By: Atty. Gregorio B. Austral, CPA
In Board We Trust
We invest our hard-earned money in corporations with the end in mind that our
money will grow. But why do we risk our money in exchange for expected returns?
The strength – and indeed the survival – of any corporation depends on a
balance of two distinct powers: the power of those who own the corporation and the
power of those who run it. Shareholders entrust their hard-earned money to the
corporation governed by a board with the expectation that they will be able to reap the
financial and non-financial rewards of their investments.
While individual shareholders may choose to directly invest their money in any
business venture, the pooling of resources from the public is necessary to generate
substantial capitalization to finance business ventures that have a huge economic
impact. The management of funds generated through the corporate medium of doing
business presents a challenge in terms of marshaling corporate resources toward the
achievement of corporate goals.
True, a corporation depends on shareholders for capital. But the crafting of
policies and the day-to-day operations of the enterprise must be entrusted to a smaller
group of persons such as the board of directors and the management, respectively.
This creates opportunities for efficiencies far beyond what any one owner/manager, or
even a group of managers, could accomplish. However, it also creates opportunities for
abuse.
In the Philippines, the board of directors or trustees shall exercise corporate
powers, conduct all business, and control all properties of the corporation. The
members of the board of directors have a three-fold duty: duty of obedience, duty of
diligence, and duty of loyalty. Accordingly, the members of the board of directors (1)
shall direct the affairs of the corporation only in accordance with the purposes for which
it was organized; (2) shall not willfully and knowingly vote for or assent to patently
unlawful acts of the corporation or act in bad faith or with gross negligence in directing
the affairs of the corporation; and (3) shall not acquire any personal or pecuniary
interest in conflict with their duty as such directors or trustees.
Despite the duties imposed on directors under the law and prevailing
jurisprudence, the ownership structure of publicly-listed companies in the Philippines
which are controlled mostly by a few rich families, and the manner of election of the
board members make it difficult for the board to exercise the independence necessary
to comply with their three-fold duties faithfully. The nomination and election of
independent directors as mandated by law and regulations is aimed at neutralizing the
bias in decisions in favor of the controller of the companies.
This is the current mechanism designed by law and regulation to provide checks
and balances in corporate boards. Whether or not the board will faithfully comply with
its mandate as a condition in investing our life savings is a question that is sometimes
considered a leap of faith.