SEC Code of Corporate Governance for PLCs: Principles 1–9
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69 Terms
CG Code for PLCs
Securities and Exchange Commission Code of Corporate Governance (SEC MC No. 19, Series of 2016) designed to raise Philippine corporate governance standards to global levels.
Comply or Explain Approach
A framework combining voluntary compliance with mandatory disclosure, where companies must state compliance or explain reasons for non-compliance in annual reports.
Principle of Proportionality
The concept that governance rules allow board flexibility, expecting larger/financial firms to follow most provisions while smaller firms adapt based on cost-benefit relevancy.
Corporate Governance (SEC Definition)
The system of stewardship and control to guide organizations in fulfilling economic, moral, legal, and social obligations towards stakeholders while maximizing long-term success.
Board of Directors
The governing body elected by stockholders that exercises corporate powers, conducts business, and controls company property.
Management
A group of executives given authority by the Board of Directors to implement policies in conducting the corporation's business.
Independent Director
A person independent of management and controlling shareholders, free from any relationship that could materially interfere with independent judgment.
Executive Director
A director who has executive responsibilities in the day-to-day operations of the organization.
Non-Executive Director (NED)
A director who has no executive responsibility and performs no work related to company operations.
Conglomerate
A group of corporations with diversified business activities in varied industries controlled and managed by a parent entity.
Internal Control
A process effected by the board, management, and personnel to provide reasonable assurance regarding achievement of operational, financial reporting, and compliance objectives.
Enterprise Risk Management (ERM)
An enterprise-wide process applied in strategy setting to identify potential events, manage risk appetites, and provide reasonable assurance on objectives.
Related Party
Covers subsidiaries, affiliates, direct/indirect controlling parties, directors, officers, shareholders and related interests (DOSRI), close family members, and entities posing potential conflicts.
Related Party Transaction (RPT)
A transfer of resources, services, or obligations between a reporting entity and a related party, regardless of whether a price is charged.
Principle 1 (Competent Board)
The company should be headed by a competent, working board to foster long-term success, competitiveness, and profitability.
Recommendation 1.1 (Board Diversity Policy)
The Board should establish a policy on board diversity to avoid groupthink and ensure a balance of skills, knowledge, experience, age, and gender.
Recommendation 1.2 (Board Composition)
The Board should be composed of a majority of non-executive directors to secure objective, independent judgment and proper checks and balances.
Director Orientation & Training Hours
First-time directors must undergo an orientation program for at least 8 hours, and all directors must attend annual continuing training for at least 4 hours.
Recommendation 1.3 (Training of Directors)
First-time directors must attend an orientation program for at least 8 hours, and all directors must complete at least 4 hours of annual continuing education.
Board Diversity Policy
A policy to avoid groupthink and optimize decision-making, covering age, ethnicity, culture, skills, competence, knowledge, and gender diversity.
Corporate Secretary
A key officer primarily responsible to the corporation and shareholders (not the Chair or President) who manages meeting schedules, minutes, records, and compliance with by-laws.
Compliance Officer
A management officer with Senior Vice President rank (or equivalent) in charge of the compliance function, reporting directly to the Board regarding legal/regulatory compliance.
Recommendation 1.4 (Corporate Secretary Role)
The Corporate Secretary should be a separate individual from the Compliance Officer, not be a member of the Board, and assist in managing governance records and board meetings.
Recommendation 1.5 (Compliance Officer Role)
The Compliance Officer should be a member of senior management with SVP rank (or equivalent), report directly to the Board Chair, and monitor regulatory compliance.
Principle 2 (Clear Roles and Responsibilities)
The fiduciary roles, responsibilities, and accountabilities of the Board under the law, articles, and by-laws must be clearly made known to all directors and stakeholders.
Duty of Care
Fiduciary duty requiring board members to act on a fully informed basis, in good faith, and with due diligence and care.
Duty of Loyalty
Fiduciary duty requiring board members to act in the best interest of the company and all its shareholders, rather than controlling groups or personal interests.
Chairman of the Board Responsibilities
Ensures agenda focuses on strategy/risk, guarantees accurate information flow, fosters constructive debate, ensures proper orientation/training, and oversees yearly board evaluation.
