What is an independent director? SEC chair explains

Securities and Exchange Commission (SEC) Chairman Francis Lim on Wednesday shed light on the role of an independent director in a company or corporation.

“Basically… the idea of independent directors was conceived to protect the investing public especially the minority shareholders,” Lim told reporters at the sidelines of the launch of a financial literacy campaign with Shareholders’ Association of the Philippines (SharePHIL), Capital Markets Development Foundation and FINEX Research and Development Foundation in Makati City.

The issue on the role of an independent director or independent member of a company’s Board of Directors came to light amid reports that Senator Rodante Marcoleta’s wife, Eden, sat as a an independent director and non-executive director of non-life insurance firms Stronghold Insurance Co. Inc. and Milestone Guaranty and Assurance, which provided bonds for companies owned by the controversial couple Curlee and Sarah Discaya.

“But you know once you’re a director of a company, whether you are independent or not, you are supposed to be independent… When you vote for a particular issue, you have to take into account what is good for the company and not what is good for the controlling stakeholders,” Lim said.

“Your duty of loyalty is to the company not to the person nominating you as director whether independent or not,” he added.

The SEC’s Revised Code of Corporate Governance, moreover, defines an independent director as “a person who, apart from his or her 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 or her exercise of independent judgment in carrying out his or her responsibilities as a director.”

Simply put, an independent director is a member of a company’s Board of Directors who does not have any material or familial ties with a company’s management and is not involved in the day-to-day business operations in contrast with a regular or executive director which heads a department or unit of a firm or performs work related to its operations.

A non-executive director, likewise, is defined as “a director who is not the head of a department or unit of the corporation nor performs any work related to its operation.”

The SEC’s rules also define the Board of Directors as primarily responsible for the governance of the corporation, setting policies and corporate objectives.

Companies covered by the Corporate Code shall have a Board composed of at least five members, but not more than 15, who are elected by the stockholders.

Companies shall have at least two independent directors or such number shall constitute 20% of the members of the Board, whichever is lesser, but in no case less than two.

Lim also announced that the SEC is seeking comments from stakeholders on its draft circular which proposes a strict nine-year limit on the term of an independent director in a corporation.

“At the same time, to make the independent directors truly independent, we're giving them a three-year security of tenure. In other words, once voted, he's elected for three years, not for one year only,” the SEC chairman said. — BM, GMA Integrated News