Election Process for Independent Directors in Philippine Corporations

Introduction

In the Philippine corporate landscape, independent directors play a pivotal role in enhancing corporate governance, ensuring transparency, and protecting minority shareholders' interests. These directors are expected to provide objective oversight, free from undue influence by management or controlling shareholders. The election of independent directors is a structured process governed by Philippine laws and regulations, primarily aimed at publicly-listed corporations (PLCs) and other entities subject to heightened governance standards. This article comprehensively explores the election process, from nomination to post-election considerations, within the Philippine context.

Legal Framework Governing Independent Directors

The foundation for the election and role of independent directors in Philippine corporations is laid out in the Revised Corporation Code of the Philippines (Republic Act No. 11232, effective February 23, 2019), which repealed the old Corporation Code (Batas Pambansa Blg. 68). Section 22 of the Revised Corporation Code mandates the election of directors by stockholders, including provisions for independent directors in specific cases.

The Securities and Exchange Commission (SEC) enforces detailed rules through various memorandum circulars. Key issuances include:

SEC Memorandum Circular No. 19, Series of 2016 (Code of Corporate Governance for Publicly-Listed Companies), which outlines the requirements for independent directors in PLCs.
SEC Memorandum Circular No. 24, Series of 2019, amending the governance code to align with the Revised Corporation Code.
SEC Memorandum Circular No. 4, Series of 2020, providing guidelines on the nomination and election of independent directors.

Additionally, the Philippine Stock Exchange (PSE) Listing Rules require compliance with these SEC guidelines for listed companies. For non-PLCs, such as public companies or those with secondary licenses, similar but less stringent requirements may apply under the SEC's general corporate governance framework.

Independent directors are mandatory for PLCs, where the board must include at least two independent directors or 20% of the board size, whichever is higher, but not less than three for boards exceeding 15 members. For other corporations, appointing independent directors is recommended as a best practice but not always obligatory unless specified by regulatory bodies like the Bangko Sentral ng Pilipinas (BSP) for banks or the Insurance Commission for insurers.

Definition and Qualifications of Independent Directors

An independent director is defined under SEC rules as a person who, apart from shareholdings and director's fees, is independent of management and free from any business or other relationship that could, or could reasonably be perceived to, materially interfere with the exercise of independent judgment in carrying out responsibilities as a director.

To qualify as an independent director, a candidate must meet the following criteria:

Independence from Management: The individual should not be, or have been within the last three years, an officer or employee of the corporation, its parent, subsidiaries, affiliates, or related interests.
No Substantial Shareholding: Ownership of shares should not exceed 2% of the corporation's outstanding capital stock, directly or indirectly.
No Familial or Business Ties: Not a relative (up to the fourth civil degree of consanguinity or affinity) of any director, officer, or substantial shareholder. Also, not a director or officer of entities with material business relationships with the corporation.
Professional Independence: Not acting as a nominee or representative of any director, substantial shareholder, or group with significant influence. Additionally, not engaged as a professional adviser (e.g., auditor, legal counsel) to the corporation within the last three years.
Other Requirements: Must possess relevant experience, integrity, and the ability to read and understand financial statements. Age and nationality are not restricted, but the candidate must be a natural person and at least 21 years old.

Disqualifications include convictions for offenses involving moral turpitude, bankruptcy, or violations of securities laws. The SEC may impose additional sector-specific disqualifications, such as for financial institutions.

Nomination Process

The nomination of independent directors is a critical precursor to their election and is designed to ensure transparency and merit-based selection.

