SEC Memorandum Circular No. 2, s. 2002 – Code of Corporate Governance
SEC Memorandum Circular No. 2, s. 2002 adopts the Code of Corporate Governance for corporations whose securities are registered or listed, public companies, and corporations holding permits, licenses, or secondary franchises from the Securities and Exchange Commission.
SEC MEMORANDUM CIRCULARS
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SEC Memorandum Circular No. 2, s. 2002
Code of Corporate Governance
Document Number: SEC Memorandum Circular No. 2, s. 2002
Date Issued: April 5, 2002
Issuing Agency: Securities and Exchange Commission
Resolution: Resolution No. 135, Series of 2002 dated April 4, 2002
Applicability:
Corporations whose securities are registered or listed
Public companies
Corporations holding permits, licenses, or secondary franchises from the Securities and Exchange Commission
Branches and subsidiaries of foreign corporations operating in the Philippines whose securities are registered or listed
Signed by:
Lilia R. Bautista
Chairperson
Effectivity:
Fifteen (15) days after publication in a newspaper of general circulation.
Overview
SEC Memorandum Circular No. 2, s. 2002 adopts the Code of Corporate Governance for corporations regulated by the Securities and Exchange Commission. The Code establishes principles and standards on board governance, internal controls, accountability, disclosure, stockholders' rights, audit, and corporate transparency. It aims to strengthen investor confidence, improve corporate accountability, develop the Philippine capital market, and promote sustainable economic growth through sound corporate governance practices. Pasted text.txt
Full Text
SEC MEMORANDUM CIRCULAR NO. 2
Series of 2002
CODE OF CORPORATE GOVERNANCE
In accordance with the State's policy to actively promote corporate governance reforms aimed to raise investor confidence, develop capital market and help achieve high sustained growth for the corporate sector and the economy, the Commission, in its Resolution No. 135, Series of 2002 dated April 04, 2002, approved the promulgation and implementation of this Code, which shall be applicable to corporations whose securities are registered or listed, corporations which are grantees of permits/licenses and secondary franchise from the Commission and public companies.
This Code also applies to branches or subsidiaries of foreign corporations operating in the Philippines whose securities are registered or listed. Pasted text.txt
I. Definitions
A. Board of Directors
Refers to the collegial body that exercises the corporate powers of all corporations formed under the Corporation Code. It conducts all business and controls or holds all property of such corporations.
B. Corporate Governance
Refers to 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 marketplace.
C. Independent Director
Refers to a person other than an officer or employee of the corporation, its parent or subsidiaries, or any other individual having any relationship with the corporation which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
This means that apart from the directors' fees and shareholdings, he should be independent of management and free from any business or other relationship which could materially interfere with the exercise of his independent judgment.
D. Public Company
Refers to any corporation with a class of equity securities listed in an Exchange or with assets in excess of Fifty Million Pesos (₱50,000,000.00) and having two hundred (200) or more stockholders, each holding at least one hundred (100) shares of a class of its securities.
E. Management
Refers to the body given the authority to implement the policies determined by the Board in directing the course or business activities of the corporation.
F. Executive Director
Refers to a director who is at the same time appointed to head a department or unit within the corporate organization.
G. Non-executive Director
Refers to a Board member with non-executive functions.
H. Non-audit Work
Refers to services offered by the external auditor that are not directly related to statutory audit functions, including accounting, bookkeeping, payroll, reconciliation, IT outsourcing, internal auditing and similar services that may impair auditor independence.
I. Internal Control
Refers to the process effected by the Board, management and personnel designed to provide reasonable assurance regarding:
Effectiveness and efficiency of operations;
Reliability of financial reporting; and
Compliance with applicable laws, regulations and internal policies.
J. Internal Control Environment
Refers to the framework under which internal controls are developed and implemented to manage and control risks or business activities.
K. Internal Auditing
Refers to an independent, objective assurance and consulting activity designed to improve organizational operations through evaluation of risk management, control and governance processes.
L. Internal Audit Department
Refers to a department, division, consultants or practitioners providing independent assurance and consulting services.
M. Chief Audit Executive
Refers to the highest-ranking officer responsible for internal audit activities, including oversight of outsourced internal audit functions where applicable.
N. Independence
Refers to an environment that allows a person to carry out duties freely and objectively.
