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. 1!, Series of "##",
dated $pril #% "##", approved the promulgation and implementation of this
Code which shall &e applica&le to corporations whose securities are
registered or listed, corporations which are grantees of permits'licenses and
secondary franchise from the Commission and pu&lic companies. (his Code
also applies to &ranches or su&sidiaries of foreign corporations operating in
the )hilippines whose securities are registered or listed.cralaw
I.
DEFINITIONS
a. Board of Directors * refers to the collegial &ody that e+ercises the
corporate powers of all corporations formed under the Corporation Code. It
conducts all &usiness and controls or holds all property of such corporations.
&. Corporate Governance * refers to a system where&y shareholders,
creditors and other stakeholders of a corporation ensure that management
enhances the value of the corporation as it competes in an increasingly
glo&al market place.cralaw
c. Independent Director * refers to a person other than an officer or
employee of the corporation, its parent or su&sidiaries, or any other
individual having any relationship with the corporation, which would interfere
with the e+ercise of independent ,udgment in carrying out the
responsi&ilities of a director. (his means that apart from the directors' fees
and shareholdings, he should &e independent of management and free from
any &usiness or other relationship which could materially interfere with the
e+ercise of his independent ,udgment.cralaw
d. Public Company * refers to any corporation with a class of e-uity
securities listed in an .+change or with assets in e+cess of /ifty 0illion )esos
1)!#,###,###.##2 and having two hundred 1"##2 or more stockholders each
holding at least one hundred 11##2 shares of a class of its securities.cralaw
e. Management * refers to the &ody given the authority to implement the
policies determined &y the 3oard in directing the course'&usiness activity'ies
of the corporation.cralaw
f. Executive Director * refers to a director who is at the same time appointed
to head a department'unit within the corporate organi4ation.cralaw
g. Non-executive Director * refers to a 3oard mem&er with non*e+ecutive
functions.cralaw
h. Non-audit or! * refers to other services offered &y the e+ternal auditor
to a corporation that are not directly related and relevant to its statutory
audit function. .+amples include accounting, payroll, &ookkeeping,
reconciliation, computer pro,ect management, data processing or
information technology outsourcing services, internal auditing, and services
that may compromise the independence and o&,ectivity of the e+ternal
audit.cralaw
I. Internal Control * refers to the process effected &y a company's 3oard of
5irectors, management and other personnel, designed to provide reasona&le
assurance regarding the achievement of o&,ectives in the effectiveness and
efficiency of operations, the relia&ility of financial reporting, and compliance
with applica&le laws, regulations, and internal policies.cralaw
,. 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 &usiness
activity, or com&ination of risks or &usiness activities, to which the company
is e+posed.cralaw
k. Internal "uditing * refers to an independent, o&,ective assurance and
consulting activity designed to add value and improve an organi4ation's
operations. It helps an organi4ation accomplish its o&,ectives &y &ringing a
systematic, disciplined approach to evaluate and improve the effectiveness
of risk management, control, and governance processes.cralaw
l. Internal "udit Department * refers to a department, division, team of
consultants, or other practitioner1s2 that provide independent, o&,ective
assurance and consulting services designed to add value and improve an
organi4ation's operations.cralaw
m. C#ief "udit Executive * refers to the top position within the organi4ation
responsi&le for internal audit activities. In a traditional internal audit activity,
this would &e the internal audit director. In the case where internal audit
activities are o&tained from outside service providers, the chief audit
e+ecutive is the person responsi&le for overseeing the service contract and
the overall -uality assurance of these activities, and follow*up of
engagement results. (he term also includes such titles as general auditor,
chief internal auditor, and inspector general.cralaw
n. Independence * refers to that environment which allows the person to
carry out his'her work freely and o&,ectively.cralaw
o. $b%ectivity * refers to un&iased mental attitude that re-uires the person to
carry out his'her work in such a manner that he'she has an honest &elief in
his'her work product and that no significant -uality compromises are made.
6&,ectivity re-uires the person not to su&ordinate his'her ,udgment to that
of others.cralaw
p. &tandards for t#e Professional Practice of Internal "uditing '&PPI"( *
refers to the criteria &y which the operations of an internal auditing
department are evaluated and measured. (hey are intended to represent the
practice of internal auditing as it should &e, provide a framework for
performing and promoting a &road range of value*added internal audit
activities and foster improved organi4ational processes and operations.cralaw
II.
THE BOARD GOVERNANCE
(he 3oard of 5irectors 13oard2 is primarily responsi&le for the governance of
the corporation. It needs to &e structured so that it provides an independent
check on management. $s such, it is vitally important that a num&er of
&oard mem&ers &e independent from management.
