Adoption of Guidelines Prescribing the Fit and Proper Rule for Directors of Insurance Companies and Public Companies

April 15, 2015 DOF DEPARTMENT ORDER NO. 054-15 SUBJECT : Adoption of Guidelines Prescribing the Fit and Proper Rule for Directors of Insurance Companies and Public Companies WHEREAS, the Insurance Commission ("IC") is authorized to issue rulings, instructions, circulars, orders and decisions to ensure the efficient regulation of the insurance industry in accordance with global best practices and to protect the insuring public; WHEREAS, the IC is attached to the Department of Finance ("DOF") for purposes of policy and program coordination, in accordance with the Administrative Code of 1987; WHEREAS, the Securities and Exchange Commission ("SEC") is vested with jurisdiction and supervision over all corporations who are the grantees of primary franchises and/or licenses or permits issued by the Government and is mandated to foster good governance and enhance investor protection; WHEREAS, the administrative supervision over the SEC was given to the DOF, pursuant to Executive Order ("EO") No. 37, s. 2011, primarily in view of the need to ensure effective financial sector coordination; WHEREAS, moved by the necessity to build a strong and stable financial system, the National Government is interested to promote good governance in the private sector, considering the sizeable role of the latter in the country's economic growth and development; WHEREAS, it is desirable to adopt a system for recognition of exemplary public companies and insurance companies ("covered entities") employing the highest standards in corporate governance, with particular emphasis on ensuring that the directors of said covered entities are fit and proper to hold such position, in order to encourage members of the private sector to aspire for said highest standards; NOW, THEREFORE, in consideration of the foregoing premises, the following instructions are hereby issued: SECTION 1. Ranking System . IC and SEC shall promulgate guidelines and shall implement a system for ranking insurance companies and public companies, respectively, in terms of company practices employed in ensuring that directors are fit and proper to hold such position. These guidelines shall include criteria on integrity, experience, education, training and competence, and shall be consistent with the standards herein set forth. The implementation of the ranking system and the standards set forth in this Department Order shall be without prejudice to, and shall be consistent with, all applicable laws and existing rules and regulations of the IC and the SEC. SECTION 2. Annual Ranking and Recognition . IC and SEC shall, on an annual basis, rank covered entities in accordance with the ranking system respectively promulgated pursuant to Section 1 hereof. The annual ranking generated by the IC and SEC shall be used as basis for recognizing insurance companies and public companies employing the highest standards in ensuring that their directors are fit and proper to hold such position. SECTION 3. Definition of Terms . The term "insurance company" shall include all partnerships, associations, cooperatives or corporations, duly authorized by the IC to transact insurance business in the Philippines, excepting mutual benefit associations. For purposes of this Department Order, the term shall also include professional reinsurers, or entities that transact solely and exclusively reinsurance business in the Philippines. The term "public company" shall refer to a corporation duly registered with the SEC having the following characteristics: a. Has a class of equity securities listed on an Exchange; or b. Has assets in excess of Fifty Million Pesos (P50,000,000.00) and having two hundred (200) or more holders, at least two hundred (200) of which are holding at least one hundred (100) shares of a class of the corporation's equity securities. SECTION 4. Ideal Minimum Qualifications of a Director . A director shall ideally have the following minimum qualifications: a. At least twenty-five (25) years of age at the time of his election or appointment; b. At least a college graduate or has at least five (5) years experience in business; c. Has attended a special seminar on corporate governance for board of directors conducted or accredited by SEC or IC as may be applicable; and d. Must be fit and proper for the position of a director of the covered entity, taking into account the following factors: integrity/probity, competence, relevant education/training ( e.g. ,financial literacy),physical and mental fitness, diligence, and knowledge/experience. SECTION 5. Ideal Qualifications of an Independent Director . An independent director shall refer to a person who, ideally: a. Is not more than eighty (80) years old, unless otherwise found fit to continue serving as such by SEC or IC; b. Is not or has not been a member of the executive committee of the board of directors, or an officer or employee, of the covered entity, its subsidiaries, affiliates or related companies during the three (3) years immediately preceding the date of his election; c. Is not a director, officer, or employee of the related companies of the covered entity's majority shareholders; d. Is not a "substantial shareholder", i.e. ,does not own/hold shares of stock sufficient to elect one (1) seat in the board of directors of either the covered entity, its subsidiaries, affiliates, or any related companies of its majority corporate shareholders; e. Is not a relative within the fourth degree of consanguinity or affinity, legitimate or otherwise, of a director, officer, or substantial shareholder of the covered entity or any of its related companies; f. Is not acting as a nominee or representative of any director or substantial shareholder of the covered entity or any of its related companies; g. Is not retained, within the three (3) years immediately preceding the date of his election, either in his personal capacity or through a firm, as a professional adviser, consultant, agent or counsel of the covered entity, any of its related companies or substantial shareholders; is otherwise independent of management and free from any business or other relationship within the three (3) years immediately preceding the date of his election; and h. Does not engage or has not engaged, whether by himself or with other persons or through a firm of which he is a partner, director or substantial shareholder, in any transaction with the covered entity or any of its related companies or substantial shareholders, other than such transactions that are conducted at arm's length and could not materially interfere with or influence the exercise of his judgment. SECTION 6. Ideal Minimum Number of Independent Directors . At least twenty percent (20%) but not less than two (2) members of the board of directors shall be independent directors: Provided, That any fractional result from applying the required minimum proportion, i.e. ,20%,shall be rounded up to the nearest whole number. For publicly-listed corporations, the number of independent directors shall be proportionate to the percentage of shares held by the public. SECTION 7. Ideal Tenure . An independent director shall ideally serve for five (5) consecutive years. After completion of five (5) consecutive years, the covered entity shall ideally consider him ineligible for re-election, which ineligibility may be lifted after the lapse of a "cooling period" of two (2) years: Provided, that during such period, he has not engaged in any activity that, under existing rules, disqualifies a person from being elected as independent director in the same entity. The former independent director who has undergone the aforementioned cooling period may be re-elected to another term of five (5) years. After serving for a cumulative period of ten (10) years, an independent director is ideally perpetually barred from being elected in the same covered entity. SECTION 8. Ideal Remuneration . A fixed amount of remuneration shall ideally be given to independent directors at the level sufficient to attract and retain the quality of directors to run the company successfully. Entitlement to such fixed amount shall ideally be based on the results of an independent ratings mechanism which shall be established for purposes of evaluating the performance of independent directors. Stock options and performance benefits of any kind shall ideally not be included in their remuneration package. SECTION 9. Separability Clause . If any part of this Department Order is declared by the courts as unconstitutional or contrary to existing laws, the other parts shall remain in full force and effect. SECTION 10. Effectivity . This Order shall take effect immediately and all concerned shall be guided accordingly. (SGD.) CESAR V. PURISIMA Secretary Department of Finance