Bernardo M. Villegas
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Good Governance for Higher Growth (Part 3)

             Together with part-time lecturing at the University of Asia and the Pacific and writing columns for two dailies, I spend a significant amount of time sitting as an Independent Director in a number of corporate boards.  Four of these boards are those of publicly listed companies (PLCs).  Although I sometimes complain about being required to attend annually too many training programs on corporate governance, I am actually truly happy that one of the strong institutions that the Philippines has established over the last thirty years is the Securities and Exchange Commission (SEC) which is one of the economic institutions on which the Philippine economy is grounded and which has helped us to get rid of the monicker “the sick man of Asia.”  The SEC is fully committed to improve corporate governance practices in the Philippines.  In 2013, the SEC, along with the Institute of Corporate Directors (ICD), launched an information campaign to familiarize PLCs, other government regulators, and investors on the objectives and mechanics of the ASEAN Corporate Governance Scorecard.  The SEC required all PLCs to issue an Annual Corporate Governance Report (ACGR), which is intended to consolidate all the governance policies and procedures of each PLC into one report for ease of reference.

            The SEC further required that all PLCs post their ACGR on their corporate website.  In December 2013, the SEC directed all key officers and members of the board of PLCs to attend a training program on corporate governance at least once a year.  I find these training programs a very effective means of upskilling, reskilling and retooling myself with the most advanced approaches to participating as an independent director, not only in the PLCs to which I belong but to other corporate boards that are not publicly listed.  Some of the most recent topics covered in these training programs are how to deal with money laundering, data analytics and digitalization.  A good number of these upskilling courses are offered by the Institute of Corporate Directors.  Others are offered by accounting firms like SGV and Pricewaterhouse.  I always find these programs useful for learning new concepts, but most important of all as reminders of the duties of independent directors.

            To serve as reminders to others who like me are active in boards of directors, let me summarize here the responsibilities of the Board.  The corporate governance framework should ensure in the first place the strategic guidance of the company by the board, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.  The first item is for the company to adopt a Code of Corporate Governance, as mandated by SEC.  This Code must clearly specify the duties and responsibilities of the board, as mandated by law.  Among the duties to be included are: a) Final approval and adoption of corporate strategy along with oversight over strategy execution.  The value of a corporation to the economy is not to be judged by examining its Articles of Incorporation and By-Laws which are always written by lawyers to include almost everything under the sun.  This, for example, was the problem some critics of the Maharlika Fund raised about the law that created it:  too many areas of investments.  What we should examine, once the entire board and management of the MIC are installed, is the first Strategic Plan it will present to the public.  Already I am glad to read what its CEO, Rafael Consing, has made public:  it will focus on a few strategic industries like digital infrastructures, renewable energy and large-scale agribusiness.

            It is the responsibility of the Board also to b) approve finally the key policies directing the operations of the company, including policy related to corporate strategy and its execution; c) monitor corporate operations, covering both financial and non-financial aspects; d) Oversight of risk management and setting of accountability systems; e) Promotion of a culture of ethics, social responsibility and good governance; f) Adoption of a board charter of protocol, which guides the board on its internal processes, including the specification of decisions requiring board approval.  As a fundamental reference for all board directors and actions, it has to adopt and promulgate:  a corporate vision, a corporate mission (founded on the corporate core values), mandate for the board to periodically revisit and review the corporate vision, mission, and core values while the corporate strategy is reviewed annually; the board pro-actively overseas strategy execution and sets up a proper mechanism for its key oversight function.  It is important to identify the head of internal audit.  Under his or her leadership, key risks are identified and disclosed.  Given the increased digitalization of business operations, there should be a disclosure of IT governance process and how it is regularly reported to the board.  The board should review the internal control and risk management systems periodically and comment on their adequacy.

            As regards the structure and composition of the Board, the roles of the Chairman and the CEO should be separated, specifying clearly the roles and responsibilities of the Chairman.  Ideally, the Chairman should be an Independent Director.  If this is not the case, the company should appoint a lead independent director.  One of the non-executive directors should have prior experience within the secto r or industry to which the company belongs.  A non-executive director should not have been the CEO in the past two years. Non-executive directors and independent directors should not serve in more than 5 boards of publicly listed companies.  Ideally, 50 per cent of board seats should be occupied by independent directors.   Independent directors should serve no more than a total of nine years in a given board.

            Members of the board should be organized in various committees in charge of key company policies.  These committees should be chaired by independent directors.  They should meet at least twice a year, except the Audit Committee which should meet at least four times a year.  Attendance details in committee meetings as well as committee charters should be disclosed.  The charter of the Audit Committee should include: a) Recommendation on the approval and removal of the external auditor; b) Approval of the appointment and removal of the internal auditor; and c) It is recommended that there be a separate board-level Risk Oversight Committee.

            Meetings of the board are scheduled in advance, set before the beginning of the year.  The board should meet at least six times a year.  Directors should be able to attend at least 75 per cent of all board meetings.  In determining if there is a quorum in each meeting, a two-thirds threshold should be observed. Non-executive directors are to meet once a year, without the presence of any executive director. Meeting materials should be sent to the directors at least five working days before the date of the meeting. The identity of the Corporate Secretary must be disclosed.  He should have a legal, accounting or company secretarial background. To be continued.