This page
contains
the full text of the
CODE
OF CORPORATE GOVERNANCE
____________________________________________________________________
MEMORANDUM
CIRCULAR NO. 02, Series of 2002
CODE
OF CORPORATE GOVERNANCE
In accordance with
the State's policy to actively promote corporate governance reforms
aimed
to raise investor confidence, develop capital market and help achieve
high
sustained growth for the corporate sector and the economy, the
Commission,
in its Resolution No. 135, Series of 2002, dated April 04 2002,
approved
the promulgation and implementation of this Code which shall be
applicable
to corporations whose securities are registered or listed, corporations
which are grantees of permits/licenses and secondary franchise from the
Commission and public companies. This Code also applies to branches or
subsidiaries of foreign corporations operating in the Philippines whose
securities are registered or listed.cralaw:red
I.
DEFINITIONS
a. Board
of Directors - refers to the collegial body that exercises the
corporate
powers of all corporations formed under the Corporation Code. It
conducts
all business and controls or holds all property of such corporations.
b. Corporate
Governance - refers to a system whereby shareholders, creditors
and
other stakeholders of a corporation ensure that management enhances the
value of the corporation as it competes in an increasingly global
market
place.cralaw:red
c. Independent
Director - refers to a person other than an officer or employee of
the corporation, its parent or subsidiaries, or any other individual
having
any relationship with the corporation, which would interfere with the
exercise
of independent judgment in carrying out the responsibilities of a
director.
This means that apart from the directors' fees and shareholdings, he
should
be independent of management and free from any business or other
relationship
which could materially interfere with the exercise of his independent
judgment.cralaw:red
d. Public
Company
-
refers to any corporation with a class of equity securities listed in
an
Exchange or with assets in excess of Fifty Million Pesos
(P50,000,000.00)
and having two hundred (200) or more stockholders each holding at least
one hundred (100) shares of a class of its securities.cralaw:red
e. Management
-
refers to the body given the authority to implement the policies
determined
by the Board in directing the course/business activity/ies of the
corporation.cralaw:red
f. Executive
Director - refers to a director who is at the same time appointed
to
head a department/unit within the corporate organization.cralaw:red
g. Non-executive
Director - refers to a Board member with non-executive functions.cralaw:red
h. Non-audit
Work - refers to other services offered by the external auditor to
a corporation that are not directly related and relevant to its
statutory
audit function. Examples include accounting, payroll, bookkeeping,
reconciliation,
computer project management, data processing or information technology
outsourcing services, internal auditing, and services that may
compromise
the independence and objectivity of the external audit.cralaw:red
I. Internal
Control - refers to the process effected by a company's Board of
Directors,
management and other personnel, designed to provide reasonable
assurance
regarding the achievement of objectives in the effectiveness and
efficiency
of operations, the reliability of financial reporting, and compliance
with
applicable laws, regulations, and internal policies.cralaw:red
j. Internal
Control Environment - refers to the framework under which internal
controls are developed, implemented, alone or in concert with other
policies
or procedures, to manage and control a particular risk or business
activity,
or combination of risks or business activities, to which the company is
exposed.cralaw:red
k. Internal
Auditing - refers to an independent, objective assurance and
consulting
activity designed to add value and improve an organization's
operations.
It helps an organization accomplish its objectives by bringing a
systematic,
disciplined approach to evaluate and improve the effectiveness of risk
management, control, and governance processes.cralaw:red
l. Internal
Audit Department - refers to a department, division, team of
consultants,
or other practitioner(s) that provide independent, objective assurance
and consulting services designed to add value and improve an
organization's
operations.cralaw:red
m. Chief
Audit
Executive - refers to the top position within the organization
responsible
for internal audit activities. In a traditional internal audit
activity,
this would be the internal audit director. In the case where internal
audit
activities are obtained from outside service providers, the chief audit
executive is the person responsible for overseeing the service contract
and the overall quality assurance of these activities, and follow-up of
engagement results. The term also includes such titles as general
auditor,
chief internal auditor, and inspector general.cralaw:red
n. Independence
- refers to that environment which allows the person to carry out
his/her
work freely and objectively.cralaw:red
o. Objectivity
- refers to unbiased mental attitude that requires the person to carry
out his/her work in such a manner that he/she has an honest belief in
his/her
work product and that no significant quality compromises are made.
Objectivity
requires the person not to subordinate his/her judgment to that of
others.cralaw:red
p. Standards
for the Professional Practice of Internal Auditing (SPPIA) -
refers
to the criteria by which the operations of an internal auditing
department
are evaluated and measured. They are intended to represent the practice
of internal auditing as it should be, provide a framework for
performing
and promoting a broad range of value-added internal audit activities
and
foster improved organizational processes and operations.cralaw:red
II.
THE BOARD
GOVERNANCEThe Board of
Directors
(Board) is primarily responsible for the governance of the corporation.
It needs to be structured so that it provides an independent check on
management.