Nomination Committee: PLCs must establish a Nomination Committee (or its equivalent, such as a Corporate Governance Committee) composed of at least three members, with an independent director as chairperson. This committee reviews nominations, assesses qualifications, and prepares a final list of candidates.
Sources of Nominations: Nominations can come from any shareholder, including minority shareholders, provided they hold at least one share. Self-nomination is allowed, but nominees must accept the nomination in writing. For PLCs, nominations must be submitted to the Nomination Committee at least 30 days before the annual stockholders' meeting (ASM), as per corporate bylaws or SEC rules.
Required Documentation: Nominators must provide:
- A written nomination letter.
- The nominee's curriculum vitae, including educational background, professional experience, and affiliations.
- A certification of independence signed by the nominee, affirming compliance with qualification criteria.
- Disclosure of any potential conflicts of interest.
Review and Shortlisting: The Nomination Committee evaluates nominees against legal and governance standards. It may conduct interviews or background checks. Disqualified nominees are notified, and reasons are documented. The final list of qualified candidates is included in the corporation's Information Statement (SEC Form 20-IS) distributed to shareholders at least 15 days before the ASM.
Special Considerations for Minority Shareholders: To promote inclusivity, minority shareholders can nominate independent directors, and the process ensures that controlling shareholders do not dominate the slate.

Election Process

The election of independent directors occurs alongside the election of regular directors during the ASM or a special meeting called for that purpose.

Voting Mechanism: Under Section 23 of the Revised Corporation Code, directors are elected through cumulative voting, unless the articles of incorporation provide otherwise. Cumulative voting allows shareholders to concentrate votes on fewer candidates, benefiting minority shareholders in electing independent directors. Each share entitles the holder to as many votes as the number of directors to be elected, multiplied by the shares owned.
- Example: If there are 9 directors to be elected (including 2 independents) and a shareholder owns 100 shares, they have 900 votes to distribute.
Quorum and Procedure: A quorum of at least a majority of the outstanding capital stock is required. Voting can be viva voce, by ballot, or electronically for PLCs. Proxies are permitted, but must be in writing and filed before the meeting.
Specific Rules for Independents: Independent directors are elected from the final list prepared by the Nomination Committee. Shareholders vote for the entire board slate, but independents must receive sufficient votes to fill the required slots. In practice, the highest vote-getters among qualified independent nominees are elected to those positions.
Remote and Electronic Voting: Pursuant to SEC Memorandum Circular No. 6, Series of 2021, PLCs must allow remote participation and electronic voting, especially post-COVID-19, to facilitate broader shareholder involvement.
Announcement and Certification: Results are announced at the meeting, and the corporate secretary certifies the election. Elected directors, including independents, must take their oath before assuming office.

Term of Office and Limits

Independent directors serve a one-year term, coinciding with regular directors, but are subject to term limits to prevent entrenchment. Under SEC rules:

Maximum of nine consecutive years for PLCs, after which a two-year "cooling-off" period is required before re-election as an independent.
Re-election is possible post-cooling-off, but perpetual disqualification applies if independence is compromised.

Vacancies due to death, resignation, or removal are filled by the board if a quorum remains, or by shareholders if not. Replacement independent directors must meet the same qualifications and serve only the unexpired term.

Roles and Responsibilities

Once elected, independent directors contribute to board committees, particularly those requiring objectivity:

Audit Committee: Must be chaired by an independent director, overseeing financial reporting and internal controls.
Risk Oversight and Related Party Transactions Committees: Often include independents to ensure impartiality.
General Duties: Provide unbiased advice, monitor compliance with laws, and protect stakeholder interests.

They are liable for breaches of fiduciary duties under Sections 30-34 of the Revised Corporation Code, including diligence, loyalty, and good faith.

Removal and Replacement

Removal of an independent director requires a vote of shareholders representing at least two-thirds of the outstanding capital stock, for cause (e.g., disqualification, misconduct). Without cause, removal is possible only if allowed by the articles of incorporation and approved by the same majority.

Upon removal or vacancy, the process reverts to nomination and election, ensuring the independent director quota is maintained.

Challenges and Best Practices

Common challenges include ensuring genuine independence amid family-controlled corporations and addressing nomination biases. Best practices involve robust committee oversight, shareholder education, and SEC monitoring through annual governance reports.

Conclusion

The election process for independent directors in Philippine corporations is a cornerstone of sound governance, balancing shareholder rights with regulatory oversight. By adhering to the Revised Corporation Code and SEC guidelines, corporations foster accountability and sustainability. Stakeholders must remain vigilant to uphold the integrity of this process, ultimately contributing to a robust Philippine business environment.