1. Composition of the Board
(he 3oard shall &e composed of at least five 1!2 &ut not more than fifteen
11!2 mem&ers elected &y shareholders. )u&lic companies shall have at least
two 1"2 independent directors or such independent directors shall constitute
at least twenty percent 1"#72 of the mem&ers of such 3oard, whichever is
the lesser. $ll other companies are encouraged to have independent
directors as well.cralaw
(he 3oard may include a &alance of e+ecutive and non*e+ecutive directors
1including independent non*e+ecutives2, having a clear division of
responsi&ilities such that no individual or small group of individuals can
dominate the 3oard's decision making.cralaw
(he non*e+ecutive directors should &e of sufficient -ualifications, stature and
num&er to carry significant weight in the 3oard's decisions. Non*e+ecutive
directors considered &y the 3oard to &e independent shall &e identified in the
annual report.cralaw
2. Multiple Board Seats
(he 3oard may consider guidelines on the num&er of directorships for its
mem&ers. (he optimum num&er is related to the capacity of a director to
perform his duties diligently in general. (he Chief .+ecutive 6fficer and other
e+ecutive directors may su&mit themselves to a low indicative limit on
mem&ership in other corporate 3oards. (he same low limit may apply to
independent, non*e+ecutive directors who serve as full*time e+ecutives in
other corporations. In any case, the capacity of directors to serve with
diligence shall not &e compromised.cralaw
3. The Chairman and the Chief Executive Officer
(he roles of the Chairman and the Chief .+ecutive 6fficer 1)CE$)2 may &e
separate to ensure an appropriate &alance of power, increased accounta&ility
and greater capacity of the 3oard for independent decision*making. (he
company shall disclose the relationship &etween the Chairman and the C.6
upon their election.cralaw
8here &oth positions of the Chairman and C.6 are unified, there is clearly
one leader to provide a single vision and mission. In this instance, checks
and &alances should &e clearly provided to help ensure that independent,
outside views, perspectives, and ,udgments are given proper hearing in the
3oard.cralaw
(he Chairman's responsi&ilities may include9chanro&lesvirtuallawli&rary
a. schedule meetings to ena&le the 3oard to perform its duties responsi&ly
while not interfering with the flow of the company's operations
&. prepare meeting agenda in consultation with the C.6:
c. e+ercise control over -uality, -uantity and timeliness of the flow of
information &etween 0anagement and the 3oard: and
d. assist in ensuring compliance with company's guidelines on corporate
governance.
(he responsi&ilities set out in the a&ove guidelines may pertain only to the
Chairman's role in respect to the 3oard proceedings. It should not &e taken
as a comprehensive list of all the duties and responsi&ilities of a Chairman.
4. ualifications of !irectors
.very director shall own at least one 112 share of the capital stock of the
corporation of which he is a director, which share shall stand in his name in
the &ooks of the corporation.cralaw
(he 3oard may provide for additional -ualifications of a director such as, &ut
not limited to, the following9chanro&lesvirtuallawli&rary
a. .ducational attainment
&. $de-uate competency and understanding of &usiness
c. $ge re-uirement
d. Integrity'pro&ity
e. $ssiduousness
". !is#ualification of !irectors
(he following shall &e grounds for the dis-ualification of a director9chanro&lesvirtuallawli&rary
a. $ny person who has &een finally convicted &y a competent ,udicial or
administrative &ody of the following9 1i2 any crime involving the purchase or
sale of securities, e.g., proprietary or non*proprietary mem&ership
certificate, commodity futures contract, or interest in a common trust fund,
pre*need plan, pension plan or life plan: 1ii2 any crime arising out of the
person's conduct as an underwriter, &roker, dealer, investment company,
investment adviser, principal distri&utor, mutual fund dealer, futures
commission merchant, commodity trading advisor, floor &roker: and 1iii2 any
crime arising out of his relationship with a &ank, -uasi*&ank, trust company,
investment house or as an affiliated person of any of them.cralaw
&. $ny person who, &y reason of any misconduct, after hearing or trial, is
permanently or temporarily en,oined &y order, ,udgment or decree of the
Commission or any court or other administrative &ody of competent
,urisdiction from9 1i2 acting as an underwriter, &roker, dealer, investment
adviser, principal distri&utor, mutual fund dealer, futures commission
merchant, commodity trading advisor, or a floor &roker: 1ii2 acting as a
director or officer of a &ank, -uasi*&ank, trust company, investment house,
investment company or an affiliated person of any of them: 1iii2 engaging in
or continuing any conduct or practice in connection with any such activity or
willfully violating laws governing securities, and &anking activities. Such
dis-ualification shall also apply when such person is currently su&,ect to an
effective order of the Commission or any court or other administrative &ody
refusing, revoking or suspending any registration, license or permit issued
under the Corporation Code, Securities Regulation Code, or any other law
administered &y the Commission or 3angko Sentral ng )ilipinas, or under
any rule or regulation promulgated &y the Commission or 3angko Sentral ng
)ilipinas, or otherwise restrained to engage in any activity involving
securities and &anking. Such person is also dis-ualified when he is currently
su&,ect to an effective order of a self*regulatory organi4ation suspending or
