Articulating SECs Vision Statement on Good Corporate Governance

Atty. Franklin I. Cueto, C.P.A.*

The Securities and Exchange Commission envisioned that, by December 31, 2006, the
programs and procedures that will foster meaningful compliance by the business community with
the rules on good corporate governance will be in place and operational. This vision statement
forms part of the SEC Mission, Values and Vision recently reformulated by the Commission in
time for its 69th Anniversary celebration last November 2005. As part of the process of
understanding and internalization by the employees, these statements are read during the flagraising ceremony conducted at the SEC lobby every Monday morning.
A year has already passed and the time set by the SEC within which to meet its target is
almost over. On the premise that building a visionary company requires 1% vision and 99%
alignment, was the Commission able to carry out its vision statement on good corporate
governance?
Articulating SECs vision statement will address the issue enunciated above. For this
purpose, the topics discussed herein are divided into three parts: 1) Rules on Good Corporate
Governance; (2) Programs and Procedures that will foster meaningful compliance of the Rules; and
(3) the question of whether or not these Programs and Procedures are now in place and operational.
RULES ON GOOD CORPORATE GOVERNANCE
The rules on good corporate governance are embodied in the Code of Corporate
Governance (SEC Memorandum Circular No. 2, Series of 2002). The Commission, in its
Resolution No. 135, Series of 2002, approved the promulgation and implementation of the Code.
This is in accordance with the States policy to actively promote corporate governance reforms
aimed to raise investor confidence, develop capital market and help achieve high-sustained growth
for the corporate sector and the economy. As prescribed therein, the Commission requires all
covered market participants to file a manual that shall institutionalize the principles of good
corporate governance in an organization. Suffice it to say that the Code of Corporate Governance
is not a requirement mandated under R.A. 8799, otherwise known as the Securities Regulation
Code. Rather, it is a rule implemented by the Commission through its rule-making authority.
Corporate Governance. It refers to a system whereby shareholders, creditors and other
stakeholders of a corporation ensure that management enhances the value of the corporation as it
competes in an increasingly global market place. The basic principles of corporate governance fairness, transparency, accountability and responsibility - are relevant all over the world.
Promoting good corporate governance can be especially beneficial to emerging market companies
and countries. By adopting principles of good corporate governance, companies in developing
countries can often command higher valuations, improve their profitability, and gain better access
to outside capital than their poorly governed peers. Developing countries can attract more interest
from local and foreign investors and reduce their vulnerability to financial crises.

UB Law Batch 2001 (Valedictorian); Editor-in-Chief, UB Law Journal (SY 2000-2001); Department of Justice Executive Assistant (2001-2002); Securities and Exchange Commission - Securities Examiner (2002-2005); Assistant
Commission Secretary (2005-2006); Securities Counsel (2006-present); MBA student De La Salle Professional
Schools Inc, Graduate School of Business.

Covered Market Participants. Compliance with the provisions of the Code shall be
mandatory, in accordance with SEC Memorandum Circular No. 5 & 5-A, Series of 2003, to the
following:
a.)

Issuers of registered securities to the public whether or not listed in the Philippine
Stock Exchange (PSE);

b.)

Public companies or those with assets of at least Fifty Million Pesos (P50,000,000.00)
or such other amount as the Commission shall prescribe, and having Two hundred
(200) or more holders each holding at least One hundred (100) shares of a class of its
equity securities;

c.)

Finance companies;

d.)

Investment houses;

e.)

Brokers and dealers of securities;

f.)

Investment companies;

g.)

Pre-need companies;

h.)

Subsidiaries or branches of foreign corporations which operate in the Philippines and

are listed in the PSE;

i.)

Stock and other securities exchange/s;

j.)

Government securities eligible dealers (GSEDs);

k.)

Universal banks registered as underwriter of securities;

l.)

Investment company advisers;

m.) Transfer agents;

n.)

Clearing agency and clearing agency acting as depository; and

o.)

