Independent directors in Philippine Corporations tend to serve for extended periods, and there are even cases where their terms exceed the ideal duration for maintaining authentic independence and fresh supervision. This traditional practice has raised concerns about whether boards can still make objective decisions that also protect the interests of shareholders.
With this, the Securities and Exchange Commission (SEC) has drafted a memorandum circular to set a nine-year term limit for independent directors, aiming to promote accountability and improve corporate governance in the business sector.
Current Rules vs. Proposed Amendments
Under the present rules, an independent director of a corporation may serve a maximum term of nine years cumulatively, whether continuous or periodic. After reaching this limit, they are prohibited from re-election as independent directors in the same company, but they may continue to qualify as non-independent directors. Companies that want to retain such directors may justify the extension and obtain the shareholders’ approval during their corresponding annual meeting.
Meanwhile, the drafted circular would still imply the nine-year term, but in a stricter sense. After serving the limit, the said director would no longer qualify for re-election in the same position. Additionally, the circular proposes that the independent director have a three-year fixed term of tenure. This means once elected, an independent director will serve a three-year term, with the total cumulative service still capped at nine years.
Why It Matters
If successfully adopted, this policy will promote renewal of the boardroom, bring new perspectives, reduce matters of complacency, and ultimately ensure that corporate decisions are made with integrity and independence.
Also, it challenges companies to plan for succession in the director position, requiring them to expand their choice of qualified professionals. These changes will enhance the independence of directors and fairly offer them job security, balancing accountability and stability.
Wrapping Up
The SEC has previously opened the proposed memorandum circular for public consultation, and it is now targeted for implementation starting on January 1, 2026. With that, the upcoming months will be crucial for companies to adapt to the changes and improve their corporate governance practices in anticipation of the new rule’s effectiveness.
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