As such, it is vitally important that a number of board members be
independent
from management.
1. Composition
of the Board
The Board shall
be composed of at least five (5) but not more than fifteen (15) members
elected by shareholders. Public companies shall have at least two (2)
independent
directors or such independent directors shall constitute at least
twenty
percent (20%) of the members of such Board, whichever is the lesser.
All
other companies are encouraged to have independent directors as well.cralaw:red
The Board may include
a balance of executive and non-executive directors (including
independent
non-executives), having a clear division of responsibilities such that
no individual or small group of individuals can dominate the Board's
decision
making.cralaw:red
The non-executive
directors should be of sufficient qualifications, stature and number to
carry significant weight in the Board's decisions. Non-executive
directors
considered by the Board to be independent shall be identified in the
annual
report.cralaw:red
2. Multiple
Board Seats
The Board may consider
guidelines on the number of directorships for its members. The optimum
number is related to the capacity of a director to perform his duties
diligently
in general. The Chief Executive Officer and other executive directors
may
submit themselves to a low indicative limit on membership in other
corporate
Boards. The same low limit may apply to independent, non-executive
directors
who serve as full-time executives in other corporations. In any case,
the
capacity of directors to serve with diligence shall not be compromised.cralaw:red
3. The Chairman
and the Chief Executive Officer
The roles of the
Chairman and the Chief Executive Officer ("CEO") may be separate
to ensure an appropriate balance of power, increased accountability and
greater capacity of the Board for independent decision-making. The
company
shall disclose the relationship between the Chairman and the CEO upon
their
election.cralaw:red
Where both positions
of the Chairman and CEO are unified, there is clearly one leader to
provide
a single vision and mission. In this instance, checks and balances
should
be clearly provided to help ensure that independent, outside views,
perspectives,
and judgments are given proper hearing in the Board.cralaw:red
The
Chairman's
responsibilities may include:chanroblesvirtuallawlibrary
a.
schedule
meetings to enable the Board to perform its duties responsibly while
not
interfering with the flow of the company's operations
b. prepare
meeting
agenda in consultation with the CEO;
c. exercise
control
over
quality, quantity and timeliness of the flow of information between
Management
and the Board; and
d. assist in
ensuring
compliance with company's guidelines on corporate governance.
The
responsibilities
set out in the above guidelines may pertain only to the Chairman's role
in respect to the Board proceedings. It should not be taken as a
comprehensive
list of all the duties and responsibilities of a Chairman.
4. Qualifications
of Directors
Every director
shall own at least one (1) share of the capital stock of the
corporation
of which he is a director, which share shall stand in his name in the
books
of the corporation.cralaw:red
The
Board
may provide for additional qualifications of a director such as, but
not
limited to, the following:chanroblesvirtuallawlibrary
a.
Educational
attainment
b. Adequate
competency
and understanding of business
c. Age
requirement
d.
Integrity/probity
e.
Assiduousness
5.
Disqualification
of Directors
The
following
shall be grounds for the disqualification of a director:chanroblesvirtuallawlibrary
a. Any person
who
has been finally convicted by a competent judicial or administrative
body
of the following: (i) any crime involving the purchase or sale of
securities,
e.g., proprietary or non-proprietary membership certificate, commodity
futures contract, or interest in a common trust fund, pre-need plan,
pension
plan or life plan; (ii) any crime arising out of the person's conduct
as
an underwriter, broker, dealer, investment company, investment adviser,
principal distributor, mutual fund dealer, futures commission merchant,
commodity trading advisor, floor broker; and (iii) any crime arising
out
of his relationship with a bank, quasi-bank, trust company, investment
house or as an affiliated person of any of them.cralaw:red
b. Any person
who,
by reason of any misconduct, after hearing or trial, is permanently or
temporarily enjoined by order, judgment or decree of the Commission or
any court or other administrative body of competent jurisdiction from:
(i) acting as an underwriter, broker, dealer, investment adviser,
principal
distributor, mutual fund dealer, futures commission merchant, commodity
trading advisor, or a floor broker; (ii) acting as a director or
officer
of a bank, quasi-bank, trust company, investment house, investment
company
or an affiliated person of any of them; (iii) engaging in or continuing
any conduct or practice in connection with any such activity or
willfully
violating laws governing securities, and banking activities. Such
disqualification
shall also apply when such person is currently subject to an effective
order of the Commission or any court or other administrative body
refusing,
revoking or suspending any registration, license or permit issued under
the Corporation Code,
Securities
Regulation Code, or any other law administered by the Commission or
Bangko Sentral ng Pilipinas, or under any rule or regulation
promulgated
by the Commission or Bangko Sentral ng Pilipinas, or otherwise
restrained
to engage in any activity involving securities and banking. Such person
is also disqualified when he is currently subject to an effective order
of a self-regulatory organization suspending or expelling him from
membership
or participation or from associating with a member or participant of
the
organization.cralaw:red
c. Any person
finally
convicted judicially or administratively of an offense involving moral