e+pelling him from mem&ership or participation or from associating with a
mem&er or participant of the organi4ation.cralaw
c. $ny person finally convicted ,udicially or administratively of an offense
involving moral turpitude, fraud, em&e44lement, theft, estafa, counterfeiting,
misappropriation, forgery, &ri&ery, false oath, per,ury or other fraudulent act
or transgressions.cralaw
d. $ny person finally found &y the Commission or a court or other
administrative &ody to have willfully violated, or willfully aided, a&etted,
counseled, induced or procured the violation of, any provision of the
Securities Regulation Code, the Corporation Code, or any other law
administered &y the Commission or 3angko Sentral ng )ilipinas, or any rule,
regulation or order of the Commission or 3angko Sentral ng )ilipinas, or who
has filed a materially false or misleading application, report or registration
statement re-uired &y the Commission, or any rule, regulation or order of
the Commission.cralaw
e. $ny person ,udicially declared to &e insolvent.cralaw
f. $ny person finally found guilty &y a foreign court or e-uivalent financial
regulatory authority of acts, violations or misconduct similar to any of the
acts, violations or misconduct listed in paragraphs 1a2 to 1e2 hereof.cralaw
g. $ny affiliated person who is ineligi&le, &y reason of paragraphs 1a2 to 1e2
hereof to serve or act in the capacities listed in those paragraphs.cralaw
h. Conviction &y final ,udgment of an offense punisha&le &y imprisonment
for a period e+ceeding si+ 1;2 years, or a violation of the Corporation Code,
committed within five 1!2 years prior to the date of his election or
appointment.cralaw
(he 3oard may also provide for the temporary dis-ualification of a director
for the following reasons9chanro&lesvirtuallawli&rary
a. Refusal to fully disclose the e+tent of his &usiness interest as re-uired
under the Securities Regulation Code and its Implementing Rules and
Regulations. (his dis-ualification shall &e in effect as long as his refusal
persists.cralaw
&. $&sence or non*participation for whatever reason's for more than fifty
percent 1!#72 of all meetings, &oth regular and special, of the 3oard of
directors during his incum&ency, or any twelve 11"2 month period during
said incum&ency. (his dis-ualification applies for purposes of the succeeding
election.cralaw
c. 5ismissal'termination from directorship in another listed corporation for
cause. (his dis-ualification shall &e in effect until he has cleared himself of
any involvement in the alleged irregularity.cralaw
d. 3eing under preventive suspension &y the corporation.cralaw
e. If the independent director &ecomes an officer or employee of the same
corporation he shall &e automatically dis-ualified from &eing an independent
director.cralaw
f. If the &eneficial security ownership of an independent director in the
company or in its related companies shall e+ceed the 1#7 limit.cralaw
g. Conviction that has not yet &ecome final referred to in the grounds for the
dis-ualification of directors.cralaw
$. !uties% &unctions and 'esponsi(ilities
It is the 3oard's responsi&ility to foster the long*term success of the
corporation and secure its sustained competitiveness in a manner consistent
with its fiduciary responsi&ility, which it should e+ercise in the &est interest
of the corporation and its shareholders.cralaw
a* General +esponsibility
$ director's office is one of trust and confidence. <e should act in the &est
interest of the corporation in a manner characteri4ed &y transparency,
accounta&ility and fairness. <e should e+ercise leadership, prudence and
integrity in directing the corporation towards sustained progress over the
long term. $ director assumes certain responsi&ilities to different
constituencies or stakeholders, who have the right to e+pect that the
institution is &eing run in a prudent and sound manner.cralaw
(o ensure good governance of the corporation, the 3oard should esta&lish
the corporation's vision and mission, strategic o&,ectives, 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. 8hile the management of the day*to*day
affairs of the institution is the responsi&ility of the management team, the
3oard is, however, responsi&le for monitoring and overseeing management
action.cralaw
b* Duties and ,unctions
(o insure a high standard of &est practice for the company and its
stakeholders, the 3oard should conduct itself with utmost honesty and
integrity in the discharge of its duties, functions and responsi&ilities which
include, among others, the following9chanro&lesvirtuallawli&rary
i. Install a process of selection to ensure a mi+ of competent directors, each
of whom can add value and contri&ute independent ,udgment to the
formulation of sound corporate strategies and policies. Select and appoint
the C.6 and other senior officers, who must have the motivation, integrity,
competence and professionalism at a very high level. $dopt a professional
development program for employees and officers, and succession planning
for senior management.cralaw
ii. 5etermine 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 ade-uately protected. )rovide sound
written policies and strategic guidelines to the corporation that will help
decide on ma,or capital e+penditures. 5etermine important policies that &ear
on the character of the corporation with a view towards ensuring its long*
term via&ility and strength. It must periodically evaluate and monitor
implementation of such strategies and policies, &usiness plans and operating
&udgets as well as management's over*all performance to ensure optimum
results.cralaw
iii. .nsure that the corporation complies with all relevant laws, regulations
