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Board Qualifications and Disqualifications: The Fit and Proper Rule

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Cesar L. Villanueva

M. A. P. Insights

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The GOCC Governance Act mandates that the Governance Commission for GOCCs (GCG) shall formally issue a “Fit and Proper Rule” as “the standards for determining whether a member of the Board of Directors/Trustees or CEO is fit and proper to hold a position in a GOCC which shall include, but not be limited to, standards on integrity, experience, education, training and competence.”

The Act specifically provides that no Appointive Director shall be appointed to any GOCC Governing Board by the President of the Philippines except from a short list prepared by the GCG. All the nominees in the short list shall meet the Fit and Proper Rule and such other qualifications which the GCG may determine taking into consideration the unique requirements of each GOCC. The short list shall always exceed by at least fifty percent (50%) the number of directors/trustees to be appointed.

The GCG formally promulgated the Fit and Proper Rule in November 2012, as the formal mechanism whereby the GCG “identif[ies] the necessary skills and qualifications required for Appointive Directors, and [serves as the guiding document for] recommend[ing] to the President a short list of suitable and qualified candidates for Appointive Directors.” Such skills and qualifications are in addition to those required under the individual charters or bylaws of GOCCs. The rule provides the standards “on integrity, experience, education, training and competence.”

The Fit and Proper Rule is a codification of the standards imposed by the SEC, the Bangko Sentral ng Pilipinas (BSP), and the Insurance Commission. It mandates the “Highest Standards Principle” which provides that the qualification and disqualification rules for Appointive Directors and CEOs contained therein “shall be in addition to those prescribed or imposed under other existing applicable laws and regulations, particularly with respect to” GOCCs under the jurisdiction of the Bangko Sentral ng Pilipinas (BSP), the Insurance Commission (IC), and those GOCCs which are public companies or publicly listed companies covered by the Securities Regulations Code (SRC) and governed by the particular rules issued by the SEC and/or the Philippine Stock Exchange (PSE). It also provides the framework for instilling professionalism and integrity in the GOCC Sector.

For example, the Rule provides that Appointive Directors may be reappointed by the President “only if he/she obtains a performance score of above average in the … immediately preceding year of tenure [based on the Commission’s evaluation.]”

Therefore, members of the GOCC Boards who refuse to heed the standards of governance mandated under the GOCC Ownership/ Operations Manual, or who do not meet the target commitments they have made to the GCG run the risk that they cannot be re-appointed by the President by the GCG simply not including their names in the short list for re-appointment based on good cause.

PERFORMANCE EVALUATION OF GOCCS AND THEIR GOVERNING BOARDS
The GOCC Governance Act declares it the policy of the State to ensure that the governance of GOCCs is carried out in a transparent, responsible, and accountable manner and with the utmost degree of professionalism and effectiveness, through Governing Boards who should competent to carry out their functions, fully accountable to the State as its fiduciaries and always acting for the best interests of the State and the constituencies they serve.

In the exercise of its mandate to “establish performance evaluation systems including performance scorecards” for the GOCC Sector, and pursuant to the requirements of the Act that every Appointive Director “may be nominated by the GCG for reappointment by the President only if one obtains a performance score of above average or its equivalent or higher in the immediately preceding year of tenure based on a performance criteria for Appointive Directors for the GOCC,” the GCG promulgated the following performance evaluation systems for the GOCC Sector:

MEASURING THE PERFORMANCE OF GOCCS: THE PERFORMANCE EVALUATION SYSTEM (PEP)
In 2013, GCG placed into operation the Performance Evaluation System (PES) to ensure that GOCCs become more accountable to their most important stakeholders — the Filipino people. The PES is pursued through annual Performance Agreement Negotiations (PAN) between the GCG and the Governing Boards and Management of GOCCs, establishing thereby the PES through Performance Scorecards, which was based on the “Balance Scorecard” system, with one importance difference: it provided for a “social impact” perspective.

All GOCCs under the jurisdiction of the GCG are directed to develop their own vision and mission pursuant to their own respective mandates, core values essential in their business operations, and performance scorecards in accordance with the country’s national development plan, taking into account the following perspectives: (1) Social Impact; (2) Customers/Stakeholders; (3) Financial; (4) Internal Processes; and (5) Learning and Growth.

The Performance Scorecards of every GOCC serves as basis for granting the Performance-Based Bonus (PBB) to the officers and employees of GOCCs and the Performance Based-Incentives (PBI) to Appointive Directors (ex officio members of GOCC Governing Boards are not entitled to per diem or PBI). No operating GOCC is exempt from coming up with their Scorecards, and every GOCC, through its Governing Board, is directly responsible for accomplishing the targets which they themselves set-out and confirmed in negotiations with the GCG.

MEASURING THE PERFORMANCE OF THE GOVERNING BOARDS AND THE CEO
The GCG formally implemented the Performance Evaluation for Directors (PED) as the basis for determining whether Appointive Directors shall be recommended for re-appointment, as well as the basis for entitlement to the “Performance-Based Bonus (PBB).”

The PED also covers the Ex Officio Directors or their Alternates for purposes of being able to report to the President the performance of such Ex Officio Directors, as well as to allow the GCG to develop and evolve a good governance system for Ex Officio Directors in the GOCC Sector.

The PED measures the overall performance of an Appointive or Ex Officio Director based on the weighted-average of the following components:

(a) GOCC Performance based on application of the Performance Evaluation System (PES) for GOCCs under GCG Memorandum Circular No. 2013-02: 60%

(b) Director Performance Review: 25% — The individual contribution of a Director shall be measured based on the following: Self Appraisal — 5%; Peer Appraisal — 10%; and Chairman’s Appraisal —

(c) Director Attendance Score: 15%

An Appointive Director who receives an overall rating of less than 85% will not be qualified to be included in the short list of nominees.

The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or the MAP.

 

Cesar L. Villanueva is the Vice-Chair of the Corporate Governance Committee of the Management Association of the Philippines (MAP), the former Chair of the Governance Commission for GOCCs and the Founding Partner of the Villanueva Gabionza & Dy Law Offices.

cvillanueva@vgslaw.com

map@map.org.ph

http://map.org.ph