O. Objectivity
Refers to an unbiased mental attitude requiring honest judgment free from significant compromise.
P. Standards for the Professional Practice of Internal Auditing (SPPIA)
Refers to the criteria used in evaluating internal audit operations and promoting value-added internal auditing practices. Pasted text.txt
II. The Board Governance
The Board of Directors (Board) is primarily responsible for the governance of the corporation. It should be structured to provide an independent check on management. Accordingly, it is vital that a number of Board members be independent from management. Pasted text.txt
1. Composition of the Board
The Board shall consist of at least five (5) but not more than fifteen (15) members elected by the shareholders.
Public companies shall have at least two (2) independent directors, or independent directors comprising at least twenty percent (20%) of the Board, whichever is less.
All other companies are encouraged to appoint independent directors.
The Board may include executive and non-executive directors, including independent non-executive directors, to ensure a clear division of responsibilities and prevent domination of Board decision-making by any individual or small group.
Independent non-executive directors shall be identified in the corporation's annual report. Pasted text.txt
2. Multiple Board Seats
The Board may establish guidelines on the number of directorships its members may hold.
Executive directors, including the Chief Executive Officer, may observe a lower limit on memberships in other corporate boards.
Independent non-executive directors serving as full-time executives in other corporations may likewise observe a lower limit.
In all cases, directors must maintain sufficient capacity to discharge their duties diligently. Pasted text.txt
3. The Chairman and the Chief Executive Officer
The roles of the Chairman and Chief Executive Officer (CEO) may be separated to promote accountability, balance of power, and independent Board decision-making.
Where both positions are held by the same individual, appropriate checks and balances should be established.
The Chairman's responsibilities include:
Scheduling Board meetings;
Preparing meeting agendas with the CEO;
Controlling the quality and timeliness of information provided to the Board; and
Assisting in ensuring compliance with corporate governance policies. Pasted text.txt
4. Qualifications of Directors
Every director shall own at least one (1) share of the corporation's capital stock.
The Board may prescribe additional qualifications, including:
Educational attainment;
Adequate business competence;
Age requirements;
Integrity and probity; and
Assiduousness. Pasted text.txt
5. Disqualification of Directors
The Code enumerates both permanent and temporary grounds for disqualification, including convictions involving securities violations, fraud, banking offenses, moral turpitude, insolvency, regulatory sanctions, conflicts of interest, excessive absences, and other circumstances affecting a director's fitness to serve. Pasted text.txt
6. Duties, Functions and Responsibilities
It is the Board's responsibility to foster the long-term success of the corporation and secure its sustained competitiveness in a manner consistent with its fiduciary responsibility, which it should exercise in the best interest of the corporation and its shareholders. Pasted text.txt
a. General Responsibility
A director's office is one of trust and confidence. He should act in the best interest of the corporation in a manner characterized by transparency, accountability and fairness. He should exercise leadership, prudence and integrity in directing the corporation towards sustained progress over the long term.
A director assumes responsibilities to different constituencies or stakeholders who have the right to expect that the institution is being managed prudently and soundly.
To ensure good governance, the Board should establish the corporation's vision and mission, strategic objectives, policies and procedures, and mechanisms for monitoring management performance.
While management is responsible for the day-to-day affairs of the corporation, the Board remains responsible for monitoring and overseeing management actions. Pasted text.txt
b. Duties and Functions
To ensure a high standard of corporate governance, the Board should:
Install a process of selection to ensure a mix of competent directors capable of contributing independent judgment in formulating corporate strategies and policies.
Select and appoint the Chief Executive Officer (CEO) and other senior officers who possess integrity, competence, professionalism and motivation.
Adopt professional development programs for employees and officers, including succession planning for senior management.
Determine the corporation's purpose, values, strategies and general policies to ensure long-term viability, protection of corporate assets, and preservation of reputation.
Provide sound written policies and strategic guidelines for major capital expenditures and periodically review business plans, operating budgets and management performance.
Ensure compliance with all applicable laws, regulations and codes of best business practices.
Identify the corporation's stakeholders and adopt policies governing communications with them, including an investor relations program that fully informs shareholders of corporate activities.
Adopt an effective system of internal checks and balances and periodically review its effectiveness.
