REVISITING THE FIDUCIARY DUTIES OF THE BOARD OF

DIRECTORS AND MANAGEMENT

Among the essential features of an effective corporate governance (CG) regime would be the proper
designation of the agency in the corporate setting that is primarily responsible for promoting CG: Who
is primarily responsible for promoting CG principles and best practice within the company setting?

This would include establishing the hierarchy of responsibilities and accountabilities among the
various agencies operating within the corporate setting, and answers the critical question: With whom
does the buck stop when it comes to the duties and responsibilities for CG?

It is equally important for an effective CG regime to properly delineate the constituencies to whom
such primary fiduciary duties of CG are owed to: To whom do we owe the fiduciary duty to properly
govern the corporate affairs?

Achieving such proper delineations provides answers to the critical questions that directors and
senior corporate officers ask in relation to pursuing good CG practices for the company: What are my
primary duty in running the affairs of the company? When are we in breach of such duty as to
become personally liable therefore? It also compels the responsible corporate agency to provide a
hierarchical delineation of the varying and sometimes conflicting rights of such constituencies.

This paper seeks to revisit the provisions Code of CG for Publicly-Listed Companies (PLCs) (SEC
Memorandum Circular No. 19, s. 2016), which became effective on 01 January 2017, on how it
structures the primary responsibility of promoting CG with the corporate setting, and how it effectively
addresses the issues of what constitutes the ―legitimate interests‖ of stakeholders, other than the
stockholders, of PLCs.

Part I Erroneous Dichotomy: The Board Must Limit Itself to Policy-Setting, and Must Respect
Management Autonomy to Run the Affairs of the Company

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(a) Prior to the CG reform movement in our country, the mantra that one often hears in corporate
boardrooms is that ―The Board must limit itself to policy setting, and the main work of running the
company is with Management, headed by the CEO.‖

This anachronistic CG attitude can also be found sprinkled in Philippine jurisprudence, a sampling of
which can be seen in Western Institute of Technology v. Salas, which held:

―There is no argument that directors or trustees, as the case may be, are not entitled to salary or
other compensation when they perform nothing more than the usual and ordinary duties of their
office. This rule is founded upon a presumption that directors/trustees render service gratuitously,
and that the return upon their shares adequately furnishes the motives for service, without
compensation‖. The Supreme Court (SC) pointed to Section 30 of the Corporation Code (CC) which
provides that in the absence of any provision in the by-laws or upon vote of stockholders representing
at least a majority of the outstanding capital stock, ―directors shall not receive any compensation, as
such directors,‖ except for reasonable per diems for actual attendance at meetings.

Such judicial attitude derogates the ―Board service‖ as not inherently compensable since it amounts
to ―nothing more than the usual and ordinary duties of their office.‖ In effect, the ―work‖ that directors
do in the corporate setting is essentially to attend meetings. Such judicial attitude treats directors as
not performing a professional role that ought to be compensated, but merely as an adjunct role to
their primary status as owners of the company. When carried into management practice, such
attitude creates a warped value system among directors that it is their proprietary right to company
earnings that remains their primordial concern, to which their fiduciary duties to the company and
other stakeholders is only an adjunct role.

Such erroneous dichotomy of the roles of the Board and Management is also enshrined in the case-
law doctrine of ―Business Judgment Rule‖ which not only provides the general rule that resolutions,
contracts and determinations of the Board are binding on the corporation even against the opposition
of the stockholders, but that even when losses are incurred by the company, the directors shall not
be held personally liable therefore as long as they had acted in good faith.

Reliance by directors on the representation of Management in arriving at corporate decisions, has

traditionally been considered as ―acting in good faith‖ as to shield them from personal liability for
corporate acts and contracts that cause damage to the corporation.

