Reflections on the SEC Corporate Governance Blueprint Project

Reflections on the SEC Corporate Governance Blueprint Project sent by retired Chief Justice ARTEMIO V. PANGANIBAN to SEC Chairperson Teresita J. Herbosa and the members of the Consultative Group on the Corporate Governance Blueprint on July 7, 2015

To begin with, I agree with the effort to improve good (repeat, good) corporate governance in our country in step with what Dr. Jesus P. Estanislao, Consultant in the SEC Blueprint Project, calls “two important priorities (i) sustaining the momentum of growth; and (ii) securing the inclusiveness of economic progress.” (italics in original)

In the grand project to update the Blueprint for Corporate Governance, he added that we must “take into account the ‘Initial References’ that the SEC has chosen,” namely: (a) the draft OECD Principles of Corporate Governance for 2015, (b) the ASEAN Corporate Governance Scorecard (ACGS), (c) the CSLS-ACGA CG Watch Reports and (d) the Malaysian 2011 ASEAN Blueprint.

Underlying and enveloping the foregoing twin calls is what Dr. Estanislao terms as “the imperative of sticking to the spirit that enlivens rather than to the impositions that deadens.” Lawyers have an equivalent maxim: Interpret laws according to the spirit that liveth rather than to the letter that killeth. Truly, we should always bear in mind the rationale for good corporate governance rather than the specific impositions or regulations that may, in fact, defeat or diminish the inclusive economic growth that we all wish for our country and our people.

As in the larger political spectrum where the battle in democratic governance is between individual liberty versus the state’s power to promote the general welfare, the struggle in good corporate governance is between private initiative and entrepreneurship, on one hand, versus governmental regulation to protect innocent investment, on the other. The ideal is always to find the proper balance between these two competing democratic forces of freedom and regulation. But doubts should always be decided in favor of liberty and private initiative. That, in short, is the very essence of the complicated field of constitutional law. Indeed, in our Philippine economic system, the private sector is the engine of economic growth. The role of government is to inspire and facilitate private entrepreneurship, interfering only to check avarice and to level the playing field.

Furthermore, with regard to the four “Initial References” the SEC has chosen, may I respectfully submit that we cannot, and should not, adopt by law or by regulation, foreign practices and rules just because they may have worked well overseas without considering the circumstances that impelled them. We must always consider the factual, historical, cultural and social differences between our country and these foreign jurisdictions. I think that of more primacy are our own pristine values, principles, practices and usages that have proven effective in our unique milieu. In other words, foreign influences must be “inculturated” into our specific environment.

Of course, Philippine publicly-listed companies (PLCs) which have chosen to be listed in foreign jurisdictions must follow the laws and PLC rules there, in addition to observing our local laws and regulations. For example, PLDT, the only Philippine company listed in the New York Stock Exchange, must obey the stringent US statutes and NYSE rules, like the SOX (Sarbanes-Oxley) Law. This makes directorships in PLDT more difficult and more hazardous because directors must strictly follow said laws and rules and absorb the risks of administrative and penal sanctions for their violations. Knowing and obeying such laws and regulations take years of study.

Consistent with the foregoing, I believe we must remember a few basic principles and assumptions applicable to our specific inculturated milieu, as follows:

(1) Our political-economic system is liberal democracy in which, I believe, five values prevail: transparency, accountability, responsibility, integrity (and independence) and the rule of law (TARIR).

(2) On the macro level of our political-economic system, the best way to conquer poverty, to create wealth, and to share prosperity is to unleash the entrepreneurial genius of people by granting them the freedom and the tools to help themselves and society. I shared this macro thesis before the recent General Assembly of the Asean Law Association (ALA) earlier this year. I summarized my speech there in two columns in the Philippine Daily Inquirer on March 1 and March 8, 2015 (both titled “Unleashing entrepreneurial ingenuity”). The original speech may be downloaded from my personal website,

In addition, the World Bank (where I humbly sit as a member of the Philippine Advisory Council) predicted that if our country can sustain its present annual growth rate of 6 percent for one generation, our per capita income of $3,300 in 2013 will increase to $35,000 in 2043 thereby bringing us to First World status. I discussed this World Bank position in my May 3, 2015 column (titled “Eradicating poverty”). I am attaching all three “macro” columns to these “Reflections,” for easy reference.