Issuers of registered time shares, proprietary and non-proprietary membership

certificates.

Salient Provisions. Briefly discussed herein are some of the salient provisions of the Code
of Corporate Governance:

Adoption of Manual of Corporate Governance Covered market participants shall

promulgate and adopt their own corporate governance rules and principles in accordance
with the code. Said rules shall be in manual form and available as reference by the
directors. A sample corporate governance manual was issued by SEC as reference to aid
the development of a similar manual by an organization. Failure to adopt a manual of
corporate governance shall subject a covered market participant, after due notice and
hearing, to a penalty of P100,000.00;

Designation of Compliance Officer to insure adherence to corporate principles and best

practices, the Chairman of the Board shall designate a Compliance Officer who shall hold
the position of a Vice President or its equivalent. He shall monitor compliance with the
provisions and requirements of the organizations corporate governance manual. The
appointment of the compliance officer shall be immediately disclosed to the Securities and
Exchange Commission on SEC Form 17-C. A certification shall likewise be submitted
every January 30th of the year on the extent of the Corporations compliance with the
manual for the completed year, explaining the reason/s of the latters deviation from the
same;

The Board Governance The Board of Directors is primarily responsible for the
governance of the corporation. Their specific duties and responsibilities includes: (a) To
conduct fair business transactions with the corporation and to ensure that personal interest
does not bias Board decisions; (b) To devote time and attention necessary to properly
discharge his duties and responsibilities; (c) To act judiciously; (d) To exercise independent
judgment; (e) 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; (f) To observe confidentiality; and (g) To ensure the continuing
soundness, effectiveness and adequacy of the companys control environment;

Nomination and Election of Independent Directors - The Board of Governance needs to

be structured so that it provides an independent check on management. As such, it is vitally
important that a number of board members be independent from management. By requiring
the election of independent directors, the law seeks to minimize incidence of fraudulent
conduct within the board governance.
The provision on the nomination and election of independent directors should be
read in relation to Section 38 of the Securities Regulation Code. Under the said law, and
reiterated under the Code of Corporate Governance, an Independent Director refers to a
person other than an officer or employee of the corporation, its parent or subsidiaries, or any
other individual having any relationship with the corporation, which would interfere with
the exercise of independent judgment in carrying out the responsibilities of a director. This
means that apart from the directors fees and shareholdings, he should be independent of
management and free from any business or other relationship, which could materially
interfere with the exercise of his independent judgment.
The instances by which a director may be considered independent of management
and free from any business or other relationship which could materially interfere with the
exercise of his independent judgment are enumerated under SRC Rule 38 par. 2, which
includes, among others, any person who: (1) is not a director or officer of the covered
company or of its related companies or any of its substantial shareholders except when the
same shall be an independent director of any of the foregoing; (2) does not own more than
2% of the shares of the covered company and/or its related companies or any of its
substantial shareholders; (3) is not related to any director, officer or substantial shareholder
of the covered company, any of its related companies or any of its substantial shareholders.
For this purpose, relatives include spouse, parent, child, brother, sister and the spouse of
such child, brother or sister; (4) is not acting as a nominee or representative of any director
or substantial shareholder of the covered company, and/or by any of its related companies
and/or any of its substantial shareholders, pursuant to a Deed of Trust or under any contract

