Independent directors swing votes in battle for Meralco control
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| Estanislao: “Our law demands that there must at least be two [independent directors in the board]. That’s the minimum.” |
By LALA RIMANDO
abs-cbnNEWS.com/Newsbreak
As the May 27 annual stockholders meeting of Meralco nears, the battle for control of the country’s biggest power retailer rages on. In this close fight– the Lopezes now have five of the 11-man board, while the government has four—the independent directors can be the swing votes for decisions including changes in management.
Between the two contending parties, whoever gains the upper hand will deal with independent directors who have two reserved seats on the board.
Independent directors are thus important in the 11-man Meralco board.
Jesus Estanislao, former finance minister who founded the Institute of Corporate Directors, a watchdog for corporate governance and ethical practices in company boardrooms, told abs-cbnNEWS.com/Newsbreak that with the two opposing camps, it is most likely that there will be two slates. “Then it is a question of who gets how many votes. And that’s where the proxy fight is.”
In the Philippines, independent directors haven’t been under public scrutiny. But in the case of Meralco, since it is in the business of distributing electricity—a basic necessity—public interest is pronounced and the board elections will most likely be watched.
Estanislao discussed the vital role of independent directors and proper channels to tap when there are unresolved issues to preserve the long -term value of the company. Excerpts of the interview:
Please tell us about independent directors. Why should company boards have them?
Independent directors have an important role to play in corporate governance. They are there primarily to represent, protect and defend the interests of the minority shareholders vis-à-vis the interests of a major or controlling shareholder who has the ability to appoint his nominees to the board. The minority shareholders often do not.
Our law demands that there must at least be two [independent directors in the board]. That’s the minimum. Another way of computing is that they should represent 20 percent of the total number of Meralco shares. They can have as many as three in Meralco, but that depends on the agreement within.
Among their tasks is to constitute the nomination committee in the board. They determine who will be in the slate of directors [based on the number of shareholdings]. Voting of these directors is during the company’s annual shareholders meeting. Normally, there is a slate of 11 that’s presented for voting. And generally, all 11 in the slate are elected.
But if there are two opposing camps, then there can be two slates. Then it is a question of who gets how many votes. And that’s where the proxy fight is. We’ve seen this in san Miguel and PCI Bank before.
How independent should independent directors be?
Ideally, it means you are independent-minded. To help in your independence of mind, you should not be related by blood, marriage, or by business relationships with the controlling shareholders and with the top management.
Top management in Meralco is Manolo Lopez. So you cannot be wife of Meralco executive and be independent.You cannot be a child, first or second cousin of Manolo and be independent. Or you cannot be an employee of Meralco in the past five years or so. You cannot be an accountant of Meralco or lawyer of Meralco or the Lopez family.
So there are two key things that bar you from being an independent director: business relationship and consanguinity. If you have either, then you should not be an independent director but a representative or nominee of the major shareholders.
What if the independent directors are not related by blood, marriage or business relationship, but they are known to be close to the major shareholders?
It depends. Everybody in this town is close to somebody. We are all close to one another. This is a very small town. I question whether Justice [Artemio] Panganiban, for example, will be influenced by the Lopezes to do anything just like that. But it’s different from the case of [Christian] Monsod because Monsod has been involved in an employer-employee relationship. So [Monsod] may not be in the position to claim that, but Justice Panganiban can.
So the reputation of the independent director counts a lot?
Absolutely necessary. You have to have credibility, and therefore the ability and the independence of mind.
The advocacy for independent directors was born from the fact that a lot of Asian companies are family owned and/or controlled. The Lopez family has stake in Meralco and two power producers, and Winston Garcia is questioning their related transactions. Will these issues always crop up when families are involved in vertical businesses?
Don’t forget that some of the best governed companies in the Philippines are family owned. Of the top five companies in the ICD’s [Institute of Corporate Director] corporate governance scorecard in 2007, four are companies under the Ayala family portfolio. So essentially, there is nothing wrong with being a family owned corporation in many or interlocking businesses. Some of the most successful companies everywhere are family owned. But even as family corporation, you have to abide by the rules.
As publicly listed company, there are such things as related party transactions that have to be tested. Garcia, as a director [and representative of GSIS, which is another major shareholder], has certain rights and as a matter of fact, certain duties. He should be worried about related party transactions. There’s a Lopez generation company that sells electricity to Meralco. He has a right to take a look and ask, is there self-dealing here? There is nothing wrong with related party transactions for as long as they are at normal market rates.
Garcia has aired his concerns about the Lopezes and Meralco. Since then, the share price of Meralco has dropped significantly because investors are wary of the company’s political risks. How do you reconcile Garcia doing his duty as a director but also reducing the value of the company?
It depends on what the board protocol is so I cannot speak for Meralco because I don’t know what their board protocol is. Every board creates its own rules. But in corporate governance, no single director should be speaking out to the general public about its affairs.
The board is very powerful and it should always act as a collegial body. Individual directors don’t have any power personally. The general rule in corporate governance is that nobody really speaks for the board except possibly the chairman. But even then the board acts as a body.
Even if there are complaints, the general rule is you complain within the board. Keep it internal. Winston has his own practices and own preferences that may not be so proper. But being a government official, I suppose he complains very publicly.
What if there are issues that cannot be resolved within and among the members of the board?
It depends on the protocol of the Meralco board. But what I can tell you is from international practice and from what many Philippine corporations have done if there are unresolved problems.
If Winston wants to assert his right to investigate the transactions which might be detrimental to the company, it is also his right to complain and even bring the company to court. But the first place where he has to complain is in the board itself. If he doesn’t get satisfaction there, following the board protocol, he can go to the SEC (Securities and Exchange Commission) and say, “This is a dysfunctional board.”
There are certain rules that SEC would like to see observed. [These rules are] in the Code of Corporate Governance, which every company should have. The protocols are in the portion called the Code of Proper Practice. So if a director sees that these codes are not being observed, he can go to the SEC and complain there.
A director is not just there for today and tomorrow. The whole objective of being in the board is to protect and maximize the long term value of the company.
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