turpitude, fraud, embezzlement, theft, estafa, counterfeiting,
misappropriation,
forgery, bribery, false oath, perjury or other fraudulent act or
transgressions.cralaw:red
d. Any person
finally
found by the Commission or a court or other administrative body to have
willfully violated, or willfully aided, abetted, counseled, induced or
procured the violation of, any provision of the Securities
Regulation Code, the Corporation
Code, or any other law administered by the Commission or Bangko
Sentral
ng Pilipinas, or any rule, regulation or order of the Commission or
Bangko
Sentral ng Pilipinas, or who has filed a materially false or misleading
application, report or registration statement required by the
Commission,
or any rule, regulation or order of the Commission.cralaw:red
e. Any person
judicially
declared to be insolvent.cralaw:red
f. Any person
finally
found guilty by a foreign court or equivalent financial regulatory
authority
of acts, violations or misconduct similar to any of the acts,
violations
or misconduct listed in paragraphs (a) to (e) hereof.cralaw:red
g. Any
affiliated
person who is ineligible, by reason of paragraphs (a) to (e) hereof to
serve or act in the capacities listed in those paragraphs.cralaw:red
h. Conviction
by
final judgment of an offense punishable by imprisonment for a period
exceeding
six (6) years, or a violation of the Corporation
Code, committed within five (5) years prior to the date of his
election
or appointment.cralaw:red
The Board may
also
provide for the temporary disqualification of a director for the
following
reasons:chanroblesvirtuallawlibrary
a. Refusal to
fully disclose the extent of his business interest as required under
the
Securities
Regulation Code and its Implementing Rules and Regulations. This
disqualification
shall be in effect as long as his refusal persists.cralaw:red
b. Absence or
non-participation
for whatever reason/s for more than fifty percent (50%) of all
meetings,
both regular and special, of the Board of directors during his
incumbency,
or any twelve (12) month period during said incumbency. This
disqualification
applies for purposes of the succeeding election.cralaw:red
c.
Dismissal/termination
from directorship in another listed corporation for cause. This
disqualification
shall be in effect until he has cleared himself of any involvement in
the
alleged irregularity.cralaw:red
d. Being
under
preventive suspension by the corporation.cralaw:red
e. If the
independent
director becomes an officer or employee of the same corporation he
shall
be automatically disqualified from being an independent director.cralaw:red
f. If the
beneficial
security ownership of an independent director in the company or in its
related companies shall exceed the 10% limit.cralaw:red
g. Conviction
that
has not yet become final referred to in the grounds for the
disqualification
of directors.cralaw:red
6. Duties,
Functions
and Responsibilities
It is the Board's
responsibility to foster the long-term success of the corporation and
secure
its sustained competitiveness in a manner consistent with its fiduciary
responsibility, which it should exercise in the best interest of the
corporation
and its shareholders.cralaw:red
a.
General Responsibility
A director's
office
is one of trust and confidence. He should act in the best interest of
the
corporation in a manner characterized by transparency, accountability
and
fairness. He should exercise leadership, prudence and integrity in
directing
the corporation towards sustained progress over the long term. A
director
assumes certain responsibilities to different constituencies or
stakeholders,
who have the right to expect that the institution is being run in a
prudent
and sound manner.cralaw:red
To ensure
good
governance of the corporation, the Board should establish the
corporation's
vision and mission, strategic objectives, policies and procedures that
may guide and direct the activities of the company and the means to
attain
the same as well as the mechanism for monitoring management's
performance.
While the management of the day-to-day affairs of the institution is
the
responsibility of the management team, the Board is, however,
responsible
for monitoring and overseeing management action.cralaw:red
b. Duties
and
Functions
To insure a
high
standard of best practice for the company and its stakeholders, the
Board
should conduct itself with utmost honesty and integrity in the
discharge
of its duties, functions and responsibilities which include, among
others,
the following:chanroblesvirtuallawlibrary
i. Install a
process
of selection to ensure a mix of competent directors, each of whom can
add
value and contribute independent judgment to the formulation of sound
corporate
strategies and policies. Select and appoint the CEO and other senior
officers,
who must have the motivation, integrity, competence and professionalism
at a very high level. Adopt a professional development program for
employees
and officers, and succession planning for senior management.cralaw:red
ii. Determine
the
corporation's purpose and value as well as strategies and general
policies
to ensure that it survives and thrives despite financial crises and its
assets and reputation are adequately protected. Provide sound written
policies
and strategic guidelines to the corporation that will help decide on
major
capital expenditures. Determine important policies that bear on the
character
of the corporation with a view towards ensuring its long-term viability
and strength. It must periodically evaluate and monitor implementation
of such strategies and policies, business plans and operating budgets
as
well as management's over-all performance to ensure optimum results.cralaw:red
iii. Ensure
that
the corporation complies with all relevant laws, regulations and codes
of best business practices.cralaw:red
iv. Identify
the
corporation's major and other stakeholders and formulate a clear policy
on communicating or relating with them accurately, effectively and
sufficiently.