The classic formulation of the rule was enunciated by the SC in Montelibano v. Bacolod-Murcia
Milling Co., Inc., which held that when a resolution is ―passed in good faith by the board of directors, it
is valid and binding, and whether or not it will cause losses or decrease the profits of the
[corporation], the court has no authority to review them,‖ adding that ―It is a well-known rule of law
that questions of policy or management are left solely to the honest decision of officers and directors
of a corporation, and the court is without authority to substitute its judgment [for that] 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.‖

The ―insulation-from-personal-liability‖ effect of the Business Judgment Rule eventually lead to a

―general rule of non-liability of directors and officers‖ for losses sustained by corporations, except only
in enumerated instances, Tramat Mercantile, Inc. v. Court of Appeals came up with a ―formula‖ in
determining the issue of personal liability for corporate officers, thus:
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Personal liability of a corporate director, trustee or officer along (although not necessarily) with the
corporation may so validly attach, as a rule, only when:

(a) He assents:

(i) to a patently unlawful act of the corporation;

(ii) for bad faith or gross negligence in directing its affairs; or

(iii) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons
(Section 31, CC);

(b) He consents to the issuance of watered stocks or who, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection thereto (Section 65, CC);

(c) He agrees to hold himself personally and solidarily liable with the corporation (De Asis & Co., Inc.
v. Court of Appeals, 136 SCRA 599 [1985]);

(d) He is made, by a specific provision of law, to personally answer for his corporate action
(Exemplified in Section 144, CC; also Section 13, P.D. No. 115, or the Trust Receipts Law).

By the use of the phrase ―may so validly attach, as a rule, only when,‖ it is clear that the SC
emphasizes that the general rule is that directors, trustees, and other corporate officers are not
personally liable for corporate debts, and that the only time they do become personally liable is on the
specifically enumerated four areas indicated in the formula. The enumerative manner by which
jurisprudence has effectively limited the cases when a corporate officer may be held liable has been
reiterated verbatim in subsequent decisions of the SC.

The CG reform commenced by the SEC in 2002 for PLCs was in great part in reaction to such
―smugness‖ of directors and senior officers to their primary fiduciary duties of diligence or care they
owed to their company, its stockholders, and other stakeholders.

(b) A good number of Board members in PLCs tend to behave as though their service is an act of
―voluntarism‖ or equivalent to quasi-public service, for which the highest form must take the norm of
giving sage advice to Management, the consequences for which they cannot be held personally
liable, since it was Management that made the final decision to pursue and implement the same. Yet,
the substantive law provisions under Philippine Corporate Law do not support such a dichotomy of
CG.

Section 23 of the CC embodies the doctrine of ―Centralized Management‖ which clearly and directly
vests ―all corporate powers, all corporate properties, and all corporate business‖ of the corporation
with its Board of Directors, which has the following legal and substantive consequences:

(a) That the Board possessing all corporate powers is the direct agent of the corporation considered
by law to be the ―principal‖ and to whom the Board owes fiduciary duties of diligence and loyalty;

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(b) That the Board possessing legal title to all the assets and business enterprise of the company
does not act as an agent, but rather as a trustee, of the stockholders and its corporate decisions, as a
general proposition, cannot be overturned by the stockholders; and

(c) Management (i.e., President and the Senior Officers) are appointed by the Board in the exercise
of its plenary corporate powers, and thereby Management is considered to be the Board‘s sub-agent
vis-à-vis the corporation as the principal in the corporate setting.

The rule under Agency Law, as embodied in the Civil Code of the Philippines, as it ought to operate
in Corporate Law, is that the primary agent (the Board) remains primarily liable to the principal (the
corporation) even when such agent appoints a sub-agent to carry on the principal‘s affairs; and that
primary agent (the Board) remains personally liable to the principal for the acts of its sub-agent
(Management).

Under such substantive corporate and civil law structures, the Board is vested directly with the
primary duty to manage the assets and affairs of the company, and that the appointment of
Management does not take away such primary responsibility of the Board; that in fact the Board
ought to be personally liable to the principal (the company, as a separate juridical person) and the
stockholders (when the corporation is seen only as a medium of doing business) for the defaults of
Management, whose members constitute the Board‘s sub-agents.