Provide appropriate technology and systems to maximize available resources and monitor key risks and performance indicators.
Constitute an Audit and Compliance Committee.
Properly discharge Board functions by meeting regularly, giving due consideration to independent views and ensuring that meetings are properly minuted.
Exercise Board authority within the limits prescribed by law, the articles of incorporation and the by-laws. Pasted text.txt
c. Specific Duties and Responsibilities of a Director
Every director shall:
Conduct fair business transactions with the corporation and avoid conflicts of interest.
Devote sufficient time and attention to properly discharge his duties.
Act judiciously after carefully evaluating matters brought before the Board.
Exercise independent judgment even when his position may be unpopular.
Maintain a working knowledge of the Corporation Code, Securities Regulation Code, SEC regulations, the corporation's articles of incorporation and by-laws, and relevant industry developments.
Observe confidentiality over non-public information obtained by reason of his position.
Ensure the continuing soundness, effectiveness and adequacy of the corporation's control environment. Pasted text.txt
d. Internal Control Responsibilities of the Board
The control environment consists of:
The Board of Directors;
Management;
Organizational and procedural controls supported by management information systems and risk management reporting systems; and
Independent audit mechanisms. Pasted text.txt
The Board's oversight responsibilities include:
Defining the duties and responsibilities of the CEO;
Selecting qualified and competent senior management;
Reviewing management appointments;
Reviewing personnel policies, compensation plans and succession planning. Pasted text.txt
Management, through the CEO, is responsible for maintaining effective organizational and procedural controls appropriate to the company's business, risks and operations. Pasted text.txt
Each company may establish an independent internal audit function headed by a Chief Audit Executive to provide reasonable assurance regarding governance, operational effectiveness, financial reporting and compliance with laws and regulations. Pasted text.txt
7. Board Meetings and Quorum Requirement
Members of the Board should attend regular and special meetings in person. Attendance through teleconference may likewise be allowed.
An independent director should always be in attendance. However, his absence shall not affect quorum if he was duly notified but deliberately and without justifiable cause failed to attend.
Corporations may submit to the Commission, at the end of every fiscal year, a sworn certification that this requirement has been complied with. The certification may accompany SEC Form 17-1 or be filed separately. Pasted text.txt
8. Remuneration of the Members of the Board and Officers
Remuneration shall be sufficient to attract and retain qualified directors and officers but should not exceed what is reasonably necessary.
Executive directors' remuneration may be linked to corporate and individual performance.
Corporations may establish transparent procedures for determining executive compensation.
No director shall participate in deciding his own remuneration.
Annual reports, information statements and proxy statements shall disclose compensation awarded to:
the Chief Executive Officer; and
the four (4) highest compensated executive officers other than the CEO.
In exceptional cases, such as corporations under receivership or rehabilitation, the Commission may regulate compensation paid to directors and officers. Pasted text.txt
9. Board Committees
The Board shall constitute committees in aid of good corporate governance.
A. Audit Committee
The Audit Committee shall consist of at least three (3) Board members, preferably with accounting or finance backgrounds.
One member shall be an independent director and another shall possess audit experience.
Its responsibilities include:
Oversight of risk management activities;
Oversight of internal and external auditors;
Approval of audit scope and annual internal audit plans;
Appointment of internal and external auditors;
Monitoring internal controls;
Reviewing audit reports;
Reviewing quarterly, semi-annual and annual financial statements;
Monitoring compliance with laws and regulations;
Evaluating non-audit work performed by external auditors; and
Ensuring the independence of the internal audit function.
The Chairman of the Audit Committee should be an independent director. Pasted text.txt
B. Other Board Committees
The Board may also constitute:
a. Nomination Committee
Composed of at least three (3) members, one of whom should be an independent director.
Its functions include evaluating nominees for the Board and assessing Board effectiveness.
b. Compensation or Remuneration Committee
Composed of at least three (3) members, one of whom should be an independent director.
It develops executive compensation policies and oversees remuneration of senior management and key personnel. Pasted text.txt
10. The Corporate Secretary
The Corporate Secretary, who must be a Filipino, is an officer of the corporation expected to perform his duties with competence, integrity and professionalism.
