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The criminalized corporate governance reform under the Revised Corporation Code

The most profound effects of the Revised Corporation Code in the pursuit of corporate governance (CG) reforms in the private corporate sector may be grouped into three areas, namely:

First, the granting of statutory foundation to the CG principles and best-practices championed by the Securities and Exchange Commission (SEC) in the private corporate sector, highlighted by the formal recognition of “corporations vested with public interest.”

Second, the reconstitution of the SEC as the primary regulatory agency to evolve the CG reforms through the expansion and institutionalization of the SEC’s power to impose administrative sanctions for any violation of the provisions of the Revised Corporation Code, and any rules or regulations issued pursuant thereto, and expressly making it separate and distinct from its power to cite in contempt for violation of any of its orders.

Third is what we term as the “over-criminalization of corporate governance practice” effected by retaining the general criminal sanction for any violation of the provisions of the Revised Corporation Code which is not specifically penalized, while providing for several criminal penalties for various broad and specific malpractices in CG, separate and distinct from the imposition of administrative sanctions by the SEC, and without prejudice to the penalties imposed on the same infraction that may be punishable under other laws, such as the Securities Regulation Code.

The paper undertakes an evaluation of the extent by which the CG principles and best-practices championed by the SEC have been grafted into the Revised Corporation Code of the Philippines (RCCP). In particular, it analyzes the effects of the new administrative sanctions that may now be imposed by the SEC and the criminal penalties that are imposed for CG infractions and felonies now expressly provided under the RCCP.

The paper also assesses the heightened fiduciary duties of competency, transparency, accountability and responsibility, and the newly minted duty to maintain and disclose corporate records, imposed on directors, trustees, and officers of corporations vested with public interests. In particular, it evaluates the means to avoid the landmines that have in effect been planted in what is now the rough CG terrain laid-out under the RCCP.

Finally, the work evaluates the institutional framework that is being adopted by the SEC in pursuing CG reforms in the Philippine corporate sector under what we term as the “overly-criminalized corporate governance provisions of the Revised Corporation Code.”

In order to better appreciate the profound effects of the CG reforms undertaken within the provisions of the RCCP, it would be very useful to revisit how the SEC approached CG reforms under the aegis of the old Corporation Code.


When the first formal code of CG for publicly held companies (PHCs) was issued by the SEC in April 2002, it contained no penal provision other than an administrative sanction for failure of a covered PHC to file with the SEC its manual of CG. More significantly, the original CG Code introduced the Stakeholder Theory as the centerpiece of the CG reforms within the PHCs sector, thus: “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.”

The “no-sanction approach” taken by the SEC under the original CG Code stood in stark contrast to the contemporary CG circulars issued by the Bangko Sentral ng Pilipinas (BSP) that provided for distinct sets of administrative penalties for offending banks, their directors and officers. The philosophical stance taken by the SEC under the original CG Code could be explained by the following considerations:

Firstly, the “with-sanction approach” taken by the BSP is well-supported by the fact that it oversees basically a “monolith industry” — the banking sector — with well-defined areas of responsibilities and accountabilities for bank directors, trustees and officers, as well as well-defined stakeholders, mainly the shareholders, the depositors and the public that they deal with. Even today, when its lays down a CG practice that is intended to protect the interests of bank shareholders and other stakeholders, the BSP not only has the regulatory expertise for the banking industry, but more importantly it is fully aware of the commercial repercussions of the corporate sanctions that it imposes, both upon the banking industry and the nation’s economic and financial sectors. In contrast, the SEC oversees the whole Philippine corporate sector, with both private corporations and PHCs, with industries as disparate as those in the service industries, to manufacturing and processing companies, to those that are involved in esoteric areas, such as the then emerging tech companies. Surely, the SEC hierarchy could not by any means claim to have expertise in all business and industry sectors that it is statutorily mandated to oversee and supervise. More crucially, the SEC, as a regulatory agency, does not have the expertise to determine who are the appropriate stakeholders of the disparate companies under its supervision; much less does it have the industry experience to determine the commercial repercussions of imposing CG practices that go beyond meeting the requirements of the law. Consequently, much of the institutional understanding that the SEC would develop into each particular industry would have to come from feedback coming from the industry captains and the Boards of Directors of the various companies operating within each particular industry sector.

