MODULE 3

SEC Code of Corporate Governance

Introduction
The Securities and Exchange Commission (SEC) has issued a new code of
corporate governance for public companies and registered issuers, in line with its plan
of adopting principles observed by the Organization for Economic Co-operation and
Development (OECD). The Philippines’ corporate regulator published over the weekend
Memorandum Circular No. 24 Series of 2019, which outlines 16 recommendations for
corporate governance. The recommendations are grouped into five primary
classifications, namely: the board’s governance responsibilities, disclosure and
transparency provisions, internal control and risk management frameworks, rules on
cultivating a synergic relationship with shareholders/members and recommendations on
corporations’ duties to stakeholders. Disclosures required under the new code include
any dealings in the company’s shares by directors and officers, as well as the annual
corporate governance report (ACGR). The ACGR should be a comprehensive report
containing all pertinent corporate governance information on a company. This provides
the corporate guide to governance.

Learning Objectives

After studying this module, you should be able to:

1. Recognize the importance of SEC Code of Corporate Governance to Philippine
Businesses
2. Identify the different terms that with regards to SEC Code
3. Describe the board’s governance responsibilities
4. Explain the board’s roles in business governance based on the code
5. Distinguish the different functions of the major committees of the board with
regards to the code

Learning Content

The Code of Corporate Governance for publicly listed companies is the first of a
series of Codes that is intended to cover all types of corporations in the Philippines
under supervision of the Securities and Exchange Commission (SEC).

Definition of Terms under The Code

 Corporate Governance – the system of stewardship and control to guide
organizations in fulfilling their long-term economic, moral, legal, and social
obligations towards their stakeholders. Corporate governance 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.
 Board of Directors – the governing body elected by the stockholders that
exercises the corporate powers of a corporation, conducts all its business, and
controls its properties.
 Management – a group of executives given the authority by the Board of
Directors to implement the policies it has laid down in the conduct of the business
of the corporation.
 Independent director – a person who is independent of management and the
controlling shareholder, and is free from any business or other relationship which
could, or could reasonably be perceived to, materially interfere with his exercise
of independent judgment in carrying out his responsibilities as a director.
 Executive director – a director who has executive responsibility of day-to-day
operations of a part or the whole of the organization.
 Non-executive director – a director who has no executive responsibility and does
not perform any work related to the operations of the corporation.
 Conglomerate – a group of corporations that has diversified business activities in
varied industries, whereby the operations of such businesses are controlled and
managed by a parent corporate entity.
 Internal control – a process designed and effected by the board of directors,
senior management, and all levels of personnel to provide reasonable assurance
on the achievement of objectives through efficient and effective operations;
reliable, complete and timely financial and management information; and
compliance with applicable laws, regulations, and the organization’s policies and
procedures.
 Enterprise Risk Management – a process, effected by an entity’s Board of
Directors, management and other personnel, applied in strategy setting and
across the enterprise that is designed to identify potential events that may affect
the entity, manage risks to be within its risk appetite, and provide reasonable
assurance regarding the achievement of entity objectives.
 Related Party – shall cover the company’s subsidiaries, as well as affiliates and
any party (including their subsidiaries, affiliates and special purpose entities), that
the company exerts direct or indirect control over or that exerts direct or indirect
control over the company; the company’s directors; officers; shareholders and
related interests (DOSRI), and their close family members, as well as
corresponding persons in affiliated companies. This shall also include such other
person or juridical entity whose interest may pose a potential conflict with the
interest of the company.
 Related Party Transactions – a transfer of resources, services or obligations
between a reporting entity and a related party, regardless of whether a price is
charged. It should be interpreted broadly to include not only transactions that are
entered into with related parties, but also outstanding transactions that are
entered into with an unrelated party that subsequently becomes a related party.
 Stakeholders – any individual, organization, or society at large who can either
affect and/or be affected by the company’s strategies, policies, business
decisions and operations, in general. This includes, among others, customers,
 creditors, employees, suppliers, investors, as well as the government and
community in which it operates.

