ATENEO DE MANILA LAW SCHOOL

Rockwell Center, Makati City

“CORPORATE GOVERNANCE”
PRINCIPLES IN THE
CORPORATION CODE OF
THE PHILIPPINES

BY

CESAR L. VILLANUEVA, BSC, CPA, LLB, LLM, DJS, FAICD, FICD

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CORPORATE GOVERNANCE

CORPORATE GOVERNANCE
PRINCIPLES AND LEADING
PRACTICES
“… THE SYSTEM BY WHICH COMPANIES
ARE DIRECTED AND MANAGED. IT
INFLUENCES HOW THE OBJECTIVES OF THE
COMPANY ARE SET AND ACHIEVED, HOW
RISK IS MONITORED AND ASSESSED, AND
HOW PERFORMANCE IS OPTIMIZED.”
IC CIRCULAR NO. 31-2005, 26 SEPT. 2005

ORIGINAL SEC CODE OF

CORPORATE GOVERNANCE
“... A SYSTEM WHEREBY
SHAREHOLDERS, CREDITORS AND OTHER
STAKEHOLDERS OF A CORPORATION
ENSURE THAT MANAGEMENT ENHANCES
THE VALUE OF THE CORPORATION AS IT
COMPETES IN AN INCREASINGLY GLOBAL
MARKET PLACE.”
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SEC MEMORANDUM CIRCULAR NO. 2, S. 2002

SEC REVISED CODE OF

CORPORATE GOVERNANCE
“ . . . THE FRAMEWORK OF RULES,
SYSTEMS AND PROCESSES IN THE
CORPORATION THAT GOVERNS THE
PERFORMANCE BY THE BOARD OF
DIRECTORS AND MANAGEMENT OF THEIR
RESPECTIVE DUTIES AND RESPONSIBILITIES
TO STOCKHOLDERS AND OTHER
STAKEHOLDERS WHICH INCLUDE, AMONG
OTHERS, CUSTOMERS, EMPLOYEES,
SUPPLIER, FINANCIERS, GOVERNMENT AND
COMMUNITY IN WHICH IT OPERATES.
SEC MEMORANDUM CIRCULAR NO. 6, S. 2009, AS REVISED
BY SEC MEMO. CIRCULAR NO. 9, S. 2014

CODE OF CORPORATE
GOVERNANCE FOR PUBLICLY-
LISTED COMPANIES
CORPORATE GOVERNANCE — THE SYSTEM
OF STEWARDSHIP AND CONTROL TO GUIDE
ORGANIZATIONS IN FULFILLING THEIR LONG-
TERM ECONOMIC, MORAL, LEGAL AND
SOCIAL OBLIGATIONS TOWARDS THEIR
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STAKEHOLDERS.

CORPORATE GOVERNANCE IS A SYSTEM OF

DIRECTION, FEEDBACK AND CONTROL
USING REGULATIONS, PERFORMANCE
STANDARDS AND ETHICAL GUIDELINES TO
HOLD THE BOARD AND SENIOR
MANAGEMENT ACCOUNTABLE FOR
ENSURING ETHICAL BEHAVIOR —
RECONCILING LONG-TERM CUSTOMER
SATISFACTION WITH SHAREHOLDER VALUE
— TO THE BENEFIT OF ALL STAKEHOLDERS
AND SOCIETY.

ITS PURPOSE IS TO MAXIMIZE THE

ORGANIZATION'S LONG-TERM SUCCESS,
CREATING SUSTAINABLE VALUE FOR ITS
SHAREHOLDERS, STAKEHOLDERS AND THE
NATION.
PAR. 7, INTRODUCTION, SEC
MEMORANDUM CIRCULAR NO. 19, S.
2016
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CORE VALUES OF GOOD

CORPORATE
GOVERNANCE
 TRANSPARENCY
 RESPONSIBILITY AND
ACCOUNTABILITY
 PROTECTION OF
MINORITY INTERESTS
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MAJOR ISSUES:
IS CORPORATE GOVERNANCE A NEW
CONCEPT OR SYSTEM THAT WOULD DEFINE
NEW DUTIES, RESPONSIBILITIES AND
LIABILITIES?

(a) CLASSICAL STOCKHOLDER THEORY – Function of the

corporation is to increase or maximize
profits and duties only towards the
Stockholders.

The primary obligation of the

directors of a corporation is “to seek
the maximum amount of profits for the
corporation,”
Prime White Cement Corp. v. IAC, 220 SCRA 103 (1993)

(b) CORPORATE SOCIAL RESPONSIBILITY (CSR):

Stakeholders’ Theory – a system of governance

which takes into account
ethical and public concerns and
not just profit making; that
every corporation is also a
corporate citizen and thereby
has both civic and social
obligations.

