Governance Briefing — June 30, 2020

Executive briefing: The Philippine Securities and Exchange Commission (SEC) adopted the Revised Code of Corporate Governance for Public Companies and Registered Issuers through Memorandum Circular (MC) No. 19, Series of 2020. The reform updates the 2017 code, aligns with the ASEAN Corporate Governance Scorecard and the G20/OECD Principles, and applies on a comply-or-explain basis to all publicly listed companies, public companies, and registered debt or equity issuers.

The revised code stresses effective boards, stronger risk and internal control frameworks, active shareholder communications, and sustainability reporting that reflects material environmental, social, and governance (ESG) risks. Boards remain responsible for strategy, oversight, and stewardship, while the SEC sets minimum practices and expects firms to exceed them where risk profiles warrant.

What changed in the 2020 revision

• Board composition rules now call for a majority of non-executive directors, at least two independent directors or 20% of the board (whichever is higher), and separation of the chair and CEO roles.
• Enhanced risk oversight and related-party transaction controls require dedicated committees chaired by independent directors, clearer thresholds for material transactions, and documented review procedures.
• Sustainability reporting is folded into annual governance reports, building on SEC MC No. 4, Series of 2019, which prescribes sustainability templates and a comply-or-explain regime.
• Stakeholder and shareholder engagement expectations have been expanded, including equal treatment of minority investors, timely disclosures, and digital channels for public companies.
• Boards must institutionalise annual performance assessments, director and key officer succession plans, and continuing education aligned to the company’s industry and risk profile.

Governance reforms

Board independence and competence. The revised code retains the requirement for at least two independent directors or 20% of the board, whichever is greater, and caps independent director tenure at a cumulative nine years. Boards are encouraged to maintain a skills matrix covering financial literacy, industry expertise, technology and cyber risk experience, and sustainability competence, and to disclose how board composition meets strategy and risk needs.

Leadership structure. Separation of the chair and chief executive roles is recommended to avoid concentration of authority. If the positions are combined, the board must appoint a lead independent director with clear authority to set agendas, convene executive sessions of non-executive directors, and oversee board evaluation.

Committees with independent leadership. The audit committee must be chaired by an independent director with accounting or audit expertise, while the corporate governance, risk oversight, and related party transaction committees must be majority independent and chaired by non-executive directors. Each committee needs a written charter, annual work plan, and performance self-assessment reported to the board.

Risk and control environment. Boards are directed to establish an enterprise risk management framework that integrates strategy setting, risk appetite, and control activities. Material risk owners should present at least annually to the board, while chief audit executives must have unimpeded access to the audit committee and the board chair. The code also encourages cyber resilience programs and data governance policies proportionate to the entity’s technology footprint.

Related party safeguards. Companies must maintain a register of material related party transactions (RPTs), adopt policies on arm’s length pricing, set approval thresholds, and disclose RPTs in annual reports and current disclosures. The RPT committee is tasked with validating fairness opinions and ensuring that interested directors abstain from deliberations.

Stakeholder and sustainability lens. Boards are expected to identify significant ESG topics, set clear sustainability objectives, and link them to executive remuneration where material. The code references SEC MC No. 4, s. 2019, for sustainability reporting templates and encourages companies to adopt internationally recognised frameworks such as the Global Reporting Initiative or SASB Standards when appropriate.

Compliance requirements and disclosures

Comply-or-explain and annual reporting. Public companies and registered issuers must file an Annual Corporate Governance Report (ACGR) within five business days of filing their audited financial statements. The ACGR now incorporates the revised code’s principles, requiring companies to state compliance or provide explanations and remediation timelines where they deviate. Listed companies continue to file the Integrated Annual Corporate Governance Report (I-ACGR) through the Philippine Stock Exchange portal.

Manual of corporate governance. Firms must update their Manual of Corporate Governance to mirror the revised code and SEC issuances, submit the manual to the SEC within 30 days of board approval, and post it on their website. Updates should cover committee charters, succession plans, conflict-of-interest rules, and whistleblowing arrangements.

Training and certification. Directors and key officers are expected to complete annual governance and risk training. The code endorses leveraging the Institute of Corporate Directors’ professional development programs and requires companies to disclose training hours per director in the ACGR.

Disclosure controls and investor communications. Companies should maintain disclosure policies that set approval levels, escalation triggers, and spokesperson protocols. The SEC encourages the use of digital investor relations sites containing minutes of shareholder meetings, board committee reports, and sustainability data, ensuring equal access for minority investors.

Audit quality and internal control representations. Audit committees must oversee external auditor rotation in accordance with the Philippine Code of Ethics for Professional Accountants, review non-audit services for independence threats, and secure management representations on internal controls over financial reporting. The revised code also asks boards to ensure the internal audit function is adequately resourced and independent of operational management.

Implementation timeline and transition expectations

Issuance and effectivity. MC No. 19, s. 2020, was issued on 30 June 2020. The circular provides that the Revised Code takes effect immediately after its publication in two newspapers of general circulation and posting on the SEC website, which occurred in early July 2020.

Transition to the new ACGR templates. Companies were expected to incorporate the revised principles in ACGRs filed in 2021 covering fiscal year 2020 results. Listed companies filing the I-ACGR were likewise instructed by the Philippine Stock Exchange and SEC to align their disclosures starting with 2021 submissions. Firms that needed more time for board or shareholder approvals were expected to disclose interim measures and target completion dates.

Sustainability reporting cycle. Entities already subject to SEC MC No. 4, s. 2019, on Sustainability Reporting Guidelines were expected to file sustainability templates beginning with fiscal year 2019 reports (due in 2020) and to integrate the same ESG discussions into ACGR narrative sections beginning in the 2020 reporting cycle. The revised code reiterates that sustainability disclosures follow a comply-or-explain model but encourages quantified metrics and board-approved targets.

Monitoring and enforcement. The SEC reviews ACGR and I-ACGR filings, publishes non-compliance lists, and may impose penalties under the Revised Corporation Code and SRC Rule 58 for misstatements or late submissions. Continuous disclosure obligations also apply: material governance or control deficiencies must be reported promptly through structured filings and press releases.

Practical steps for boards

1. Map gaps. Benchmark existing governance policies and committee charters against MC No. 19, s. 2020, and sustainability guidelines under MC No. 4, s. 2019. Prioritise changes affecting independence thresholds, RPT approvals, and risk governance.
2. Refresh succession and skills matrices. Update board and management succession plans, disclose critical roles, and verify that director competencies cover finance, technology, industry, and ESG. Use the skills matrix to inform recruitment and training plans.
3. Strengthen controls testing. Align internal audit plans with enterprise risk assessments, ensuring coverage of financial reporting controls, data privacy, cyber security, and third-party risks. Document how findings feed into board risk oversight.
4. Enhance stakeholder communications. Publish governance and sustainability information on the corporate website, provide accessible channels for minority shareholder questions ahead of meetings, and disclose voting results within seven business days as recommended by the code.
5. Document the explain rationale. Where full compliance is not feasible, articulate alternatives, remediation timelines, and monitoring arrangements in the ACGR. Boards should evidence deliberations in minutes and track follow-through.

The revised code sets a higher bar for board stewardship while allowing proportional flexibility. Companies that integrate risk, sustainability, and stakeholder considerations into strategy discussions will be better positioned to demonstrate compliance and long-term value creation.