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10 May, 2017
In the present corporate world, sound corporate governance plays a major role in any successful business. Implementation of an effective code of corporate governance maximizes the company’s resources and enterprise value with respect to its shareholders. It also promotes transparency and fairness in dealing with all stakeholders.
The Securities and Exchange Commission (SEC) approved the Code of Corporate Governance for Publicly Listed Companies (CG Code for PLCs). Pursuant to SEC Memorandum Circular 19, the Code took effect on January 1. All publicly listed companies are required to submit a new manual on corporate governance to the SEC on or before May 31.
The Code is intended to raise the corporate governance standards of Philippine corporations to a level at par with its regional and global counterparts.
As defined in the Code, Corporate Governance is the system of stewardship and control to guide organizations in fulfilling their long-term economic, moral, legal, and social obligations towards their stakeholders. It is a system of direction, feedback and control using regulations, performance standards and ethical guidelines to hold the Board and senior management accountable for ensuring ethical behavior — reconciling long-term customer satisfaction with shareholder value — to the benefit of all stakeholders and society. Its purpose is to maximize the organization’s long-term success, creating sustainable value for its shareholders, stakeholders and the nation.
‘COMPLY OR EXPLAIN’ APPROACH
The Code adopts the “comply or explain” approach which combines voluntary compliance with mandatory disclosure. Companies are encouraged to comply with the Code, but if they chose not to, they must identify any areas of noncompliance in their annual corporate governance reports and explain the reasons for noncompliance.
PRINCIPLE OF PROPORTIONALITY
The Principle of Proportionality is considered in the application of its provisions as the Code does not, in any way, prescribe a “one size fits all” framework. It is designed to allow boards some flexibility in establishing their corporate governance arrangements. Larger companies and financial institutions would generally be expected to follow most of the Code’s provisions. Smaller companies may decide that the costs of some of the provisions outweigh the benefits, or are less relevant in their case.
PRINCIPLES, RECOMMENDATIONS AND EXPLANATION
The Code is arranged as follows: Principles, Recommendations and Explanations. The Principles can be considered as high-level statements of corporate governance good practice, and are applicable to all companies. The Recommendations are objective criteria that are intended to identify the specific features of corporate governance good practice that are recommended for companies operating according to the Code. Alternatives to a Recommendation may be justified in particular circumstances if good governance can be achieved by other means. When a Recommendation is not complied with, the company must disclose and describe this noncompliance, and explain how the overall Principle is being achieved. The Explanations strive to provide companies with additional information on the recommended best practice.
It is important to note that in superseding the Revised Code of Corporate Governance, the Code introduced new recommendations, which include, among others that the Board of Directors should be composed of a majority of non-executive directors and that the Board should have at least three independent directors, or such number as to constitute at least one-third of the members of the Board, whichever is higher.
The Code also recommends the establishment of a Corporate Governance Committee, Board Risk Oversight Committee and Related Party Transaction Committee, which are required to have Committee Charters stating their respective purposes, memberships, structures, operations, reporting processes, resources, and other relevant information. It also indicates the importance for publicly listed companies to adopt an anti-corruption policy and program in its Code of Conduct and a suitable framework for whistle-blowing that allows employees to freely communicate their concerns about illegal or unethical practices.
Indeed, the Recommendations are laudable and although there are no sanctions or penalties imposed for failure to comply, companies are well advised to adopt such sound corporate governance practices in the furtherance of successful business.
For further information, please contact:
Felice Suzanne D. Soria, Angara Abello Concepcion Regala & Cruz (ACCRALAW)
fdsoria@accralaw.com
