Coping with the challenges: The 2016 Corporate Governance Code for Publicly Listed Companies

SUITS THE C-SUITE By Paulo Celestino O. Lastimosa

Business World (02/06/2017 – p.S1/4)

The Securities and Exchange Commission (SEC) released in November the new Code of Corporate Governance for Publicly Listed Companies that introduced changes to further strengthen the core principles of fairness, accountability and transparency. The provisions of the 2009 Revised Code of Corporate Governance are still effective for covered companies that are not listed in an exchange. The development of the new code was also guided by the recent changes in the Organization for Economic Cooperation and Development (OECD) principles of corporate governance released in September 2015, and from a series of discussions with other corporate governance advocates in the region.

This Code adopts a “comply or explain” approach which combines voluntary compliance with mandatory disclosure. Listed companies must state in their annual corporate governance reports whether they comply with the Code provisions, identify any areas of non-compliance, and explain the reasons for non-compliance.

This Code also incorporates the principle of proportionality wherein the SEC provides flexibility to covered companies in implementing the Code taking into account their size, structure, risk profile and complexity of operations.

We noted some major changes in the new Code, and we present four of the more critical changes, as follows:

1. Expansion of the definition of corporate governance to further emphasize the responsibility of the board.

The new definition centers on the “system of stewardship in fulfilling the company’s obligations.” This takes into account the various obligations of the company, such as economic, moral, legal and social.

2. Increased balance of executive and non-executive directors.

In 2002, the SEC only required covered companies to have at least two independent directors. However, the SEC last year recommended that listed companies increase the number to at least three, or that one third of the board should be independent directors. According to the SEC, there is now an increasing global recognition that more independent directors in the board leads to more objective decision-making, particularly in situations where there is potential conflict of interest. Although experts have varying opinions on the optimal number of independent directors, the ideal number ranges from one third to a substantial majority to balance the competing demands of corporations. Additionally, the new Code limits the term of the independent directors to a cumulative period of nine years, after which the concerned independent director is permanently barred from being an independent director in the same organization. There is, however, no prohibition to acting as a regular director.

The SEC likewise recommends that listed organizations adopt a policy on board diversity. The policy should not only be limited to gender diversity, but should also include age, ethnicity, culture, skills, competence and knowledge. This is to avoid groupthink and ensure that optimal decision making can be achieved.

Although not a new requirement, the 2016 Code further stresses the SEC’s recommendation that the majority of the board members should be composed of non-executive directors.

3. The creation of additional required committees to improve the Board’s accountability and responsibility.

The new Code recognizes that Board committees are necessary to support the Board in the effective performance of its functions. For example, the creation of an audit committee was mandated in 2002 to enhance the Board’s oversight capability over a company’s financial reporting, internal control system, internal and external audit processes, and compliance with applicable laws and regulations. However, the SEC now cites three additional committees: the Corporate Governance Committee, the Business Risk Oversight Committee and the Related Party Transactions Committee.

a. Among other functions, the Corporate Governance Committee oversees the implementation of the company’s corporate governance framework, evaluation of the board, its committees and the executive management, and supervises the continuing education of the board. This includes functions that were previously assigned to the Nomination and Remuneration Committees, and which are now combined under the Corporate Governance Committee.

b. The Board Risk Oversight Committee is responsible for the oversight of the Company’s Enterprise Risk Management system to ensure its functionality and effectiveness.

c. The Related Party Transactions Committee is responsible for reviewing all the material transactions of the company with its related parties, to ensure that all such transactions are not undertaken on more favorable economic terms than similar transactions with non-related parties under similar circumstances.

4. Increased focus on non-financial and sustainability reporting.

Among the recommendations in the new Code is the provision on the need for listed companies to focus on non-financial and sustainability reporting. The SEC now recommends that Boards should have a clear and focused policy on the disclosure of non-financial information, with an emphasis on the management of the economic, environmental, social and governance issues of its business, primarily those underpinning sustainability. The SEC further recommends that companies should adopt a globally recognized framework in reporting sustainability and non-financial issues.

In recent years, the SEC has been very prolific in crafting corporate governance regulations to raise the standards of corporate governance in the Philippines. This is in line with the call for the Philippines to align more closely with the rest of our ASEAN neighbors to raise investor confidence not only in the country but also in the region. As our country moves forward, we are on the right track to strengthen our policies for us to be at par with the rest of the developing nations in the region.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of EY or SGV & Co. All the points in the article are based on a review of the new Code of Corporate Governance issued by the Securities and Exchange Commission in November 2016.

Paulo Celestino O. Lastimosa is a Director of SGV & Co.