Rethinking independent directors’ tenure

Rethinking independent directors’ tenure | Daily Tribune

The Securities and Exchange Commission (SEC) is studying the imposition of a mandatory nine-year cumulative term limit for independent directors.

At present, the nine-year cap exists under the Code of Corporate Governance of Publicly Listed Corporations’ “comply or explain” framework. While companies are expected to justify any deviation, the SEC is now examining whether this limit should become mandatory.

Under the proposal, independent directors who have served for a cumulative period of nine years would no longer be eligible for reelection as independent directors in the same company. They may, however, still be nominated and elected as non-independent directors.

This possible shift underscores the core principle behind independent directorship: genuine independence. Independent directors are expected to exercise objective and impartial judgment, free from management influence or relationships that could compromise their autonomy.

The discussion around a firm term limit reflects a longstanding tension in corporate governance.

While companies often value long-serving independent directors for their experience and institutional memory, there is increasing recognition that prolonged tenure may, over time, dilute independence. Familiarity with management, entrenched board relationships, and comfort within the corporate culture may affect a director’s willingness or ability to challenge decisions and introduce fresh perspectives.

Importantly, the SEC’s authority to impose such limits is firmly grounded in law. Section 22 of the Revised Corporation Code expressly provides that independent directors shall be subject to rules and regulations governing their qualifications, disqualifications, voting requirements, duration of term and term limits, maximum number of board memberships, and other requirements that the Commission may prescribe to strengthen their independence and align with international best practices.

Concerns over independence are further amplified by the growing demand for seasoned independent directors, many of whom serve on multiple boards across different corporations.

To address this, existing SEC rules limit independent directorships to a maximum of five companies at any one time. The rationale is straightforward: directors must have sufficient time and attention to discharge their fiduciary duties effectively.

This approach mirrors international thinking. Under the OECD Principles of Corporate Governance, board members are expected to commit themselves fully to their responsibilities.

Serving on too many boards or committees may impair performance. While jurisdictions differ in prescribing numerical limits, the guiding objective is to ensure that board members retain legitimacy and the confidence of shareholders.

Within the ASEAN region, term limits for independent directors are common. In Malaysia, independent directors may serve for up to nine years, extendable to 12 years under specific conditions. Singapore imposes a nine-year limit, while in Vietnam, independent directors serve five-year terms, renewable for one additional term.

These regional practices reflect a shared recognition that independence is not static and must be safeguarded through structural rules. Beyond tenure and board seat limitations, continuing education requirements also play a critical role in board effectiveness.

Under the Code of Corporate Governance for Public Companies and Registered Issuers, Recommendation 1.3 requires corporations to adopt a formal training policy for directors. Newly appointed directors must undergo at least eight hours of orientation, while all directors are expected to complete a minimum of four hours of annual continuing training.

These requirements are rooted in directors’ fiduciary duties, which extend to ensuring the corporation’s long-term viability and value. Boards are expected to oversee strategy, monitor execution, and balance stakeholder interests with prudence and foresight. Effective oversight requires directors who are not only experienced but also continuously learning.

Ultimately, independence and competence must go hand in hand. Limits on board memberships ensure capacity and focus; continuing education ensures capability; and a carefully calibrated term limit helps preserve independence.

As the SEC studies these reforms, the broader objective remains clear: to strengthen corporate governance by fostering boards that are engaged, credible, and truly independent.