Ensuring the independence of independent directors

Ensuring the independence of independent directors | Daily Tribune

If the controlling stockholders truly wish to retain a director beyond the nine-year term limit, they should keep him as an executive director. After all, the Securities and Exchange Commission’s (SEC) proposed term limit of nine years applies only to independent directors who are meant to stand apart from management and ownership influence.

The proposal, outlined in a draft Memorandum Circular (MC) recently released by the SEC for public comment, seeks to institutionalize a nine-year cumulative term limit for independent directors. This reform aligns with international best practices and aims to preserve the integrity of board oversight by ensuring that “independent” truly means independent.

Under Section 22 of the Revised Corporation Code (RCC), independent directors are subject to SEC rules governing their qualifications, disqualifications, duration of term, and term limits which are aimed at strengthening their independence and align with international best practices.

Further, Section 179(m) of the RCC empowers the SEC to prescribe the number of independent directors and the minimum criteria in determining independence. In other words, the law entrusts the Commission not only with defining independence but also with guarding it against erosion.

The RCC defines them as members of the board who are free of any relationship that could materially interfere with their independent judgment. They are expected to protect minority shareholders, uphold transparency, and ensure that management decisions serve the company’s long-term interests rather than the whims of the controlling bloc.

Yet, experience suggests that independence weakens with familiarity. Over time, long-serving independent directors may develop personal or professional loyalties that compromise their objectivity. Studies show that an extended tenure often reduces the likelihood of directors challenging management decisions. Another study finds that long-tenured independent directors are associated with less effective monitoring and higher levels of insider trading.

This phenomenon is sometimes called the “familiarity threat.” This happens when independent directors, through years of collegial interaction, begin to sympathize with management’s perspective. According to studies, corporations with independent directors serving for an extended period tend to experience weaker firm performance, suggesting diminishing oversight quality. Further, analysts perceive companies with long-tenured independent directors as less transparent and less likely to issue accurate earnings forecasts.

The SEC’s move to cap tenure at nine years thus seeks to reset this dynamic and to ensure the periodic infusion of fresh perspectives and reaffirm the director’s role as a check, not a cheerleader. Independence, after all, is not merely about the absence of financial ties; it is about the freedom and the courage to speak truth to power.

If independent directors remain at the mercy of controlling shareholders and are beholden to them for their reappointment and are hesitant to dissent, their independence becomes merely nominal. Without genuine autonomy, they risk becoming extensions of management rather than its conscience.

The SEC’s proposed term limits seek to break this cycle by ensuring that directors serve with independence of mind, not dependence on favor.

Ultimately, effective corporate governance is safeguarded not by tenure but by integrity, objectivity, and the courage to uphold what is right even at the cost of reappointment.