Fit and Proper Rule Issued for Insurance and Public Companies
Purisima: Good governance extends to corporate governance
The Department of Finance has issued Department Order No. 054-2015, prescribing the “fit and proper rule” for directors of insurance and public companies (covered entities) in the interest of building a strong and stable financial system by virtue of upholding the highest standards in corporate governance. Signed on 15 April 2015, the rule will ensure that covered entities have directors who are fit and proper to hold such positions.
Finance Secretary Cesar V. Purisima said, “Good governance extends to corporate governance. We want our insurance and public companies to reflect the highest corporate standards of integrity and excellence. For company directors in the country to be “fit and proper” is a given; this rule merely enforces good practice.”
The Insurance Commission (IC) and the Securities and Exchange Commission (SEC), both attached agencies of the Department of Finance (DOF), will institute a system for ranking covered entities annually, in terms of company practices employed in ensuring that directors are fit and proper. Among these guidelines include criteria on integrity, experience, education, training and competence. The annual ranking generated by the IC and SEC shall be used as basis for recognizing covered entities employing the highest standards.
The Department Order (DO) sets forth minimum qualifications of directors and independent directors. For directors, the qualifications are namely that s/he must ideally be at least 25 years old, and a college graduate or an individual with at least 5 years experience in the business. Ideally, s/he must also have attended a special seminar on corporate governance for board of directors conducted or accredited by SEC or IC as may be applicable. Lastly, s/he must be fit and proper for the position of a director of the covered entity, taking into account several factors including integrity or probity, competence, relevant education/training (e.g., financial literacy), physical and mental fitness, diligence, and knowledge or experience.
Meanwhile, the DO prescribes that an independent director is ideally an individual not more than 80 years old, unless otherwise found fit to continue serving as such by SEC or IC. Ideally, s/he must also not be (or has been) a member of the executive committee of the board of directors, or an officer or employee, of the covered entity, its subsidiaries, affiliates or related companies during the 3 years immediately preceding the date of his election
Further, an independent director must not be a “substantial shareholder,” i.e., does not own/hold shares of stock sufficient to elect 1 seat in the board of directors of either the covered entity, its subsidiaries, affiliates, or any related companies of its majority corporate shareholders.
The DO prescribes the ideal minimum number of independent directors as at least 20% but not less than 2 members of the board of directors. For publicly-listed corporations, the DO holds that the number of independent directors shall be proportionate to the percentage of shares held by the public.
Further, the DO describes an ideal tenure as 5 consecutive years, after which re-election is possible after a “cooling period” of 2 years. Finally, the DO maintained that a fixed amount of remuneration is ideal, while stock options and performance benefits are not.
SEC Chairperson Teresita Herbosa welcomed the issuance of the DO saying, “”It is high time for corporations in the Philippines to take a step up in terms of governance standards. I welcome this Department Order from the Department of Finance outlining what our ideal directors and independent directors should be like. Setting our ideal definitions on what is fit and proper serves us well in our bid to be globally competitive.”
Meanwhile, public companies in the DO refer to corporations duly registered with the SEC having a class of equity securities listed on an Exchange, or having assets in excess of P50 million and having 200 or more holders, at least 200 of which are holding at least 100 shares of a class of the corporation’s equity securities.
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