CODE OF CORPORATE GOVERNANCE FOR PUBLICLY LISTED COMPANIES

THE BOARD’S GOVERNANCE RESPONSIBILITIES
1. ESTABLISHING A COMPETENT BOARD
Principle 1: The company should be headed by a competent, working board to foster
the long-term success of the corporation, and to sustain its competitiveness and
profitability in a manner consistent with its corporate objectives and the long term best
interests of its shareholders and other stakeholders.
Recommendation 1.1
The Board should be composed of directors with a collective working knowledge,
experience or expertise that is relevant to the company’s industry/sector. The
Board should always ensure that it has an appropriate mix of competence and
expertise and that its members remain qualified for their positions individually
and collectively, to enable it to fulfill its roles and responsibilities and respond to
the needs of the organization based on the evolving business environment and
strategic direction.
Explanation
Competence can be determined from the collective knowledge,
experience and expertise of each director that is relevant to the
industry/sector that the company is in. A Board with the necessary
knowledge, experience and expertise can properly perform its task of
overseeing management and governance of the corporation, formulating
the corporation’s vision, mission, strategic objectives, policies and
procedures that would guide its activities, effectively monitoring
management’s performance and supervising the proper implementation of
the same. In this regard, the Board sets qualification standards for its
members to facilitate the selection of potential nominees for board seats,
and to serve as a benchmark for the evaluation of its performance.
Recommendation 1.2
The Board should be composed of a majority of non-executive directors who
possess the necessary qualifications to effectively participate and help secure
objective, independent judgment on corporate affairs and to substantiate proper
checks and balances.
Explanation
The right combination of non-executive directors (NEDs), which include
independent directors (IDs) and executive directors (EDs), ensures that no
director or small group of directors can dominate the decision-making
process. Further, a board composed of a majority of NEDs assures
protection of the company’s interest over the interest of the individual
shareholders. The company determines the qualifications of the NEDs that
enable them to effectively participate in the deliberations of the Board and
carry out their roles and responsibilities.
Recommendation 1.3
The Company should provide in its Board Charter and Manual on Corporate
Governance a policy on the training of directors, including an orientation program
for first-time directors and relevant annual continuing training for all directors.
Explanation
The orientation program for first-time directors and relevant annual
continuing training for all directors aim to promote effective board
performance and continuing qualification of the directors in carrying-out
their duties and responsibilities. It is suggested that the orientation
program for first-time directors, in any company, be for at least eight
hours, while the annual continuing training be for at least four hours.
All directors should be properly oriented upon joining the board. This
ensures that new members are appropriately apprised of their duties and
responsibilities, before beginning their directorships. The orientation
program covers SEC-mandated topics on corporate governance and an
introduction to the company’s business, Articles of Incorporation, and
Code of Conduct. It should be able to meet the specific needs of the
company and the individual directors and aid any new director in
effectively performing his or her functions.
The annual continuing training program, on the other hand, makes certain
that the directors are continuously informed of the developments in the
business and regulatory environments, including emerging risks relevant
to the company. It involves courses on corporate governance matters
relevant to the company, including audit, internal controls, risk
management, sustainability and strategy. It is encouraged that companies
assess their own training and development needs in determining the
coverage of their continuing training program.
Recommendation 1.4
The Board should have a policy on board diversity.
Explanation
Having a board diversity policy is a move to avoid groupthink and ensure
that optimal decision-making is achieved. A board diversity policy is not
limited to gender diversity. It also includes diversity in age, ethnicity,
culture, skills, competence and knowledge. On gender diversity policy, a
good example is to increase the number of female directors, including
female independent directors.
Recommendation 1.5
The Board should ensure that it is assisted in its duties by a Corporate Secretary,
who should be a separate individual from the Compliance Officer. The Corporate
Secretary should not be a member of the Board of Directors and should annually
attend a training on corporate governance.
Explanation
The Corporate Secretary is primarily responsible to the corporation and its
shareholders, and not to the Chairman or President of the Company and
has, among others, the following duties and responsibilities:
 a. Assists the Board and the board committees in the conduct of their
meetings, including preparing an annual schedule of Board and committee
meetings and the annual board calendar, and assisting the chairs of the
Board and its committees to set agendas for those meetings;
b. Safe keeps and preserves the integrity of the minutes of the meetings of
the Board and its committees, as well as other official records of the
corporation;
c. Keeps abreast on relevant laws, regulations, all governance issuances,
relevant industry developments and operations of the corporation, and
advises the Board and the Chairman on all relevant issues as they arise;
d. Works fairly and objectively with the Board, Management and
stockholders and contributes to the flow of information between the Board
and management, the Board and its committees, and the Board and its
stakeholders, including shareholders;
e. Advises on the establishment of board committees and their terms of
reference;
f. Informs members of the Board, in accordance with the by-laws, of the
agenda of their meetings at least five working days in advance, and
ensures that the members have before them accurate information that will
enable them to arrive at intelligent decisions on matters that require their
approval;
g. Attends all Board meetings, except when justifiable causes, such as
illness, death in the immediate family and serious accidents, prevent
him/her from doing so;
h. Performs required administrative functions;
i. Oversees the drafting of the by-laws and ensures that they conform with
regulatory requirements; and
j. Performs such other duties and responsibilities as may be provided by
the SEC.
Recommendation 1.6
The Board should ensure that it is assisted in its duties by a Compliance Officer,
who should have a rank of Senior Vice President or an equivalent position with
adequate stature and authority in the corporation. The Compliance Officer should
not be a member of the Board of Directors and should annually attend a training
on corporate governance.
Explanation
The Compliance Officer is a member of the company’s management team
in charge of the compliance function. Similar to the Corporate Secretary,
he/she is primarily liable to the corporation and its shareholders, and not
to the Chairman or President of the company. He/she has, among others,
the following duties and responsibilities:
a. Ensures proper onboarding of new directors (i.e., orientation on the
company’s business, charter, articles of incorporation and by-laws,
among others);
b. Monitors, reviews, evaluates and ensures the compliance by the
corporation, its officers and directors with the relevant laws, this Code,
 rules and regulations and all governance issuances of regulatory
agencies;
c. Reports the matter to the Board if violations are found and recommends
the imposition of appropriate disciplinary action;
d. Ensures the integrity and accuracy of all documentary submissions to
regulators;
e. Appears before the SEC when summoned in relation to compliance with
this Code;
f. Collaborates with other departments to properly address compliance
issues, which may be subject to investigation;
g. Identifies possible areas of compliance issues and works towards the
resolution of the same;
h. Ensures the attendance of board members and key officers to relevant
trainings; and
i. Performs such other duties and responsibilities as may be provided by
the SEC.