Grounds for Permanent Disqualification of a Director
Conviction of securities/banking crimes, permanent injunction by SEC/BSP for misconduct, conviction of crimes involving moral turpitude/fraud, or imprisonment over 6 years.
Grounds for Temporary Disqualification of a Director
Absence from >50% of board meetings in a year, dismissal for cause from a PLC, or independent director's equity ownership exceeding 2% in the corporation/affiliates.
Arm's-Length Basis
A requirement for Related Party Transactions to occur under market prices and conditions that protect the rights of all shareholders.
Principle 3 (Board Committees)
Board committees should be set up to support effective performance regarding audit, risk management, related party transactions, nomination, and remuneration.
Audit Committee Composition (Recommendation 3.2)
Must consist of at least 3 non-executive directors, a majority of whom (including the Chair) must be independent, and all members must have relevant financial/accounting background.
Audit Committee Chair Independence
The Chair of the Audit Committee must be an independent director and should NOT be the Chair of the Board or of any other committee.
Corporate Governance Committee Composition (Recommendation 3.3)
Composed of at least 3 members, all of whom should be non-executive directors and a majority of whom (including the Chair) must be independent directors.
Board Risk Oversight Committee (BROC)
A committee (generally for conglomerates/high-risk firms) responsible for developing and evaluating an integrated enterprise risk management plan and risk tolerance limits.
Board Risk Oversight Committee Composition (Recommendation 3.4)
Composed of at least 3 members, a majority of whom must be independent directors, chaired by an independent director who is not the Board Chair or CEO.
RPT Committee Functions
Evaluates material RPTs, ensures arm's-length terms, prevents resource misappropriation, ensures appropriate disclosures, and oversees periodic independent audits of RPTs.
Related Party Transaction Committee Composition (Recommendation 3.5)
Composed of at least 3 non-executive directors, a majority of whom must be independent, including the Committee Chair.
Committee Charter
A publicly available document defining the purpose, membership, structure, operations, reporting, resources, and performance evaluation standards of a board committee.
Principle 4 (Fostering Commitment)
Directors should devote the time and attention necessary to perform duties effectively, including attending board, committee, and shareholder meetings.
Maximum Directorships for Non-Executive Directors
Non-executive directors should concurrently serve as directors to a maximum of 5 publicly listed companies to ensure adequate time and performance.
Lead Director
An independent director designated to lead the board, serve as an intermediary, and chair meetings of non-executive directors when the Chairman is not independent or is also the CEO.
Lead Independent Director Function (Recommendation 4.2)
Appointed when the Board Chair is not independent or when the Chair and CEO roles are held by the same person, leading independent directors' meetings without management present.
Maximum ID Term Limits (Recommendation 5.3)
An Independent Director can serve for a maximum cumulative term of 9 years, after which they are perpetually barred from being re-elected as an ID in the same company.
Principle 6 (Assessing Board Performance)
The Board should conduct an annual self-assessment of its performance (as a body, individual members, committees, and Chair), supported by an external facilitator every 3 years.
External Facilitator for Board Assessment (Recommendation 6.2)
The annual board performance self-assessment should be supported by an independent external facilitator at least once every 3 years.
Principle 7 (Risk Management Framework)
Recognize and manage risk by establishing a sound system of risk oversight, management, and internal control.
Principle 8 (Disclosure and Transparency)
Establish practical corporate disclosure policies giving a fair, complete, accurate, and timely picture of financial condition, results, and operations under Rule 68 SRC.
Share Dealings Disclosure Window
A policy requiring all directors and officers to disclose or report any dealings in the company's shares to the company within 3 business days.
Manual on Corporate Governance
A reference document containing the company's governance policies, programs, and procedures, submitted to regulators and posted on the company website.
SRC Rule 68
Securities Regulation Code rule governing financial statement disclosures, audit requirements, and reporting standards for public and regulated companies in the Philippines.
Principle 9 (External Auditor Independence)
Establish standards for selecting an external auditor and exercise oversight to strengthen auditor independence, objectivity, and audit quality.
External Auditor Appointment Process
Recommended by the Audit Committee, approved by the Board of Directors, and ratified by the shareholders at the annual meeting.
Non-Audit Services Disclosure
Requirement to disclose non-audit services in the Annual Report to address and mitigate potential conflict of interest situations that could impair auditor objectivity.