Strengthening director independence: Why term limits matter

Strengthening director independence: Why term limits matter | Daily Tribune

The Securities and Exchange Commission (SEC) has released for public comment its draft Memorandum Circular on the Duration of Term and Term Limit of Independent Directors. The proposal, which seeks to formalize rules on how long independent directors may serve, is anchored on the SEC’s authority to set qualifications, disqualifications, and tenure for independent directors.

Under the draft, an independent director will serve a fixed term of three years, with a maximum cumulative limit of nine years, counted from 2012.

Once the limit is reached, the director can no longer be reelected as an independent director in the same company. The proposed rules are mandatory, and violations will carry penalties.

The logic behind this policy is that independence tends to weaken with familiarity. Independence fades when familiarity sets in.

Without term limits, an independent director who stays too long may grow too comfortable with management, lose objectivity, and eventually prioritize tenure over responsibility. Independence, after all, is not just about having no financial ties, it’s about having the freedom and courage to speak truth to power.

Over time, a long-serving director may become less inclined to challenge management or question longstanding practices, especially if they’ve developed close ties with executives. This erosion of independence can quietly dull the board’s oversight function, which is precisely what independent directors are supposed to strengthen.

Setting term limits prevents complacency and ensures the regular infusion of fresh perspectives, an important ingredient in effective corporate governance. New independent directors bring with them new ideas and varied experiences.

Some may argue that the rule curtails shareholder rights, since it fixes the term to three years instead of leaving it to annual reelection. But that concern is misplaced. The proposal does not deprive shareholders of control.

Under Section 27 of the Revised Corporation Code, shareholders representing two-thirds of the outstanding capital stock may remove a director at any time. If an independent director underperforms or loses the trust of the shareholders, there is a clear remedy.

In fact, the fixed term offers a kind of security of tenure that protects independent directors from the fear of non-reappointment in the next annual meeting, a fear that can compromise their judgment. With a three-year window, they can perform their oversight role more freely, unburdened by yearly political calculations.

Independent directors make up only a minority of the board, but their role is vital. They serve as the corporation’s conscience — the steady voice reminding management and controlling shareholders to keep decisions fair, transparent, and in the company’s long-term interest.

By contrast, non-executive directors, who may have served for decades, can remain without term limits to preserve institutional knowledge. The new rule focuses only on those whose independence must be beyond question.

In the end, the proposal is not about limiting tenure; it’s about strengthening integrity.

Independence loses meaning when it becomes permanent. The SEC’s move, if implemented, could help ensure that the boards remain not only competent but also courageous, composed of directors who are close enough to know, yet far enough to say no.