2. ESTABLISHING CLEAR ROLES AND RESPONSIBILITIES OF THE BOARD

Principle 2: The fiduciary roles, responsibilities and accountabilities of the Board as
provided under the law, the company’s articles and by-laws, and other legal
pronouncements and guidelines should be clearly made known to all directors as well
as to stockholders and other stakeholders.
Recommendation 2.1
The Board members should act on a fully informed basis, in good faith, with due
diligence and care, and in the best interest of the company and all shareholders.
Explanation
The Board members should act on a fully informed basis, in good faith,
with due diligence and care, and in the best interest of the company and
all shareholders. There are two key elements of the fiduciary duty of board
members: the duty of care and the duty of loyalty. The duty of care
requires board members to act on a fully informed basis, in good faith,
with due diligence and care. The duty of loyalty is also of central
importance; the board member should act in the interest of the company
and all its shareholders, and not those of the controlling company of the
group or any other stakeholder.
Recommendation 2.2
The Board should oversee the development of and approve the company’s
business objectives and strategy, and monitor their implementation, in order to
sustain the company’s long-term viability and strength.
Explanation
According to the OECD, the Board should review and guide corporate
strategy, major plans of action, risk management policies and procedures,
annual budgets and business plans; set performance objectives; monitor
implementation and corporate performance; and oversee major capital
expenditures, acquisitions and divestitures. Sound strategic policies and
objectives translate to the company’s proper identification and
 prioritization of its goals and guidance on how best to achieve them. This
creates optimal value to the corporation.
Recommendation 2.3
The Board should be headed by a competent and qualified Chairperson.
Explanation
The roles and responsibilities of the Chairman include, among others, the
following:
a. Makes certain that the meeting agenda focuses on strategic matters,
including the overall risk appetite of the corporation, considering the
developments in the business and regulatory environments, key
governance concerns, and contentious issues that will significantly affect
operations;
b. Guarantees that the Board receives accurate, timely, relevant,
insightful, concise, and clear information to enable it to make sound
decisions;
c. Facilitates discussions on key issues by fostering an environment
conducive for constructive debate and leveraging on the skills and
expertise of individual directors;
d. Ensures that the Board sufficiently challenges and inquires on reports
submitted and representations made by Management;
e. Assures the availability of proper orientation for first-time directors and
continuing training opportunities for all directors; and
f. Makes sure that performance of the Board is evaluated at least once a
year and discussed/followed up on.
Recommendation 2.4
The Board should be responsible for ensuring and adopting an effective
succession planning program for directors, key officers and management to
ensure growth and a continued increase in the shareholders’ value. This should
include adopting a policy on the retirement age for directors and key officers as
part of management succession and to promote dynamism in the corporation.
Explanation
The transfer of company leadership to highly competent and qualified
individuals is the goal of succession planning. It is the Board’s
responsibility to implement a process to appoint competent, professional,
honest and highly motivated management officers who can add value to
the company.
A good succession plan is linked to the documented roles and
responsibilities for each position, and should start in objectively identifying
the key knowledge, skills, and abilities required for the position. For any
potential candidate identified, a professional development plan is defined
to help the individuals prepare for the job (e.g., training to be taken and
cross experience to be achieved). The process is conducted in an
impartial manner and aligned with the strategic direction of the
organization.
Recommendation 2.5
The Board should align the remuneration of key officers and board members with
the long-term interests of the company. In doing so, it should formulate and adopt
a policy specifying the relationship between remuneration and performance.
Further, no director should participate in discussions or deliberations involving his
own remuneration.
Explanation
Companies are able to attract and retain the services of qualified and
competent individuals if the level of remuneration is sufficient, in line with
the business and risk strategy, objectives, values and incorporate
measures to prevent conflicts of interest. Remuneration policies promote a
sound risk culture in which risk-taking behavior is appropriate. They also
encourage employees to act in the long-term interest of the company as a
whole, rather than for themselves or their business lines only. Moreover, it
is good practice for the Board to formulate and adopt a policy specifying
the relationship between remuneration and performance, which includes
specific financial and nonfinancial metrics to measure performance and
set specific provisions for employees with significant influence on the
overall risk profile of the corporation.
Key considerations in determining proper compensation include the
following:
(1) the level of remuneration is commensurate to the
responsibilities of the role;
(2) no director should participate in deciding on his remuneration;
and
(3) remuneration pay-out schedules should be sensitive to risk
outcomes over a multi-year horizon.
For employees in control functions (e.g., risk, compliance and internal
audit), their remuneration is determined independent of any business line
being overseen, and performance measures are based principally on the
achievement of their objectives so as not to compromise their
independence.
Recommendation 2.6
The Board should have and disclose in its Manual on Corporate Governance a
formal and transparent board nomination and election policy that should include
how it accepts nominations from minority shareholders and reviews nominated
candidates. The policy should also include an assessment of the effectiveness of
the Board’s processes and procedures in the nomination, election, or
replacement of a director. In addition, its process of identifying the quality of
directors should be aligned with the strategic direction of the company.
Explanation
It is the Board’s responsibility to develop a policy on board nomination,
which is contained in the company’s Manual on Corporate Governance.
The policy should encourage shareholders’ participation by including
procedures on how the Board accepts nominations from minority
shareholders. The policy should also promote transparency of the Board’s
nomination and election process.
The nomination and election process also includes the review and
evaluation of the qualifications of all persons nominated to the Board,
including whether candidates: (1) possess the knowledge, skills,
experience, and particularly in the case of non-executive directors,
independence of mind given their responsibilities to the Board and in light
of the entity’s business and risk profile; (2) have a record of integrity and
good repute; (3) have sufficient time to carry out their responsibilities; and
(4) have the ability to promote a smooth interaction between board
members. A good practice is the use of professional search firms or
external sources when searching for candidates to the Board.
In addition, the process also includes monitoring the qualifications of the
directors. The qualifications and grounds for disqualification are contained
in the company’s Manual on Corporate Governance.
The following may be considered as grounds for the permanent
disqualification of a director:
a. Any person convicted by final judgment or order by a competent judicial
or administrative body of any crime that:
(a) involves the purchase or sale of securities, as defined in the
Securities Regulation Code;
(b) arises out of the person’s conduct as an underwriter, broker,
dealer, investment adviser, principal, distributor, mutual fund
dealer, futures commission merchant, commodity trading advisor,
or floor broker; or
(c) arises out of his fiduciary relationship with a bank, quasi-bank,
trust company, investment house or as an affiliated person of any
of them;
b. Any person who, by reason of misconduct, after hearing, is permanently
enjoined by a final judgment or order of the SEC, Bangko Sentral ng
Pilipinas (BSP) or any court or administrative body of competent
jurisdiction from:
(a) acting as underwriter, broker, dealer, investment adviser,
principal distributor, mutual fund dealer, futures commission
merchant, commodity trading advisor, or floor broker;
(b) acting as director or officer of a bank, quasi-bank, trust
company, investment house, or investment company;
(c) engaging in or continuing any conduct or practice in any of the
capacities mentioned in sub-paragraphs (a) and (b) above, or
willfully violating the laws that govern securities and banking
activities.
The disqualification should also apply if
(a) such person is the subject of an order of the SEC, BSP or any
court or administrative body denying, revoking or suspending any
registration, license or permit issued to him under the Corporation
Code, Securities Regulation Code or any other law administered by
the SEC or BSP, or under any rule or regulation issued by the
Commission or BSP;
 (b) such person has otherwise been restrained to engage in any
activity involving securities and banking; or
(c) such person is the subject of an effective order of a self-
regulatory organization suspending or expelling him from
membership, participation or association with a member or
participant of the organization;
c. Any person convicted by final judgment or order by a court, or
competent administrative body of an offense involving moral turpitude,
fraud, embezzlement, theft, estafa, counterfeiting, misappropriation,
forgery, bribery, false affirmation, perjury or other fraudulent acts;
d. Any person who has been adjudged by final judgment or order of the
SEC, BSP, court, or competent administrative body to have willfully
violated, or willfully aided, abetted, counseled, induced or procured the
violation of any provision of the Corporation Code, Securities Regulation
Code or any other law, rule, regulation or order administered by the SEC
or BSP;
e. Any person judicially declared as insolvent;
f. Any person found guilty by final judgment or order of a foreign court or
equivalent financial regulatory authority of acts, violations or misconduct
similar to any of the acts, violations or misconduct enumerated previously;
g. Conviction by final judgment of an offense punishable by imprisonment
for more than six years, or a violation of the Corporation Code committed
within five years prior to the date of his election or appointment; and
h. Other grounds as the SEC may provide.
In addition, the following may be grounds for temporary disqualification of
a director:
a. Absence in more than fifty percent (50%) of all regular and
special meetings of the Board during his incumbency, or any 12-
month period during the said incumbency, unless the absence is
due to illness, death in the immediate family or serious accident.
The disqualification should apply for purposes of the succeeding
election;
b. Dismissal or termination for cause as director of any publicly-
listed company, public company, registered issuer of securities and
holder of a secondary license from the Commission. The
disqualification should be in effect until he has cleared himself from
any involvement in the cause that gave rise to his dismissal or
termination;
c. If the beneficial equity ownership of an independent director in
the corporation or its subsidiaries and affiliates exceeds two
percent (2%) of its subscribed capital stock. The disqualification
from being elected as an independent director is lifted if the limit is
later complied with; and
d. If any of the judgments or orders cited in the grounds for
permanent disqualification has not yet become final.
Recommendation 2.7
The Board should have the overall responsibility in ensuring that there is a group-
wide policy and system governing related party transactions (RPTs) and other
unusual or infrequently occurring transactions, particularly those which pass
certain thresholds of materiality. The policy should include the appropriate review
and approval of material or significant RPTs, which guarantee fairness and
transparency of the transactions. The policy should encompass all entities within
the group, taking into account their size, structure, risk profile and complexity of
operations.

