Republic of the Philippines

Department of Finance
INSURANCE COMMISSION
1071 United Nations Avenue : :
Manila Se
Certificate Number: AJA18-0159

Circular Letter (CL) No.: 2020-71

Date: 13 June 2020
Supersedes: CL No. 31-2005
dated 26 September
2005

CIRCULAR LETTER

TO : ALL INSURANCE/REINSURANCE COMPANIES,

INSURANCE AND REINSURANCE BROKERS, MUTUAL
BENEFIT ASSOCIATIONS, PRE-NEED COMPANIES AND
HEALTH MAINTENANCE ORGANIZATIONS

SUBJECT : REVISED CODE OF CORPORATE GOVERNANCE FOR

INSURANCE COMMISSION REGULATED COMPANIES

WHEREAS, on 10 April 2018, this Commission issued CL No. 2018-26 creating

a Technical Working Group (TWG) tasked to update the Code of Corporate
Governance and Corporate Governance Scorecard for Insurance Commission
Regulated Entities.

WHEREAS, pursuant to the above CL, several TWG meetings were held to
discuss revisions to existing CL on Code of Corporate Governance Principles and
Leading Practices’.

WHEREAS, the Code of Corporate Governance for Publicly Listed Companies?

issued by the Securities and Exchange Commission (SEC) as well as
international best practices and standards on Corporate Governance were used
as key reference materials in the drafting the said Revised Code of Corporate
Governance for Insurance Commission Regulated Companies (ICRCs).

NOW THEREFORE, pursuant to the power vested to the undersigned Insurance

Commissioner under Section 437 of the Insurance Code of the Philippines, as
amended by Republic Act (R.A.) No. 10607, Section 6 of R.A. No. 9829,
otherwise known as the Pre-Need Code of the Philippines, and Section 4 of
Executive Order (E.O.) No. 192, Series of 2015, the attached Revised Code of

1 CL No. 31-2005 dated 26 September 2005

2 SEC Memorandum Circular No. 19, Series of 2016

Head Office, P.O. Box 3589 Manila | Facsimile No. (02) 522-1434 | Telephone Nos. (02) 523-8461 to 70 | www.insurance.gov.ph
Corporate Governance for Insurance Commission Regulated Companies
(ICRCs) is hereby promulgated for the adoption and compliance by all ICRCs°.

This Circular Letter shall take effect immediately.

DENNI . FUNA
Insu e Commissioner

Sinclude insurance/reinsurance companies, insurance and reinsurance brokerage companies,

mutual benefit associations, pre-need companies and health maintenance organization
companies duly authorized by the Insurance Commission to conduct business.
 CODE OF CORPORATE GOVERNANCE
FOR
INSURANCE COMMISSION REGULATED COMPANIES

|. INTRODUCTION

1. The Code of Corporate Governance is intended to raise the corporate

governance standards of Insurance Commission Regulated Companies (ICRCs)
to a level at par with its regional and global counterparts. The latest G20/
Organisation for Economic Co-operation and Development Principles of
Corporate Governance, the Association of Southeast Asian Nations Corporate
Governance Scorecard and the Code of Corporate Governance for Publicly
Listed Companies’ issued by the Securities and Exchange Commission (SEC)
were used as key reference materials in the drafting of this Code.

2. The Code will adopt the “comply or explain” approach. If a company cannot
comply with the Code, it must identify any areas of non- compliance, explain the
reasons, and provide action plan to address non-compliant areas in the annual
corporate governance report.

3. The Code is arranged as follows: Principles, Recommendations and

Explanations.

4. The Principles can be considered as high-level statements of corporate

governance good practice, and are applicable to all companies.

5. The Recommendations are objective criteria that are intended to identify the
specific features of corporate governance good practice that are recommended
for companies operating according to the Code. Alternatives to a
Recommendation may be justified in particular circumstances if good governance
can be achieved by other means. When a Recommendation is not complied with,
the company must disclose and describe this non-compliance, and explain how
the overall Principle is being achieved. The alternative should be consistent with
the overall Principle. The annual corporate governance report shall contain the
descriptions and explanations written in plain language and in a clear, complete,
objective and precise manner, so that shareholders and other stakeholders can
assess the company's governance framework.

6. The Explanations strive to provide companies with additional information on the

recommended best practice.

1 SEC Memorandum Circular No. 19, Series of 2016

1
7. The Code of Corporate Governance for Insurance Commission Regulated
Companies is intended to cover all corporations in the Philippines under
supervision of the Insurance Commission (IC).

DEFINITION OF TERMS - For purposes of this Code, the following terms are
defined as follows:

1. Corporate Governance - the system of stewardship and control to guide

organizations in fulfilling their long-term economic, moral, legal and social
obligations towards their stakeholders.

