I. Overview

“Independent directors” are board members intended to bring objective judgment to corporate decision-making by being free from relationships that could impair—or appear to impair—their independence. In the Philippines, the requirement to appoint independent directors is not universal. It depends on (1) the corporation’s nature (e.g., publicly listed, bank, insurance company, public utility, publicly held), (2) whether it is regulated by a particular agency (SEC, BSP, IC, ERC, etc.), and (3) what special law or regulatory code applies.

Because different regulators and regimes impose overlapping but not identical rules, corporations sometimes face conflicting standards on:

who qualifies as “independent,”
the minimum number (or proportion) required,
term limits, cooling-off periods, and disqualifications, and
the committee structure tied to independence (audit, nomination, risk, governance).

This article maps the minimum requirements and explains how to manage overlaps and inconsistencies.

II. The Core Philippine Legal Framework

A. Revised Corporation Code (RCC) as the baseline

The RCC provides the general corporate law framework, but it does not impose a blanket independent-director mandate on all corporations. Instead, the RCC recognizes that certain corporations—particularly those with public interest—are subject to enhanced governance requirements through SEC rules and special laws.

Key baseline principles:

Boards owe fiduciary duties (obedience, diligence, loyalty) regardless of independence labeling.
Independence requirements typically come from sectoral regulation or the SEC’s governance regime for specific classes of corporations.

B. SEC governance rules as the main cross-cutting source

For corporations under SEC oversight that fall into special categories (commonly “publicly listed companies” and “public interest entities”), SEC rules supply:

who is an independent director,
how independence is assessed and maintained, and
minimum board/committee independence structures.

However, other regulators (BSP, IC, ERC, and exchange rules) may impose different thresholds.

III. Who Must Have Independent Directors

A. Publicly listed companies (PLCs)

If a corporation’s shares are listed and traded on an exchange in the Philippines, independent directors are required under a combination of SEC governance rules and exchange listing rules.

Practical hallmark:

PLCs almost always have the most formalized independence, nomination, and committee rules.

B. Public interest entities (PIEs)

Philippine governance regulation commonly treats “public interest” corporations as needing higher governance standards, often including independent directors. The definition can include (depending on the applicable SEC issuances and related regulations):

publicly listed companies,
issuers of registered securities (even if not listed),
banks and quasi-banks,
insurance companies,
other institutions that hold assets in a fiduciary or public-facing capacity, and
large corporations meeting thresholds set by regulation.

Because “PIE” categorization can change by regulation and thresholds, companies should treat PIE status as a compliance classification that must be periodically validated.

C. Banks and other BSP-supervised financial institutions (BSFIs)

BSP-supervised entities are subject to BSP corporate governance rules that impose independent director requirements, often with specific definitions and stricter disqualifications.

D. Insurance companies and other IC-regulated entities

Insurance entities governed by the Insurance Commission typically have independent director requirements under IC corporate governance rules.

E. Public utilities / regulated industries

Certain regulated sectors may require independent directors by virtue of their sector regulator’s governance rules or by franchise/authorization conditions.

IV. Minimum Number of Independent Directors: The Common Standards

There is no single universal minimum that applies to every covered corporation. Instead, minimums are usually expressed in one of the following ways:

Standard 1: “At least two (2) independent directors”

This is a common floor in governance regimes, especially where boards are small and proportional requirements would be impractical.

Where it matters:

corporations with 5–9 directors often default to “at least two,” unless a higher proportion is mandated.

Standard 2: “At least 20% of the board, but not less than two (2)”

This is frequently used for PLCs and similar entities.

How it works:

Compute 20% of the board size.
If the result is less than 2, the minimum becomes 2.
Round-up approaches vary by regulator or listing rule practice; conservative compliance treats fractional results as requiring the next whole number.

Examples:

5 directors → 20% = 1 → minimum becomes 2
7 directors → 1.4 → conservative rounding → 2 (still meets “not less than 2”)
10 directors → 2 → minimum 2
11 directors → 2.2 → conservative rounding → 3

Standard 3: “At least one-third (1/3) of the board”

This appears in some governance regimes, particularly for certain financial institutions or where regulators want stronger minority/public protection.

Examples:

9 directors → 3 independent directors
12 directors → 4 independent directors

Standard 4: “Majority independent” (rare as a baseline requirement)

Generally uncommon as a minimum for Philippine corporations overall, but can appear in:

particular committee composition rules (audit committee often requires independence dominance),
specific licensing conditions, or
special corporate structures and controlled entities with heightened governance constraints.