Explanation
Ensuring the integrity of related party transactions is an important fiduciary
duty of the director. It is the Board’s role to initiate policies and measures
geared towards prevention of abuse and promotion of transparency, and
in compliance with applicable laws and regulations to protect the interest
of all shareholders. One such measure is the required ratification by
shareholders of material or significant RPTs approved by the Board, in
accordance with existing laws. Other measures include ensuring that
transactions occur at market prices, at arm’s-length basis and under
conditions that protect the rights of all shareholders.
The following are suggestions for the content of the RPT Policy:
• Definition of related parties;
• Coverage of RPT policy;
• Guidelines in ensuring arm’s-length terms;
• Identification and prevention or management of potential or actual
conflicts of interest which arise;
• Adoption of materiality thresholds;
• Internal limits for individual and aggregate exposures;
• Whistle-blowing mechanisms, and
• Restitution of losses and other remedies for abusive RPTs.
In addition, the company is given the discretion to set their materiality
threshold at a level where omission or misstatement of the transaction
could pose a significant risk to the company and influence its economic
decision. The SEC may direct a company to reduce its materiality
threshold or amend excluded transactions if the SEC deems that the
threshold or exclusion is inappropriate considering the company’s size,
risk profile, and risk management systems.
Depending on the materiality threshold, approval of management, the RPT
Committee, the Board or the shareholders may be required. In cases
where the shareholders’ approval is required, it is good practice for
interested shareholders to abstain and let the disinterested parties or
majority of the minority shareholders decide.
Recommendation 2.8
The Board should be primarily responsible for approving the selection and
assessing the performance of the Management led by the Chief Executive Officer
(CEO), and control functions led by their respective heads (Chief Risk Officer,
Chief Compliance Officer, and Chief Audit Executive).
 Explanation
It is the responsibility of the Board to appoint a competent management
team at all times, monitor and assess the performance of the management
team based on established performance standards that are consistent
with the company’s strategic objectives, and conduct a regular review of
the company’s policies with the management team. In the selection
process, fit and proper standards are to be applied on key personnel and
due consideration is given to integrity, technical expertise and experience
in the institution’s business, either current or planned.
Recommendation 2.9
The Board should establish an effective performance management framework
that will ensure that the Management, including the Chief Executive Officer, and
personnel’s performance is at par with the standards set by the Board and Senior
Management.
Explanation
Results of performance evaluation should be linked to other human
resource activities such as training and development, remuneration, and
succession planning. These should likewise form part of the assessment
of the continuing fitness and propriety of management, including the Chief
Executive Officer, and personnel in carrying out their respective duties and
responsibilities.
Recommendation 2.10
The Board should oversee that an appropriate internal control system is in place,
including setting up a mechanism for monitoring and managing potential conflicts
of interest of Management, board members, and shareholders. The Board should
also approve the Internal Audit Charter.
Explanation
In the performance of the Board’s oversight responsibility, the minimum
internal control mechanisms may include overseeing the implementation
of the key control functions, such as risk management, compliance and
internal audit, and reviewing the corporation’s human resource policies,
conflict of interest situations, compensation program for employees and
management succession plan.
Recommendation 2.11
The Board should oversee that a sound enterprise risk management (ERM)
framework is in place to effectively identify, monitor, assess and manage key
business risks. The risk management framework should guide the Board in
identifying units/business lines and enterprise-level risk exposures, as well as the
effectiveness of risk management strategies.
Explanation
Risk management policy is part and parcel of a corporation’s corporate
strategy. The Board is responsible for defining the company’s level of risk
tolerance and providing oversight over its risk management policies and
procedures.
Recommendation 2.12
 The Board should have a Board Charter that formalizes and clearly states its
roles, responsibilities and accountabilities in carrying out its fiduciary duties. The
Board Charter should serve as a guide to the directors in the performance of their
functions and should be publicly available and posted on the company’s website.
Explanation
The Board Charter guides the directors on how to discharge their
functions. It provides the standards for evaluating the performance of the
Board. The Board Charter also contains the roles and responsibilities of
the Chairman.