Secondly, the essence of CG reforms under the original CG Code was not to enforce statutory provisions found in either the Securities Regulation Code or the then Corporation Code, but to actually “raise the bar” in the exercise of business judgment by the Boards of Directors of PHCs beyond just complying with the letter of the law. CG reforms were intended to move from the statutorily sanctioned principle of Maximization of Shareholder Value to the more open-ended Stakeholder Theory which embodies the principles that:

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.

A director assumes certain responsibilities to different constituencies or stakeholders, who have the right to expect that the institution is being run in a prudent and sound manner.

Therefore, it was not for the SEC, as a regulatory agency, to substitute its judgment for that of the Board of Directors and Management of PHCs on how to best pursue CG reforms for its various stakeholders. The main work for the SEC was to promote (not enforce) the CG principles and best-practices that were being championed mainly by multilateral agencies, such as the World Bank, the IFC, and the OECD.

This doctrine that courts and regulatory agencies are not in a position to substitute their judgment for that of the Board of Directors in running the affairs of the company was best expressed by the Supreme Court in its decision in Philippine Stock Exchange v. SEC, where the core issue was whether the SEC was in a position to dictate to the PSE on whether to allow the listing of the shares of an applying company, thus:

“We affirm that the SEC is the entity with the primary say as to whether or not securities, including shares of stock of a corporation, may be traded or not in the stock exchange. This is in line with the SEC’s mission to ensure proper compliance with the laws, such as the Revised Securities Act and to regulate the sale and disposition of securities in the country. …

x x x

The role of the SEC in our national economy cannot be minimized. The legislature, through the Revised Securities Act, Pres. Decree No. 902-A, and other pertinent laws, has entrusted to it the serious responsibility of enforcing all laws affecting corporations and other forms of associations not otherwise vested in some other government office.

“This is not to say, however, that the PSE’s management prerogatives are under the absolute control of the SEC. The PSE is, after all, a corporation authorized by its corporate franchise to engage in its proposed and duly approved business. One of the PSE’s main concerns, as such, is still the generation of profit for its stockholders. Moreover, the PSE has all the rights pertaining to corporations, including the right to sue and be sued, to hold property in its own name, to enter (or not to enter) into contracts with third persons, and to perform all other legal acts within its allocated express or implied powers.

“A corporation is but an association of individuals, allowed to transact under an assumed corporate name, and with a distinct legal personality. In organizing itself as a collective body, it waives no constitutional immunities and perquisites appropriate to such a body. As to its corporate and management decisions, therefore, the state will generally not interfere with the same. Questions of policy and of management are left to the honest decision of the officers and directors of a corporation, and the courts are without authority to substitute their judgment for the judgment 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.

“Thus, notwithstanding the regulatory power of the SEC over the PSE, and the resultant authority to reverse the PSE’s decision in matters of application for listing in the market, the SEC may exercise such power only if the PSE’s judgment is attended by bad faith. …”

At that time the original CG Code was under consideration, the SEC took what we consider to be the best approach to introducing CG reforms among Philippine PHCs — it made it the obligation of each company to adopt a manual of CG in accordance with the model provided by the SEC. Among the key features of every manual formally adopted by a company, was for the Board of Directors and Management to “Identify the corporation’s major and other stakeholders and formulate a clear policy on communicating or relating with them accurately, effectively and sufficiently. There must be an accounting rendered to them regularly in order to serve their legitimate interests.”

In theory, the adoption of the manual of CG and its registration with the SEC would mean that the Board of Directors and Management of every PHC would then have to evaluate its contents, including an assessment of whether the configuration of its stakeholders and their legitimate interests have been properly framed as to best reflect the circumstances abounding the company and the industry in which it operates.

In effect, the compulsion under pains of administrative sanction for PHCs to adopt and register with the SEC their manuals of CG that identify their stakeholders and provide for their legitimate interests, became a transformative exercise by which the Boards of Directors and Management of PHCs would “take to mind and heart” the provisions of the manual of CG. In turn, the formally adopted and submitted manual of CG became the legal document by which the SEC and the identified stakeholders may use as the basis to formally bring a complaint for breach of duties and obligations on the part of the members of the Board of Directors and Management for violating the legitimate interests of the identified stakeholders.

This article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines (MAP).


Attorney Cesar L. Villanueva is Chair of MAP Corporate Governance Committee, Trustee of Institute of Corporate Directors, former Chair of Governance Commission for GOCCs (August 2011 to June 30, 2016), Dean of the Ateneo Law School (April 2004 to September 2011), author of The Law and Practice in Philippine Corporate Governance, the National Book Board Award winning Profession, and Founding Partner of Villanueva Gabionza & Dy Law Offices.




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