties and responsibilities, including sufficient time to be familiar with the corporation’s business.
- Principle 5: The Board should endeavor to exercise objective and independent judgment on all corporate affairs.
- Principle 6: The best measure of the Board’s effectiveness is through an assessment process. The Board should regularly carry out evaluations to appraise its performance as a body, and assess whether it possesses the right mix of backgrounds and competencies.
- Principle 7: Members of the Board are duty-bound to apply high ethical standards, taking into account the interest of all stakeholders.
Disclosure and transparency
- Principle 8: The company should establish corporate disclosure policies and procedures that are practical and in accordance with best practices and regulatory expectations.
- Principle 9: The company should establish standards for the appropriate selection of an external auditor, and exercise effective oversight of the same to strengthen the external auditor’s independent and enhance audit quality.
- Principle 10: The company should ensure that material and reportable nonfinancial and sustainability issues are disclosed.
- Principle 11: The company should maintain a comprehensive and cost-efficient communication channel for disseminating relevant information. This channel is crucial for informed decision-making by investors, stakeholders and other interested users.
Internal control system and risk-management framework
- Principle 12: To ensure the integrity, transparency and proper governance in the conduct of its affairs, the company should have a strong and effective internal control system and enterprise risk management framework.
Cultivating a synergic relationship with shareholders
- Principle 13: The company should treat all shareholders fairly and equitably, and also recognize, protect and facilitate the exercise of their rights.
Duties to stakeholders
- Principle 14: The rights of stakeholders established by law, by contractual relations and through voluntary commitments must be respected. Where stakeholders’ rights and/or interests are at stake, stakeholders should have the opportunity to obtain prompt effective redress for the violation of their rights.
- Principle 15: A mechanism for employee participation should be developed to create a symbolic environment, realize the company’s goals and participate in its corporate governance processes.
- Principle 16: The company should be socially responsible in all its dealings with the communities where it operates. It should ensure that its interactions serve its environment and stakeholders in a positive and progressive manner that is fully supportive of its comprehensive and balanced development.
According to the SEC, the Code of Corporate Governance for Publicly Listed Companies is the first of a series of codes that is intended to cover all types of corporations in the Philippines under supervision of the SEC.
While the code sets the “Gold Standard” for governance in the corporate world, there are external factors that corporations have no control over—among them, the political decisions of our leaders; social, economic and financial risks that will affect the business climate; government stability; law and order; external and internal conflict; bureaucracy quality; the military/police. It is imperative, therefore, that the corporate boards adopt a risk-management policy as part and parcel of corporate strategy and good governance!