In actual corporate practice, of course, the Board of Directors is not expected to run the day-to-day
affairs of the company, but that it is expected to employ its plenary corporate powers to appoint
Management, headed by the CEO, as its direct sub-agent to run the affairs of the company pursuant
to the purpose of the enterprise as set out in the company charters. Through the decades, the
concept of ―strong CEO‖, who often was the Chairman of the Board at the same time, created a
culture of ―Board reticency‖ which relied upon Management to carry the ball in running the affairs,
postered by the fact that members of the Board who act in good faith relying upon the representation
and assurances of Management and general counsel, to be insulated from personal liability for the
wrong suffered by the company under the business judgment rule.

Even the CC, which does not provide for the office of the Chairman of the Board, still contains
provisions that are supportive of the ―strong CEO‖ culture in the corporate setting, thus:

 the President must be a member of the Board (Sec. 25);

 the stockholders‘ meeting to be held to remove a member of the Board must be called by the
secretary on order of the President (Sec. 28);
 special meetings of the Board may be held at any time upon the call of the President (Sec. 53);
 The President presides at all meetings of the Board, as well as of the stockholders‘ meetings,
unless the by-laws provide otherwise (Sec. 54);
A conscious return to the proper dichotomy of the roles and hierarchical responsibilities of the Board
and Management was one of the primary aims for the CG reforms undertaken by the SEC when it
promulgated in 2002 the original Code of CG (SEC Memo Circular No. 2, s. 2002) that specifically
applied to PLCs, where it provided under the heading ―The Board Governance‖ that –

The Board of Directors (Board) is primarily responsible for the governance of the corporation. It
needs to be structured so that it provides an independent check on Management…

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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 interests of the corporation and its shareholders. …

The original SEC Code of CG also provided under the heading ―Accountability and Audit‖ the proper
designation of the fiduciary duty of governance to be with the Board, thus:

…The Board is primarily accountable to the shareholders and Management is primarily accountable
to the Board. The Board should provide the shareholders with a balanced and understandable
assessment of the corporation‘s performance, position and prospects on a quarterly basis. The
Management should provide all members of the Board with a balanced and understandable account
of the corporation‘s performance, position and prospects on a monthly basis…

The objective of the original Code of CG was to drill into hearts and minds of Board members the
legal truism that on their shoulders is legally imposed the primary duty of pursuing the affairs of the
company, and they cannot hide behind the theory of ―Management prerogative‖ to withdraw into the
background of CG.

(c) Philippine CG reforms for PLCs formally began with the promulgation by the SEC in 2002 of the
original Code of CG (SEC Memo Circular No. 2, s. 2002), which among others provided in clear
language the central theme of good CG: The Board, headed by the Chairman, is primarily
responsible and accountable to the stockholders and other stakeholders, for CG; whereas,
Management, headed by the CEO, is primarily accountable to the Board.

It is our position that essentially, the Code of CG for PLCs (SEC Memo Circular No. 19, s. 2016) has
maintained the CG dichotomy that ―The Board is primarily responsible for good CG to the
stockholders and other stakeholders; whereas, Management is primarily responsible to the Board.‖
We base our position on the following key provisions of the CG Code for PLCs, thus:

First, CG Code for PLCs has retained substantially the definitions of the Board and Management as
in the original Code of CG, that indicates such dichotomy, thus:

Board of Directors – the governing body elected by the stockholders that exercises the corporate
powers of a corporation, conducts all its business and controls its properties.

Management – a group of executives given the authority by the Board of Directors to implement the
policies it has laid down in the conduct of the business of the corporation.

The Code also recommends that the Board should be headed by a competent and qualified
Chairperson and provides for his roles and responsibilities; and provides that the position of
Chairman and CEO shall be held by separate individuals, with each having clearly defined
responsibilities.

Secondly, Principles 1 and 4 embody the primary role of the Board to be a ―competent and working
Board‖ in fostering the long-term success of the company, thus:

Principal 1:

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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 long-term best interests of its shareholders and other stakeholders.

Principle 4:

To show full commitment to the company, the directors should devote the time and attention
necessary to properly and effectively perform their duties and responsibilities, including sufficient time
to be familiar with the corporation‘s business.