Corporate governance is a system of direction, feedback and control using

regulations, performance standards and ethical guidelines to hold the Board and
senior management accountable for ensuring ethical behavior — reconciling long-
term customer satisfaction with shareholder value — to the benefit of all
stakeholders and society.

Its purpose is to maximize the organization’s long-term success, creating

sustainable value for its shareholders, stakeholders and the nation.

2. Board of Directors — the governing body elected by the stockholders that

exercises the corporate powers of a corporation, conducts all its business and
controls its properties. The term shall also include Board of Trustees.

3. Director- as used in this Code shall also refers to a Trustee.

4. Management - a group of executives given the authority by the Board of

Directors to implement the policies it has laid down in the conduct of the business
of the corporation.

5. Independent director — a person who is independent of management and the

controlling shareholder, and is free from any business or other relationship which
could, or could reasonably be perceived to, materially interfere with his exercise
of independent judgment in carrying out his responsibilities as a director.

6. Executive director — a director who has executive responsibility of day-to-day

operations of a part or the whole of the organization.

7. Non-executive director — a director who has no executive responsibility and

does not perform any work related to the operations of the corporation.
8. Conglomerate — a group of corporations that has diversified business activities
in varied industries, whereby the operations of such businesses are controlled
and managed by a parent corporate entity.

9. Internal control — a process designed and effected by the board of directors,

senior management, and all levels of personnel to provide reasonable assurance
on the achievement of objectives through efficient and effective operations;
reliable, complete and timely financial and management information; and
compliance with applicable laws, regulations, and the organization's policies and
procedures.

10.Enterprise Risk Management - a process, effected by an entity's Board of

Directors, management and other personnel, applied in strategy setting and
across the enterprise that is designed to identify potential events that may affect
the entity, manage risks to be within its risk appetite, and provide reasonable
assurance regarding the achievement of entity objectives.

1 . Entity - shall also refer to a company.

12.Related Party — shall cover the company’s subsidiaries, as well as affiliates and
any party (including their subsidiaries, affiliates and special purpose entities), that
the company exerts direct or indirect control over or that exerts direct or indirect
control over the company; the company’s directors; officers; shareholders and
related interests (DOSRI), and their close family members, as well as
corresponding persons in affiliated companies. This shall also include such other
person or juridical entity whose interest may pose a potential conflict with the
interest of the company.

13.Related Party Transactions — a transfer of resources, services or obligations

between a reporting entity and a related party, regardless of whether a price is
charged. It should be interpreted broadly to include not only transactions that are
entered into with related parties, but also outstanding transactions that are
entered into with an unrelated party that subsequently becomes a related party.

14.Shareholder- refers to an owner of a share of stock in a company. For the

purpose of this Code, the term shareholder shall also refer to a member of a non-
stock non-profit entity.

15.Stakeholders — any individual, organization or society at large who can either

affect and/or be affected by the company’s strategies, policies, business
decisions and operations, in general. This includes, among others, customers,
creditors, employees, suppliers, investors, as well as the government and
community in which it operates.
ll. PRINCIPLES AND RECOMMENDATIONS

A. THE BOARD’S GOVERNANCE RESPONSIBILITIES

Principle 1. Establishing A Competent Board

The company should be headed by a competent, working Board to foster the

long-term success and sustainability of the corporation in a manner consistent
with its corporate objectives and the long- term best interests of its
shareholders and other stakeholders.

Recommendation 1.1

The Board should be composed of directors with a collective working

knowledge, experience or expertise that is relevant to the company’s
industry/sector. The Board should always ensure that it has an appropriate
mix of competence and expertise and that its members remain qualified
for their positions individually and collectively, to enable it to fulfill its roles
and responsibilities and respond to the needs of the organization based
on the evolving business environment and strategic direction.

Explanation

Competence can be determined from the collective knowledge,

experience and expertise of each director that is relevant to the
industry/sector that the company is in. A Board with the necessary
knowledge, experience and expertise can properly perform its task of
overseeing management and governance of the corporation, formulating
the corporation’s vision, mission, strategic objectives, policies and
procedures that would guide its activities, effectively monitoring
management's performance and supervising the proper implementation of
the same. In this regard, the Board sets qualification standards for its
members to facilitate the selection of potential nominees for board seats,
and to serve as a benchmark for the evaluation of its performance.

Recommendation 1.2

The Board should be composed of a majority of non-executive directors

who possess the necessary qualifications to effectively participate and
help secure objective, independent judgment on company affairs and to
substantiate proper checks and balances.

Explanation

The right combination of non-executive directors (NEDs), which include

independent directors (IDs) and executive directors (EDs), ensures that no
director or small group of directors can dominate the decision-making

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 process. Further, a board composed of a majority of NEDs assures
protection of the company's interest over the interest of the individual
shareholders. The company determines the qualifications of the NEDs that
enable them to effectively participate in the deliberations of the Board and
carry out their roles and responsibilities.