He shall:
Serve as adviser to the Board regarding directors' responsibilities;
Ensure directors receive complete information before Board meetings;
Attend all Board meetings;
Maintain schedules and agendas;
Ensure compliance with Board procedures and applicable laws and regulations; and
Work fairly with the Board, management, shareholders and other stakeholders. Pasted text.txt
III. Supply Information
To enable directors to fulfill their responsibilities, management shall provide the Board with complete, adequate and timely information before Board meetings and on a continuing basis.
Directors shall have independent access to senior management and the Corporate Secretary.
Information supplied may include:
Background information on matters for Board action;
Disclosure documents;
Budgets and forecasts;
Monthly financial statements; and
Explanations for significant variances between projected and actual results.
The Board shall establish procedures allowing directors to obtain independent professional advice at the corporation's expense whenever necessary in the performance of their duties. Pasted text.txt
IV. Accountability and Audit
1. Accountability of the Board and Management
The Board is primarily accountable to the shareholders, while Management is primarily accountable to the Board. The Board shall provide shareholders with a balanced and understandable assessment of the corporation's performance, financial position, and prospects on a quarterly basis. Likewise, Management shall provide all members of the Board with a balanced and understandable account of the corporation's performance, financial position, and prospects on a monthly basis.
This responsibility extends to interim reports, price-sensitive disclosures, and reports required by regulatory agencies. Management shall likewise ensure proper financial reporting and internal controls in accordance with the following guidelines:
a. Financial Reporting
The Board and Management shall:
Present a balanced and understandable assessment of the corporation's financial position and prospects.
Explain their responsibility for preparing the financial statements, accompanied by the external auditor's report on its own responsibilities.
State whether the corporation is a going concern, together with supporting assumptions or qualifications where appropriate.
Maintain a sound system of internal control to safeguard stakeholders' investments and corporate assets.
Ensure that internal audit examinations cover governance, operations, information systems, reliability of financial and operational information, efficiency of operations, safeguarding of assets, and compliance with applicable laws, rules, regulations, and contracts.
Require the Chief Audit Executive to submit an annual report to the Audit Committee and senior management regarding the internal audit department's activities, responsibilities, authority, significant risk exposures, governance issues, and performance relative to approved audit plans. The report shall likewise be made available to the corporation's stockholders.
Internal auditors shall state whether their activities were conducted in accordance with the Standards for the Professional Practice of Internal Auditing (SPPIA). If full compliance has not yet been achieved, the Chief Audit Executive shall disclose such fact to the Board and senior management. Pasted text.txt
2. Selection, Appointment, Resignation, Dismissal or Cessation of Service of an External Auditor
The Board, through the Audit Committee, shall recommend to the stockholders a duly accredited external auditor who shall undertake an independent audit and provide objective assurance regarding the preparation and presentation of the corporation's financial statements.
The external auditor shall not simultaneously perform internal audit services for the same client. Any non-audit work shall not impair the auditor's independence.
The external auditor shall be rotated every five (5) years, or earlier, or the handling partner shall be changed.
The corporation's annual and current reports shall disclose:
the reason for the resignation, dismissal or cessation of service of the external auditor;
the effective date thereof; and
any disagreement involving accounting principles, auditing scope, financial statement disclosure, or auditing procedures.
Where the external auditor believes that statements contained in an annual report, information statement or proxy statement are materially incorrect or incomplete, the auditor shall present his views in the appropriate report. Pasted text.txt
V. Stockholders' Rights and Protection of Minority Stockholders' Interests
The Board shall be committed to respecting the rights of stockholders.
1. Voting Right
Shareholders have the right to elect, remove and replace directors and vote on corporate matters in accordance with the Corporation Code.
The Code mandates cumulative voting in the election of directors.
Directors may be removed with or without cause, except where removal without cause would deprive minority shareholders of Board representation.
Removal of directors requires the affirmative vote of at least two-thirds (2/3) of the outstanding capital stock. Pasted text.txt
2. Pre-emptive Right
Stockholders possess pre-emptive rights unless expressly denied in the Articles of Incorporation or an amendment thereto.
They shall have the right to subscribe to additional capital stock under the terms provided by law and the corporation's Articles of Incorporation. Pasted text.txt
3. Power of Inspection
Corporations shall allow shareholders to inspect corporate books and records, including minutes of Board meetings and stock registries, in accordance with the Corporation Code.