In other words, the ―work of the Board‖ goes beyond just attendance at meetings, but constitute full
professional service to oversee the company‘s operations.

The CG Code for PLCs clearly considers the ―work of the Board‖ as essentially compensable work
and recommends that the Boards of PLCs ―should align the remuneration of key officers and board
members with the long-term interests of the company [and] formulate and adopt a policy specifying
the relationship between remuneration and performance.‖

In fact, Principle 6 requires a periodic measurement of the performance of such ―working Board‖,
thus: ―The best measure of the Board‘s effectiveness is through an assessment process. The Board
should regularly carry out evaluations to appraise its performance as a body, and assess whether it
possesses the right mix of backgrounds and competencies.‖

Thirdly, the recommended CG practices under Principle 2 (Establishing Clear Roles and
Responsibilities of the Board), ensure that the Board exercises dynamic recruitment and supervision
over Management and thereby be responsible for the competence and performance of Management.

 Recommendation 2.4 provides that 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.‖
 Recommendation 2.8 provides that the ―Board should be primarily responsible for approving
the selection and assessing the performance of the Management led by the Chief Executive
Officer (CEO), and control functions led by their respective heads (Chief Risk Officer, Chief
Compliance Officer, and Chief Audit Executive).‖
 Recommendation 2.9 provides that the ―Board should establish an effective performance
management framework that will ensure that the Management, including the Chief Executive
Officer, and personnel‘s performance is at par with the standards set by the Board and Senior
Management.‖
Finally, the recommended CG practice under Principle 2, places squarely on the Board‘s shoulders
the establishment of the company‘s risk management systems, thus:

 Recommendation 2.10 provides that the Board should oversee that an appropriate internal
control system is in place, including setting up a mechanism for monitoring and managing
potential conflicts of interest of Management, board members, and shareholders. The Board
should also approve the Internal Audit Charter.
 Recommendation 2.11 provides that the ―Board should oversee that a sound enterprise risk
management (ERM) framework is in place to effectively identify, monitor, assess and manage
key business risks. The risk management framework should guide the Board in identifying
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 units/business lines and enterprise-level risk exposures, as well as the effectiveness of risk
management strategies.‖
It would have been more useful, of course, if the CG Code for PLCs had formally and expressly
adopted within its Principles the very cornerstone of good CG: The Board of Directors is primarily
responsible to the stockholders and other stakeholders; whereas, Management is primarily
responsible to the Board.

(Second of two parts)

THE very essence of what constitutes ―good corporate governance‖ for stock for-profit
corporations depends largely on properly delineating the constituencies to whom their Board and
Management owe the fiduciary duties of responsibility, accountability and transparency.

Under contemporary Philippine Corporate Law settings, there are mainly three competing corporate
governance (CG) doctrines, briefly described as follows:

–– ADVERTISEMENT ––

• The Stockholders Theory: The primary duty of the Board and Management is to maximize the
profits of the corporation for the benefit of its stockholders; hence, the fiduciary duties of the Board
and Management are owed only to the corporation and its stockholders.

• The Stakeholders Theory: The primary duty of the Board and Management is owed not only to the
stockholders, but also to members of the public whose economic welfare is affected by the corporate
enterprise.

• Doctrine of Corporate Social Responsibility (CSR): Since the corporation is a creature of the State,
then the Board and Management are burdened by social obligations relating to public welfare which
the State is bound to promote.

Under Philippine Corporate Law, the Doctrine of Maximization of Shareholders’ Value has for the
longest time been the only prevailing doctrine to define what constitutes ―good CG.‖ The well-
established principle under the Corporation Code (CC) is that directors and corporate officers owe
fiduciaries duties of diligence and loyalty only to the corporation and it stockholders, and to no others,
based on the following grounds:
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• the fact that whenever the duties are covered by statutory provisions, they are defined in relation to
the corporation and its stockholders;

• the CC provides for a separate set of provisions for non-stock non-profit corporations to serve
eleemosynary objectives (i.e., CSR), then certainly the institution of stock for-profit
corporations should be devoted towards a single objective of maximizing the profits of the corporation
for the benefit of its stockholders who by both statutory and common-law doctrine have the right to
the profits of the company;

• When it comes to other stakeholders, their rights are governed under separate laws and disciplines,
such as Labor Code for employees, Contract Law for creditors and suppliers, Consumer Protection
Laws for clients and consumers, and Environmental Laws for the public interests.