Recommendation 1.3

The Company should provide in its Board Charter or Manual on Corporate

Governance a policy on the training of directors, including an orientation
program for first-time directors and relevant annual continuing training for
all directors.

Explanation

The orientation program for first-time directors and relevant annual

continuing training for all directors aim to promote effective board
performance and continuing qualification of the directors in carrying-out
their duties and responsibilities. It is suggested that the orientation
program for first-time directors, in any company, be for at least eight
hours, while the annual continuing training be for at least four hours.

All directors should be properly oriented upon joining the board. This
ensures that new members are appropriately apprised of their duties and
responsibilities, before beginning their directorships. The orientation
program covers IC-mandated topics on corporate governance and an
introduction to the company’s business, Articles of Incorporation, and
Code of Conduct. It should be able to meet the specific needs of the
company and the individual directors and aid any new director in
effectively performing his or her functions.

The annual continuing training program, on the other hand, makes certain
that the directors are continuously informed of the developments in the
business and regulatory environments, including emerging risks relevant
to the company. It involves courses on corporate governance matters
relevant to the company, including audit, internal controls, risk
management, sustainability and strategy. It is encouraged that companies
assess their own training and development needs in determining the
coverage of their continuing training program.

IC-mandated topics on corporate governance include the following:

Code of Corporate Governance for IC Regulated Companies;

ACGS and IC Annual Corporate Governance Report;
oaoo®

Board Responsibilities;
legal activities of corporations/ directors/officers;
Protection of minority shareholders;

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 Liabilities of directors;
Confidentialities;
re Conflict of interest;
RPT;
Enterprise Risk management; and
am

Case studies and Financial Reporting and Audit.

Recommendation 1.4

The Board should have a policy on board diversity.

Explanation

Having a board diversity policy is a move to avoid groupthink and ensure

that optimal decision-making is achieved. A board diversity policy is not
limited to gender diversity. It also includes diversity in age, ethnicity,
culture, skills, competence and knowledge. On gender diversity policy, a
good example is to increase the number of female directors, including
female independent directors.

Recommendation 1.5

The Board should ensure that it is assisted in its duties by a Corporate

Secretary, who should be a separate individual from the Compliance
Officer. The Corporate Secretary should not be a member of the Board of
Directors and should annually attend a training on corporate governance.

Explanation

The Corporate Secretary is primarily responsible to the corporation and its

shareholders, and not to the Chairman or President of the Company and
has, among others, the following duties and responsibilities:

a. Safe keeps and preserves the integrity of the minutes of the meetings
of the Board and its committees, as well as other official records of the
corporation;
Keeps abreast on relevant laws, regulations, all governance issuances,
relevant industry developments and operations of the corporation, and
advises the Board and the Chairman on all relevant issues as they
arise;
Works fairly and objectively with the Board, Management and
stockholders and contributes to the flow of information between the
Board and management, the Board and its committees, and the Board
and its stakeholders, including shareholders;
Advises on the establishment of board committees and their terms of
reference;
Informs members of the Board, in accordance with the by-laws, of the
 agenda of their meetings at least five working days in advance, and
ensures that the members have before them accurate information that
will enable them to arrive at intelligent decisions on matters that require
their approval;
f. Attends all Board meetings, except when justifiable causes, such as
illness, death in the immediate family and serious accidents, prevent
him/her from doing so;
g. Performs required administrative functions;
h. Oversees the drafting of the by-laws and ensures that they conform
with regulatory requirements; and
i. Performs such other duties and responsibilities as may be provided by
the IC.

Recommendation 1.6

The Board should ensure that it is assisted in its duties by a Compliance

Officer, who should have a rank of Vice President or an equivalent
position with adequate stature and authority in the corporation. The
Compliance Officer should not be a member of the Board of Directors and
should annually attend a training on corporate governance.

Explanation

The Compliance Officer is a member of the company’s management team

in charge of the compliance function. Similar to the Corporate Secretary,
he/she is primarily liable to the corporation and its shareholders, and not
to the Chairman or President of the company. He/she has, among others,
the following duties and responsibilities:

a. Ensures proper onboarding of new directors (i.e., orientation on the

company’s business, charter, articles of incorporation and by-laws, among
others);

b. Monitors, reviews, evaluates and ensures the compliance by the

corporation, its officers and directors with the relevant laws, this Code,
rules and regulations and all governance issuances of regulatory
agencies;

c. Reports the matter to the Board if violations are found and recommends
the imposition of appropriate disciplinary action;

d. Ensures the integrity and accuracy of all documentary submissions to

regulators;

e. Appears before the IC when summoned in relation to compliance with

this Code;
 f. Collaborates with other departments to properly address compliance
issues, which may be subject to investigation;

g. Identifies possible areas of compliance issues and works towards the

resolution of the same;

h. Ensures the attendance of board members and key officers to relevant

trainings; and

i. Performs such other duties and responsibilities as may be provided by

the IC.

