“WHAT IS AN INDEPENDENT DIRECTOR? Why did you accept the position?” So my friends asked me after media reported my election as one of the two independent directors of Meralco. (The other is retired banker Vicente L. Panlilio.)
Who may be independents. Since I am already kept busy as independent director in some other firms, I initially hesitated accepting my nomination. I thought the work in Meralco was too stressful for this retiree not only because of the nature of the company’s business but also because of the high profile controversy between the Lopez group and GSIS president Winston Garcia. But I decided to accept in the hope that I could help uphold good corporate governance, promote the interests of customers, investors and employees, and ultimately, reduce electricity rates.
Sec. 38 of the Securities Regulation Code or SRC (Republic Act 8799), which took effect on Aug. 8, 2000, defines an independent director in typical legalese as “a person other than an officer or employee of the corporation, its parents or subsidiaries, or any other individual having a relationship with the corporation, which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.” Listed corporations, among others, are required to have at least two independent directors.
Circular 16, Series of 2002, of the Securities and Exchange Commission is a little more explanatory: “a person who, apart from his fees and shareholdings, is independent of management and 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?”
Who may not be independents. An independent director should not have any business, professional, or financial dealings with the corporation and its affiliates, or be related by blood, marriage or employment with any “substantial” shareholder, director, or officer. Thus, an executive or professional adviser of the corporation or its affiliates cannot serve concurrently as its/their independent director. However, an independent director of one company can be an independent director of a related entity.
The stockholders elect all corporate directors. Most of the time, the major shareholders vote themselves or their nominees into the board of directors to protect and promote their corporate and personal interests. Many times, they dominate the board and appoint themselves or their associates as top executives, resulting sometimes in conflicts between the owners’ and the corporation’s disparate interests.
Because shares are classified into voting (or common) and non-voting (or preferred), the officer-directors are able to run companies that are much larger than their equities or shareholdings. This is especially true of businesses listed in the stock exchange, as well as of banks, investment houses, securities brokers, and other entities that deal with “other people’s money.”
Selection of independents. To protect the corporation, its creditors, investors and the public and to professionalize corporate governance, the SRC encourages the election of more independents than the minimum of two set by law. To assure that only “the best and the brightest” are chosen as independents, this SEC circular set down stringent requirements for their election, like:
1. A nomination committee, created well before the election, pre-screens the qualifications and submits to the SEC and the shareholders the list of nominees, together with their bio-data.
2. Only the nominees appearing in the final list are eligible for election. No further nominations whether prior to or during the shareholders? meeting are allowed.
3. The chair of the meeting shall inform the shareholders of the mandatory requirement of electing independent directors and shall ensure that they are elected during the meeting. Slots reserved for independents cannot be filled by unqualified nominees.
4. In turn, the SRC bars independents from soliciting votes for themselves or for others.
Because of the rigid requirements of uprightness, independents are usually chosen from retired jurists who understand the labyrinths of business, retired bankers, former public officials and corporate executives with solid reputations for untrammeled judgment and equanimity.
Indeed, while the shareholders elect them, independents are expected to act apart from and at times opposed to the pecuniary interests of the owners. Sometimes, they may need to air views and cast votes opposite those of the shareholders who chose them. That demands moral courage and integrity beyond the ordinary.
Although the last election for regular Meralco directors was contentious, the one for independents was largely uncontroversial. After prior screening by the Meralco Nomination Committee and the two major shareholders (the Lopez group and the GSIS) only Mr. Panlilio and I were finally nominated and incontestably elected to the two slots.
I believe that this is a tribute not to us but to the two major shareholders who, despite the acrimony that beset the shareholders? meeting, have accorded exemplary regard for the independent directorship system. In turn, I shall (and I think, Mr. Panlilio also) work beyond the current corporate struggle and perform my duties with the independence, integrity and probity expected of me by the law, the shareholders and the public.
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