A key to strong corporate governance
By: Atty. Raida Argeli G. Grefiel on April 4,2025
DIRECTORS play a key role in corporations. Being juridical entities, corporations cannot act on their own but only through the acts of natural persons comprising its board of directors. To be precise, the Revised Corporation Code (RCC) provides that the board exercises corporate powers, conducts all business and controls all properties of the corporation.
In the exercise of its powers, the board must maintain a fiduciary relationship with the corporation and the shareholders, and to qualify as members, directors should meet qualifications and not have any of the disqualifications under the law.
The role of independent directors is also crucial in the performance and governance of a board, as they are seen to bring an essential level of impartiality, oversight and diversity that enhances decision-making and promotes accountability.
The requirement of having independent directors was made law when the RCC was passed in 2019. Under the law, at least 20 percent of the boards of the following corporations must have independent directors:
– corporations whose securities are registered with the Securities and Exchange Commission (SEC), those listed with an exchange or with assets of at least P50 million and having 200 or more shareholders, each holding at least one hundred shares of a class of its equity shares;
– banks, quasi-banks, non-stock savings and loan associations, pawnshops, corporations engaged in money service business, preneed, trust and insurance companies, and other financial intermediaries; and
– other corporations engaged in business vested with public interest as determined by the SEC.
Who should then be qualified as an independent director? Under the RCC and the Securities Regulation Code, an independent director is a person who, apart from shareholdings and fees received from the corporation, is independent of management and free from any business or other relationship that could, or could reasonably be perceived to, materially interfere with the exercise of independent judgment in carrying out a director’s responsibilities.
In a recent ruling, the SEC said that hospital consultants could not qualify as independent directors of the same hospital they work in, even if the said consultants are not hospital employees (SEC-OGC Opinion 25-02, Feb. 10, 2025). The SEC said that prohibitions were not limited to an employer-employee relationship but also included all business or other relationships that could materially interfere with the exercise of independent judgment.
As observed by the regulator, the function of hospital consultants to coordinate with hospital staff and patients and participate in the hospital’s daily operations and management can reasonably be perceived to affect an independent director’s objectivity. The SEC said the relationship between the independent director and the corporation must not compromise the director’s objectivity and loyalty to the shareholders.
Are there other benefits in having independent directors? Studies have shown that involving independent directors in corporate boards has had a positive impact on corporate performance. In a 2023 survey of private companies in the US, it was found that nearly 90 percent of the respondents said their boards had at least one independent director, and that quarters said that an independent director added value to the corporation by giving advice on strategies and balancing the views of the management and business owners.
Because of their “independence,” independent directors are seen to be able to bring to the boardroom diverse perspectives and specialized knowledge (R. Joshi, Exploring the Integral Role of Independent Directors in Elevating Corporate Governance and Disclosure Practices in Indian Companies, 2022). The same study showed that the presence of independent directors enhanced the quality of the board’s decision-making processes and strengthened the overall corporate governance framework.
Aside from complying with requirements under the law, having independent directors on company boards certainly indicates a corporation’s commitment to adhering to strong corporate governance. Having them also makes good business sense.
Raida Argeli G. Grefiel is an associate of Mata-Perez, Tamayo & Francisco (MTF Counsel). This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, you can email the author at info@mtfcounsel.com or visit the MTF website at www.mtfcounsel.com.