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Should there be ‘independent directors’ in the GOCC sector?

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Cesar L. Villanueva

M. A. P. Insights

Should there be ‘independent directors’ in the GOCC sector?

While I was the incumbent Chair of the Governance Commission for GOCCs (GCG), I had a short conversation with Securities and Exchange Commission (SEC) Chair Teresa J. Herbosa who encouraged me to institute within the GOCC Sector the system of independent directors, which she found to be foremost feature of corporate governance reforms in the private sector.

In the “publicly held corporations” (PHCs), independent directors are elected in order to represent the public interests, as distinguished from the regular directors who represent primarily the stockholders’ interest. I had thought deeply on the issue, and eventually came out with the conclusion that in the public corporate sector, the institution of the system of independent directors would by duplicative, if not a surplusage, for the following reasons:

Firstly, unlike private corporations which are set-up to represent private interests, essentially profit-maximization for the benefit of the stockholders, all GOCCs, even the ones created as stock corporations under the Corporation Code, primarily have a “public interests” purpose for their establishment, or are expected to achieve the public ends which the government seeks to achieve. The owner of all GOCCs is essentially the government, which does not seek maximization of profits as its goal in setting-up a GOCC (it can create more income through its taxing powers).

Consequently, all the members of the governing boards of GOCCs take on their role to pursue the public purpose for which the entities were formed which is to pursue the full benefits to the members of the public for whose benefit the entities are established — which is fully in accordance with the Stakeholder Theory.

Secondly, all members of every GOCC governing board, whether ex officio or appointive, take their posts as “public officials” and sworn to serve the public interests. The exercise of their fiduciary duties of diligence and loyalty to the government whose objective it is to serve the public interests and not a maximization of profits, promotes directly the interests of the publics which constitute the stakeholders of the entities they serve in.

In effect, GOCC directors and trustees are sworn to serve the public interests in a deeper sense than independent directors in the private sector, who in the end legally are bounded to fiduciaries duties to the corporation and its stockholders.

TERM OF OFFICE OF DIRECTORS AND ‘HOLD-OVER PRINCIPLE’
The GOCC Governance Act follows the one-year term policy under the Corporation Code for private corporations and provides that notwithstanding the provisions of the charters of GOCCs, “the term of office of each Appointive Director shall be for one (1) year, unless sooner removed for cause.”

The act formally expressed into statutory term the “hold-over principle” that pervades in common law for private corporations, in that in spite of the lapse of the one-year term, “appointive director shall continue to hold office until the successor is appointed.”

The act formally incorporates the “merit system” pervading in PHCs in that the re-appointment of any director shall be based on good performance in office, thus: “An Appointive Director may be nominated by the GCG for re-appointment 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 as Appointive Director based on the performance criteria for Appointive Directors for the GOCC.”

The adoption of the one-year term-holdover principles for the GOCC Sector has provided a double-edged sword when it comes to the good governance principles. Indeed, there has been a mild outcry in the public sector against discarding the “fixed tenure” system of directors and trustees as provided in GOCC charters since it would engender short-sighted agenda in GOCC corporate planning, and it undermines the sense of independence and professionalism of Governing Boards against a politically inclined Administration.

Our reply to the alleged “short-termism” mentality that would pervade the GOCC Governing Boards whose members are only given a one-year term is not supported at all by the long-term experience in the private sector, where the one-year term system has been the inflexible system since the adoption of the Corporation Law in the Philippines. Indeed, the Boards of Directors/Trustees of private corporations, are perceived to have achieve the corporate visions of their corporations, since they have to renew their mandates on an annual basis, and their annual performance becomes the basis by which they are able to achieve a fresh mandate for a new one-year term during annual stockholders’ meetings. In the GOCC Sector, all directors and trustees, are mandated to pursue the President’s PDP during the six-year term of his administration, and the one-year term given to GOCC directors and trustees ensures that they will serve during the entire term of the President only when they are able to actively pursue the breakthrough goals that are set out for them that would contribute to the realization of the objectives of the PDP.

On the other hand, we do recognized that the one-year term does present a danger that during an administration where politics and pork-barrel system pervades, that GOCC directors and trustees, to be able to ensure renewal of their terms would be less professional in their work, and become swayed by the political moods pervading the government sector.

In other words, in times where the incumbent administration does not pursue the highest callings of “public service is a public trust,” or worse when corruption and self-aggrandizement pervades the top brass of the administration in power, the one-year term-holder over system becomes a tool that weaken the independence of GOCC Governing Boards, who seek to cater to the demands of the appointing powers to ensure survival in their office.

It is in those times that the professionalism and integrity of the GCG as the key government agency that oversees the GOCC Sector, as well as the integrity and competence of the members of the Governing Boards become the keys to preserving the integrity of public corporate governance in the GOCC Sector.

(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 a member of the Management Association of the Philippines (M.A.P.) , 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