and codes of &est &usiness practices.cralaw
iv. Identify the corporation's ma,or and other stakeholders and formulate a
clear policy on communicating or relating with them accurately, effectively
and sufficiently. (here must &e an accounting rendered to them regularly in
order to serve their legitimate interests.cralaw
=ikewise, an investor relations program that reaches out to all shareholders
and fully informs them of corporate activities should &e developed. $s a &est
practice, the chief financial officer or C.6 should have oversight of this
program and should actively participate in pu&lic activities
v. $dopt a system of internal checks and &alances, which may &e applied in
the first instance to the 3oard. $ regular review of the effectiveness of such
system must &e conducted so that the decision*making capa&ility and the
integrity of corporate operations and reporting systems are maintained at a
high level at all times.cralaw
vi. .ndeavor to provide appropriate technology and systems rating to
account for availa&le 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
vii. Constitute an $udit and Compliance Committee.cralaw
viii. )roperly discharge 3oard functions &y meeting regularly. Independent
views during 3oard meetings should &e given due consideration and all such
meetings should &e duly minuted.cralaw
i+. >eep 3oard authority within the powers of the institution as prescri&ed in
the articles of incorporation, &y*laws and in e+isting laws, rules and
regulation. Conduct and maintain the affairs of the institution within the
scope of its authority as prescri&ed in its charter and in e+isting laws, rules
and regulations.cralaw
c* &pecific Duties and +esponsibilities of a Director
i. (o conduct fair &usiness transactions with the corporation and to ensure
that personal interest does not &ias 3oard decisions. (he &asic principle to
&e o&served is that a director should not use his position to make profit or to
ac-uire &enefit or advantage for himself and'or his related interests. <e
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
e+ecutives, it should &e fully disclosed and the concerned director should not
participate in the decision making. $ director who has a continuing conflict of
interest of a material nature should consider resigning.cralaw
ii. (o devote time and attention necessary to properly discharge his duties
and responsi&ilities. $ director should devote sufficient time to familiari4e
himself with the institution's &usiness. <e should &e constantly aware of the
institution's condition and &e knowledgea&le enough to contri&ute
meaningfully to the 3oard's work. <e should attend and actively participate
in 3oard and committee meetings, re-uest and review meeting materials,
ask -uestions, and re-uest e+planations.cralaw
iii. (o act ,udiciously. 3efore deciding on any matter &rought &efore the
3oard of directors, every director should thoroughly evaluate the issues, ask
-uestions and seek clarifications when necessary.cralaw
iv. (o e+ercise independent ,udgment. $ director should view each
pro&lem'situation o&,ectively. 8hen a disagreement with others occurs, he
should carefully evaluate the situation and state his position. <e should not
&e afraid to take a position even though it might &e unpopular. Corollarily, he
should support plans and ideas that he thinks are &eneficial to the
corporation.cralaw
v. (o have a working knowledge of the statutory and regulatory
re-uirements affecting the corporation, including the contents of its articles
of incorporation and &y*laws, the re-uirements of the Commission, and
where applica&le, the re-uirements of other regulatory agencies. $ director
should also keep himself informed of industry developments and &usiness
trends in order to safeguard the corporation's competitiveness.cralaw
vi. (o o&serve confidentiality. $ director should o&serve the confidentiality of
non*pu&lic information ac-uired &y reason of his position as director. <e
should not disclose any information to any other person without the
authority of the 3oard.cralaw
vii. (o ensure the continuing soundness, effectiveness and ade-uacy of the
company's control environment.cralaw
d* Internal Control +esponsibilities of t#e Board
(he control environment is composed of9 1a2 the 3oard which ensures that
the company is appropriately and effectively managed and controlled, 1&2 a
management that actively manages and operates the company in a sound
and prudent manner, 1c2 the organi4ational and procedural controls
supported &y an effective management information system and risk
management reporting system, and 1d2 the independent audit mechanisms
to monitor the ade-uacy and effectiveness of the organi4ation's governance,
operations, information systems, to include relia&ility and integrity of
financial and operational information, effectiveness and efficiency of
operations, safeguarding of assets, and compliance with laws, rules,
regulations, and contracts.cralaw
i. (he minimum internal control mechanisms for the 3oard's oversight
responsi&ility may include9chanro&lesvirtuallawli&rary
? 5efining the duties and responsi&ilities of the C.6:
? Selecting or approving an individual with appropriate a&ility, integrity,
e+perience to fill the C.6 role:
? Reviewing proposed senior management appointments:
? .nsuring the selection, appointment and retention of -ualified 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. (he minimum internal control mechanisms for management's operational
responsi&ility would center on the C.6, &eing ultimately accounta&le for the
company's organi4ational and procedural controls.