or arrangement; (5) has not been employed in any executive capacity by the covered
company, any of its related companies and/or by any of its substantial shareholders within
the last 2 years (as amended by SEC Memorandum Circular No. 13, Series of 2004); (6) is
not retained, either personally or through his firm or any similar entity, as professional
adviser, by that covered company, any of its related companies and/or any of its substantial
shareholders, within the last 2 years (as amended by SEC Memorandum Circular No. 13,
Series of 2004); or (7) has not engaged and does not engage in any transaction with the
covered company and/or with any of its related companies and/or with any of its substantial
shareholders, whether by himself and/or with other persons and/or through a firm of which
he is a partner and/or a company of which he is a director or substantial shareholder, other
than transactions which are conducted at arms length are immaterial.
When used in relation to a company subject to the requirements of the aforesaid
Rule and Section 38 of the SRC: (a) Related company means another company which is its
holding company, or its subsidiary, or a subsidiary of its holding company; and (b)
Substantial shareholder means any person who is directly or indirectly the beneficial owner
of more than 10% of any class of its equity security.
The Commission, in SEC Resolution No. 435 dated October 12, 2006, adopted the
policy that a stockbroker shall be disqualified from sitting as an independent director of the
registered issuer whose shares are being traded by the said broker.
Further, in scrutinizing the qualifications of independent directors in accordance
with the provisions of the SRC, the Commission issued a Notice dated October 20, 2006,
requiring all independent directors to submit a certification under oath that they possess all
the qualifications and none of the disqualifications provided for in the SRC and its
Implementing Rules and Regulations. The certification should contain an enumeration of
the independent directors affiliations or positions in all organizations, corporate or
otherwise, that my directly or indirectly give rise to conflict of interest or violate SRC Rule
38.
The SRC likewise prescribes that issuers of registered securities and public
companies shall have at least 2 independent directors or such independent directors shall
constitute at least 20% of the members of such board, whichever is lesser. Provided,
further, that said companies may choose to have more independent directors in their boards
than as above required. The Exhange/s, on the other hand, are required to have at least 3
independent directors. All other companies are encouraged to have independent directors as
well;

Board Meetings and Quorum Requirements Members of the Board should attend
regular and special Board meetings in person. In view of modern technology, however,
attendance at Board meetings through teleconferencing may be allowed.
Incidentally, the Commission has a standing circular (SEC Memorandum Circular
No. 15, Series of 2001), in relation to Section 16 of the Electronic Commerce Act (R.A.
8792) and Section 26 of the Corporation Code of the Philippines, providing the guidelines
for the conduct of teleconferencing and videoconferencing (i.e. conferences or meetings
through electronic medium or telecommunications where the participants who are not
physically present are located at different local or international places) of the Board of
Directors;

Creation of Board Committees The Board of Directors shall constitute the following
Committees to aid in complying with the principles of good corporate governance: (a) Audit
Committee; (b) Nomination Committee; and (c) Compensation or Remuneration
Committee;

Rotation of External Auditors An external auditor shall enable an environment of good

corporate governance as reflected in the financial records and reports of the company. He
shall be rotated or the handling partner shall be changed every 5 years or earlier.
PROGRAMS AND PROCEDURES THAT WILL FOSTER
MEANINGFUL COMPLIANCE OF THE RULES

To sustain corporate governance reforms, the SEC has issued the following Memorandum
Circulars:
1. SEC Memorandum Circular No. 14, Series of 2002 This refers to the Guidelines for
Accreditation of Institutional Training Providers on Corporate Governance. To ensure that
quality training on good corporate governance principles and standards shall be provided for the
directors of corporations covered under the Code of Corporate Governance, the conduct of
seminars/trainings on said topics shall be made by institutional training providers that are duly
recognized and accredited by the SEC.
2. SEC Memorandum Circular No. 16, Series of 2002 This refers to the Guidelines on
the Nomination and Election of Independent Directors to properly guide the companies in the
nomination and election of independent directors and to have uniform procedures on the same.
3. SEC Memorandum Circular No. 5 & 5-A, Series of 2003 - This refers to the
Implementation of the Self-Rating System on Corporate Governance directing covered market
participants to submit their duly accomplished Corporate Governance Self-Rating Forms (CG-SRF)
in order to assess the level of compliance with the leading practices and principles on good
corporate governance. The duly accomplished CG-SRF shall be a one-time submission. Any
company deviating or not complying with its manual on corporate governance is ordered to give its
explanation thereto and/or reasons therefor.
4. SEC Memorandum Circular No. 8, Series of 2003 This refers to the Rotation of
External Auditors. All corporations covered under the Code of Corporate Governance, who had
engaged their respective external auditors for a consecutive period of five (5) years or more as of
December 31, 2002, shall have a one-year transition period or up to December 31, 2003 within
which to change said external auditors or engagement partners.
5. SEC Memorandum Circular No. 8, Series of 2004 This refers to the Certification
Requirements for Compliance Officers mandating all financing companies, investment houses,
fund managers, distributors and mutual fund/investment companies and pre-need companies to at
least have one officer or director certified by examination as compliance officer to ensure that
regulatory safeguards imposed on said entities are complied with and that leading practices on
corporate governance are observed by such companies.

