8.4 Board Committees and Special Responsibilities

8.4 Board Committees and Special Responsibilities

A full board of directors cannot efficiently examine every complex technical matter, audit finding, risk exposure, and related party transaction during routine board meetings. To ensure rigorous scrutiny and specialized oversight, the Code of Corporate Governance for Publicly-Listed Companies (SEC MC No. 19, Series of 2016) directs the board of a listed company to establish specialized Board Committees.

Board committees operate under delegated authority to examine specific functional areas in depth and report their findings and recommendations back to the full board for formal action.

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Mandatory and Specialized Committees for Listed Companies

The Code of Corporate Governance outlines four vital standing committees designed to safeguard corporate integrity, financial veracity, and minority shareholder rights:

Core Board Committees for Publicly-Listed Companies
  ├── 1. Audit Committee (All Non-Executive Directors; Majority & Chair must be Independent)
  ├── 2. Corporate Governance Committee (Composed ENTIRELY of Independent Directors)
  ├── 3. Board Risk Oversight Committee / BROC (Majority & Chair must be Independent)
  └── 4. Related Party Transaction / RPT Committee (Majority & Chair must be Independent)

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1. The Audit Committee (Recommendation 3.2)

The Audit Committee is the most critical governance committee in a publicly-listed company. It serves as the primary guardian of financial integrity and internal accounting controls.

Composition Rules

• Exclusively Non-Executive Directors: Under Recommendation 3.2, the Audit Committee must consist entirely of non-executive directors.
• Majority Independent Directors: The majority of the committee members must be independent directors.
• Independent Chairperson: The Chairperson of the Audit Committee must be an independent director.
• The Board Chair Prohibition: The Chairperson of the Board of Directors cannot serve as the Chairperson of the Audit Committee or any other committee, preventing concentration of power.

Professional Qualifications

• All members of the Audit Committee must have relevant background, knowledge, skills, and experience in areas of accounting, auditing, or finance.
• The Chairperson of the Audit Committee must possess relevant accounting or related financial management expertise (such as being a Certified Public Accountant, Chief Financial Officer, or professional auditor).

Core Responsibilities

1. Financial Reporting Integrity: Reviews quarterly and annual financial statements prior to submission to the full board and filing with the SEC and PSE, focusing on changes in accounting policies, major judgmental areas, and compliance with Philippine Financial Reporting Standards (PFRS).
2. External Auditor Oversight: Recommends the appointment, reappointment, removal, and compensation of the independent external auditor. Evaluates the external auditor's qualifications, performance, and independence, and pre-approves any non-audit services.
3. Internal Audit Function: Directs the selection, appointment, and performance assessment of the Chief Audit Executive (CAE) and approves the annual internal audit plan.
4. Internal Controls Assessment: Evaluates the adequacy and effectiveness of the company's internal control system and whistleblowing mechanisms.

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2. The Corporate Governance Committee (Recommendation 3.3)

The Corporate Governance Committee unifies and elevates nomination, remuneration, and governance oversight into a single high-level body.

Composition Rules

• Exclusively Independent Directors: Under Recommendation 3.3, the Corporate Governance Committee must be composed entirely of independent directors.
• Independent Chair: Chaired by an independent director.

Core Responsibilities

1. Nomination and Succession: Oversees the nomination process for board directorships, ensuring candidate qualifications conform to RCC Section 22 and SRC Section 38, while actively implementing the Board Diversity Policy.
2. Remuneration and Executive Compensation: Formulates and reviews policies on executive remuneration, ensuring director and officer compensation aligns with long-term corporate performance without encouraging excessive short-term risk-taking.
3. Governance Guidelines Review: Periodically reviews corporate governance policies, bylaws, board charters, and ethical codes to ensure compliance with SEC and PSE regulations.
4. Board Evaluation: Establishes performance evaluation criteria and processes for assessing the performance of the full Board, individual directors, and the CEO.

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3. The Board Risk Oversight Committee (BROC) (Recommendation 3.4)

For companies with complex risk exposures, financial holding structures, or capital market trading desks, the board should establish a dedicated Board Risk Oversight Committee (BROC).

Composition Rules

• Majority Independent Directors: The BROC must be composed of a majority of independent directors.
• Independent Chair: The Chairperson must be an independent director.
• Chair Prohibition: The Chair of the BROC should not be the Chairperson of the Board or the Chairperson of any other board committee.
• Expertise Requirement: At least one member must have technical experience and competence in Enterprise Risk Management (ERM).