3. ESTABLISHING BOARD COMMITTEES

Principle 3: Board committees should be set up to the extent possible to support the
effective performance of the Board’s functions, particularly with respect to audit, risk
management, related party transactions, and other key corporate governance concerns,
such as nomination and remuneration. The composition, functions and responsibilities
of all committees established should be contained in a publicly available Committee
Charter.
Recommendation 3.1
The Board should establish board committees that focus on specific board
functions to aid in the optimal performance of its roles and responsibilities.
Explanation
Board committees such as the Audit Committee, Corporate Governance
Committee, Board Risk Oversight Committee and Related Party
Transaction Committee are necessary to support the Board in the effective
performance of its functions. The establishment of the same, or any other
committees that the company deems necessary, allows for specialization
in issues and leads to a better management of the Board’s workload. The
type of board committees to be established by a company would depend
on its size, risk profile and complexity of operations. However, if the
committees are not established, the functions of these committees may be
carried out by the whole board or by any other committee.
Recommendation 3.2
The Board should establish an Audit Committee to enhance its oversight
capability over the company’s financial reporting, internal control system, internal
and external audit processes, and compliance with applicable laws and
regulations. The committee should be composed of at least three appropriately
qualified non-executive directors, the majority of whom, including the Chairman,
should be independent. All of the members of the committee must have relevant
background, knowledge, skills, and/or experience in the areas of accounting,
auditing and finance. The Chairman of the Audit Committee should not be the
chairman of the Board or of any other committees.
Explanation
The Audit Committee is responsible for overseeing the senior
management in establishing and maintaining an adequate, effective and
efficient internal control framework. It ensures that systems and processes
 are designed to provide assurance in areas including reporting, monitoring
compliance with laws, regulations and internal policies, efficiency and
effectiveness of operations, and safeguarding of assets.
Recommendation 3.3
The Board should establish a Corporate Governance Committee that should be
tasked to assist the Board in the performance of its corporate governance
responsibilities, including the functions that were formerly assigned to a
Nomination and Remuneration Committee. It should be composed of at least
three members, all of whom should be independent directors, including the
Chairman.
Explanation
The Corporate Governance Committee (CG Committee) is tasked with
ensuring compliance with and proper observance of corporate governance
principles and practices. It has the following duties and functions, among
others:
a. Oversees the implementation of the corporate governance framework
and periodically reviews the said framework to ensure that it remains
appropriate in light of material changes to the corporation’s size,
complexity and business strategy, as well as its business and regulatory
environments;
b. Oversees the periodic performance evaluation of the Board and its
committees as well as executive management, and conducts an annual
self-evaluation of its performance;
c. Ensures that the results of the Board evaluation are shared, discussed,
and that concrete action plans are developed and implemented to address
the identified areas for improvement;
d. Recommends continuing education/training programs for directors,
assignment of tasks/projects to board committees, succession plan for the
board members and senior officers, and remuneration packages for
corporate and individual performance;
e. Adopts corporate governance policies and ensures that these are
reviewed and updated regularly, and consistently implemented in form and
substance;
f. Proposes and plans relevant trainings for the members of the Board;
g. Determines the nomination and election process for the company’s
directors and has the special duty of defining the general profile of board
members that the company may need and ensuring appropriate
knowledge, competencies and expertise that complement the existing
skills of the Board; and
h. Establishes a formal and transparent procedure to develop a policy for
determining the remuneration of directors and officers that is consistent
with the corporation’s culture and strategy as well as the business
environment in which it operates.
The establishment of a Corporate Governance Committee does not
preclude companies from establishing separate Remuneration or
Nomination Committees, if they deem necessary.
Recommendation 3.4
Subject to a corporation’s size, risk profile and complexity of operations, the
Board should establish a separate Board Risk Oversight Committee (BROC) that
should be responsible for the oversight of a company’s Enterprise Risk
Management system to ensure its functionality and effectiveness. The BROC
should be composed of at least three members, the majority of whom should be
independent directors, including the Chairman. The Chairman should not be the
Chairman of the Board or of any other committee. At least one member of the
committee must have relevant thorough knowledge and experience on risk and
risk management.
Explanation
The establishment of a Board Risk Oversight Committee (BROC) is
generally for conglomerates and companies with a high risk profile.
Enterprise risk management is integral to an effective corporate
governance process and the achievement of a company's value creation
objectives. Thus, the BROC has the responsibility to assist the Board in
ensuring that there is an effective and integrated risk management
process in place. With an integrated approach, the Board and top
management will be in a confident position to make well-informed
decisions, having taken into consideration risks related to significant
business activities, plans and opportunities.
The BROC has the following duties and responsibilities, among others:
a. Develops a formal enterprise risk management plan which contains the
following elements:
(a) common language or register of risks,
(b) well-defined risk management goals, objectives and oversight,
(c) uniform processes of assessing risks and developing strategies
to manage prioritized risks,
(d) designing and implementing risk management strategies, and
(e) continuing assessments to improve risk strategies, processes
and measures;
b. Oversees the implementation of the enterprise risk management plan
through a Management Risk Oversight Committee. The BROC conducts
regular discussions on the company’s prioritized and residual risk
exposures based on regular risk management reports and assesses how
the concerned units or offices are addressing and managing these risks;
c. Evaluates the risk management plan to ensure its continued relevance,
comprehensiveness and effectiveness. The BROC revisits defined risk
management strategies, looks for emerging or changing material
exposures, and stays abreast of significant developments that seriously
impact the likelihood of harm or loss;
d. Advises the Board on its risk appetite levels and risk tolerance limits;
e. Reviews at least annually the company’s risk appetite levels and risk
tolerance limits based on changes and developments in the business, the
regulatory framework, the external economic and business environment,
 and when major events occur that are considered to have major impacts
on the company;
f. Assesses the probability of each identified risk becoming a reality and
estimates its possible significant financial impact and likelihood of
occurrence. Priority areas of concern are those risks that are the most
likely to occur and to impact the performance and stability of the
corporation and its stakeholders;
g. Provides oversight over Management’s activities in managing credit,
market, liquidity, operational, legal and other risk exposures of the
corporation. This function includes regularly receiving information on risk
exposures and risk management activities from Management; and
h. Reports to the Board on a regular basis, or as deemed necessary, the
company’s material risk exposures, the actions taken to reduce the risks,
and recommends further action or plans, as necessary.