6. SEC Memorandum Circular No.13, Series of 2004 This refers to the Amendment to
Rule 38 of the Implementing Rules and Regulations of the Securities Regulation Code where the
period stated under SRC Rule 38 (2)(E) & (F) was reduced from 5 years to 2 years.
7. SEC Memorandum Circular No. 4, Series of 2005 This refers to the Certification
Requirements for Compliance Officers of Financing Companies limiting the requirement to those
that have issued or are authorized to issue securities such as, but not limited to, promissory notes,
commercial papers, bonds, and preferred shares whose redemption or payment of dividends is
mandatory, that are still outstanding as of the date of the circular.
8. SEC Memorandum Circular No. 5, Series of 2005 - This is addressed to all the
corporate secretaries of Philippine corporations directing them to advise the Commission in
writing, not later than November 30, 2005, of the fact that their corporation possesses all the
attributes of a public company and the date the said status was attained. The same information
shall, together with other data, be disclosed in the audited financial statements due for submission
in 2006 and succeeding years.
WHETHER OR NOT THE SAID PROGRAMS AND PROCEDURES
ARE NOW IN PLACE AND OPERATIONAL
Compliance with the provisions of the Code needs to be supported by certifications issued
by: (a) the corporate secretary as to the presence of a quorum in board meetings; and (b) by the
compliance officers as to the level of compliance by the company with its Manual of Corporate
Governance and the conduct of seminars by qualified and accredited training providers on
corporate governance. The details on the submission for the year 20051 are provided hereunder:
Type of Participant

Complied

Compliance
Rate (%)

Submission of certification of compliance by Compliance Officer

on the level of compliance with leading practices on corporate
governance

132

100

Submission of certification by Corporate Secretary on the

attendance of directors during board meetings

132

100

Submission of certification of compliance by Compliance Officer

on the level of compliance with leading practices on corporate
governance

18

100

Submission of certification by Corporate Secretary on the

attendance of directors during board meetings

18

100

1. Broker Dealer Exchange Member

2. Broker Dealer Non-Exchange Member

SEC 2005 Annual Report

3. GSEDs
Submission of certification of compliance by Compliance Officer
on the level of compliance with leading practices on corporate
governance

