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Independence of directors

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By Atty. Jun de Zuñiga

Last August, the Bangko  Sentral issued Circular No. 969 which further bolstered the regulations on corporate governance by broadening the definition of independent directors of banks, prescribing additional standards for their qualification, defining their maximum tenure and increasing their seats in the board and in board-level committees. The issuance was done to complement SEC’s Code of Corporate Governance for Publicly-Listed Companies and was also meant to align the quality of governance in the financial industry with international standards and best practices.

The concept of independent directors in banks was first formally introduced in the General Banking Law of 2000 which prescribed that a bank should have at least two (2) independent directors.  This is merely a minimum number and there is a trend now for banks to increase on their own the number of independent directors in their boards.  This law also defined an independent director to be “a person other than an officer or employee of the bank, its subsidiaries or affiliates or related interests.” Based on congressional deliberations, independent directors are deemed useful to the corporate entity because of their diligence and independent judgment, regardless of the business interest of the majority and, as such, can share their expertise and experience in shaping the entity’s policy and direction.

When we speak however of diligence and independent judgment, these are characteristics nonetheless embedded in the inherent functions of any director of a corporation for that matter, whether he is categorized as independent or not.  In this sense, all board directors have independence and not subject to dictation or control when they act for the corporation.   They are  always expected to act in their best judgment.

This principle is explicitly  recognized in Section 31 of the Corporation Code which provides that directors who wilfully  and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders and other persons. Moreover, if there is a violation of the Corporation Code by a director, he can be punished by fine or imprisonment under Section 144 of the same Code.  Under the same provision, if the violation is committed by the corporation, it shall be subject to dissolution without prejudice to the institution of appropriate action against the director or officer responsible for the violation.

All these would emphasize that discharging the functions of a director is an accountability which would entail a personal liability, whether it is administrative, criminal or civil, if a violation of law results therefrom.  A directorship is after all a position of trust, primarily between the director and the corporation.  The directors of a corporation are its agents and they occupy a fiduciary relation to the corporation (Villanueva, Corporation Code, p. 291).

Circular No. 969 prescribed the regulatory standards for the qualification, appointment, participation and involvement of independent directors in banks as an integral part of good corporate governance.  This constitutes merely a part of the equation since, as discussed, the responsibility for good corporate governance is the mandate of all other directors as well.

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The above comments are the personal views of the writer. His email address is jzuniga@bsp.gov.ph

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