iii. (he scope and particulars of a system of effective organi4ational and
procedural controls may differ among companies depending on factors such
as9 the nature and comple+ity of &usiness and the &usiness culture: the
volume, si4e and comple+ity of transactions: the degree of risk: the degree
of centrali4ation and delegation of authority: the e+tent and effectiveness of
information technology: and the e+tent of regulatory compliance.cralaw
iv. .ach company may have in place an independent audit function, through
which the company's 3oard, senior management, and stockholders may &e
provided with reasona&le assurance that its key organi4ational and
procedural controls are effective, appropriate, and complied with. (he 3oard
may appoint a chief audit e+ecutive to carry out the audit function, and may
re-uire the chief audit e+ecutive to report to a level within the organi4ation
that allows the internal audit activity to fulfill its responsi&ilities.cralaw
). Board Meetin*s and uorum 'e#uirement
0em&ers of the 3oard should attend regular and special meetings of the
3oard in person. In view of modern technology, however, attendance at
3oard meetings through teleconference may &e allowed.cralaw
$n independent director should always &e in attendance. <owever, the
a&sence of an independent director may not affect the -uorum re-uirements
if he is duly notified of the meeting &ut deli&erately and without ,ustifia&le
cause fails to attend the meeting. @ustifia&le causes may only include grave
illness or death of immediate family and serious accidents.cralaw
(o monitor compliance with the a&ove re-uirement, corporations may, at the
end of every fiscal year, provide the Commission with a sworn certification
that the foregoing re-uirement has &een complied with. (he said certification
may &e su&mitted with the company's current report 1S.C /orm 1A*12 or on
a separate filing.cralaw
+. 'emuneration of the Mem(ers of the Board and Officers
=evels of remuneration shall &e 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.
$ proportion of e+ecutive directors' remuneration may &e structured so as to
link rewards to corporate and individual performance.cralaw
Corporations may esta&lish a formal and transparent procedure for
developing a policy on e+ecutive remuneration and for fi+ing the
remuneration packages of individual directors, if any, and officers. No
director should &e involved in deciding his or her own remuneration.cralaw
(he corporations' annual reports, information and pro+y statements shall
include a clear, concise and understanda&le disclosure of all plan and non*
plan compensation awarded to, earned &y, paid to, or estimated to &e paid
to, directly or indirectly to all individuals serving as the C.6 or acting in a
similar capacity during the last completed fiscal year, regardless of the
compensation level and the corporation's four 1%2 most highly compensated
e+ecutive officers other than the C.6 who were serving as e+ecutive officers
at the end of the last completed year.cralaw
(o protect the funds of the corporation, the Commission may regulate the
payment &y the corporation to directors and officers of compensation,
allowance, fees and fringe &enefits in very e+ceptional cases, e.g., when a
corporation is under receivership or reha&ilitation.cralaw
,. Board Committees
(he 3oard shall constitute Committees in aid of good corporate governance.cralaw
$. (he $udit Committee shall &e composed of at least three 12 3oard
mem&ers, prefera&ly with accounting and finance &ackground, one of whom
shall &e an independent director and another should have related audit
e+perience. It shall have the following specific functions9chanro&lesvirtuallawli&rary
a. )rovide oversight over the senior management's activities in managing
credit, market, li-uidity, operational, legal and other risks of the corporation.
(his function shall include receiving from senior management periodic
information on risk e+posures and risk management activities. <owever, in
consideration of the risk profile of the corporation, the 3oard may constitute
a separate Risk 0anagement Committee to focus on carrying out this
oversight role over risk management:
&. )rovide oversight of the corporation's internal and e+ternal auditors:
c. Review and approve audit scope and fre-uency, and the annual internal
audit plan:
d. 5iscuss with the e+ternal auditor &efore the audit commences the nature
and scope of the audit, and ensure coordination where more than one audit
firm is involved:
e. Responsi&le for the setting*up of an internal audit department and
consider the appointment of an internal auditor as well as an independent
e+ternal auditor, the audit fee and any -uestion of resignation or dismissal:
f. 0onitor and evaluate the ade-uacy and effectiveness of the corporation's
internal control system:
g. Receive and review reports of internal and e+ternal auditors and
regulatory agencies, where applica&le 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 -uarterly, half*year and annual financial statements &efore
su&mission to the 3oard, focusing particularly on9chanro&lesvirtuallawli&rary
B $ny change's in accounting policies and practices
B 0a,or ,udgmental areas
B Significant ad,ustments resulting from the audit
B Coing concern assumption
B Compliance with accounting standards
B Compliance with ta+, legal, and stock e+change re-uirements
i. Responsi&le for coordinating, monitoring and facilitating compliance with
e+isting laws, rules and regulations. It may also constitute a Compliance Dnit
for this purpose.