Strategic Management Theory – a system whereby

shareholders, creditors and
other stakeholders of a
corporation ensure that
management enhances the
value of the corporation as it
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competes in an increasingly
global market.

CORPORATION CODE
BACKDROP
ROLE AND POWER OF BOARD OF DIRECTORS

 THE “CORPORATE PACKAGE”

 STRONG JURIDICAL PERSONALITY
 LIMITED LIABILITY TO INVESTORS
 CENTRALIZED MANAGEMENT
 FREE-TRANSFERABILITY OF EQUITY UNITS

POWER OF BOARD DIRECTLY VESTED BY LAW

EXCEPT IN SPECIFIED CASES IN THE CORPORATION
CODE WHERE STOCKHOLDERS ARE GRANTED
RATIFICATORY POWERS:

THE BOARD OF DIRECTORS:

 EXERCISES ALL CORPORATE POWERS
 CONDUCTS ALL CORPORATE BUSINESSES
 CONTROLS AND HOLDS ALL CORPORATE
PROPERTY
SEC. 23, CORPORATION CODE
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BOARD IS NOT THE AGENT OF STOCKHOLDERS

Both upon principle and authority, it is

clear that any action or resolution of the
stockholders on corporate matters should
be ignored. . . . The theory of a
corporation is that the stockholders may
have all the profits but shall turn over the
complete management of the enterprise
to their representatives . . . . , called
directors. Accordingly, there is little for
the stockholders to do beyond electing
directors, making by-laws, and exercising
certain other special powers defined by
law. In conformity with this idea it is
settled that contracts between a
corporation and third persons must be
made by the directors ad not by the
stockholders. The corporation, in such
matters, is represented by the former
and not by the latter . . . .
Raminez v. The Orientalist Co., 38 Phil. 634 (1918)
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CORPORATE SETTING
ESSENTIALLY A TRUST
ARRANGEMENT
The Board of Directors occupies a
position of “trust.” The fiduciary or trust
relationship “is not a matter of statutory
or technical law. It springs from the fact
that directors have the control and
guidance of corporate affairs and
property and hence of the property
interest of the stockholders.”
Prime White Cement Corp. v. IAC, 220 SCRA 103 (1993)

Proper appreciation of Director's role

and function would require that although
he may have been voted into office by the
shareholders, it is his duty to vote
according to his own independent
judgment and his own conscience as to
what is in the corporation’s best
interests.
San Miguel Corp. v. Kahn, 176 SCRA 447, 463 (1989)
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BUSINESS JUDGMENT RULE

 BASEDON “CENTRALIZED MANAGEMENT”
FEATURE OF THE CORPORATE MEDIUM:

BUSINESS TRUST medium provides a vehicle by

which EXPERT/RESPONSIBLE MANAGEMENT is retained
to benefit INCOMPETENT OWNERS:

BOARD OF DIRECTORS
(Trustee/Naked Owner)

STOCKHOLDERS
CREDITORS
(Beneficial Owner)
Business

Equities Enterprise Liabilities

Property
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When a resolution is “passed in

good faith by the Board of Directors,
it is valid and binding, and whether or
not it will cause losses or decrease
the profits of the central, the court
has no authority to review them, . . .
It is a well-known rule of law that
questions of policy or management
are left solely to the honest decision
of officers and directors of a
corporation, and the court is without
authority to substitute its judgment
[for that] of the board of directors;
the board is the business manager of
the corporation, and so long as it acts
in good faith its orders are not
reviewable by the courts.”
Montelibano v. Bacolod-Murcia Milling Co., Inc., 5 SCRA 36 (1962)
PSE v. Court of Appeals, 281 SCRA 232 (1997)

“Courts cannot supplant the discretion

of the board on administrative matters as
to which they have legitimate power of
action, and contracts which are intra vires
entered into by the board are binding upon
the corporation and courts will not
interfere unless such contracts are so
unconscionable and oppressive as to
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amount to a wanton destruction of rights

of the minority.”
Gamboa v. Victoriano, 90 SCRA 40 (1979)
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THE AMERICAN EXPERIENCE:

ABSOLUTE
POWER TENDS
TO CORRUPT
ABSOLUTELY
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THE PHILIPPINE EXPERIENCE:

SINCE DIRECTORSHIP
IS AN HONORARY
POSITION, THEN THE
BULK OF CORPORATE
RESPONSIBILITY AND

EXECUTION SHOULD BE
ON THE SHOULDER OF

MANAGEMENT WHICH
GETS WELL-PAID ANYWAY.
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ASPECTS OF CORPORATION
CODE ON GOOD
GOVERNANCE
 LIMITATION OF BOARD SIZE (5 TO 15)
 QUALIFICATION AND
DISQUALIFICATIONS
(A) EACH DIRECTORS MUST OWN ON RECORD ONE (1) SHARE