Core Responsibilities

1. Enterprise Risk Management (ERM) Framework: Formulates and oversees the enterprise-wide risk management framework, identifying critical exposures across market risk, credit risk, liquidity risk, operational risk, and legal/regulatory risk.
2. Risk Appetite and Tolerance: Establishes risk tolerance limits and ensures corporate management operates strictly within board-approved risk thresholds.
3. Crisis and Business Continuity: Reviews crisis management, disaster recovery, and cybersecurity resilience frameworks.

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4. The Related Party Transaction (RPT) Committee (Recommendation 3.5)

Related party transactions represent a primary channel through which controlling shareholders can expropriate corporate wealth to the detriment of minority investors. To counter abusive transfer pricing and self-dealing, listed companies must establish a dedicated Related Party Transaction (RPT) Committee.

Composition Rules

• Majority Independent Directors: Must consist of a majority of independent directors.
• Independent Chair: Chaired by an independent director.

Material Related Party Transactions (SEC MC No. 10, Series of 2019)

Under SEC Memorandum Circular No. 10, Series of 2019 (Rules on Material Related Party Transactions for Publicly-Listed Companies):

$\text{Material RPT Threshold} = \text{Transaction reaching or exceeding } 10\% \text{ of the company's total assets}$

• Cumulative Rule: Materiality covers individual transactions or aggregate transactions with the same related party within a twelve-month period that meet or exceed the 10% total asset threshold based on the latest audited financial statements.
• Board Approval Requirement: Material RPTs must be evaluated by the RPT Committee and approved by at least two-thirds (2/3) of the board of directors, with at least a majority of independent directors voting in favor.
• Independent External Review: The RPT Committee must require an independent financial evaluation (such as an external valuation report or fairness opinion) from an accredited independent appraiser for material transactions.

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Committee Charters

Under Recommendation 3.6 of the CG Code for PLCs, each board committee must adopt a comprehensive written Committee Charter:

• Mandatory Contents: The charter must explicitly state the committee's purpose, membership qualifications, structure, authorities, reporting duties, and processes for decision-making.
• Public Transparency: All committee charters must be publicly published on the company's official corporate website.
• Annual Review: Committee charters must be reviewed and re-evaluated annually by the committee and re-approved by the full board.

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Board, Committee, and CEO Performance Evaluation

To ensure board members maintain accountability, Recommendation 6.1 and 6.2 of the CG Code for PLCs mandate regular performance assessments:

Board Evaluation Architecture
  ├── Annual Internal Assessment: Board self-evaluation, committee assessments & CEO review
  └── Triennial External Facilitator: Conducted by an independent external consultant every 3 years

1. Annual Internal Assessment

The board must conduct an annual self-assessment evaluating:

• The collective performance of the Board of Directors as a whole;
• The effectiveness of each Board Committee in executing its charter;
• The contribution and meeting attendance of individual directors; and
• The performance of the Chief Executive Officer against annual strategic key performance indicators (KPIs).

2. Triennial External Facilitation (The 3-Year Rule)

Under Recommendation 6.2 of the CG Code for PLCs:

The board should undergo an independent performance evaluation conducted by an independent external facilitator at least once every three (3) years.

Engaging an independent third-party facilitator (such as the Institute of Corporate Directors or a specialized governance advisory firm) prevents internal complacency, provides an objective assessment of board dynamics, and benchmarks domestic board performance against international standards.

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Summary Comparison Table: Board Committees Architecture

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Practical Exam Traps & Regulatory Pitfalls

• Trap 1: The Board Chair as Audit Committee Chair. Exam questions frequently describe a highly qualified Board Chairperson who also chairs the Audit Committee. This is a direct regulatory violation under Recommendation 3.2. The Chairperson of the Board cannot chair the Audit Committee.
• Trap 2: Executive Directors on the Audit Committee. An exam item may include the Chief Executive Officer or Chief Financial Officer as voting members of the Audit Committee. The Audit Committee must consist strictly and exclusively of Non-Executive Directors.
• Trap 3: Corporate Governance Committee Composition. Unlike the BROC and RPT committees (which require a majority of independent directors), the Corporate Governance Committee under Recommendation 3.3 must be composed entirely (100%) of independent directors.
• Trap 4: Material RPT Threshold Percentage. Remember the quantitative threshold for material related party transactions under SEC MC No. 10, Series of 2019: ten percent (10%) or more of total assets, requiring evaluation by the RPT Committee and approval by 2/3 of the board with a majority of independent directors.
• Trap 5: External Facilitator Frequency. The external evaluation of the board does not take place every year (which is done internally) or every five years. The Code explicitly recommends an independent external facilitator at least once every three (3) years.