,. .valuate and determine non*audit work &y e+ternal auditor and keep
under review the non*audit fees paid to the e+ternal auditor &oth in relation
to their significance to the auditor and in relation to the company's total
e+penditure on consultancy. (he non*audit work should &e disclosed in the
annual report.cralaw
k. .sta&lish and identify the reporting line of the chief audit e+ecutive so that
the reporting level allows the internal audit activity to fulfill its
responsi&ilities. (he chief audit e+ecutive shall report directly to the $udit
Committee functionally. (he $udit 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 &e free from interference in determining the
scope of internal auditing e+aminations, performing work, and
communicating results, and shall provide a venue for the $udit Committee to
review and approve the annual internal audit plan.cralaw
(he Chairman of this committee should &e an independent director. <e
should &e responsi&le for inculcating in the minds of the 3oard mem&ers the
importance of management responsi&ilities in maintaining a sound system of
internal control and the 3oard's oversight responsi&ility.cralaw
/or )hilippine &ranches or su&sidiaries of foreign corporations covered &y
this Code, the local audit head for such entities should &e independent of the
)hilippine operations and should report to the regional or corporate
head-uarters.cralaw
3. (he 3oard may also constitute the following committees9chanro&lesvirtuallawli&rary
a. (he Nomination Committee which may &e composed of at least three 12
mem&ers, one of whom should &e an independent director may review and
evaluate the -ualifications of all persons nominated to the 3oard as well as
those nominated to other positions re-uiring appointment &y the 3oard and
provide assessment on the 3oard's effectiveness in directing the process of
renewing and replacing 3oard mem&ers.cralaw
&. (he Compensation or Remuneration Committee may &e composed of at
least three 12 mem&ers, one of whom should &e an independent director. It
may esta&lish a formal and transparent procedure for developing a policy on
e+ecutive remuneration and for fi+ing 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
1-. The Corporate Secretar.
(he Corporate Secretary, who must &e a /ilipino, is an officer of the
corporation. )erfection in performance and no surprises are e+pected of him.
=ikewise, his loyalty to the mission, vision and specific &usiness o&,ectives of
the corporate entity come with his duties.cralaw
=ike the C.6, he should work and deal fairly and o&,ectively with all the
constituencies of the corporation, namely, the 3oard, management,
stockholders and other stakeholders. $s such, he should &e someone his
colleagues and these constituencies can turn to, trust and confide with on a
regular &asis.cralaw
<e 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. <e must also have the financial
and accounting skills of a chief financial officer, and, lastly the vision and
decisiveness of the C.6.cralaw
Since there are different individuals on top of various corporate activities,
the Corporate Secretary should &e fully informed and &e part of the
scheduling process of the different activities. $s to agendas, he should have
the schedule thereof at least for the current year and should put the 3oard
on notice &efore every meeting. It is a very important discipline to get the
3oard to think ahead. <e should serve as an adviser to director's
responsi&ilities and o&ligations.cralaw
(he Corporate Secretary should make sure that directors have &efore them
everything that they need to make an informed decision. 8hen the 3oard
makes a decision, it is covered &y a &usiness ,udgment that can &e arrived
at &y the mem&ers 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
III.
SUPPLY INFORMATION
In order to fulfill their responsi&ilities, 3oard mem&ers, should &e provided
with complete, ade-uate and timely information prior to 3oard meetings on
an on*going &asis.cralaw
0anagement should have an o&ligation to supply the 3oard with complete,
ade-uate information in a timely manner. Reliance purely on what is
volunteered &y 0anagement is unlikely to &e enough in all circumstances
and further in-uiries may &e re-uired if the particular director is to fulfill his
or her duties properly. <ence, the 3oard may have separate and
independent access to the company's senior management.cralaw
(he information may include the &ackground or e+planatory information
relating to matters to &e &rought &efore the 3oard, copies of disclosure
documents, &udgets, forecasts and monthly internal financial statements.
8ith respect to the &udget, any variance &etween the pro,ections and actual
results should also &e disclosed and e+plained.cralaw
5irectors should also have a separate and independent access to the
Corporate Secretary. (he role of the Corporate Secretary should &e clearly
defined and should include responsi&ility for ensuring that 3oard procedures
are &eing followed and that applica&le rules and regulations are complied
with. (he Corporate Secretary should attend all 3oard meetings.
(he 3oard 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 e+pense.cralaw
IV.
ACCOUNTABILITY AND AUDIT
1. The Board is primaril. accounta(le to the shareholders and
Mana*ement is primaril. accounta(le to the Board. (he 3oard should
provide the shareholders with a &alanced and understanda&le assessment of
the corporation's performance, position and prospects on a -uarterly &asis.