(b) ANYDIRECTOR WHO CEASES TO OWN AT LEAST ONE (1) SHARE

CEASES TO BE A DIRECTOR

(c) NOTCONVICTED BY FINAL JUDGMENT OF OFFENSE PUNISHABLE

BY 6 YEARS IMPRISONMENT, OR A VIOLATION OF THIS CODE,
COMMITTED WITHIN 5 YEARS PRIOR TO ELECTION/
APPOINTMENT

SECS. 23 AND 27, CORPORATION CODE

 ELECTION BY THE STOCKHOLDERS TO

ONE-YEAR TERMS
SEC. 23 , CORPORATION CODE

 PERSONAL ATTENDANCE IN ALL

MEETINGS, PROXY NOT ALLOWED

 RIGHT OF REMOVAL BY
STOCKHOLDERS
SEC. 28, CORPORATION CODE
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 DUTIES: OBEDIENCE, LOYALTY,

DILIGENCE, AND TO INFORM
SECS. 26, 31, 33, 34, CORPORATION CODE

 INTRA-CORPORATE CONTRACTS
GENERALLY VOIDABLE
SEC. 32 , CORPORATION CODE

 BOARDS CANNOT FIX THEIR OWN

SALARIES; THE POWER TO REMUNERATE
DIRECTORS IS WITH STOCKHOLDERS
SEC. 30, CORPORATION CODE

 RIGHTS OF MINORITY OR DISSENTING

STOCKHOLDERS:
 RATIFICATORY VOTES ON KEY CORPORATE ACTIONS
 CUMULATIVE VOTING • PRE-EMPTIVE RIGHT
 TO EXAMINE AND INSPECT • TO FINANCIAL STATEMENTS
 APPRAISAL RIGHT • TO FILE DERIVATIVE SUITS
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OPERATING PARADIGM
UNDER THE CORPORATION CODE
(A) SIZE AND COMPOSITION OF BOARD ONLY BASED ON LAW,
ARTICLES OF INCORPORATION, AND BY-LAWS

(B) ONLY QUALIFICATIONS OR DISQUALIFICATIONS PROVIDED BY

LAW OR IN BY-LAWS ARE VALID
GOKONGWEI V. SEC, 89 SCRA 336 (1979)

(C) BOARD HAVE NO POWER TO PROVIDE UNILATERALLY FOR

THEIR OWN QUALIFICATIONS AND DISQUALIFICATIONS

(D) OUTSIDE OF SPECIFIC STATUTORY EMPOWERMENT, THE

POWER TO REMOVE ANY MEMBER OF THE BOARD OF
DIRECTORS IS VESTED BY LAW WITH THE STOCKHOLDERS
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WHY DO BOARDS NOT HAVE

POWER OF INTERNAL DISCIPLINE?
 DIRECT ACCOUNTABILITY TO STOCKHOLDERS
 PREVENT UNDERMINING OF MINORITY
REPRESENTATION

 INSULATE DIRECTORS FROM THE “INFLUENCE OF

THE POWERS-THAT-BE IN BOARD”

 ENSURES HIGH-LEVEL DISCUSSIONS,

NEGOTIATION, BARGAINING AND COMPROMISE, (AND NOT
SANCTIONS) BECOME THE BASIS TO ARRIVE AT BUSINESS
CONSENSUS AND DECISIONS
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DUTIESAND LIABILITIES OF DIRECTORS

UNDER GENERAL CORPORATE LAW

 GENERAL RULE:

General rule is that members of Board

and officers who purport to act for and in
behalf of the corporation, keep within the
lawful scope of their authority in so acting,
and act in good faith, do not become
liable, whether civilly or otherwise, for the
consequences of their acts. Those acts,
when they are such a nature and are done
under such circumstances, are properly
attributed to the corporation alone and no
personal liability is incurred by such
officers and Board members.

Benguet Electric Cooperative, Inc. v. NLRC, 209 SCRA 55, 63 (1992)

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DUTY OF OBEDIENCE
THE BOARD OF DIRECTORS ARE BOUND TO DIRECT THE
AFFAIRS OF THE CORPORATION ONLY IN ACCORDANCE WITH THE
PURPOSES FOR WHICH IT WAS ORGANIZED. “THE DIRECTORS OR
TRUSTEES AND OFFICERS TO BE ELECTED SHALL PERFORM THE
DUTIES ENJOINED ON THEM BY LAW AND BY THE BY-LAWS OF
THE CORPORATION.”