(3) On a micro level, to protect the shareholders rights in our corporate world and to improve corporate governance, I believe we should still keep in mind Dr. Estanislao’s “imperative of sticking to the spirit that enlivens rather than to the impositions that deadens,” and if I may be permitted to add, we should also remember the TARIR values (transparency, accountability, responsibility, integrity and rule of law).

(4) On transparency, I believe that we should always adhere to the spirit of full disclosure to accord stakeholders a level playing field in protecting their PLC investments. Directors of all types (not just Independent Directors or IDs) should never be given any chance to profit at the expense of innocent shareholders. Related party transactions and conflicts of interest should be fully, truthfully and timely disclosed. Insider trading should be carefully scrutinized and sanctioned. I suppose these are motherhood statements that need no further elaboration in these reflections.

(5) On accountability, IDs, as a group in each PLC, should I think render a report independently – as a part of the printed Annual Report of PLCs – of all their activities for the year, including their attendance and participation in board and committee meetings. I believe this is a better safeguard than the specific “impositions” of limiting terms, board seats and calendar ages of IDs.

(6) On responsibility, Incumbent IDs should be rated not on the basis of the sheer number of seats they hold or mechanically on the number of years served, but on the basis of whether they have performed their duties mandated by law, and of their fidelity to the “spirit” of being the voice of good governance in the corporation.

In this regard, I agree with the verbal clarification made by Chairperson Teresita J. Herbosa during our initial meeting on June 29, 2015 that SEC Memorandum Circular No. 9, Series of 2011, issued on December 5, 2011, (regarding the 5-2-5 ID term) will not affect the corporate elections in 2016, that IDs elected therein can serve their full one-year terms and that said Circular will affect only the corporate elections starting in 2017.

Such clarification, once put in writing as she committed, would render academic the plea of the eight major business associations in the country (BAP, ECP, FFCCCI, MBC, MAP, PCCI, PFC and PSE), dated June 9, 2015 and addressed to Finance Secretary Cesar V. Purisima, requesting the postponement of the “5-year term limit and 5-corporation limit for IDs.” It would also free all discussions on the Blueprint Project from any perceived fear that incumbent IDs are in the immediate danger of being eased out arbitrarily.

(7) On integrity and independence, it is important to arm IDs with the protection and tools to discharge their functions. I refer to granting them by law security of tenure and compensation. As a comparison, if judges were to be appointed by the President yearly and their compensation determined by Congress also yearly, can we expect them to be truly independent? By the same token, can we truly expect full independence from IDs who depend on the votes of the majority to be elected yearly, and on the board of directors (in which they are a minority) to fix their compensation periodically? Surely, instead of restricting the prerogatives of IDs, the first order of the day should be to strengthen their independence and integrity so they can perform their lonely work effectively.

Instead of arbitrarily cutting their terms or their number of seats, good IDs should be encouraged to stay on. Surely, the reappointment of the present Governor of the Bangko Sentral ng Pilipinas to another term of six years (for a total of 12 years) did not diminish his independence and integrity. Quite the contrary, I think his longer stay in office has magnified his value and integrity.

Looking back at my seven years of being an ID in some PLCs since I retired from the judiciary, I can humbly say that it takes courage and guts to stand up and oppose the majority (which modesty aside, I have done). In large conglomerates with several complicated businesses and subsidiaries, it takes many years of study and observation to be able to meaningfully contribute to corporate goals and values, and to intelligently oppose management when necessary.