(he 0anagement should provide all mem&ers of the 3oard with a &alanced
and understanda&le account of the corporation's performance, position and
prospects on a monthly &asis. (his responsi&ility should e+tend to interim
and other price sensitive pu&lic reports and reports to regulators 1if
re-uired2. It should &e primarily responsi&le in making financial reporting
and internal control in accordance with the following guidelines9chanro&lesvirtuallawli&rary
a. )resent a &alanced and understanda&le assessment of the company's
position and prospects. (he 3oard's responsi&ility to present a &alanced and
understanda&le assessment should e+tend to interim and other price*
sensitive pu&lic reports and reports to regulators as well as to information
re-uired to &e presented &y statutory re-uirements:
&. .+plain their responsi&ility for preparing the accounts, for which there
should &e a statement &y the auditors a&out their reporting responsi&ilities:
c. Report that the &usiness is a going concern, with supporting assumptions
or -ualifications, if necessary:
d. 0aintain a sound system of internal control to safeguard stakeholders'
investment and the company's assets:
e. 3ased on the approved audit plans, scope and fre-uency of audits, ensure
that internal audit e+aminations cover, at least, the evaluation of ade-uacy
and effectiveness of controls encompassing the organi4ation's governance,
operations, information systems, to include relia&ility and integrity of
financial and operational information, effectiveness and efficiency of
operations, safeguarding of assets, and compliance with laws, rules,
regulations, and contracts.cralaw
f. Re-uire the chief audit e+ecutive to render to the $udit Committee and
senior management an annual report on the internal audit department's
activity, purpose, authority, responsi&ility and performance relative to the
audit plans and strategies approved &y the $udit Committee of the 3oard.
Such annual report should include significant risk e+posures and control
issues, corporate governance issues, and other matters needed or re-uested
&y the 3oard and senior management. (he chief audit e+ecutive's annual
report shall likewise &e made availa&le to the stockholders of the company.
Internal auditors shall report that their activities are )conducted in
accordance -it# t#e &tandards for t#e Professional Practice of Internal
"uditing)* 6therwise, the chief audit e+ecutive shall disclose to the 3oard
and senior management that it has not yet achieved full compliance with the
standards for the professional practice of internal auditing.cralaw
2. Selection/0ppointment% 'esi*nation% !ismissal or Cessation of
Service of an External 0uditor
(he 3oard, through the $udit Committee, shall recommend to the
stockholders a duly accredited e+ternal auditor who shall undertake an
independent audit and shall provide an o&,ective assurance on the way in
which financial statements shall have &een prepared and presented. Such
e+ternal auditor cannot at the same time provide the services of an internal
auditor to the same client. 6ther non*audit work should not &e in conflict
with the functions of the e+ternal auditor.cralaw
(he e+ternal auditor should &e rotated every five 1!2 years or earlier or the
handling partner shall &e changed.cralaw
(he reason's for the resignation, dismissal or cessation from service and the
date thereof of an e+ternal auditor shall &e reported in the company's annual
and current reports. Said report shall include a discussion of any
disagreement with said former e+ternal 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 su&,ect matter of the
disagreement in connection with its report.cralaw
If an e+ternal auditor &elieves that the statements made in an annual report,
information statement or pro+y statement filed during his engagement are
incorrect or incomplete, he shall also present his views in said reports.

chanroblesvirtualawlibrary
V.
STOCHOLDERS! RIGHTS AND PROTECTION OF MINORITY
STOCHOLDERS! INTERESTS
(he 3oard shall &e committed to respect the following rights of the
stockholders9chanro&lesvirtuallawli&rary
1. 1otin* 'i*ht
Shareholders have the right to elect, remove and replace directors and vote
on certain corporate acts in accordance with the Corporation Code.cralaw
(he Code mandates the use of cumulative voting in the election of directors.
