2016 INVESTMENT GUIDE

CORPORATE GOVERNANCE

The role and qualifications of

independent directors in listed
Philippine companies come under
close scrutiny as government
regulators propose new rules
aligned with global best practice.

Regulating
Independence

Proposals to impose term and age limits on

independent directors have triggered objections
from business groups. We examine the ranks of
the independent members of company boards.
BY PAUL JOHN CAA, LALA RIMANDO
AND LORENZO KYLE SUBIDO

s the Philippine stock market

slump continues, top executives and
directors of listed companies remain
on edge. The value of their holdings
and year-end bonuses are linked to
their companies latest share prices, which have
fallen sharply from their peaks in the middle of
2015.
Adding to their woes are proposals from
policymakers to toughen the so-called fit
and proper rules on independent directors
serving in listed companies. The aim: align
local standards with what are considered best
global practices. The proposed regulations may
disqualify many of the incumbent independent
directors and compel affected companies to
JANUARY 2016

FORBES | 45

2016 INVESTMENT GUIDE

CORPORATE GOVERNANCE

recruit new ones. Business groups are

raising a howl, warning the proposals
could hurt the companies as they lose
experienced and knowledgeable board
members.
In a sign of widespread opposition
to the Department of Finance
(DoF) and Securities and Exchange
Commission (SEC) proposals, eight of
the countrys biggest business groups
have come together and issued a
strongly worded statement condemning
the government move as usurpation
of legislative power. The groups
include the Bankers Association of
the Philippines, the Philippine Stock
Exchange, the Makati Business Club,
Employers Confederation of the
Philippines, Federation of FilipinoChinese Chambers of Commerce and
Industry Inc., Management Association
of the Philippines, Philippine Chamber
of Commerce and Industry and the
Philippine Franchise Association.
One of the most contentious
proposals, which were outlined in
Department Order 054-2015 released by
the DoF in April 2015, seeks to limit the
term of independent directors to five
consecutive years. After their term, they
must step down for a cooling period of
at least two years. They can be elected
to the board again after two years but
can stay for no more than five years.
The DoF is also setting the
maximum age for independent
directors at 80 years old. Those beyond
the age limit need a special approval
from the SEC.
A FORBES Philippines investigation
that examined the tenure, ages and
positions of independent directors in
246 PSE-listed companies sheds light
on the controversy generated by the
DoF proposals.
A total of 444 independent directors
in 246 listed companies provided data
on the composition of their governing
boards as gleaned from 2014 annual
reports filed with the PSE. These
persons occupied 596 independent
director positions, which suggest that
some of them served in two or more
companies.
Indeed, 84 persons held at least two
independent director posts; of this, 18
had four or more independent board
seats in listed companies. One person
46 | FORBES

JANUARY 2016

SGV & Co. founder Washington

SyCip (left) and former Department
of Finance undersecretary Romeo
Bernardo (above) are two of the
most sought after independent
directors.

held nine independent director seats.

Some independent directors might have
held more seats if they also served as
regular directors in listed and unlisted
companies.
The number of directors who will
be affected by the proposal depends
on its effectivity. To get an idea of
what is the likely impact of the

and management seek out wellrespected independent directors not

only to benefit from their knowledge
and experience but also to demonstrate
to the investing public that their
companies can withstand scrutiny
with such independent-minded men
and women. We should not shackle
such good aspirations with ill-advised

None of my clients are complaining about

my age. They are paying me for thinking ahead.
WASHINGTON SYCIP, FOUNDER, SGV & CO.

new rules, we looked at the tenure

of incumbent directors and found
that those occupying 266 of 596
independent board seats have been
serving since 2009 or earlier. If the
DoF and SEC proposals on term limits
took effect last year and were applied
retroactively, it would have rendered
44.6% of the total incumbents
ineligible for another term.
Romeo Bernardo, a former DoF
undersecretary who sits on several
company boards as independent
director, says majority shareholders

fiats like limits on term or number

of seats of independent directors,
he says.
Imposing term limits on directors
have not been empirically and
conclusively proven to improve board
effectiveness, argues the eight business
groups in a statement, citing a study by
doctoral students of the University of
New South Wales Australia.
The average age of independent
directors in the list compiled by
FORBES Philippines is 64.5 years old,
with the youngest at 29 and the oldest

CORPORATE GOVERNANCE

2016 INVESTMENT GUIDE

EIGHT THINGS YOU SHOULD KNOW ABOUT INDEPENDENT DIRECTORS

are 444
1 There
directors occupying
596 independent
board seats.

Number of
independent directors
and how many board
seats they occupy in
listed companies

1 seat
2 seats
3 seats
4 or
more
seats

companies
Some directors have
2 Some
3
have more independent
been around far longer
directors than others.
than others.

directors
4 Independent
tend to belong to the
older set.