13

20.96

Submission of certification by Corporate Secretary on the

attendance of directors during board meetings

16

25.80

Submission of certification of compliance by Compliance Officer

on the level of compliance with leading practices on corporate
governance

64.29

Submission of certification by Corporate Secretary on the

attendance of directors during board meetings

35.71

Submission of certification of compliance by Compliance Officer

on the level of compliance with leading practices on corporate
governance

14

42.42

Submission of certification by Corporate Secretary on the

attendance of directors during board meetings

19

57.58

Independent Directors

230

98.29

Designation of Compliance Officer

232

99.15

Rotation of External Auditor

231

98.72

Creation of Audit, Compensation and Nomination Committees

231

98.72

Nomination and Election Procedures for Independent Directors

229

97.86

Qualification/Disqualification of Independent Directors

227

97.01

Disclosure on the level of compliance, deviation and any

improvements on corporate governance practices

230

98.29

Independent Directors

35

89.74

Designation of Compliance Officer

38

97.44

4. ICA

5. Investment Houses

6. Listed Companies

7. Mutual Funds

Rotation of External Auditor

34

87.50

Creation of Audit, Compensation and Nomination Committees

31

77.50

Nomination and Election Procedures for Independent Directors

35

100

Qualification/Disqualification of Independent Directors

35

89.74

Disclosure on the level of compliance, deviation and any

improvements on corporate governance practices

26

100

Submission of certification of compliance by Compliance Officer

on the level of compliance with leading practices on corporate
governance

118

75.64

Submission of certification by Corporate Secretary on the

attendance of directors during board meetings

117

75.00

Creation of Audit, Compensation and Nomination Committees;

Designation of members and disclosure

72

46.15

Designation/election and disclosure of Independent Directors

75

48.08

Submission of certification of compliance by Compliance Officer

on the level of compliance with leading practices on corporate
governance

28

84.84

Submission of certification by Corporate Secretary on the

attendance of directors during board meetings

27

81.81

Submission of certification of compliance by Compliance Officer

on the level of compliance with leading practices on corporate
governance

11

39.29

Submission of certification by Corporate Secretary on the

attendance of directors during board meetings

25.00

Creation of Audit, Compensation and Nomination Committees;

Designation of members and disclosure

20

74.07

8. Public Companies and Other Issuers of Securities to the Public

9. Pre-Need Companies

10. Transfer Agents

11. Other Market Participants

Submission of certification of compliance by Compliance Officer
on the level of compliance with leading practices on corporate

governance

50.00

Submission of certification by Corporate Secretary on the

attendance of directors during board meetings

50.00

Submission of certification of compliance by Compliance Officer

on the level of compliance with leading practices on corporate
governance

11.11

Submission of certification by Corporate Secretary on the

attendance of directors during board meetings

22.22

12. Underwriters of Securities

Conclusion
The SECs vision statement on good corporate governance primarily focused on the
programs and procedures that will implement corporate governance reforms. In that aspect, the
Commission succeeded. Needless to say, the rate of compliance of the certification requirements
by covered market participants for the past few years may not yet be sufficient to measure the
success of corporate governance reforms in the country. In the final analysis, the task of ensuring
success of the reforms, taking into account its impact on the Philippine economy, is a continuing
effort shared between and among the public and private sectors. For the SECs part, the initial
phase of its contribution in line with the objective has just been fulfilled.
In line with the celebration of the SECs 70th Anniversary last November 11, 2006, the
Commission released its long-term Capital Market Development Plan for the Philippines. It is in
the form of a blueprint articulating a series of eleven strategic objectives (and the relevant steps to
achieve them) that are intended to stipulate the growth, efficiency and competitiveness of the
Philippine Capital Market over the next five years (2005 2010). Objective No. 11 thereof
provided that Governance structures of entities that support the Non-Bank Financial Sector
either by delivering investment services or financing capital needs through the sector shall
utilize independent directors to guard against self-dealing by corporate insiders and other forms
of corporate fraud and deception. Additionally, feasible and effective enforcement remedies
(including private right of actions) will be put in place to redress potential abusive practices by
corporate managers.
As a preview of what the SEC intends to accomplish for the next five years, listed
hereunder are some of the corporate governance reforms to be institutionalized in order to attract
and retain investment capital: (1) SEC will promote adoption and implementation of Revised
OECD Corporate Governance Principles (Principles II) by SEC registered corporations; (2) SEC
will take steps to strengthen the role of independent directors to provide adequate protection for
minority shareholders rights; (3) SEC will advocate for reforms to provide for adequate remedies
to address corporate malfeasance; and (4) SEC will define a course and timeline for the continued
evolution of the Philippine Corporate Governance regime.
The full text of the Code of Corporate Governance (as well as the Model Manual) and the
SEC Memorandum Circulars/Notices referred to above may be accessed via the SECs website at
www.sec.gov.ph