(8) On rule of law, I believe that the SEC should refrain as much as possible from making minute and detailed “impositions” particularly in limiting shareholders’ rights to vote and be voted. The Corporation Code has granted these rights to vote and be voted, and corporations have been given the right via their articles of incorporation to classify shares. Investors buy and hold more expensive common shares to enjoy these prerogatives to freely elect and be elected directors.

The right to vote and be voted as directors – whether executive, non-executive or independent – cannot be arbitrarily restricted or limited by mere administrative regulation. Only Congress has the power to legislate on them. A usurpation of legislative function by any executive agency or official is criminally and administratively sanctioned by law.

Once sued in or by the Office of the Ombudsman, the public officials concerned may be suspended from office, and if convicted after trial in our courts, they may altogether lose their offices or worse, go to jail. I do not wish to put at risk of administrative and criminal sanction any executive officer, even in the guise of promoting good corporate governance.

Always, the rule of law should be upheld, in this instance by deferring to Congress statutory matters, like whether to restrict the terms of IDs, and if so, to how many years, or whether directors should be limited to a certain number of seats in a conglomerate, or whether IDs should be increased from a minimum of two to a majority in the board of directors, or whether these matters should be left to the sound discretion of the shareholders themselves in the spirit of free enterprise given our unique historical, social and factual setting.

Areas for administrative regulations on IDs should be canalized by the standard of delegation given by Congress to the SEC in the Securities Regulation Code, namely, that an ID is without a relationship to the company that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Accordingly, SEC may, as it had, require IDs to take periodic seminars on corporate governance, make them compulsory chairs or members of certain board committees, compel stricter disclosures of their private interests, amplify their independence to carry out their responsibilities, etc.

In this connection, it would be worthy well to distinguish between the SEC’s specific rule-making power under Section 68 of the SRC and the general one under Section 72. The former (Sec. 68) clearly grants the SEC “the authority to make, amend and rescind such accounting rules and regulations as may be necessary to carry out the provisions of this Code.” The latter (Sec. 72), on the other hand, is a general grant by Congress to the SEC to formulate rules and regulations to what are already deemed self-executory provisions. Although the authority to issue such rules and regulations to implement a legislative purpose is granted to administrative agencies like the SEC and the DOF, such rules and regulations must not subvert existing statutes. Basic it is admonition that administrative regulation merely implements legislations and cannot extend or amend them in any wise, even with the best of intentions. (See GMA Network vs COMELEC, Sept. 2, 2015, Lokin vs COMELEC, June 22, 2010, Boie-Takeda vs De La Serna, Dec. 10, 1993.)

Let me close the discussion on the rule of law with an enduring quote from the old, landmark case of Villegas vs Subido (Nov. 28, 1969):

“One last word. Nothing is better settled in the law than that a public official exercises power, not rights. The government itself is merely an agency through which the will of the state is expressed and enforced. Its officers therefore are likewise agents entrusted with the responsibility of discharging its functions. As such there is no presumption that they are empowered to act. There must be a delegation of such authority, either express or implied. In the absence of a valid grant, they are devoid of power. What they do suffers from a fatal infirmity. That principle cannot be sufficiently stressed. In the appropriate language of Chief Justice Hughes: ‘It must be conceded that departmental zeal may not be permitted to outrun the authority conferred by statute.’ Neither the high dignity of the office nor the righteousness of the motive then is an acceptable substitute. Otherwise the rule of law becomes a myth. Such an eventuality, we must take all pains to avoid.”

(9) On September 11, 2011, I delivered a speech before the Institute of Corporate Directors titled “Rights, Duties and Perks of Independent Directors.” This speech forms a part of these reflections. For easy reference, I am attaching a copy. It can be downloaded also from my personal website,

Makati, July 6, 2015


Comments Off on Reflections on the SEC Corporate Governance Blueprint Project

Filed under Speeches

Comments are closed.