When the Revised Code of Corporate Governance (RCCG) was issued by the Securities and Exchange Commission (SEC) in June 2009, it changed the regulatory approach to the corporate governance reform by providing for a general administrative sanction clause for any violation of its provisions, thus:
ARTICLE 11: ADMINISTRATIVE SANCTIONS
A fine of not more than P200,000 shall, after due notice and hearing, be imposed for every year that a covered corporation violates the provisions of this Code, without prejudice to other sanctions that the Commission may be authorized to imposed under the law; provided, however, that any violation of the Securities Regulation Code punishable by a specific penalty shall be assessed separately and shall not be covered by the abovementioned fine.
A major criticism we held against the 2009 RCCG was its overhaul of the definition and coverage of the term “Corporate Governance” (CG) and the deletion of all references to “stakeholders” and “constituencies,” and thereby limiting its application only to purely intra-corporate relationships already governed by the old Corporation Code. It was not difficult for the SEC to impose a general administrative sanction clause in the 2009 RCCG since this was consistent with general criminal penalty approach under Section 144 of the then Corporation Code, thus:
SEC. 144. Violations of the Code. — Violations of any of the provisions of this Code or its amendments not otherwise specifically penalized therein shall be punished by a fine of not less than P1,000 or by imprisonment for not less than 30 days but not more than five years, or both, in the discretion of the court. …
Nonetheless, the SEC still met oppositions to its exercise of any power to impose administrative sanctions for violations for the 2009 RCCG since there was no statutory basis thereof found in the then Corporation Code. What power the SEC had to impose administrative sanctions could be found only under Presidential Decree No. 902-A and the Securities Regulation Code, and yet the CG reforms mandated under the 2009 RCCG pertained primarily to a higher benchmark than those provided for under the Corporation Code.
We recall then that after reading the 2009 RCCG, one was left with the feeling that the great experiment of ushering into our jurisdiction modern CG principles and practices had abruptly come to an end; and that we in the Philippines were retreating back to old, familiar grounds — the governance principles espoused under the century-old principles expressed in the provisions of the old Corporation Code. Indeed, the issue that stood out from the provisions of the 2009 RCCG was not what cutting-edge concepts or provisions were introduced, but rather a withdrawal from the application Stakeholder Theory, and reverting back to the familiar Maximization of Shareholder Value.
In May 2014, under Chair Teresita J. Herbosa, the SEC issued Memorandum Circular No. 9-2014, with the principal purpose of reintegrating the stakeholder provisions of the original CG Code back into the 2009 RCCG. Nonetheless, the general administrative sanction clause for violation of any of the provisions of the 2014 RCCG was retained. The issue under the 2014 RCCG was how an “administrative sanction approach to any violation of its provision” would sit well with the promotion of good CG among the directors and executive officers of publicly-held companies.
Fines and other penalties imposed by the SEC are serious matters, not only because of the pecuniary burdens placed on the company, but more so on the egregious effect on the value of its securities to the detriment of investors. More importantly, under the then Corporation Code, and in the 2014 Revised CG Code itself, a violation may be a ground for the disqualification of a director, or constitute as “proper cause” for his removal by the requisite vote of shareholders.
Worse, was the fact that the overly broad language used in the administrative sanction clause sent a chilling effect through the publicly held companies sector. Although there is no doubt that the failure to comply with the requirement of filing the manual is punishable under Article 11 of the 2014 Revised CG Code, it seemed difficult to see how any other “violation” thereof may be properly punished by a fine of P200,000 “for every year that a covered corporation violates the provisions of this Code.”
Firstly, instead of the fine being imposed on every violation of the provisions of the 2014 RCCG, the penalty that was imposable was limited to “P200,000 every year.” That would come to the dubious end that a covered company may commit various infractions under the 2014 RCCG, and only be liable to a maximum penalty of P200,000 per year.
Secondly, CG principles and best practices are primarily to be followed or practiced by the directors and key officers of a covered company, and the infraction would be a personal liability on their part. Yet the provisions of Article 11 of the 2014 RCCG apply the penalty only to a violation by the company itself and not on the director or officer guilty of an offense under the Code.
Thirdly, although the non-filing of the manual on CG constituted a situation that “a covered corporation violates the provisions of this Code,” simply because the original provisions of the original CG Code specifically covered only such violation, it was not clear what other violations may be punishable under Article 11 of the 2014 RCCG.
To illustrate, under Art. 2(F) of the 2014 RCCG, it was provided that “The Board should formulate the corporation’s vision, mission, strategic objectives, policies and procedures that shall guide its activities, including the means to effectively monitor Management’s performance.” Obviously, compliance with such a duty may find its expression in the manual of CG submitted with the SEC. But if the manual duly submitted does not contain one or some of the items enumerated, or what are submitted are not effective or complete, did that constitute a violation of the 2014 RCCG, triggering the imposition, after notice and hearing, of the P200,000 fine? Who is to judge what is “effective”?
If we were to presume that the clear intention under Article 11 of the 2014 RCCG was that the penalty imposed would be personally against the offending director or officer, it would have a chilling effect on the exercise of business judgment on the part of the Board of Directors, and would even discourage qualified professional directors from accepting appointments to publicly held companies simply because they are not certain exactly what action or inaction would constitute punishable offense under the said provision.
In any event, what is important to consider is that the net effect of the changes introduced by the 2014 RCCG was to make the provisions thereof mandatory to publicly held companies, and non-compliance therewith may involve the imposition of administrative sanctions. Such penalty provisions are often necessary to get any system going, but effective only when they are evenly enforced. The use of coercive measures in fact misses the whole point of what CG reform movement is all about — it is meant to show to businessmen that doing good is consistent with doing well in business. As they say, piety obtained out of fear is mere pretense.
The second important feature of both the original CG Code and 2014 RCCG was that they were presented with the same format: they start each section by stating the CG principle in a certain area of concern, and then provide under each principle a set of duties and responsibilities or best practices that would enforce the principle highlighted. In short, both CG Codes issued by the SEC were primarily “rules-based” codes, as contrasted to “principles-based” approaches in CG reforms.
The main objection to rules-based codes, especially those that carry sanctions, is that they do not promote a “change of hearts and minds,” in the sense that they merely impel directors and officers to right away refer the matters to their legal counsel, and the organization ends up “ticking the boxes” to ensure compliance with the required or indicated measures of the code. In addition, since a rules-based code cannot possibly anticipate all situations that may occur in the corporate setting, then pursuit of CG reforms ends up with the Board and Management looking for loopholes, or in pursuit of a set of actions that are not clearly within the mandatory coverage of the rules or measures indicated in the code.
This article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or the MAP.
Attorney Cesar L. Villanueva is Chair of MAP Corporate Governance Committee, trustee of the Institute of Corporate Directors, former Chair of Governance Commission for GOCCs (August 2011 to June 2016), Dean of the Ateneo Law School (April 2004 to September 2011), author of the book The Law and Practice in Philippine Corporate Governance and the National Book Board Award-winning Profession, and founding partner of the Villanueva Gabionza & Dy Law Offices.