$lthough directors may &e removed with or without cause, the Code
prohi&its removal without cause if it will deny minority shareholders
representation in the 3oard. Removal of directors re-uires an affirmative
vote of two*thirds of the outstanding capital.cralaw
2. 2re3emptive 'i*ht
$ll stockholders have pre*emptive rights, unless there is a specific denial of
this right in the articles of incorporation or an amendment thereto. (hey
shall have the right to su&scri&e to the capital stock of the corporation. (he
$rticles 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 &y law so long as they are not in conflict with the Corporation
Code.cralaw
3. 2o4er of 5nspection
(he Corporation Code mandates corporations to allow shareholders to
inspect corporate &ooks and records including minutes of 3oard 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
4. 'i*ht to 5nformation
(he Shareholders shall &e provided, upon re-uest, with periodic reports
which disclose personal and professional information a&out 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. (he
Information Statement')ro+y Statement where these are found must &e
distri&uted to the shareholders &efore annual general meetings and in the
Registration Statement and )rospectus in case of registration of shares for
pu&lic offering with the Commission.cralaw
(he minority shareholders should &e 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 &usiness purposes.cralaw
(he minority shareholders should have access to any and all information
relating to matters for which the management is accounta&le 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, &eing within
the definition of )legitimate purposes)*
". 'i*ht to !ividends
Shareholders have the right to receive dividends su&,ect to the discretion of
the 3oard. <owever, the Commission may direct the corporation to declare
dividends when its retained earnings is in e+cess of 1##7 of its paid*in
capital stock, e+cept9 1a2 when ,ustified &y definite corporate e+pansion
pro,ects or programs approved &y the 3oard or 1&2 when the corporation is
prohi&ited 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 &een secured: or 1c2 when it can &e
clearly shown that such retention is necessary under special circumstances
o&taining in the corporation, such as when there is a need for special reserve
for pro&a&le contingencies.cralaw
$. 0ppraisal 'i*ht
(he Corporation Code allows the e+ercise of the shareholders' appraisal
rights under the following circumstances9chanro&lesvirtuallawli&rary
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
authori4ing preferences in any respect superior to those of outstanding
shares of any class, or of e+tending or shortening the term of corporate
e+istence:
&. In case of sale, lease, e+change, transfer, mortgage, pledge or other
disposition of all or su&stantially all of the corporate property and assets as
provided in the Corporation Code: and cralaw
c. In case of merger or consolidation, it is the duty of the directors to
promote shareholder rights, remove impediments to the e+ercise of
shareholders rights and allow possi&ilities to seek redress for violation of
their rights. (hey shall encourage the e+ercise of shareholders' voting rights
and the solution of collective action pro&lems through appropriate
mechanisms. (hey shall &e instrumental in removing e+cessive costs and
other administrative or practical impediments to shareholders participating in
meetings and'or voting in person. (he directors shall pave the way for the
electronic filing and distri&ution of shareholder information necessary to
make informed decisions su&,ect to legal constraints.cralaw
VI.
EVALUATION SYSTEMS
(he management may esta&lish a performance evaluation system to
measure the performance of the 3oard and top*level management of the
corporation.cralaw
(he esta&lishment of such evaluation system, including the features thereof,
may &e disclosed in the company's annual report 1S.C /orm 1A*$2.cralaw
VII.
DISCLOSURE AND TRANSPARENCY
$ dominant theme in all issues related to corporate governance is the vital
importance of disclosure. (he more transparent the internal workings of the
company and cash flows, the more difficult it will &e for management and
controlling shareholders to misappropriate company assets or mismanage
the company.cralaw
(he most &asic and all encompassing disclosure re-uirement is that all
material information, i.e., any thing that could potentially affect share price,
should &e pu&licly disclosed. Such information would include earnings
results, ac-uisition or disposal of assets, &oard changes, related party
transactions, shareholdings of directors and changes to ownership. 6ther
information that should always &e disclosed includes remuneration 1including
stock options2 of all directors and senior management corporate strategy,
and off &alance sheet transactions. $ll disclosed information should &e
released via the approved stock e+change procedure for company
announcements as well as through the annual report.cralaw
(he 3oard shall therefore, commit at all times to full disclosure of material
information dealings. It shall cause the filing of all re-uired information for
the interest of the stakeholders.cralaw
VIII.
COMMITMENT TO CORPORATE GOVERNANCE
Corporations shall promulgate and adopt its corporate governance rules and
principles in accordance with this Code. Said rules shall &e in manual form
and availa&le as reference &y the directors. It shall &e su&mitted to the
Commission, which shall evaluate the same and their compliance with this
Code taking into account the si4e and nature of &usiness. (he said manual
shall &e availa&le for inspection &y any stockholder of the corporation at
reasona&le hours on &usiness days. (he Chairman of the 3oard shall &e
specifically tasked with the responsi&ility of ensuring adherence to the
corporate governance code and practices.cralaw
Dnless mandated &y law, other corporations are likewise encouraged to
o&serve this Circular in the a&sence of any mandated corporate governance
rules adopted &y other agencies.cralaw
I".
ADMINISTRATIVE SANCTION
/ailure to adopt a manual of corporate governance as specified therein shall
su&,ect a corporation, after due notice and hearing, to a penalty of
)1##,###.##.cralaw
".
TRANSITORY PROVISION
$ll corporations affected &y this Code shall su&mit their manual &y @uly 1,
"##" to &e effective @anuary 1, "##. $ model manual will &e drafted &y the
Commission and will &e availa&le &y 0ay 1!, "##" in the S.C we& page.cralaw
"I.
EFFECTIVE DATE
(his 0emorandum Circular shall take effect after fifteen 11!2 days from
pu&lication in a newspaper of general circulation.

$pril !, "##", 0andaluyong City, )hilippines.
LILIA R. BAUTISTA
Chairperson