V. What “Independent” Means: Core Qualification Tests

While wording differs, Philippine standards typically converge on this core idea:

An independent director is a director who:

is not an officer or employee of the corporation, its parent, subsidiaries, affiliates, or related interests;
has not been an officer/employee within a prescribed lookback period (commonly 2–3 years, depending on the regime);
is not a substantial shareholder (or representing one), and does not have beneficial ownership that creates control or significant influence beyond permitted de minimis thresholds;
is not a relative (within specified degrees) of:
- controlling shareholders,
- directors, or
- key officers that could compromise objective judgment;
does not have material business relationships with the corporation or its related companies—e.g., as supplier, customer, consultant, auditor, legal counsel—within a lookback period, where the relationship is significant enough to impair independence; and
does not receive compensation other than standard director fees and allowed benefits (and does not participate in incentive schemes that tie pay to management metrics, subject to exceptions).

Typical “red flags” that break independence

Acting as the corporation’s or group’s external counsel, auditor, or major consultant (or being a partner in those firms), especially recently.
Being a major supplier/customer where revenues are material.
Close family ties to controlling owners or executive management.
Being a former CEO/COO/CFO (even of an affiliate) within the cooling-off period.
Holding a significant ownership stake, or representing a blockholder.

VI. Term Limits, Cooling-Off Periods, and “Independence Fatigue”

One of the most frequent points of conflicting standards is how long someone can remain independent.

A. Term limits

Some regimes impose:

a maximum cumulative term (often framed as a number of years, sometimes consecutive years), after which a director can no longer be classified as independent.

Rationale:

After long service, familiarity and personal relationships may undermine perceived objectivity.

B. Cooling-off periods

Some regimes allow re-qualification as independent after:

a “cooling-off” period (e.g., 2 years) from the end of the disqualifying relationship or after serving the maximum term.

C. Practical effect of differing term limits

A director might be “independent” under one standard but “non-independent” under another due solely to tenure rules. This often happens when:

a PLC is also part of a financial conglomerate supervised by another regulator with stricter tenure rules, or
the parent and subsidiary are subject to different governance codes.

VII. Conflicting Standards: Why They Happen and the Common Collision Points

A. Multiple regulators with overlapping jurisdiction

A single corporate group may include:

a listed holding company (SEC + exchange),
a bank subsidiary (BSP),
an insurance subsidiary (IC),
a power or water utility subsidiary (sector regulator), all of which can impose board independence requirements with different definitions and minimum ratios.

B. Exchange rules vs. SEC rules

Listing rules typically reinforce SEC governance requirements but may have:

additional committee composition requirements,
disclosure and fit-and-proper procedures, and
stricter enforcement tied to continued listing.

C. Key collision points

Minimum number/proportion
- One standard says “at least two,” another says “one-third.”
Definition of affiliate/related interests
- “Affiliate” definitions differ across regimes; a person may be independent under a narrow definition but not under a broad one.
Lookback periods
- One standard uses a 2-year lookback, another uses 3 years.
Materiality thresholds
- “Material business relationship” can be defined quantitatively (percentage of revenues) in one regime and qualitatively in another.
Tenure limits
- One code may cap at a certain number of years; another may permit longer service.
Compensation restrictions
- Some regimes treat certain allowances or benefits as impairing independence; others tolerate them if disclosed/approved.

VIII. How to Reconcile Conflicting Standards: Compliance Method

When two or more standards apply, the defensible approach is:

Step 1: Identify every applicable regime

Map the corporation’s status:

listed vs. unlisted,
issuer of registered securities,
BSP/IC-regulated,
public utility/regulated franchise,
public interest classification,
parent/subsidiary relationships that trigger “affiliate” rules.

Step 2: Create a unified “independence matrix”

For each director, test:

employment history and cooling-off,
ownership and representation,
relationships and relatives,
business dealings and professional engagements,
tenure,
compensation arrangements.

Step 3: Apply the “highest common denominator”

When minimum counts differ, comply with the stricter minimum:

If one-third is required by any applicable regime, meet one-third.
If 20% but not less than two applies, meet that, unless another rule requires more.

When definitions differ, follow the stricter disqualification:

If one regulator treats a relationship as disqualifying, treat it as disqualifying for classification purposes (or clearly designate the director as non-independent and adjust the minimum count).

Step 4: Align committee composition with the strictest rule

Even if the board meets minimum independence, committees may have higher requirements:

audit committee often requires a strong independence component,
nomination and governance committees often require independent director participation or chairmanship.

