Covered entities and independent director seats
- The rules apply to insurance companies, insurance brokers, mutual benefit associations, pre-need companies, and health maintenance organizations.
- These covered entities must have at least two (2) independent directors or twenty percent (20%) of the members of the board, whichever is higher.
- Any fractional result from the required minimum proportion must be rounded off to the nearest whole number.
- If a covered entity fails to comply with the required independent director seat number, it must submit a formal written justification for non-compliance to the Insurance Commission for consideration and/or approval.
Definition of an independent director
- An independent director is a person other than an officer or employee of the corporation, its parent or subsidiaries, or any other individual having any relationship with the corporation that could interfere with independent judgment.
- Apart from the director’s fees and shareholdings, the person must be independent of management and free from any business or other relationship that could materially interfere with independent judgment.
- An independent director is one who meets the following conditions:
- The person is not or was not a regular director, officer, or employee of the covered entity, its subsidiaries, affiliates, or related companies during the past three (3) years counted from the date of election/appointment.
- The person is not or was not a regular director, officer, or employee of the covered entity as substantial stockholders and their related companies during the past three (3) years counted from the date of election/appointment.
- The person is not an owner of more than two percent (2%) of the outstanding shares or a stockholder with shares sufficient to elect one (1) seat in the board of directors of the covered entity, or any related companies, or majority corporate shareholders.
- The person is not a relative by affinity or consanguinity within the fourth (4th) degree of a director, officer, or stockholder holding shares sufficient to elect one (1) seat in the covered entity or any related companies, or of any substantial stockholders.
- The person is not acting as a nominee or representative of any director or substantial shareholder of the covered entity, any related company, or any substantial shareholder.
- The person is not or was not retained as a professional adviser, auditor, consultant, agent, or counsel of the covered entity, any related companies, or any substantial shareholders—either personally or through the person’s firm—during the past three (3) years counted from the date of election/appointment.
- The person is not a securities broker-dealer of listed companies and registered issuers of securities; a “securities broker-dealer” refers to any person holding any office of trust and responsibility in a broker-dealer firm, including (among others) a director, officer, principal stockholder, nominee of the firm to the Exchange, an associated person or salesman, and an authorized clerk of the broker or dealer.
- The person is independent of management and free from any business or other relationship, and has not engaged and does not engage in any transaction with the covered entity, its related companies, or substantial shareholders—whether by himself or with other persons or through a firm where the person is a partner or a company where the person is a director or substantial shareholder—other than transactions conducted at arm’s length that could not materially interfere with or influence independent judgment.
- The person was not appointed in the covered entity, its subsidiaries, affiliates, or related companies as Chairman Emeritus, Ex-Officio, Regular Directors, Officers, or Members of any Advisory Board, or otherwise appointed in a capacity to assist the board in performing its duties and responsibilities during the past three (3) years counted from the date of election/appointment.
- The person is not affiliated with any non-profit organization that receives significant funding from the covered entity, any related companies, or substantial shareholders.
- The person is not employed as an executive officer of another company where executives of the covered entity serve as regular directors.
Related company definition used for independence
- A “related company” includes:
- (a) the covered entity’s holding/parent company;
- (b) its subsidiary or affiliate;
- (c) subsidiaries of its holding/parent company; or
- (d) a corporation where a covered entity or its majority stockholder own such number of shares that allow/enable the person or group to elect at least one (1) member of the board of directors, or a partnership where such majority stockholder is a partner.
Minimum qualifications for independent directors
- An independent director must be either:
- (a) at least a college graduate, or
- (b) engaged or exposed to the corporation’s business for at least five (5) years.
- An independent director must possess proven integrity, probity and independence.
Term limits and reckoning rules
- An independent director may serve for a maximum cumulative term of nine (9) years.
- For insurance companies, the term limit reckoning starts from 02 January 2015.
- For pre-need companies and health maintenance organizations, the term limit reckoning starts from 21 September 2016.
- For other covered entities, all previous terms served by existing independent directors prior to the circular’s effectivity are excluded from the application of the term limit.
- An independent director who serves the maximum period is perpetually barred from re-election in the same covered entity as an independent director.
- The director who reaches the maximum period may continue in the same covered entity as a non-independent director.
- As an exception, if the covered entity desires to continue the services of an independent director who has already served the maximum term limit:
- the covered entity must submit a formal written justification to the Insurance Commission, and
- the covered entity must also obtain the majority of the shareholders’ approval during its annual meeting.
Penalties and effects on authority renewal
- If a covered entity fails to comply with the rules, the Insurance Commission may impose a penalty of PHP 200,000.00 per calendar year of non-compliance.
- Failure to comply with the minimum number of qualified independent directors, or failure to pay the penalty imposed for violating the circular, must be taken into account in the renewal of the Certificate of Authority.