The primacy of the Doctrine of Maximization of Shareholders’ Value over the Stakeholders Theory
and CSR has been supported by the writings of market gurus like Milton Friedman who in his seminal
paper published in the New York Times Sunday (13 September 1970) posited that

In a free-enterprise, private-property system, a corporate executive is an employee of the owners of

the business. He has direct responsibility to his employers. That responsibility is to conduct the
business in accordance with their desires, which generally will be to make as much money as
possible while conforming to the basic rules of the society, both those embodied in law and those
embodied in ethical custom. . . . in a free society . . . ―there is one and only one social responsibility of
business―to use its resources and engage in activities designed to increase its profits so long as it
stays within the rules of the game, which is to say, engages in open and free competition without
deception or fraud.‖

Our Supreme Court (SC) in Prime White Cement Corp. v. Intermediate Appellate Court, affirmed in
no uncertain terms that the primary obligation of the Board is ―to seek the maximum amount of profits
for the corporation,‖ thus: ―As corporate managers, directors are committed to seek the maximum
amount of profits for the corporation. This trust relationship is not a matter of statutory or technical
law. It springs from the fact that directors have the control and guidance of corporate affairs and
property and hence of the property interests of the stockholders.‖

The fact that Board of Directors (BOD) is vested under Section 23 of the CC with legal title to the
corporate assets and its enterprise to be employed for the benefit of stockholders provides the legal
bedrock for the prevalence of the Doctrine of Maximization of Shareholders’ Value in CG; it is also
the legal basis used to support the proposition that inherently BODs owe no fiduciary duties to
stakeholders other than stockholders.

To illustrate, in its decision in Nielson & Co. v. Lepanto Consolidated Mining Co., the SC held as
unlawful a provision in a Management Contract that entitled the management company to stock
dividends as compensation payment on the ground that ―only stockholders are entitled to dividends.
They are the only ones who have a right to a proportional share in that part of the surplus which is
declared as dividends…If a stockholder is deprived of his stock dividends — and this happens if the
shares of stock forming part of the stock dividends are issued to a non-stockholder — then the
proportion of the stockholder‘s interest changes radically. Stock dividends are civil fruits of the
original investment, and to the owners of the shares belong the civil fruits.‖

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Since it is only the stockholders of a corporation who have ―equity standing‖ to the corporate assets
and it business, they are the only sole ―beneficiaries‖ to whom the BOD and Management would
clearly owe fiduciary duties. Other stakeholders would have rights arising against the corporation on
bases other than the trusts relationship. Thus, customers, supplier and creditors do not have any
equity claims against the company, and would locate their rights against the corporation on the basis
of the contracts they entered into with the corporation, through its BOD. Therefore, the relationship of
the BOD with such stakeholders is purely economic in character, based on contracts entered into ―at
arms length,‖ and is no way fiduciary in character or based on trust.

In the same manner, employees—who actually spend more time within the company than its
stockholders—have no proprietary claims on the business of the corporation, and they expect and
may legally demand to be compensated for their services in accordance with their employment
contract, whether the company is making profits or is operating at a loss.

The prevalence of the Doctrine of Maximization of Shareholders’ Value can also be supported based
on the truism that it provides for a strong enforcement and accountability mechanism under a good
CG framework: The maximization of profits goal is a clear measure that everybody can agree with as
a measure of the Board and Management‘s performance of their primary fiduciary obligation.