There must be an accounting rendered to them regularly in order to
serve
their legitimate interests.cralaw:red
Likewise, an
investor
relations program that reaches out to all shareholders and fully
informs
them of corporate activities should be developed. As a best practice,
the
chief financial officer or CEO should have oversight of this program
and
should actively participate in public activities
v. Adopt a
system
of internal checks and balances, which may be applied in the first
instance
to the Board. A regular review of the effectiveness of such system must
be conducted so that the decision-making capability and the integrity
of
corporate operations and reporting systems are maintained at a high
level
at all times.cralaw:red
vi. Endeavor
to
provide appropriate technology and systems rating to account for
available
resources to ensure a position of a strong and meaningful competitor.
Identify
key risk areas and key performance indicators and monitor these factors
with due diligence.cralaw:red
vii.
Constitute
an Audit and Compliance Committee.cralaw:red
viii.
Properly
discharge Board functions by meeting regularly. Independent views
during
Board meetings should be given due consideration and all such meetings
should be duly minuted.cralaw:red
ix. Keep
Board
authority within the powers of the institution as prescribed in the
articles
of incorporation, by-laws and in existing laws, rules and regulation.
Conduct
and maintain the affairs of the institution within the scope of its
authority
as prescribed in its charter and in existing laws, rules and
regulations.cralaw:red
c.
Specific
Duties and Responsibilities of a Director
i. To conduct
fair
business transactions with the corporation and to ensure that personal
interest does not bias Board decisions. The basic principle to be
observed
is that a director should not use his position to make profit or to
acquire
benefit or advantage for himself and/or his related interests. He
should
avoid situations that may compromise his impartiality. If an actual or
potential conflict of interest should arise on the part of directors or
senior executives, it should be fully disclosed and the concerned
director
should not participate in the decision making. A director who has a
continuing
conflict of interest of a material nature should consider resigning.cralaw:red
ii. To devote
time
and attention necessary to properly discharge his duties and
responsibilities.
A director should devote sufficient time to familiarize himself with
the
institution's business. He should be constantly aware of the
institution's
condition and be knowledgeable enough to contribute meaningfully to the
Board's work. He should attend and actively participate in Board and
committee
meetings, request and review meeting materials, ask questions, and
request
explanations.cralaw:red
iii. To act
judiciously.
Before deciding on any matter brought before the Board of directors,
every
director should thoroughly evaluate the issues, ask questions and seek
clarifications when necessary.cralaw:red
iv. To
exercise
independent judgment. A director should view each problem/situation
objectively.
When a disagreement with others occurs, he should carefully evaluate
the
situation and state his position. He should not be afraid to take a
position
even though it might be unpopular. Corollarily, he should support plans
and ideas that he thinks are beneficial to the corporation.cralaw:red
v. To have a
working
knowledge of the statutory and regulatory requirements affecting the
corporation,
including the contents of its articles of incorporation and by-laws,
the
requirements of the Commission, and where applicable, the requirements
of other regulatory agencies. A director should also keep himself
informed
of industry developments and business trends in order to safeguard the
corporation's competitiveness.cralaw:red
vi. To
observe
confidentiality. A director should observe the confidentiality of
non-public
information acquired by reason of his position as director. He should
not
disclose any information to any other person without the authority of
the
Board.cralaw:red
vii. To
ensure
the continuing soundness, effectiveness and adequacy of the company's
control
environment.cralaw:red
d.
Internal
Control Responsibilities of the Board
The control
environment
is composed of: (a) the Board which ensures that the company is
appropriately
and effectively managed and controlled, (b) a management that actively
manages and operates the company in a sound and prudent manner, (c) the
organizational and procedural controls supported by an effective
management
information system and risk management reporting system, and (d) the
independent
audit mechanisms to monitor the adequacy and effectiveness of the
organization's
governance, operations, information systems, to include reliability and
integrity of financial and operational information, effectiveness and
efficiency
of operations, safeguarding of assets, and compliance with laws, rules,
regulations, and contracts.cralaw:red
i. The
minimum
internal control mechanisms for the Board's oversight responsibility
may
include:chanroblesvirtuallawlibrary
•
Defining
the duties and responsibilities of the CEO;
• Selecting or
approving an individual with appropriate ability, integrity, experience
to fill the CEO role;
• Reviewing
proposed
senior management appointments;
• Ensuring the
selection, appointment and retention of qualified and competent
management;
• Reviewing
the
company's personnel and human resource policies and sufficiency,
conflict
of interest situations, changes to the compensation plan for employees
and officers and management succession plan.
ii. The minimum
internal
control mechanisms for management's operational responsibility would
center
on the CEO, being ultimately accountable for the company's
organizational
and procedural controls.
iii. The
scope
and particulars of a system of effective organizational and procedural
controls may differ among companies depending on factors such as: the
nature
and complexity of business and the business culture; the volume, size
and
complexity of transactions; the degree of risk; the degree of
centralization
and delegation of authority; the extent and effectiveness of
information
technology; and the extent of regulatory compliance.cralaw:red
iv. Each
company
may have in place an independent audit function, through which the
company's
Board, senior management, and stockholders may be provided with
reasonable
assurance that its key organizational and procedural controls are
effective,
appropriate, and complied with. The Board may appoint a chief audit
executive
to carry out the audit function, and may require the chief audit
executive
to report to a level within the organization that allows the internal
audit
activity to fulfill its responsibilities.cralaw:red
7. Board
Meetings
and Quorum Requirement
Members of the
Board should attend regular and special meetings of the Board in
person.
