Mandatory nine-year cap on independent directors

Mandatory nine-year cap on independent directors | Daily Tribune

Beginning in 2026, a major shift in corporate boardrooms is set to take place for independent directors. The Securities and Exchange Commission will implement the mandatory nine-year cumulative term limit under the SEC’s Code of Corporate Governance for Publicly-Listed Companies (CG Code).

The rule, which has long existed under the CG Code’s “comply or explain” framework, will now become mandatory, with the SEC requiring that independent directors who have served for nine years, whether continuously or intermittently, will be perpetually barred from reelection as independent directors in the same company.

However, they may still be nominated and elected as non-independent directors, provided they meet the necessary qualifications.

This development forms part of a broader wave of reforms being introduced by a revitalized SEC en banc, under the leadership of a newly appointed SEC Chairman and Commissioner, both of whom bring with them substantial experience from private legal practice.

Their fresh perspective, shaped by first-hand engagement in corporations and real-world governance challenges, is now guiding the Commission’s proactive stance in elevating corporate governance standards across the country.

This reaffirms the fundamental principle behind independent directorship, which is true independence.

Independent directors are expected to exercise objective and impartial judgment, free from management influence or relationships that could impair their autonomy.

Under the Revised Corporation Code, corporations vested with public interest, such as publicly-listed companies, must ensure that at least 20 percent of their board consists of independent directors.

The CG Code expands this requirement further, mandating at least three independent directors or one-third of the board, whichever is higher.

The introduction of the nine-year cap seeks to address a longstanding tension in corporate governance.

While many companies have come to value and even rely on long-serving independent directors for their experience and institutional knowledge, there is growing recognition that prolonged tenure may erode independence.

Familiarity with management, long-term relationships with other board members, and comfort within the company culture may all affect an independent director’s ability to challenge decisions or offer fresh perspectives.

The rise in demand for seasoned independent directors has also raised concerns about directors holding multiple board seats across different corporations. The SEC addresses this by limiting independent directorships to a maximum of five companies at any one time.

This limit is intended to ensure that directors can devote sufficient time and attention to each corporation. The duties of diligence and loyalty require deep engagement and informed decision-making, something that may be compromised when one is spread too thin.

Companies are encouraged to begin succession planning now, as 2026 nears. Identifying and developing the next generation of independent directors will be critical not only for compliance but also for maintaining effective corporate governance in the years to come.

This initiative by the new SEC leadership reflects a clear message that corporate governance must evolve in the Philippine corporate culture, and that the independence of corporate directors will be monitored and implemented by the SEC.

The SEC will now claim meaningful corporate governance and ensure that it is effectively practiced.