The Stakeholders Theory has a built-in drawback in the sense that ―it fails to provide adequate
guidance to decision making by management. In insisting that the corporation or management has
many responsibilities toward its various stakeholders, it does not furnish a neat or suitably precise
formula with which the weighing and balancing of competing considerations are to be made.‖ Prof.
Niceto S. Poblador observes that the theory ―has no concept of what economists call ‗equilibrium,‘ the
imaginary point towards which a system tends to gravitate. But more seriously for the practicing
manager, it provides no rational basis for action,‖ and summarized the ―crux‖ of what is lacking in
the Stakeholders Theory:

In more precise terms, our main concerns are two-fold: (1) How do we specify the firm‘s ultimate
objective or goal? (2) How can we pursue this goal in such a way as to satisfy the needs of all groups
that have a stake in the enterprise? If we can come up with a precise statement of the firm‘s ultimate
goal (that is, specify clearly what economists call its ―objective function‖), then we have a basis for
defining rationality. If we can come up with a set of criteria for meeting the needs of all corporate
stakeholders, then we have defined in operation terms what is and what is not ethical behavior.

The essence of the first criticism against the Stakeholders Theory is summarized by Prof. Emmanuel
Q. Fernando as follows: ―And although the first stakeholder theories acknowledge the existence of
other stakeholders and the moral duties the corporation had toward them, they did not sufficiently
explain the nature of these duties, how they are to be weighed and measured against each other in
case of conflict and whether there was an ethical difference between them.‖

Although our Constitution provides for the principle that the use of private property ―bears a social
function‖ (Section 6, Article XII, 1987 Constitution), nevertheless, jurisprudential application of
the CSR doctrine has been quite limited.

To start with, Section 36 is the lone instance in the CC that alludes to the CSR doctrine to
circumscribe the power of the corporation, acting through its BOD ―to make reasonable donations,
including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar
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purposes,‖ which dovetails it with the provisions under the National Internal Revenue Code (NIRC) on
tax deductible charitable contributions. Even in academic discussions, the determination of what
constitutes ―reasonable donation‖ is often linked to improving the goodwill of the company for it to
operate more profitably in its dealings with customers and the communities where it operates.

A good illustration of the State‘s intervention into corporate affairs to promote social good can be
found in the decision of the SC in Chamber of Real Estate and Builders Association v. Romulo,
where the main issue that had to be resolved was the lawfulness of the minimum corporate income
tax (MCIT) imposed upon all corporations which did not report taxable income after the initial three
succeeding taxable years of operations, thus: ―The MCIT on domestic corporations…came about as
a result of the perceived inadequacy of the self-assessment system in capturing the true income of
corporations. It was devised as a relatively simple and effective revenue-raising instrument compared
to the normal income tax which is more difficult to control and enforce. It is a means to ensure that
everyone will make some minimum contribution to the support of public sector.‖

In its decision in Professional Services, Inc. v. Court of Appeals, the SC began to recognize that
corporations which operate enterprises vested with public interest, such as that of operating a
hospital, assume certain legal relationship with members of the public whom they invite to use its
facilities, and thereby become responsible for the negligent acts of even contractors, such as doctors,
who treat them in their facilities. Our SC held that apart from the professional relationship between a
doctor and his patient, and the relationship between the hospital and the doctor who uses the
hospital‘s facilities, there is a separate and independent legal relationship that is created between the
hospital and the patient, for which the hospital would owe a certain degree of responsibility of
prudence.

In an earlier resolution in Professional Services, Inc., the SC had invoked for the first time the
―Doctrine of Corporate Responsibility,‖ when it held that ―The challenged Decision [making the
hospital liable for the malpractice of a physician] also anchors its ruling on the doctrine of corporate
responsibility. The duty of providing quality medical service is no longer the sole prerogative and
responsibility of the physician. This is because the modern hospital now tends to organize a highly-
professional medical staff whose competence and performance need also to be monitored by the
hospital commensurate with its inherent responsibility to provide quality medical care. Such
responsibility includes the proper supervision of the members of its medical staff. Accordingly, the
hospital has the duty to make a reasonable effort to monitor and oversee the treatment prescribed
and the administered by the physicians practicing in its premises.‖

(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.)

Cesar L. Villanueva is a member of the Management Association of the Philippines (M.A.P.) CG

Committee, the former Chair of the Governance Commission for GOCCs and the Founding Partner of
the Villanueva Gabionza & Dy Law Offices.

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