Step 5: Disclose transparently

Where a director is independent under one rule but not another, avoid ambiguity:

classify based on the strictest applicable rule, and
explain the basis in governance disclosures and SEC filings where required.

IX. Board Size, Rounding, and “Minimum” Computations

Because many standards are ratio-based, computation issues arise.

A. Rounding

Where the rule says “at least X%,” conservative governance practice is:

round up fractional results to the next whole number.

B. Board expansion vs. independence dilution

Increasing board size can accidentally increase the required number of independent directors under ratio rules.

Example: A 9-member board under a 20% rule may require 2; expanding to 11 may require 3 (rounding up).

C. Minimum floors still apply

Even if 20% yields 1, the “not less than 2” floor makes it 2.

X. Election, Nomination, and Removal: Practical Corporate Mechanics

A. Election

Independent directors are elected like other directors, but governance rules typically require:

nomination screening (often through a nomination committee),
validation of independence qualifications,
disclosures to stockholders (particularly for PLCs and public interest entities).

B. Cumulative voting and minority protection

Philippine corporate law recognizes cumulative voting for director elections (commonly associated with stock corporations). Independent director requirements interact with minority rights because:

independence can strengthen oversight even where control is concentrated.

C. Removal

Removal is generally governed by corporate law and bylaws, but regulated entities may require:

notice to regulators,
fit-and-proper review for replacements,
maintaining minimum independent director counts at all times (vacancy must be filled within prescribed periods).

XI. Common Governance Structures Tied to Independent Directors

Even where the board minimum is met, regulators often expect independent directors to play specific roles:

A. Audit committee

Typically:

includes independent directors,
may require an independent chair,
requires financial literacy or audit expertise expectations for at least one member.

B. Nomination and governance committee

Often:

evaluates board composition, succession, and independence,
screens nominees and validates qualifications.

C. Risk oversight (especially for financial institutions)

Often:

requires independent director involvement,
expects independence in risk challenge and escalation.

XII. Group Structures: Parent, Subsidiary, Affiliate Complications

A. Independence at the subsidiary level

A director may be independent at the subsidiary but not at the parent (or vice versa) depending on:

whether “affiliate” includes the parent and sister companies,
whether the director has roles in the group.

B. Cross-directorships

Being a director/officer in another group company may:

compromise independence if the rule treats affiliates broadly, or
be allowed if the rule is narrower but still risky from a perception standpoint.

C. Controlled corporations and “independent in form, not in substance”

A recurring compliance pitfall is appointing nominally independent directors who:

have long-standing advisory ties,
represent controlling shareholder interests informally,
are dependent on consulting income from the group.

Regulators focus on both technical independence and substantive independence.

XIII. Penalties and Consequences of Non-Compliance

Consequences vary by regime but typically include:

SEC enforcement actions for governance and disclosure breaches,
exchange sanctions for listed companies (including trading suspensions in severe cases),
BSP/IC supervisory actions for regulated entities, including directives, monetary penalties, and governance remediation requirements,
reputational and investor-relations impact,
increased litigation risk when oversight failures occur (independence is often scrutinized after corporate scandals).

XIV. Implementation Checklist for Philippine Corporations

Classify the entity: listed, issuer, PIE, BSP/IC regulated, public utility/regulated.
Confirm the governing standards: SEC governance code, exchange rules, BSP/IC rules, sector rules.
Compute the minimum independent directors under each standard; adopt the highest requirement.
Screen independence using an “independence matrix” with lookbacks, affiliates, relatives, business ties, compensation, tenure.
Structure committees to satisfy the strictest applicable composition rules.
Document and disclose: independence certifications, board evaluation, nomination committee minutes, and required public disclosures.
Plan succession: term limits and cooling-off periods require a pipeline of independent candidates.
Monitor continuously: independence can be lost mid-term due to new relationships, transactions, or appointments.

XV. Key Takeaways on Conflicting Standards

Independent director obligations are status-based: not every Philippine corporation is covered, but many public-facing and regulated entities are.
Minimum requirements commonly cluster around (a) at least two, (b) 20% but not less than two, or (c) one-third—with committees often requiring stronger independence.
Conflicts usually arise from different definitions, lookback periods, tenure rules, and affiliate scope across regulators.
The safest reconciliation method is to comply with the strictest applicable requirement and classify independence using the most conservative disqualification set.
Independence is not only a label; regulators and stakeholders expect substantive independence demonstrated through committee work, challenge function, and transparent disclosures.