do2015-54 (1)

8/19/2019 DO2015-54 (1)

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Repu blic of the PhilippinesDEPARTMENT OF FINANCE

Ito\ us lioulknaid Curia Pah l ) )camp°, Si StreetM 11 , u u ld 1 0 1 1

DEPARTMENT ORDER NO. 54 201515 April 2015

SUBJECT : DOPTION OF GUIDELINES PRESCRIBING THE FIT ANDPROPER RULE FOR DIRECTORS OF INSURANCE COMPANIESAND PUBLIC COMPANIES

WHEREAS the Insurance Commission ( IC ) is authorized to issue rulings.instructions, circulars, orders and decisions to ensure the efficient regulation of theinsurance industry in accordance with global best practices and to protect the insuringpublic;

WHEREAS the IC is attached to the Department of Finance ( DOF ) forpurposes of policy and program coordination, in accordance with the AdministrativeCode of 1987;

WHEREAS the Securities and Exchange Commission ( SEC ) is vested withjurisdiction and supervision over all corporations who are the grantees of primaryfranchises and/or licenses or permits issued by the Government and is mandated tofoster good governance and enhance investor protection;

WHEREAS the administrative supervision over the SEC was given to the DOF.pursuant to Executive Order ( EC ) No. 37, s.2011, primarily in view of the need toensure 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 anddevelopment;

WHEREAS it is desirable to adopt a system for recognition of exemplary publiccompanies and insurance companies ( covered entities ) employing the higheststandards in corporate governance, with particular emphasis on ensuring that thedirectors of said covered entities are fit and proper to hold such position, in order toencourage members of the private sector to aspire for said highest standards;

NOW THEREFORE in consideration of the foregoing premises, the followinginstructions are hereby issued:

Section 1. Ranking System. IC and SEC shall promulgate guidelines and shallimplement a system for ranking insurance companies and public companies,

RE: Adoption of Guidelines Prescribing the Fit and Proper Rule forDirectors of Insurance Companies and Public Companies

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respectively, in terms of company practices employed in ensuring that directors are fitand proper to hold such position. These guidelines shall include criteria on integrity,experience, education, training and competence, and shall be consistent with thestandards herein set forth.

The implementation of the ranking system and the standards set forth in thisDepartment Order shall be without prejudice to, and shall be consistent with, allapplicable laws and existing rules and regulations of the IC and the SEC.

Section 2. Annual Ranking and Recognition. IC and SEC shall, on an annualbasis, rank covered entities in accordance with the ranking system respectivelypromulgated pursuant to Section 1 hereof. The annual ranking generated by the IC andSEC shall be used as basis for recognizing insurance companies and public companiesemploying the highest standards in ensuring that their directors are fit and proper tohold 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 businessin the Philippines, excepting mutual benefit associations. For purposes of thisDepartment Order, the term shall also include professional reinsurers, or entities thattransact solely and exclusively reinsurance business in the Philippines.

The term public company shall refer to a corporation duly registered with theSEC having the following characteristics:

a. Has a class of equity securities listed on an Exchange; orb. 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 whichare holding at least one hundred (100) shares of a class of thecorporation's equity securities.

Section 4. Ideal Minimum Qualifications of a Director. A director shall ideally havethe 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 inbusiness;

c. Has attended a special seminar on corporate governance for board ofdirectors 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 mentalfitness, diligence, and knowledge/experience.

RE: Adoption of Guidelines Prescribing the Fit and Proper Rule for

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Section 5. Ideal Qualifications of an Independent Director. An independentdirector shall refer to a person who, ideally:

a. Is not more than eighty (80) years old, unless otherwise found fit tocontinue serving as such by SEC or IC;

b. Is not or has not been a member of the executive committee of the boardof directors, or an officer or employee, of the covered entity, itssubsidiaries, affiliates or related companies during the three (3) yearsimmediately preceding the date of his election;

c. Is not a director, officer, or employee of the related companies of thecovered entity's majority shareholders;

d. Is not a substantial shareholder , i.e., does not own/hold shares of stocksufficient to elect one (1) seat in the board of directors of either thecovered entity, its subsidiaries, affiliates, or any related companies of itsmajority 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 ofthe covered entity or any of its related companies;

f. Is not acting as a nominee or representative of any director or substantialshareholder of the covered entity or any of its related companies;

g. Is not retained, within the three (3) years immediately preceding the dateof his election, either in his personal capacity or through a firm, as aprofessional adviser, consultant, agent or counsel of the covered entity.any of its related companies or substantial shareholders; is otherwiseindependent of management and free from any business or otherrelationship within the three (3) years immediately preceding the date ofhis election ; and

h. Does not engage or has not engaged, whether by himself or with otherpersons or through a firm of which he is a partner, director or substantialshareholder, in any transaction with the covered entity or any of its relatedcompanies or substantial shareholders, other than such transactions thatare conducted at arm's length and could not materially interfere with orinfluence the exercise of his judgment.

Section 6. Ideal Minimum Number of Independent Directors. At least twentypercent (20%) but not less than two (2) members of the board of directors shall beindependent directors: Provided, That any fractional result from applying the requiredminimum proportion, i.e., 20%, shall be rounded up to the nearest whole number.

For publicly-listed corporations, the number of independent directors shall beproportionate 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 entityshall ideally consider him ineligible for re-election,. which ineligibility may be lifted afterthe lapse of a cooling period of two (2) years: Provided, that during such period, he


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has not engaged in any activity that, under existing rules, disqualifies a person frombeing elected as independent director in the same entity. The former independentdirector who has undergone the aforementioned cooling period may be re-elected toanother term of five (5) years. After serving for a cumulative period of ten (10) years, anindependent director is ideally perpetually barred from being elected in the samecovered entity.

Section 8. Ideal Remuneration. A fixed amount of remuneration shall ideally begiven to independent directors at the level sufficient to attract and retain the quality ofdirectors to run the company successfully. Entitlement to such fixed amount shall ideallybe based on the results of an independent ratings mechanism which shall beestablished for purposes of evaluating the performance of independent directors. Stockoptions and performance benefits of any kind shall ideally not be included in theirremuneration package.

Section 9. eparability Clause. If any part of this Department Order isdeclared by the courts as unconstitutional or contrary to existing laws, the other partsshall remain in full force and effect.

Section 10. Effectivity —This Order shall take effect immediately and allconcerned shall be guided accordingly.

CES R IMASecretary

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