Sunday, February 3, 2008

DIRECTOR’S CUT (Rewards and responsibilities of the board of directors)

By Obiter07

It can be one of the cushiest jobs to have, being a member of the board of directors of a big company, preferably one of the listed ones. No day to day responsibilities, except the regular meetings of the board, but with the possibility of substantial rewards as per diem or possibly having a share in the profits of the company.

For example, one listed company described the following benefits for non-executive directors:

“P1,000,000.00 consisting of the following components:

Retainer Fee: P500,000.00

Per diem per Board meeting attended: P100,000.00

In addition, a non-executive director is entitled to a per diem of P20,000.00 per board committee meeting actually attended.”[1]

Now, who would not attend a meeting that is worth P100,000.00? No one can get enough of such meetings.

Unfortunately, the perks above are more the exception than the rule. This is because ordinarily, a director does not receive compensation as such except for reasonable per diems.

SECTION 30. Compensation of directors. — In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such directors, except for reasonable per diems: Provided, however, That any such compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders’ meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year. (n)

Authority

Ordinarily, a corporation cannot act unless it does so through an authority given by the board. As provided in the Corporation Code:

SECTION 23. The board of directors or trustees. — Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. (28a) xxx”

But what exactly does a director do? How can one be a director? And what liabilities does a director have to contend with?

Qualifications

The qualifications for appointment to the Board of Directors has been summarized thus:

1. ownership of at least one share of the capital stock of the corporation in his own during his term of office (Section 23);

2. majority of the directors must be residents (Section 23);

3. he must not have been convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years or a violation of the Corporation Code committed within five (5) years prior to the date of his election (Section 27);

4. he must not have a substantial interest in a competing corporation (Gokongwei vs. SEC)

5. only natural persons can be elected as directors, and

6. other qualifications as may be prescribed in the by-laws (Section 47[5]). [2]

Lately, the SEC has now required certain companies to have “independent” directors. An independent director “shall mean a person other than an officer or employee of the corporation, its parent or subsidiaries, or any other individual having a relationship with the corporation, which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.” The definition of independent directors is further refined in the Securities Regulation Code’s Implementing Rules and Regulations.[3]

Removal

Directors are generally subject to removal with or without cause irrespective of the 1-year tenure under Section 23 of the Code. Section 28 pertains to the inherent power to remove directors, trustees and officers prior to the expiration of their term.[4] The underlying reason is that stockholders are the ultimate masters, not the directors, to make the corporate government responsible to the owners. Nevertheless, there can be no removal without cause if this would deprive minority stockholders of their right to representation by virtue of the rule on cumulative voting.[5] (We’ll tackle voting, cumulative or otherwise, in a different post.)

Liabilities and responsibilities

What do directors have to watch out for? Well, they may be solidarily responsible for all damages suffered by the corporation and its stockholders as stated in Section 31 of the Code:

SECTION 31. Liability of directors, trustees or officers. — Directors or trustees 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 or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.

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 disability 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. (n)

But a director cannot be held liable for mistakes or errors in the exercise of their business judgment, provided they have acted in good faith and with due care and prudence. The general rule is that contracts intra vires (or within one’s authority) entered into by the board of directors are binding upon the corporation and the courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to a wanton destruction of the rights of the minority.[6]

However, a director cannot appropriate corporate opportunities for himself.

SECTION 34. Disloyalty of a director. — 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 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. (n)

Being a director can be a heavy responsibility but it can have substantial rewards as well.



[1] SEC Form 20-IS, Ayala Corporation, 2005.

[2] SEC Opinion No. 31, May 26, 2003.

[3] SRC Rule 38 (2).

[4] SECTION 28. Removal of directors or trustees. — Any director or trustee of a corporation may be removed from office by a vote of the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote: Provided, That such removal shall take place either at a regular meeting of the corporation or at a special meeting called for the purpose, and in either case, after previous notice to stockholders or members of the corporation of the intention to propose such removal at the meeting. A special meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock, or, if it be a non-stock corporation, on the written demand of a majority of the members entitled to vote.
Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse to give the notice, or if there is no secretary, the call for the meeting may be addressed directly to the stockholders or members by any stockholder or member of the corporation signing the demand. Notice of the time and place of such meeting, as well as of the intention to propose such removal, must be given by publication or by written notice prescribed in this Code. Removal may be with or without cause: Provided, That removal without cause may not be used to deprive minority stockholders or members of the right of representation to which they may be entitled under Section 24 of this Code. (n)

[5] Ibid.

[6] (Campos, et al.,The Corporation Code, Comments, Notes and Selected Cases, Vol. I (1990), p. 643).

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