The Securities and Exchange Commission (SEC) under newly appointed Chair Francis Lim, a grizzled veteran of the local capital markets scene following his stints as president of the Philippine Stock Exchange, Finex, MAP and SharePhil, has started to move the needle on good governance.

In furtherance of what he obviously believes is important to promote a culture of good governance, the SEC has issued a draft circular on limiting, without exception, the tenure of Independent Directors to not more than nine years. The draft circular would mandate a minimum term of three years upon election of an independent director, not to exceed a cumulative maximum of nine years.

Why is this rule being pushed? The SEC argues that a long tenure and likely closer relationship developed with the controlling shareholders over time may compromise the impartiality and independence of an independent director. When this happens, the very rationale for having independent directors could be at risk, presumably on the theory that familiarity could very well breed complacency and lack of objectivity. Furthermore, without constant change, opportunities for fresher looks and new perspectives are diminished.

Perhaps the most important consideration for supporting this proposed circular is to ensure that for publicly listed corporations, the “public,” which in the context of the Philippines — where most listed corporations are controlled by a single family — means the widely dispersed minority shareholders, would have an “independent” voice who would confidently speak out against management and the controlling shareholders on their behalf for at least three years without fear the controlling bloc would remove them for taking a contrary stand.

But, of course, there are two sides to a coin and opinions are not always unanimous, particularly on a diverse board with strong-willed personalities. In the unfortunate event the choice of an independent director turns out to be a mistake, i.e., an obstructionist impeding the progress of the corporation, the company will be stuck with them for three years.

However, there is also the opinion that forcing a director out after nine years would deprive a company of a highly experienced, well-balanced voice already very familiar with the industry and the company’s operations.

In such a situation, the supporters of the SEC circular point out that the shareholders can re-elect the outgoing independent director, but this time as a non-independent executive director.

What are other countries doing with regard to independent directors? The world is not unanimous insofar as this issue is concerned. The US does not have a limit on the tenure of an independent director. However, the NYSE and Nasdaq, the premier stock exchanges considered the benchmark for capital markets, require that the majority of a board be independent. The thinking apparently is that the constant presence of independent directors is a crucial safeguard to ensure the protection of the minority shareholders’ interests.

The United Kingdom, Singapore, and Malaysia, on the other hand, use nine years only as a guide and threshold for reassessing the independence of directors and not as a mandatory regulatory limit, which is consistent with the Organization for Economic Cooperation and Development’s (OECD) recommendation.

Our local capital market stakeholders, it seems, are not unanimous on this proposed circular, except to reiterate that they are generally supportive of the SEC’s initiative regarding the need to set definitive term limits for independent directors, but they also recognize that there are nuances in the proposal, particularly regarding the minimum three-year tenure, that need further clarification.

Until next week… OBF!

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