How independent are independent directors in Philippine listed companies?
The evolution of Philippine listed corporations has been aptly described as actually “glorified family corporations” which later decided to offer their shares to the public. There is a dominance of controlled corporations in the Philippines as opposed to widely held corporations which are popular in the U.S. Hence, the ownership structure issue among the Philippines lies at the very core of all corporate governance initiatives that seem to curb the gains of achieving the desired board independence from management and the controller.
Some scholars, however, do not see the ownership structure per se as the problem since they are espousing the principle of allowing the controlling stockholder to take the lead in corporate governance.
When the controller encounters a conflict-of-interest situation or insider trading problems, on which side does the independent director stand? Scholars Bebchuk and Hamdani argue that independent directors in controlled companies still have incentives to favor controllers, undermining their effectiveness in overseeing controller conflicts.
Under the Philippine setting, the controller exercises some degree of control or influence in the nomination, election, and independent directors’ removal. Under SEC Memorandum Circular No. 16, Series of 2002, there is no qualification for stockholders who can nominate a person for independent director position except that the candidate is not acting as a nominee or representative of a substantial shareholder of the corporation, any of its related companies or any of its substantial shareholders. The rules provide a screening mechanism through the Nomination Committee to determine if the nominee has all the qualifications and none of the disqualifications.
The election of independent directors is made according to the company’s standard election procedures or its by-laws. This situation means that shares are converted into voting power, and the controlling stockholder or group, as well as the minority shareholders, may resort to cumulative voting to ensure the election of their preferred candidates. This ‘tyranny of numbers’ will expectedly yield a result that is aligned to the wishes of the controlling stockholder, leaving the minority shareholders with no representation in the Board. As a result, the elected independent directors might feel gratitude towards the shareholder who elected them, and in the words of Bebchuk and Hamdani, “You dance with the one who brought you to the party.”