SEC. 26, CORPORATION CODE

DUTY OF LOYALTY;
DOCTRINE OF CORPORATE OPPORTUNITY
“WHEN A DIRECTOR, TRUSTEE OR OFFICER ATTEMPTS
TO ACQUIRE OR ACQUIRES, IN VIOLATION OF HIS DUTY, ANY
INTEREST ADVERSE TO THE CORPORATION IN RESPECT OF
ANY MATTER WHICH HAS BEEN REPOSED IN HIM IN
CONFIDENCE, AS TO WHICH EQUITY IMPOSES A LIABILITY
UPON HIM TO DEAL IN HIS OWN BEHALF, HE SHALL BE
LIABLE AS A TRUSTEE FOR THE CORPORATION AND MUST
ACCOUNT FOR THE PROFITS WHICH OTHERWISE WOULD
HAVE ACCRUED TO THE CORPORATION.”
SEC. 31, CORPORATION CODE

“WHERE A DIRECTOR, BY VIRTUE OF HIS OFFICE,

ACQUIRES FOR HIMSELF A BUSINESS OPPORTUNITY WHICH
SHOULD BELONG TO THE CORPORATION, THEREBY
OBTAINING PROFITS TO THE PREJUDICE OF SUCH
CORPORATION, HE MUST ACCOUNT TO THE LATTER FOR ALL
SUCH PROFITS BY REFUNDING THE SAME, UNLESS HIS ACT
HAS BEEN RATIFIED BY A VOTE OF THE STOCKHOLDERS
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OWNING OR REPRESENTING AT LEAST TWO-THIRDS (2/3) OF

THE OUTSTANDING CAPITAL STOCK. THIS PROVISION SHALL
BE APPLICABLE, NOTWITHSTANDING THE FACT THAT THE
DIRECTOR RISKED HIS OWN FUNDS IN THE VENTURE.”
SEC. 34, CORPORATION CODE

DUTY OF DILIGENCE
“. . . DIRECTORS . . . WHO WILLFULLY AND
KNOWINGLY VOTE FOR OR ASSENT TO PATENTLY
UNLAWFUL ACTS OF THE CORPORATION OR WHO ARE
GUILTY OF GROSS NEGLIGENCE OR BAD FAITH IN
DIRECTING THE AFFAIRS OF THE CORPORATION . . .
SHALL BE LIABLE JOINTLY AND SEVERALLY FOR ALL
DAMAGES RESULTING THEREFROM SUFFERED BY THE
CORPORATION, ITS STOCKHOLDERS OR MEMBERS AND
OTHER PERSONS.”

SEC. 31, CORPORATION CODE

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JURISPRUDENCE:
Rightfully had it been said that bad faith
does not simply connote bad judgment or
negligence; it imports a dishonest purpose or
some moral obliquity and conscious doing of
wrong; it means breach of a known duty thru
some motive or interest or ill will; it partakes
of the nature of fraud. Applying this precept to
the given facts herein, we find that there was
no "dishonest purpose," or "some moral
obliquity," or "conscious doing of wrong," or
"breach of a known duty," or "some motive or
interest or ill will:” that "partakes of the
nature of fraud.”
Board of Liquidators v. Kalaw, 20 SCRA 986 (1967)
PSE v. Court of Appeals, 281 SCRA 232 (1997)
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SUMMARY OF LIABILITY RULES FOR DIRECTORS

TRAMAT MERCANTILE, INC. V. COURT OF APPEALS
238 SCRA 14 (1994)

PERSONAL LIABILITY OF A CORPORATE DIRECTOR,

TRUSTEE OR OFFICER ALONG (ALTHOUGH NOT
NECESSARILY) WITH THE CORPORATION MAY SO VALIDLY
ATTACH, AS A RULE, ONLY WHEN:

(A) HE ASSENTS:
 TO A PATENTLY UNLAWFUL ACT OF
CORPORATION

 FOR BAD FAITH OR GROSS NEGLIGENCE IN

DIRECTING ITS AFFAIRS

 FOR CONFLICT OF INTEREST, RESULTING IN

DAMAGES TO CORPORATION, ITS
STOCKHOLDERS OR OTHER PERSONS

(B) CONSENTS TO ISSUANCE OF WATERED

STOCKS OR, HAVING KNOWLEDGE THEREOF,
DOES NOT FORTHWITH FILE HIS WRITTEN
OBJECTION WITH CORPORATE SECRETARY

(C) AGREES TO HOLD HIMSELF PERSONALLY

AND SOLIDARILY LIABLE WITH CORPORATION

(D) HE IS MADE, BY A SPECIFIC PROVISION OF LAW,

TO PERSONALLY ANSWER FOR HIS CORPORATE
ACTION
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ISSUE:
Does CCG by subsidiary legislation
therefore create a fiduciary obligation on
part of Board of Directors to the
stakeholders beyond the stockholders?

—OOO—