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The SEC's campaign against years of board entrenchment is, in the end, an effort to persuade investors that Philippine capital markets are finally ready to favorThe SEC's campaign against years of board entrenchment is, in the end, an effort to persuade investors that Philippine capital markets are finally ready to favor

[Vantage Point] When independent directors stop being neutral

Author: Rappler

Source: Rappler

2026/05/26 12:00

6 min read

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For now, unless revoked by a higher court, the circular of the Securities and Exchange Commission (SEC) limiting to nine years the cumulative term limit on independent directors stays.

The SEC may have secured one of the most historic governance victories in the Philippine financial sector. In a May 11, 2026 ruling, the Makati Regional Trial Court refused to align itself with GMA Network’s opposition to the SEC move.

This is long overdue.

The SEC’s efforts to establish term limits did not occur in a vacuum. Long before the GMA ruling, the regulator had broadened its governance offensive to the Philippine Stock Exchange (PSE) itself — a much more politically sensitive battlefield.

Earlier this year, the SEC also proposed a 10-year cumulative term limit on broker-directors of the PSE, possibly driving out some of the exchange’s longest-serving power brokers.

It is important to distinguish the two reforms. The SEC’s nine-year cumulative term limit applies to independent directors of listed companies — the very rule challenged by GMA Network before the Makati court. Separately, the regulator also proposed a 10-year cumulative term limit for broker-directors of the Philippine Stock Exchange, while granting veteran directors additional transition time before full implementation.

The recent SEC proposal signals that reform would happen without unnecessary chaos in the marketplace. It’s a compromise that undermines assertions that the SEC is recklessly trying to push for governance reform. Rather, the regulator seems to be addressing the modernization of governance with the realities of operations in long-established market institutions.

The SEC led by Francis Lim is more and more convinced that the weakness in the Philippine market is no longer just a problem of liquidity but a matter of governance credibility. Its campaign against years of board entrenchment is, in the end, an effort to persuade investors that Philippine capital markets were finally ready to favor institutional independence over legacy relationships.

The Philippine capital market has operated under a governance contradiction that regulators were hesitant to confront directly. Listed firms proudly advertised “independent directors,” yet many of those same directors have occupied their seats for well over a decade, eventually becoming deeply embedded in the institutional, social, and strategic fabric of the very corporations they were supposed to independently oversee.

That contradiction now sits at the center of one of the major governance reforms in recent Philippine market history.

The circular that sets a strict 9-year cumulative term limit on independent directors has been criticized by some corporate quarters as disruptive, impractical, and unnecessarily rigid. The recent court challenge from the GMA Network has crystallized those concerns.

The company argued that compelling a long-serving set of independent directors, such as retired Supreme Court chief justice Artemio Panganiban and former Bangko Sentral ng Pilipinas (BSP) governor Jaime Laya, to retire would rob the board of institutional savvy, undermine audit and risk oversight, and disrupt governance continuity.

Those concerns are not frivolous. For one, independent directors in the largest listed companies are not mere token figures. They usually chair audit, risk oversight, nomination, and compensation committees that constitute the board’s primary defense against governance shortcomings, internal control deficiencies, and undue management power.

Court ruling gives SEC muscles

But the Makati Regional Trial Court’s refusal to suspend the SEC circular may be more relevant and necessary overall than the dispute itself.

The ruling basically confirmed a larger regulatory principle that could revolutionize the way listed companies think about how the PSE is being governed: once corporations enter the public capital markets, governance ceases to be a purely private matter.

That distinction matters enormously. For decades, many Philippine-listed companies regarded independent directors more as members of an inner governing circle than as objective, rotating watchdogs. But the issue was not corruption per se.

Most long-serving directors were skilled and deeply respected. The problem was structural. Prolonged tenure gradually dilutes the semblance — and perhaps the discipline — of independence. Familiarity creates alignment. Alignment softens skepticism. And softened skepticism undermines investor confidence that boards can still reasonably challenge management and controlling shareholders. Essentially, the SEC circular is an effort to address that structural decay.

The key element of the court order was not procedural but philosophical. The SEC asserted that no corporation has a constitutional right to indefinitely retain certain individuals as independent directors. It added that the Philippine capital market cannot remain globally competitive if board renewal is simply an administrative inconvenience.

The court seemed to have accepted that reasoning — that once investor protection and market integrity are implicated, public companies do not have unlimited freedom to entirely shape governance their own way.

Independent directors are not private assets of management or controlling shareholders. They exist because securities laws demand that there be mechanisms in place to prevent undue insider influence over public investors. That interpretation subtly extends the SEC’s regulatory reach.

Beyond persuasion and voluntary compliance

For years, many governance reforms in the Philippines operated largely through persuasion and voluntary compliance. Regulators were often cautious about aggressively interfering with internal board structures, especially in large and institutionally respected corporations.

This strengthens the SEC’s authority by not merely punishing fraud after investors suffer damage, but by proactively redesigning governance systems to reduce the probability of leadership failure before capital is impaired.

Global institutional investors now view governance quality as a valuation metric for board renewal, succession planning, and director independence, giving it equal close scrutiny as financial metrics like earnings and leverage.

Markets that are willing to put up with deep-seated governance structures later bear discounts as investors incorporate entrenchment risk into their valuation decisions. Critics argue that expertise is not something that can be replaced overnight. GMA Network itself warned that replacing veteran independent directors overseeing audit, risk management, and governance could disrupt continuity and weaken board effectiveness.

The court, however, pointed out a deeper flaw. If a listed company gets operationally dependent on certain independent directors, it highlights a failure in succession planning.

Governance systems should outlast personalities. A board cannot become structurally fragile just because two of the directors retire after nearly two decades of service. The court found that the alleged injury was not irreparable and that companies had sufficient time to prepare successors.

The public interest in preserving objective board oversight outweighed the inconvenience of a board turnover.

I welcome your views on these and other issues where decisions made in power shape the country’s economic future.

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