In view of modern technology, however, attendance at Board meetings
through
teleconference may be allowed.cralaw:red
An independent
director should always be in attendance. However, the absence of an
independent
director may not affect the quorum requirements if he is duly notified
of the meeting but deliberately and without justifiable cause fails to
attend the meeting. Justifiable causes may only include grave illness
or
death of immediate family and serious accidents.cralaw:red
To monitor compliance
with the above requirement, corporations may, at the end of every
fiscal
year, provide the Commission with a sworn certification that the
foregoing
requirement has been complied with. The said certification may be
submitted
with the company's current report (SEC Form 17-1) or on a separate
filing.cralaw:red
8. Remuneration
of the Members of the Board and Officers
Levels of remuneration
shall be sufficient to attract and retain the directors, if any, and
officers
needed to run the company successfully. Corporations, however, should
avoid
paying more than what is necessary for this purpose. A proportion of
executive
directors' remuneration may be structured so as to link rewards to
corporate
and individual performance.cralaw:red
Corporations may
establish a formal and transparent procedure for developing a policy on
executive remuneration and for fixing the remuneration packages of
individual
directors, if any, and officers. No director should be involved in
deciding
his or her own remuneration.cralaw:red
The corporations'
annual reports, information and proxy statements shall include a clear,
concise and understandable disclosure of all plan and non-plan
compensation
awarded to, earned by, paid to, or estimated to be paid to, directly or
indirectly to all individuals serving as the CEO or acting in a similar
capacity during the last completed fiscal year, regardless of the
compensation
level and the corporation's four (4) most highly compensated executive
officers other than the CEO who were serving as executive officers at
the
end of the last completed year.cralaw:red
To protect the
funds of the corporation, the Commission may regulate the payment by
the
corporation to directors and officers of compensation, allowance, fees
and fringe benefits in very exceptional cases, e.g., when a corporation
is under receivership or rehabilitation.cralaw:red
9. Board
Committees
The Board shall
constitute Committees in aid of good corporate governance.cralaw:red
A. The
Audit Committee shall be composed of at least three (3) Board members,
preferably with accounting and finance background, one of whom shall be
an independent director and another should have related audit
experience.
It shall have the following specific functions:chanroblesvirtuallawlibrary
a. Provide
oversight
over the senior management's activities in managing credit, market,
liquidity,
operational, legal and other risks of the corporation. This function
shall
include receiving from senior management periodic information on risk
exposures
and risk management activities. However, in consideration of the risk
profile
of the corporation, the Board may constitute a separate Risk Management
Committee to focus on carrying out this oversight role over risk
management;
b. Provide
oversight
of the corporation's internal and external auditors;
c. Review and
approve
audit scope and frequency, and the annual internal audit plan;
d. Discuss
with
the external auditor before the audit commences the nature and scope of
the audit, and ensure coordination where more than one audit firm is
involved;
e.
Responsible
for the setting-up of an internal audit department and consider the
appointment
of an internal auditor as well as an independent external auditor, the
audit fee and any question of resignation or dismissal;
f. Monitor
and
evaluate the adequacy and effectiveness of the corporation's internal
control
system;
g. Receive
and
review reports of internal and external auditors and regulatory
agencies,
where applicable and ensure that management is taking appropriate
corrective
actions, in a timely manner in addressing control and compliance
functions
with regulatory agencies;
h. Review the
quarterly,
half-year and annual financial statements before submission to the
Board,
focusing particularly on:chanroblesvirtuallawlibrary
· Any
change/s
in accounting policies and practices
·
Major judgmental
areas
·
Significant
adjustments resulting from the audit
·
Going concern
assumption
·
Compliance
with accounting standards
·
Compliance
with tax, legal, and stock exchange requirements
i. Responsible
for
coordinating, monitoring and facilitating compliance with existing
laws,
rules and regulations. It may also constitute a Compliance Unit for
this
purpose.
j. Evaluate
and
determine non-audit work by external auditor and keep under review the
non-audit fees paid to the external auditor both in relation to their
significance
to the auditor and in relation to the company's total expenditure on
consultancy.
The non-audit work should be disclosed in the annual report.cralaw:red
k. Establish
and
identify the reporting line of the chief audit executive so that the
reporting
level allows the internal audit activity to fulfill its
responsibilities.