Shareholders shall likewise receive annual reports, including financial statements, without cost or unreasonable restriction. Pasted text.txt
4. Right to Information
Upon request, shareholders shall be provided with periodic reports disclosing:
personal and professional information concerning directors and officers;
shareholdings;
dealings with the corporation;
relationships among directors and officers; and
aggregate compensation of directors and officers.
Information Statements, Proxy Statements, Registration Statements and Prospectuses shall likewise contain such information where required.
Minority shareholders shall have the right to:
propose the holding of meetings;
propose agenda items involving legitimate corporate business; and
obtain information relating to matters for which management is accountable. Pasted text.txt
5. Right to Dividends
Shareholders have the right to receive dividends, subject to the discretion of the Board.
However, the Commission may direct the declaration of dividends where retained earnings exceed one hundred percent (100%) of paid-in capital stock, except where:
definite expansion projects have been approved;
loan agreements prohibit dividend declarations without creditor consent; or
special circumstances justify retention of earnings. Pasted text.txt
6. Appraisal Right
Shareholders may exercise appraisal rights in accordance with the Corporation Code in cases involving:
amendments to the Articles of Incorporation affecting shareholder rights;
sale, lease, exchange, transfer, mortgage, pledge or other disposition of substantially all corporate assets; and
merger or consolidation.
The Board shall encourage the exercise of shareholder rights, remove unnecessary impediments to shareholder participation, and facilitate electronic dissemination of shareholder information whenever legally permissible. Pasted text.txt
VI. Evaluation Systems
Management may establish a performance evaluation system for the Board and top-level management.
The establishment of such evaluation system, including its features, may be disclosed in the corporation's Annual Report (SEC Form 17-A). Pasted text.txt
VII. Disclosure and Transparency
The Code recognizes disclosure as a fundamental principle of corporate governance.
Material information that may affect the value of the corporation or influence investment decisions shall be publicly disclosed. Such information includes, among others:
earnings results;
acquisitions and disposals of assets;
Board changes;
related party transactions;
shareholdings of directors;
changes in ownership;
remuneration, including stock options, of directors and senior management;
corporate strategy; and
off-balance-sheet transactions.
Material information shall be disclosed through approved stock exchange procedures and the corporation's Annual Report.
The Board shall remain committed to the full disclosure of material information and timely filing of all reports required by law for the benefit of shareholders and other stakeholders. Pasted text.txt
VIII. Commitment to Corporate Governance
Corporations covered by this Code shall adopt a Manual of Corporate Governance consistent with the provisions of this Circular.
The Manual shall:
be submitted to the Securities and Exchange Commission;
be evaluated by the Commission based on the corporation's size and nature of business; and
be available for inspection by stockholders during reasonable business hours.
The Chairman of the Board shall be primarily responsible for ensuring compliance with the Manual and with corporate governance practices.
Corporations not otherwise required by law are likewise encouraged to adopt this Circular in the absence of other applicable corporate governance rules. Pasted text.txt
IX. Administrative Sanction
Failure to adopt a Manual of Corporate Governance shall subject a corporation, after due notice and hearing, to an administrative fine of One Hundred Thousand Pesos (₱100,000.00). Pasted text.txt
X. Transitory Provision
All corporations covered by this Code shall submit their Manual of Corporate Governance on or before July 1, 2002, to become effective on January 1, 2003.
The Securities and Exchange Commission shall prepare a model Manual, which shall be made available on the SEC website on or before May 15, 2002. Pasted text.txt
XI. Effective Date
This Memorandum Circular shall take effect fifteen (15) days after its publication in a newspaper of general circulation.
Issued on April 5, 2002, at Mandaluyong City, Philippines.
LILIA R. BAUTISTA
Chairperson Pasted text.txt
Source
Official Source: Securities and Exchange Commission
Official Copy: SEC Memorandum Circular No. 2, Series of 2002 – Code of Corporate Governance. Pasted text.txt
Official URL: https://appointment.sec.gov.ph/
Citation:
Securities and Exchange Commission. SEC Memorandum Circular No. 2, s. 2002, "Code of Corporate Governance," approved pursuant to SEC Resolution No. 135, Series of 2002 (April 4, 2002), issued April 5, 2002, effective fifteen (15) days after publication.