Recommendation 3.5
Subject to a corporation’s size, risk profile and complexity of operations, the
Board should establish a Related Party Transaction (RPT) Committee, which
should be tasked with reviewing all material related party transactions of the
company and should be composed of at least three non-executive directors, two
of whom should be independent, including the Chairman.
Explanation
Examples of companies that may have a separate RPT Committee are
conglomerates and universal/commercial banks in recognition of the
potential magnitude of RPTs in these kinds of corporations.
The following are the functions of the RPT Committee, among others:
a. Evaluates on an ongoing basis existing relation between and among
businesses and counterparties to ensure that all related parties are
continuously identified, RPTs are monitored, and subsequent changes in
relationships with counterparties (from non-related to related and vice
versa) are captured. Related parties, RPTs and changes in relationships
should be reflected in the relevant reports to the Board and
regulators/supervisors;
b. Evaluates all material RPTs to ensure that these are not undertaken on
more favorable economic terms (e.g., price, commissions, interest rates,
fees, tenor, collateral requirement) to such related parties than similar
transactions with nonrelated parties under similar circumstances and that
no corporate or business resources of the company are misappropriated
or misapplied, and to determine any potential reputational risk issues that
may arise as a result of or in connection with the transactions. In
evaluating RPTs, the Committee takes into account, among others, the
following:
1. The related party’s relationship to the company and interest in
the transaction;
 2. The material facts of the proposed RPT, including the proposed
aggregate value of such transaction;
3. The benefits to the corporation of the proposed RPT;
4. The availability of other sources of comparable products or
services; and
5. An assessment of whether the proposed RPT is on terms and
conditions that are comparable to the terms generally available to
an unrelated party under similar circumstances. The company
should have an effective price discovery system in place and
exercise due diligence in determining a fair price for RPTs;
c. Ensures that appropriate disclosure is made, and/or information is
provided to regulating and supervising authorities relating to the
company’s RPT exposures, and policies on conflicts of interest or potential
conflicts of interest. The disclosure should include information on the
approach to managing material conflicts of interest that are inconsistent
with such policies, and conflicts that could arise as a result of the
company’s affiliation or transactions with other related parties;
d. Reports to the Board of Directors on a regular basis, the status and
aggregate exposures to each related party, as well as the total amount of
exposures to all related parties;
e. Ensures that transactions with related parties, including write-off of
exposures are subject to a periodic independent review or audit process;
and
f. Oversees the implementation of the system for identifying, monitoring,
measuring, controlling, and reporting RPTs, including a periodic review of
RPT policies and procedures.
Recommendation 3.6
All established committees should be required to have Committee Charters
stating in plain terms their respective purposes, memberships, structures,
operations, reporting processes, resources and other relevant information. The
Charters should provide the standards for evaluating the performance of the
Committees. It should also be fully disclosed on the company’s website.
Explanation
The Committee Charter clearly defines the roles and accountabilities of
each committee to avoid any overlapping functions, which aims at having
a more effective board for the company. This can also be used as basis
for the assessment of committee performance.

4. FOSTERING COMMITMENT
Principle 4: To show full commitment to the company, the directors should devote the
time and attention necessary to perform their duties and responsibilities properly and
effectively, including sufficient time to be familiar with the corporation’s business.
Recommendation 4.1
The directors should attend and actively participate in all meetings of the Board,
Committees, and Shareholders in person or through tele-/videoconferencing
conducted in accordance with the rules and regulations of the Commission,
 except when justifiable causes, such as, illness, death in the immediate family
and serious accidents, prevent them from doing so. In Board and Committee
meetings, the director should review meeting materials and if called for, ask the
necessary questions or seek clarifications and explanations.
Explanation
A director’s commitment to the company is evident in the amount of time
he dedicates to performing his duties and responsibilities, which includes
his presence in all meetings of the Board, Committees and Shareholders.
In this way, the director is able to effectively perform his/her duty to the
company and its shareholders.
The absence of a director in more than fifty percent (50%) of all regular
and special meetings of the Board during his/her incumbency is a ground
for disqualification in the succeeding election, unless the absence is due
to illness, death in the immediate family, serious accident or other
unforeseen or fortuitous events.