The chief audit executive shall report directly to the Audit Committee
functionally. The Audit Committee shall ensure that the internal
auditors
shall have free and full access to all the company's records,
properties
and personnel relevant to the internal audit activity and that the
internal
audit activity should be free from interference in determining the
scope
of internal auditing examinations, performing work, and communicating
results,
and shall provide a venue for the Audit Committee to review and approve
the annual internal audit plan.cralaw:red
The Chairman
of
this committee should be an independent director. He should be
responsible
for inculcating in the minds of the Board members the importance of
management
responsibilities in maintaining a sound system of internal control and
the Board's oversight responsibility.cralaw:red
For
Philippine
branches or subsidiaries of foreign corporations covered by this Code,
the local audit head for such entities should be independent of the
Philippine
operations and should report to the regional or corporate headquarters.cralaw:red
B. The Board
may
also constitute the following committees:chanroblesvirtuallawlibrary
a. The
Nomination
Committee which may be composed of at least three (3) members, one of
whom
should be an independent director may review and evaluate the
qualifications
of all persons nominated to the Board as well as those nominated to
other
positions requiring appointment by the Board and provide assessment on
the Board's effectiveness in directing the process of renewing and
replacing
Board members.cralaw:red
b. The
Compensation
or Remuneration Committee may be composed of at least three (3)
members,
one of whom should be an independent director. It may establish a
formal
and transparent procedure for developing a policy on executive
remuneration
and for fixing the remuneration packages of corporate officers and
directors,
and provide oversight over remuneration of senior management and other
key personnel ensuring that compensation is consistent with the
corporation's
culture, strategy and control environment.cralaw:red
10. The
Corporate
Secretary
The Corporate Secretary,
who must be a Filipino, is an officer of the corporation. Perfection in
performance and no surprises are expected of him. Likewise, his loyalty
to the mission, vision and specific business objectives of the
corporate
entity come with his duties.cralaw:red
Like the CEO, he
should work and deal fairly and objectively with all the constituencies
of the corporation, namely, the Board, management, stockholders and
other
stakeholders. As such, he should be someone his colleagues and these
constituencies
can turn to, trust and confide with on a regular basis.cralaw:red
He should have
the administrative skills of the chief administrative officer of the
corporation
and the interpersonal skills of the chief human resources officer. If
the
Corporate Secretary is not the general counsel, then he must have the
legal
skills of a chief legal officer. He must also have the financial and
accounting
skills of a chief financial officer, and, lastly the vision and
decisiveness
of the CEO.cralaw:red
Since there are
different individuals on top of various corporate activities, the
Corporate
Secretary should be fully informed and be part of the scheduling
process
of the different activities. As to agendas, he should have the schedule
thereof at least for the current year and should put the Board on
notice
before every meeting. It is a very important discipline to get the
Board
to think ahead. He should serve as an adviser to director's
responsibilities
and obligations.cralaw:red
The Corporate Secretary
should make sure that directors have before them everything that they
need
to make an informed decision. When the Board makes a decision, it is
covered
by a business judgment that can be arrived at by the members acting in
good faith with the assistance of the Corporate Secretary who should
review
carefully the information presented to the directors at the time they
are
to make a decision.cralaw:red
III.
SUPPLY
INFORMATION
In order to fulfill
their responsibilities, Board members, should be provided with
complete,
adequate and timely information prior to Board meetings on an on-going
basis.cralaw:red
Management should
have an obligation to supply the Board with complete, adequate
information
in a timely manner. Reliance purely on what is volunteered by
Management
is unlikely to be enough in all circumstances and further inquiries may
be required if the particular director is to fulfill his or her duties
properly. Hence, the Board may have separate and independent access to
the company's senior management.cralaw:red
The information
may include the background or explanatory information relating to
matters
to be brought before the Board, copies of disclosure documents,
budgets,
forecasts and monthly internal financial statements. With respect to
the
budget, any variance between the projections and actual results should
also be disclosed and explained.cralaw:red
Directors should
also have a separate and independent access to the Corporate Secretary.
The role of the Corporate Secretary should be clearly defined and
should
include responsibility for ensuring that Board procedures are being
followed
and that applicable rules and regulations are complied with. The
Corporate
Secretary should attend all Board meetings.
The Board should
have a procedure for directors, either individually or as a group, in
the
furtherance of their duties, to take independent professional advice,
if
necessary, at the corporation's expense.cralaw:red
IV.
ACCOUNTABILITY
AND AUDIT
1. The Board
is primarily accountable to the shareholders and Management is
primarily
accountable to the Board.
The Board should provide the
shareholders
with a balanced and understandable assessment of the corporation's
performance,
position and prospects on a quarterly basis. The Management should
provide
all members of the Board with a balanced and understandable account of
the corporation's performance, position and prospects on a monthly
basis.
