Term limits and the myth of perpetual independence

The Securities and Exchange Commission (SEC) issued Memorandum Circular No. 7 on the term limits of independent directors (IDs) which marks a significant step in strengthening corporate governance in the Philippines. While the requirement to appoint independent directors has long existed, the new rules finally confront a persistent weakness in our system: independence that exists on paper, but is frequently undermined in reality.

The SEC’s authority to regulate independent directors is firmly anchored in Section 22 of Republic Act 11232, or the Revised Corporation Code of the Philippines (RCC). The law 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 SEC may prescribe to strengthen their independence and align Philippine practice with international best standards.

In other words, the SEC is not merely exercising administrative discretion; it is implementing a direct legislative mandate to design a governance framework that ensures independent directors remain truly independent.

Under the new SEC Circular:

•An independent director shall be elected for a term of one (1) year;

•An independent director may serve for a maximum cumulative term of nine (9) years in the same company;

•Independent directors elected prior to the Circular are covered, with the nine-year period reckoned from calendar year 2012; and

•Most importantly, an independent director who has served the maximum cumulative term is perpetually barred from re-election as an ID in the same company, although they may still serve as a non-independent director or officer without any cooling-off period.

The OECD, in its 2024 Capital Market Review observed that independent directors are meant to play a crucial role in providing objective oversight and protecting minority shareholders, yet in the Philippines, enforcement remains weak due to concentrated ownership structures where controlling shareholders dominate appointments and removals.

The OECD highlights a major risk: long tenure. Citing International Finance Corporation (IFC) guidelines, it notes that independent directors should not serve for more than ten years, as extended tenure leads to excessive familiarity with management. At that point, directors risk becoming “new insiders” — legally independent, but functionally aligned with those they are supposed to monitor.

A significant proportion of Philippine independent directors, the OECD found, have already served for more than nine years, making this not a hypothetical issue, but a systemic governance problem.

The SEC’s choice of a cumulative term limit is what gives the rule real substance. If the rule applied only to consecutive terms, companies could easily rotate directors out briefly and reappoint them, preserving personal relationships while complying with the letter of the law. That would convert independence into a technical fiction.

A cumulative limit prevents this. It enforces board renewal, disrupts entrenched loyalties, and ensures that independence is not something that can be extended indefinitely through legal maneuvering. It recognizes a basic truth of governance: time itself erodes objectivity.

Term limits do not question the competence or character of long-serving directors. Rather, they acknowledge that no one remains institutionally independent forever. Independence is not a moral trait; it is a structural condition that must be protected by design.

In that sense, the SEC’s reform is not merely regulatory compliance. It is a recalibration of board power, one that strengthens investor confidence, protects minority shareholders, and aligns Philippine corporate governance with globally accepted principles.