Revisiting the fiduciary duties of the board of directors and management

The Code of Corporate Governance for Publicly-Listed Companies ( SEC Memo Circular No. 19, s. 2016) formally defines “Corporate Governance” as “the system of stewardship and control to guide organizations in fulfilling their long-term economic, moral, legal and social obligations towards their stakeholders.”

As structure, the definition embodies as its capstone the Stakeholder Theory, but with “long-term economic . . . obligations” appearing first in the listing, and therefore emphasizing the point that the foremost obligation of a stock for-profit corporation, especially one whose shares are publicly listed, is the maximization of profits with an eye towards its sustainability.

We will therefore proceed to discuss how the Corporate Governance (CG) Code for publicly listed companies (PLC) has managed to handle the “equilibrium problem” besetting the version of the Stakeholders Theory it has adopted that can provide a robust system of corporate governance for publicly listed companies.

By its Principle 1 under the general heading “The Board’s Governance Responsibilities,” there can be no doubt that the CG Code for PLCs, embodies the Maximization of Profits Doctrine as the cornerstone of its corporate governance regime, albeit operating within a greater concentric circle of the Stakeholders Theory, thus:

PRINCIPLE 1:

The company should be headed by a competent, working board to foster the long-term success of the corporation, and to sustain its competitiveness and profitability in a manner consistent with its corporate objectives and the longterm best interests of its shareholders and other stakeholders.

Principle 1 therefore sets a hierarchy of priorities for the Board and Management in the fulfilment of their duties and responsibilities to the various stakeholders:

• First and foremost, they must foster the long- term success of the company to sustain its competitiveness and profitability — which thereby place the stockholders in the first rung of stakeholders whose interest must be served;

• Secondly, the manner of pursuing the “foremost objective of maximization of profits,” must be consistent with the company’s objectives and long-term best interests of other stakeholders.

The foregoing governance formula is consistent with the adage that “In order that a company can do good in the communities it operates in, it must necessarily do well in its business operations.” It is also consistent with the PSE’s concept of corporate governance as a framework that governs the “performance by the Board of Directors and Management of their respective duties and responsibilities to the stockholders, with due regard to the stakeholders.”

The nature of the rights and legal standing of stockholders and securities-holders in publicly listed companies, as well as the nature and consequences of the fiduciary duties and responsibilities of their Boards and Managements towards stockholders and securities-holders are well defined both by law (Corporation Code and the Securities Regulation Code) and underlying jurisprudence. There are, however, no clear statutory bases to define the nature of the rights and legal standing of other stakeholders to allow for a proper application of the hybrid corporate governance central principle of “First and foremost, the company must be operated to maximize profits, but in a manner consistent with the long-term best interests of other stakeholders.”

In other words, we must seek from the CG Code for PLCs the answer to the question uppermost in the minds of members of the Board and Management: We know exactly when we are fulfilling our obligation to maximize profits, and how to exercise our business judgment in faithful compliance with such doctrine; but how do we know that we are giving “due regards to the long-term best interests of other stakeholders?”

Principle 2 under the heading “Establishing Clear Roles and Responsibilities of the Board,” ought to provide an indication of where the Boards and Management of publicly listed companies may seek guidance of what may constitute acts that are “with due regards to other stakeholders,” thus:

PRINCIPLE 2:

The fiduciary roles, responsibilities, and accountabilities of the Board as provided under the law, the company’s articles and bylaws, and other legal pronouncements and guidelines should be clearly made known to all directors as well as to stockholders and other stakeholders.

A close-reading of Principle 2 does not clearly indicate that the SEC is setting forth a fiduciary duties on the part of the Board and Management in relation to stakeholders other than stockholders, but merely imposes an obligation “to know” whatever fiduciary roles, responsibilities, and accountabilities that the Board has to stakeholders (other than stockholders) as they are provided for in law and the company’s charter documents. In other words, Boards and Management of publicly listed companies do not seem to per se owe fiduciary duties to stakeholders (other than stockholders). Another way of looking at the same concept embodied in Principle 2 is that, stakeholders (other than stockholders) do not by the fact of being such per se assume any right to demand any fiduciary duty from the Board and Management, except only when in instances provided by law, or formally assumed in the company charter documents.

This position is bolstered by language used in Recommendation 2.1 that seems to define the director’s duty of diligence as pertaining only to the company and all shareholders, but not to other stakeholders, thus: “The Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the company and all shareholders.” This seems to imply that when the Board exercises its business judgment, it remains limited to maximization of shareholders’ value. Even underlying Explanation seems to imply that directors of publicly listed companies do not owe fiduciary duty of loyalty to “any other stakeholder,” thus: “The duty of loyalty is also of central importance; the board member should act in the interest of the company and all its shareholders, and not those of the controlling company of the group or any other stakeholder.”

More telling is the language of Recommendation 2.4 that seems to channel the Board’s responsibility for succession planning program towards the duty of maximization of shareholders value, thus: “The Board should be responsible for ensuring and adopting an effective succession planning program for directors, key officers and management to ensure growth and a continued increase in the shareholders’ value.” In fact, other than in Principle 2 and Recommendation 2.1, there is no other reference to “stakeholders” other than stockholders under the heading “Establishing Clear Roles and Responsibilities of the Board.”

We can therefore make the preliminary assessment that the SEC in the exercise of its quasilegislative powers through the promulgation of the CG Code for PLCs, recognizes that the fiduciary duties of diligence and loyalty (of governance principles of responsibility and accountability) in the management of the assets and the enterprise of the company are owed primarily to the stockholders under the well- established principle of Maximization of Shareholders’ Value; that any fiduciary duty that may be owed to other stakeholders in implementation of the Stakeholders Theory is only to the extent that such duties are imposed by law, rules and regulations, and what are voluntarily assumed by the company in its charter documents.

What are the fiduciary duties of the Board and Management to stakeholders, other than stockholders, in publicly listed companies?

We endeavor to answer that question by evaluating Principles 14, 15, and 16 of the CG Code for PLCs under the heading “Duties to Stakeholders” to allow a better understanding of what exactly constitute the rights and legitimate interests of stakeholders, other than stockholders in publicly listed companies.

How do we know that we are giving “due regards to the long-term best interests of other stakeholders?”

This piece has been edited for brevity. To read the full version, please visit the link http:// bit.ly/ fidrevisit or use a smartphone to scan the QR code. The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or the M.A.P.