This responsibility should extend to interim and other price sensitive
public reports and reports to regulators (if required). It should be
primarily
responsible in making financial reporting and internal control in
accordance
with the following guidelines:chanroblesvirtuallawlibrary
a.
Present
a balanced and understandable assessment of the company's position and
prospects. The Board's responsibility to present a balanced and
understandable
assessment should extend to interim and other price-sensitive public
reports
and reports to regulators as well as to information required to be
presented
by statutory requirements;
b. Explain
their
responsibility for preparing the accounts, for which there should be a
statement by the auditors about their reporting responsibilities;
c. Report
that
the business is a going concern, with supporting assumptions or
qualifications,
if necessary;
d. Maintain a
sound
system of internal control to safeguard stakeholders' investment and
the
company's assets;
e. Based on
the
approved audit plans, scope and frequency of audits, ensure that
internal
audit examinations cover, at least, the evaluation of adequacy and
effectiveness
of controls encompassing the organization's governance, operations,
information
systems, to include reliability and integrity of financial and
operational
information, effectiveness and efficiency of operations, safeguarding
of
assets, and compliance with laws, rules, regulations, and contracts.cralaw:red
f. Require
the
chief audit executive to render to the Audit Committee and senior
management
an annual report on the internal audit department's activity, purpose,
authority, responsibility and performance relative to the audit plans
and
strategies approved by the Audit Committee of the Board. Such annual
report
should include significant risk exposures and control issues, corporate
governance issues, and other matters needed or requested by the Board
and
senior management. The chief audit executive's annual report shall
likewise
be made available to the stockholders of the company. Internal auditors
shall report that their activities are "conducted in accordance
with
the Standards for the Professional Practice of Internal Auditing".
Otherwise, the chief audit executive shall disclose to the Board and
senior
management that it has not yet achieved full compliance with the
standards
for the professional practice of internal auditing.cralaw:red
2.
Selection/Appointment,
Resignation, Dismissal or Cessation of Service of an External Auditor
The Board, through
the Audit Committee, shall recommend to the stockholders a duly
accredited
external auditor who shall undertake an independent audit and shall
provide
an objective assurance on the way in which financial statements shall
have
been prepared and presented. Such external auditor cannot at the same
time
provide the services of an internal auditor to the same client. Other
non-audit
work should not be in conflict with the functions of the external
auditor.cralaw:red
The external auditor
should be rotated every five (5) years or earlier or the handling
partner
shall be changed.cralaw:red
The reason/s for
the resignation, dismissal or cessation from service and the date
thereof
of an external auditor shall be reported in the company's annual and
current
reports. Said report shall include a discussion of any disagreement
with
said former external auditor on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or
procedure,
which if not resolved to the satisfaction of the former auditor, would
have cause making reference to the subject matter of the disagreement
in
connection with its report.cralaw:red
If an external
auditor believes that the statements made in an annual report,
information
statement or proxy statement filed during his engagement are incorrect
or incomplete, he shall also present his views in said reports.
chanroblesvirtualawlibrary
V.
STOCKHOLDERS'
RIGHTS AND PROTECTION OF MINORITY STOCKHOLDERS' INTERESTS
The Board shall
be committed to respect the following rights of the stockholders:chanroblesvirtuallawlibrary
1. Voting
Right
Shareholders have
the right to elect, remove and replace directors and vote on certain
corporate
acts in accordance with the Corporation
Code.cralaw:red
The Code
mandates the use of cumulative voting in the election of directors.
Although
directors may be removed with or without cause, the Code
prohibits removal without cause if it will deny minority shareholders
representation
in the Board. Removal of directors requires an affirmative vote of
two-thirds
of the outstanding capital.cralaw:red
2. Pre-emptive
Right
All stockholders
have pre-emptive rights, unless there is a specific denial of this
right
in the articles of incorporation or an amendment thereto. They shall
have
the right to subscribe to the capital stock of the corporation. The
Articles
of Incorporation may lay down the specific rights and powers of
shareholders
with respect to the particular shares they hold, all of which are
protected
by law so long as they are not in conflict with the Corporation
Code.cralaw:red
3. Power
of Inspection
The Corporation
Code mandates corporations to allow shareholders to inspect
corporate
books and records including minutes of Board meetings and stock
registries
in accordance with the Corporation
Code and to provide them an annual report, including financial
statements,
without cost or restrictions.cralaw:red
4. Right
to Information
The Shareholders
shall be provided, upon request, with periodic reports which disclose
personal
and professional information about the directors and officers and
certain
other matters such as their holdings of the company's shares, dealings
with the company, relationships among directors and key officers, and
the
aggregate compensation of directors and officers. The Information
Statement/Proxy
Statement where these are found must be distributed to the shareholders
before annual general meetings and in the Registration Statement and
Prospectus
in case of registration of shares for public offering with the
Commission.cralaw:red
The minority shareholders
should be granted the right to propose the holding of a meeting, and
the
right to propose items in the agenda of the meeting, provided the items
are for legitimate business purposes.cralaw:red
The minority shareholders
should have access to any and all information relating to matters for
which
the management is accountable for and to those relating to matters for
which the management should include such information and, if not
included,
then the minority shareholders can propose to include such matters in
the
agenda of stockholders' meeting, being within the definition of "legitimate
purposes".