Recommendation 4.2
The non-executive directors of the Board should concurrently serve as directors
to a maximum of five publicly listed companies to ensure that they have sufficient
time to fully prepare for meetings, challenge Management’s proposals/views, and
oversee the long-term strategy of the company.
Explanation
Being a director necessitates a commitment to the corporation. Hence,
there is a need to set a limit on board directorships. This ensures that the
members of the board are able to effectively commit themselves to
perform their roles and responsibilities, regularly
update their knowledge and enhance their skills. Since sitting on the board
of too many companies may interfere with the optimal performance of
board members, in that they may not be able to contribute enough time to
keep abreast of the corporation’s operations and to attend and actively
participate during meetings, a maximum board seat limit of five
directorships is recommended.
Recommendation 4.3
A director should notify the Board where he/she is an incumbent director before
accepting a directorship in another company.
Explanation
The Board expects commitment from a director to devote sufficient time
and attention to his/her duties and responsibilities. Hence, it is important
that a director notifies his/her incumbent Board before accepting a
directorship in another company. This is for the company to be able to
assess if his/her present responsibilities and commitment to the company
will be affected and if the director can still adequately provide what is
expected of him/her.

5. REINFORCING BOARD INDEPENDENCE

Principle 5: The Board should endeavor to exercise objective and independent
judgment on all corporate affairs.
Recommendation 5.1
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.
Explanation
The presence of independent directors in the Board is to ensure the
exercise of independent judgment on corporate affairs and proper
oversight of managerial performance, including prevention of conflict of
interests and balancing of competing demands of the corporation. There is
increasing global recognition that more independent directors in the Board
lead to more objective decision-making, particularly in conflict of interest
situations. In addition, experts have recognized that there are varying
opinions on the optimal number of independent directors in the board.
However, the ideal number ranges from one-third to a substantial majority.

Recommendation 5.2
The Board should ensure that its independent directors possess the necessary
qualifications and none of the disqualifications for an independent director to hold
the position.
Explanation
Independent directors need to possess a good general understanding of
the industry they are in. Further, it is worthy to note that independence and
competence should go hand-in-hand. It is therefore important that the non-
executive directors, including independent directors, possess the
qualifications and stature that would enable them to effectively and
objectively participate in the deliberations of the Board.
An Independent Director refers to a person who, ideally:
a. Is not, or has not been a senior officer or employee of the covered
company unless there has been a change in the controlling ownership of
the company;
b. Is not, and has not been in the three years immediately preceding the
election, a director of the covered company; a director, officer, employee
of the covered company’s subsidiaries, associates, affiliates or related
companies; or a director, officer, employee of the covered company’s
substantial shareholders and its related companies;
c. Has not been appointed in the covered company, its subsidiaries,
associates, affiliates or related companies as Chairman “Emeritus,” “Ex-
Officio” Directors/Officers or Members of any Advisory Board, or otherwise
appointed in a capacity to assist the Board in the performance of its duties
and responsibilities within three years immediately preceding his election;
d. Is not an owner of more than two percent (2%) of the outstanding
shares of the covered company, its subsidiaries, associates, affiliates or
related companies;
 e. Is not a relative of a director, officer, or substantial shareholder of the
covered company or any of its related companies or of any of its
substantial shareholders. For this purpose, relatives include spouse,
parent, child, brother, sister and the spouse of such child, brother or sister;
f. Is not acting as a nominee or representative of any director of the
covered company or any of its related companies;
g. Is not a securities broker-dealer of listed companies and registered
issuers of securities. “Securities broker-dealer” refers to any person
holding any office of trust and responsibility in a broker-dealer firm, which
includes, among others, a director, officer, principal stockholder, nominee
of the firm to the Exchange, an associated person or salesman, and an
authorized clerk of the broker or dealer;
h. Is not retained, either in his personal capacity or through a firm, as a
professional adviser, auditor, consultant, agent or counsel of the covered
company, any of its related companies or substantial shareholder, or is
otherwise independent of Management and free from any business or
other relationship within the three years immediately preceding the date of
his election;
i. Does not engage or has not engaged, whether by himself or with other
persons or through a firm of which he is a partner, director or substantial
shareholder, in any transaction with the covered company or any of its
related companies or substantial shareholders, other than such
transactions that are conducted at arm’s length and could not materially
interfere with or influence the exercise of his independent judgment;
j. Is not affiliated with any non-profit organization that receives significant
funding from the covered company or any of its related companies or
substantial shareholders; and
k. Is not employed as an executive officer of another company where any
of the covered company’s executives serve as directors.
Related companies, as used in this section, refer to
(a) the covered entity’s holding/parent company;
(b) its subsidiaries; and (c) subsidiaries of its holding/parent company.
Recommendation 5.3
The Board’s independent directors should serve for a maximum cumulative term
of nine years. After which, the independent director should be perpetually barred
from reelection as such in the same company but may continue to qualify for
nomination and election as a non-independent director. In the instance that a
company wants to retain an independent director who has served for nine years,
the Board should provide meritorious justification/s and seek shareholders’
approval during the annual shareholders’ meeting.
Explanation
Service in a board for a long duration may impair a director’s ability to act
independently and objectively. Hence, the tenure of an independent
director is set to a cumulative term of nine years. Independent directors
(IDs) who have served for nine years may continue as a non-independent
director of the company. Reckoning of the cumulative nine-year term is
 from 2012, in connection with SEC Memorandum Circular No. 9, Series of
2011.
Any term beyond nine years for an ID is subjected to particularly rigorous
review, taking into account the need for progressive change in the Board
to ensure an appropriate balance of skills and experience. However, the
shareholders may, in exceptional cases, choose to re-elect an
independent director who has served for nine years. In such instances, the
Board must provide a meritorious justification for the re-election.
Recommendation 5.4
The positions of Chairman of the Board and Chief Executive Officer should be
held by separate individuals and each should have clearly defined
responsibilities.
Explanation
To avoid conflict or a split board and to foster an appropriate balance of
power, increased accountability, and better capacity for independent
decision-making, it is recommended that the positions of Chairman and
Chief Executive Officer (CEO) be held by different individuals. This type of
organizational structure facilitates effective decision making and good
governance. In addition, the division of responsibilities and accountabilities
between the Chairman and CEO is clearly defined and delineated and
disclosed in the Board Charter.
Recommendation 5.5
The Board should designate a lead director among the independent directors if
the Chairman of the Board is not independent, including if the positions of the
Chairman of the Board and Chief Executive Officer are held by one person.
Explanation
In cases where the Chairman is not independent and where the roles of
Chair and CEO are combined, putting in place proper mechanisms
ensures independent views and perspectives. More importantly, it avoids
the abuse of power and authority, and potential conflict of interest. A
suggested mechanism is the appointment of a strong “lead director”
among the independent directors. This lead director has sufficient
authority to lead the Board in cases where management has clear
conflicts of interest.
The functions of the lead director include, among others, the following:
a. Serves as an intermediary between the Chairman and the other
directors when necessary; b. Convenes and chairs meetings of the non-
executive directors; and c. Contributes to the performance evaluation of
the Chairman, as required.
Recommendation 5.6
A director with a material interest in any transaction affecting the corporation
should abstain from taking part in the deliberations for the same.
Explanation
The abstention of a director from participating in a meeting when related
party transactions, self-dealings or any transactions or matters on which
he/she has a material interest are taken up ensures that he has no
 influence over the outcome of the deliberations. The fundamental principle
to be observed is that a director does not use his position to profit or gain
some benefit or advantage for his himself and/or his/her related interests.
Recommendation 5.7
The non-executive directors (NEDs) should have separate periodic meetings with
the external auditor and heads of the internal audit, compliance and risk
functions, without any executive directors’ present to ensure that proper checks
and balances are in place within the corporation. The meetings should be chaired
by the lead independent director.
Explanation
NEDs are expected to scrutinize Management’s performance, particularly
in meeting the companies’ goals and objectives. Further, it is their role to
satisfy themselves on the integrity of the corporation’s internal control and
effectiveness of the risk management systems. This role can be better
performed by the NEDs if they are provided access to the external auditor
and heads of the internal audit, compliance and risk functions, as well as
to other key officers of the company without any executive directors’
present. The lead independent director should lead and preside over the
meeting.

