The SEC’s mandate to strengthen director independence

The SEC’s mandate to strengthen director independence | Daily Tribune

The Securities and Exchange Commission (SEC) has recently invited public comments on its draft Memorandum Circular setting the duration of terms and term limits for independent directors. The proposal seeks to formalize a three-year fixed term and a maximum cumulative limit of nine years, reckoned from 2012. While the substance of the rule has sparked discussion, its foundation rests squarely on the SEC’s legal mandate.

Under Section 22 of the Revised Corporation Code (RCC), independent directors are expressly made “subject to rules and regulations governing their qualifications, disqualifications, voting requirements, duration of term and term limit, maximum number of board memberships, and other requirements that the Commission will prescribe to strengthen their independence and align with international best practices.”

The law could not be clearer. It grants the SEC the authority and the responsibility to issue rules that protect the independence of these directors. By defining tenure and limits, the SEC ensures that independent directors do not merely exist in form but function in substance as true checks on management.

Further, Section 179(m) of the Code empowers the SEC to “prescribe the number of independent directors and the minimum criteria in determining the independence of a director.”

Together, these provisions form a solid legal basis for the Commission’s initiative. The rule-making power is not arbitrary; it is part of a broader framework that entrusts the SEC with safeguarding good governance in Philippine corporations.

The role of independent directors is to act as impartial stewards of corporate integrity. Directors who are neither beholden to management nor driven by personal interest. They bring objectivity, discipline, and accountability to the boardroom. But these qualities must be protected through structure. Without defined terms, independence can blur over time, as relationships deepen and familiarity grows.

Term limits ensure a healthy balance between continuity and renewal. They prevent long-serving independent directors from becoming too aligned with management, while still allowing them to contribute meaningfully during their tenure. The proposed three-year term, renewable up to a total of nine years, reflects both prudence and global practice.

Critics may argue that fixing a term constrains shareholder choice. Yet, under Section 27 of the RCC, shareholders retain the power to remove any director — independent or otherwise — by a two-thirds vote. The rule does not displace shareholder authority; it simply defines the parameters within which independence can thrive.

In practice, the SEC’s move aligns the Philippines with corporate governance standards adopted in many jurisdictions, where tenure restrictions are viewed as an essential safeguard of board objectivity. International studies have long shown that prolonged service can erode independence and limit the inflow of fresh perspectives.

Corporate governance is, at its core, about balance — between accountability and flexibility, experience and renewal, management and oversight. The SEC’s authority to define the qualifications and tenure of independent directors is not just a matter of legal text, it is a policy tool to maintain that balance.

By exercising its rule-making powers under Sections 22 and 179(m), the SEC reaffirms its role as the guardian of good governance. Setting clear term limits does not merely comply with the law, it strengthens the spirit of independence that modern corporations cannot afford to lose.