5. Right
to Dividends
Shareholders have
the right to receive dividends subject to the discretion of the Board.
However, the Commission may direct the corporation to declare dividends
when its retained earnings is in excess of 100% of its paid-in capital
stock, except: (a) when justified by definite corporate expansion
projects
or programs approved by the Board or (b) when the corporation is
prohibited
under any loan agreement with any financial institution or creditor,
whether
local or foreign, from declaring dividends without its consent, and
such
consent has not been secured; or (c) when it can be clearly shown that
such retention is necessary under special circumstances obtaining in
the
corporation, such as when there is a need for special reserve for
probable
contingencies.cralaw:red
6. Appraisal
Right
The Corporation
Code allows the exercise of the shareholders' appraisal rights
under
the following circumstances:chanroblesvirtuallawlibrary
a. In
case any amendment to the articles of incorporation has the effect of
changing
or restricting the rights of any stockholders or class of shares, or of
authorizing preferences in any respect superior to those of outstanding
shares of any class, or of extending or shortening the term of
corporate
existence;
b. In case of
sale,
lease, exchange, transfer, mortgage, pledge or other disposition of all
or substantially all of the corporate property and assets as provided
in
the Corporation Code; and cralaw:red
c. In case of
merger
or consolidation, it is the duty of the directors to promote
shareholder
rights, remove impediments to the exercise of shareholders rights and
allow
possibilities to seek redress for violation of their rights. They shall
encourage the exercise of shareholders' voting rights and the solution
of collective action problems through appropriate mechanisms. They
shall
be instrumental in removing excessive costs and other administrative or
practical impediments to shareholders participating in meetings and/or
voting in person. The directors shall pave the way for the electronic
filing
and distribution of shareholder information necessary to make informed
decisions subject to legal constraints.cralaw:red
VI.
EVALUATION
SYSTEMS
The management
may establish a performance evaluation system to measure the
performance
of the Board and top-level management of the corporation.cralaw:red
The establishment
of such evaluation system, including the features thereof, may be
disclosed
in the company's annual report (SEC Form 17-A).cralaw:red
VII.
DISCLOSURE
AND TRANSPARENCY
A dominant theme
in all issues related to corporate governance is the vital importance
of
disclosure. The more transparent the internal workings of the company
and
cash flows, the more difficult it will be for management and
controlling
shareholders to misappropriate company assets or mismanage the company.cralaw:red
The most basic
and all encompassing disclosure requirement is that all material
information,
i.e., any thing that could potentially affect share price, should be
publicly
disclosed. Such information would include earnings results, acquisition
or disposal of assets, board changes, related party transactions,
shareholdings
of directors and changes to ownership. Other information that should
always
be disclosed includes remuneration (including stock options) of all
directors
and senior management corporate strategy, and off balance sheet
transactions.
All disclosed information should be released via the approved stock
exchange
procedure for company announcements as well as through the annual
report.cralaw:red
The Board shall
therefore, commit at all times to full disclosure of material
information
dealings. It shall cause the filing of all required information for the
interest of the stakeholders.cralaw:red
VIII.
COMMITMENT
TO CORPORATE GOVERNANCE
Corporations shall
promulgate and adopt its corporate governance rules and principles in
accordance
with this Code. Said rules shall be in manual form and available as
reference
by the directors. It shall be submitted to the Commission, which shall
evaluate the same and their compliance with this Code taking into
account
the size and nature of business. The said manual shall be available for
inspection by any stockholder of the corporation at reasonable hours on
business days. The Chairman of the Board shall be specifically tasked
with
the responsibility of ensuring adherence to the corporate governance
code
and practices.cralaw:red
Unless mandated
by law, other corporations are likewise encouraged to observe this
Circular
in the absence of any mandated corporate governance rules adopted by
other
agencies.cralaw:red
IX.
ADMINISTRATIVE
SANCTION
Failure to adopt
a manual of corporate governance as specified therein shall subject a
corporation,
after due notice and hearing, to a penalty of P100,000.00.cralaw:red
X.
TRANSITORY
PROVISION
All corporations
affected by this Code shall submit their manual by July 1, 2002 to be
effective
January 1, 2003. A model manual will be drafted by the Commission and
will
be available by May 15, 2002 in the SEC web page.cralaw:red
XI.
EFFECTIVE DATE
This Memorandum
Circular shall take effect after fifteen (15) days from publication in
a newspaper of general circulation.
April 5, 2002,
Mandaluyong City, Philippines.
LILIA R.
BAUTISTA
Chairperson
Back
to Top - Back
to Home - Back
to Corporate Index
chanroblesvirtualawlibrary
Since 19.07.98
|