6. ASSESSING BOARD PERFORMANCE

Principle 6: The best measure of the Board’s effectiveness is through an assessment
process. The Board should regularly carry out evaluations to appraise its performance
as a body and assess whether it possesses the right mix of backgrounds and
competencies.
Recommendation 6.1
The Board should conduct an annual self-assessment of its performance,
including the performance of the Chairman, individual members and committees.
Every three years, the assessment should be supported by an external facilitator.
Explanation
Board assessment helps the directors to thoroughly review their
performance and understand their roles and responsibilities. The periodic
review and assessment of the Board’s performance as a body, the board
committees, the individual directors, and the Chairman show how the
aforementioned should perform their responsibilities effectively. In
addition, it provides a means to assess a director’s attendance at board
and committee meetings, participation in boardroom discussions and
manner of voting on material issues. The use of an external facilitator in
the assessment process increases the objectivity of the same. The
external facilitator can be any independent third party such as, but not
limited to, a consulting firm, academic institution, or professional
organization.
Recommendation 6.2
The Board should have in place a system that provides, at the minimum, criteria
and process to determine the performance of the Board, the individual directors,
 committees and such system should allow for a feedback mechanism from the
shareholders.
Explanation
Disclosure of the criteria, process and collective results of the assessment
ensures transparency and allows shareholders and stakeholders to
determine if the directors are performing their responsibilities to the
company. Companies are given the discretion to determine the
assessment criteria and process, which should be based on the
mandates, functions, roles and responsibilities provided in the Board and
Committee Charters. In establishing the criteria, attention is given to the
values, principles and skills required for the company. The Corporate
Governance Committee oversees the evaluation process.

7. STRENGTHENING BOARD ETHICS

Principle 7: Members of the Board are duty-bound to apply high ethical standards,
considering the interests of all stakeholders.
Recommendation 7.1
The Board should adopt a Code of Business Conduct and Ethics, which would
provide standards for professional and ethical behavior, as well as articulate
acceptable and unacceptable conduct and practices in internal and external
dealings. The Code should be properly disseminated to the Board, senior
management, and employees. It should also be disclosed and made available to
the public through the company website.
Explanation
A Code of Business Conduct and Ethics formalizing ethical values is an
important tool to instill an ethical corporate culture that pervades
throughout the company. The main responsibility to create and design a
Code of Conduct suitable to the needs of the company and the culture by
which it operates lies with the Board. To ensure proper compliance with
the Code, appropriate orientation and training of the Board, senior
management, and employees on the same are necessary.
Recommendation 7.2
The Board should ensure the proper and efficient implementation and monitoring
of compliance with the Code of Business Conduct and Ethics and internal
policies.
Explanation
The Board has the primary duty to make sure that the internal controls are
in place to ensure the company’s compliance with the Code of Business
Conduct and Ethics and its internal policies and procedures. Hence, it
needs to ensure the implementation of said internal controls to support,
promote and guarantee compliance. This includes efficient communication
channels, which aid and encourage employees, customers, suppliers, and
creditors to raise concerns on potential unethical/unlawful behavior without
fear of retribution. A company’s ethics policy can be made effective and
inculcated in the company culture through a communication and
awareness campaign, continuous training to reinforce the code, strict
monitoring and implementation and setting in place proper avenues where
issues may be raised and addressed without fear of retribution.