Number of listed
companies and
the proportion
of independent
directors on
their boards

Age of
independent
directors (by
board seat)

Less than 20%

20-29%
30-39%
40-49%
50% or more

17 5

10 18
56

Start of tenure
of independent
directors
(by board seat)

1% 6%

45

25

Before 2000
2000-2004
2005-2009
2010-2015
No data

7%

Under 50 years
50-59 years
60-69 years
70-79 years
80 years and up
No data

3% 7%

13%
20%
33%
54%

360

26%
30%

153
Source: Forbes Philippines research based on corporate records filed with SEC and PSE

at 93. FORBES Philippines found that at least 28 of current

independent directors are 80 years old and older, potentially
disqualifying them from being elected as independent
directors unless cleared by the SEC.
The most well-known of the elderly independent directors
is Washington SyCip, founding partner of local accounting
firm SyCip Gorres Velayo & Co. At 93, SyCip is also one
of the record holders for the most number of directorship
positions, with at least 25 board seats as of end-2014. He is an
independent director in 14 of these companies and a regular
board member in 11. None of my clients are complaining
about my age, says SyCip. They are paying me for thinking
ahead. And because I work hard.
Independent directors also caution against setting limits
on the number of directorships held even though it is not
part of the DoF and SEC proposals. Bernardo quotes a
study by professors at the University of Missouri-Columbia,
Binghamton University and University of Michigan Law
School: We find firm performance has a positive effect on
the number of appointments held by a director. We find no
evidence that multiple directors shirk their responsibilities to
serve on board committees.
Artemio Panganiban Jr., a former Supreme Court chief
justice, is one of the countrys highly sought directors; he
holds at least 17 board seats, 11 of which are as an independent
director and the rest as a regular board member. I join a
company where I can be comfortable attending the board
meetings, says Panganiban. If I cannot devote time, then I
do not accept. Of all his directorship positions, the ex-chief
justice says he is almost never absent during board meetings.
I take a two-week break for me and my family every year and
theres only one company whose regular board meeting falls on
that [period]. Otherwise, in all the others, Im in 100%.
Still, age and the number of directorships have a bearing
on an independent directors physical ability to attend board

Top: Participants in a forum on corporate governance in October 2015

debate the governments proposed rules on independent directors.
Bottom: Former Supreme Court chief justice Artemio Panganiban has
at least 17 board seats but attends almost all the meetings.

JANUARY 2016

FORBES | 47

2016 INVESTMENT GUIDE

Doctorate
Degree

7%

1%

Honorary
Degree

0%

2%

Unspecified

3%

6%

95%

25

90%
85%
80%

20
90%
15
85%
10
80%

75%

75%

70%

70%

10

20

30

Total directorships

40

50

5
0
40

50

60

70

Age

80

90

100

More than 50%

43%

95%

41%-50%

57%

100%

31%-40%

Masters
Degree

100%

20%-25%

48%

Average Profit Margin (%)

30

26%-30%

33%

more
8 Having
independent directors
improves profit margins
up to a point.

Attendance compared
with total directorships*

REGULAR

Bachelors
Degree

Attendance compared
with age*

meetings.

Attendance in board meetings

INDEPENDENT

do older
7 Soindependent
directors

Less than 20%

Highest educational attainment

of board members of Top 25
listed companies

directors
6 Independent
serving in too many
boards miss more

Attendance in board meetings

more graduate
5 Have
degrees

CORPORATE GOVERNANCE

Proportion of independent directors

* Data covers only 18 independent directors with the most number of board seats

meetings, which are often held at least

once every quarter. We looked at the
average attendance in board meetings
of 18 independent directors holding
four or more seats in listed companies
and compared these with their ages and
number of directorships (as independent
and regular board member). The results
show attendance tends to drop with
age and the number of directorships.
Admittedly, the sample size is too small to
be conclusive but the results suggest the
matter needs more study.
Despite the dispute over some of
the DoF and SEC proposals, there is
consensus that independent directors
are needed to ensure that board
decisions benefit all shareholders;
related party transactions are at
arms length and disclosed; and that
corporate actions comply with the
countrys laws and good corporate
governance standards.
The current independent directors
are well-positioned to carry out these
functions because they tend to be
older and more experienced than
regular directors and well-educated.
On average, independent directors
in the 100 most valuable listed
companies examined by FORBES
Philippines are six years older than
regular board members. About 60%
of independent directors in a smaller
list of 25 companies with the highest
48 | FORBES

JANUARY 2016

The returns theyre getting from the U.S. and

U.K.-based governance (system) is actually
subpar compared with what you have in some
emerging markets, especially in Asian markets.
HANS SICAT, PRESIDENT, PHILIPPINE STOCK EXCHANGE

market capitalization possess advanced

academic degrees compared with 43%
among regular directors.
As of 2014, independent directors
made up 27% on average of listed
companies governing boards. Although
the DoF and SEC are not raising this to
at least 50% following the direction in
developed countries business leaders
are against it. Bernardo explains that
ownership in rich countries tends to be
diffused and CEOs become powerful
and unaccountable unlike in Asia
where controlling family shareholders
are the value creators.
Hans Sicat, the PSE president, points out
that the Western governance model, which
is the inspiration for the DoF and SEC
proposals, does not yield superior financial
performance compared with the so-called
Asian model. The returns theyre getting
from the U.S. and U.K.-based governance
(system) is actually subpar compared with
what you have in some emerging markets,
especially in Asian markets, he says.
To find out if independence
matters for financial performance,
we gathered data on the proportion

of independent directors among the

100 most valuable listed companies
and compared this against the
companies average profit margins
from 2012 to 2014. Companies whose
independent directors make up
less than a fifth of board members
posted an average profit margin of
13%. Profitability increased to 18%
for companies with 20% to 25%
independent directors on the board
and 28% for those with 26% to 30%.
The average profit margin dropped
to 24% for companies with 31% to
40% independent directors on the
board. For companies led by majority
of independent directors, the average
profit margin fell to 20%.
When it comes to board independence
in Philippine companies, our limited data
show that too much of a good thing
can also be bad. F
This report was prepared as part of a series of
seminars on data journalism organized by the
Philippine Center for Investigative Journalism
and the Open Knowledge Foundation from July to
November 2015. The sponsors recognized it as one
of the two best stories produced for the project.