Principle 2. Establishing Clear Roles And Responsibilities Of The Board

The fiduciary roles, responsibilities and accountabilities of the Board as

provided under the law, the company’s articles and by-laws, and other legal
pronouncements and guidelines should be clearly made known to all directors
as well as to shareholders and other stakeholders.

Recommendation 2.1

The Board members should act on a fully informed basis, in good faith,
with due diligence and care, and in the best interest of the company and
all shareholders.

Explanation

There are two key elements of the fiduciary duty of board members: the
duty of care and the duty of loyalty. The duty of care requires board
members to act on a fully informed basis, in good faith, with due diligence
and care. The duty of loyalty is also of central importance; the board
member should act in the interest of the company and all its shareholders,
and not those of the controlling company of the group or any other
stakeholder.

Recommendation 2.2

The Board should oversee the development of and approve the

company's business objectives and strategy, and monitor their
implementation, in order to sustain the company’s long-term viability and
strength.

Explanation

According to the OECD, the Board should review and guide corporate

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 strategy, major plans of action, risk management policies and procedures,
annual budgets and business plans; set performance objectives; monitor
implementation and corporate performance; and oversee major capital
expenditures, acquisitions and divestitures. Sound strategic policies and
objectives translate to the company’s proper identification and
prioritization of its goals and guidance on how best to achieve them. This
creates optimal value to the corporation.

Recommendation 2.3

The Board should be headed by a competent and qualified Chairperson.

Explanation

The roles and responsibilities of the Chairman include, among others, the
following:

a. Makes certain that the meeting agenda focuses on strategic matters,

including the overall risk appetite of the corporation, considering the
developments in the business and regulatory environments, key
governance concerns, and contentious issues that will significantly affect
operations;

b. Guarantees that the Board receives accurate, timely, relevant,

insightful, concise, and clear information to enable it to make sound
decisions;

c. Facilitates discussions on key issues by fostering an environment

conducive for constructive debate and leveraging on the skills and
expertise of individual directors;

d. Ensures that the Board sufficiently challenges and inquires on reports

submitted and representations made by Management;

e. Assures the availability of proper orientation for first-time directors and

continuing training opportunities for all directors; and

f. Makes sure that performance of the Board is evaluated at least once a

year and discussed/followed up on.

Recommendation 2.4

The Board should be responsible for ensuring and adopting an effective

succession planning program for directors, key officers and management
to ensure growth and a continued increase in the shareholders’ value.
This should include adopting a policy on the retirement age for directors

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 and key officers as part of management succession and to promote
dynamism in the company.

Explanation

The transfer of company leadership to highly competent and qualified

individuals is the goal of succession planning. It is the Board’s
responsibility to implement a process to appoint competent, professional,
honest and highly motivated management officers who can add value to
the company.

A good succession plan is linked to the documented roles and

responsibilities for each position, and should start in objectively identifying
the key knowledge, skills, and abilities required for the position. For any
potential candidate identified, a professional development plan is defined
to help the individuals prepare for the job (e.g., training to be taken and
cross experience to be achieved). The process is conducted in an
impartial manner and aligned with the strategic direction of the
organization.

Recommendation 2.5

The Board should formulate and adopt a policy specifying the relationship
between remuneration and performance of key officers and board
members which should be aligned with the long-term interests of the
company. Further, no director should participate in discussions or
deliberations involving his own remuneration.

Explanation

Companies are able to attract and retain the services of qualified and
competent individuals if the level of remuneration is sufficient, in line with
the business and risk strategy, objectives, values and incorporate
measures to prevent conflicts of interest. Remuneration policies promote a
sound risk culture in which risk-taking behavior is appropriate. They also
encourage employees to act in the long-term interest of the company as a
whole, rather than for themselves or their business lines only. Moreover, it
is good practice for the Board to formulate and adopt a policy specifying
the relationship between remuneration and performance, which includes
specific financial and non- financial metrics to measure performance and
set specific provisions for employees with significant influence on the
overall risk profile of the corporation.

Key considerations in determining proper compensation include the

following: (1) the level of remuneration is commensurate to the
responsibilities of the role; (2) no director should participate in deciding on

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 his remuneration; and (3) remuneration pay-out schedules should be
sensitive to risk outcomes over a multi-year horizon.

For employees in control functions (e.g., risk, compliance and internal

audit), their remuneration is determined independent of any business line
being overseen, and performance measures are based principally on the
achievement of their objectives so as not to compromise their
independence.

Recommendation 2.6

The Board should have and disclose in its Manual on Corporate

Governance a formal and transparent board nomination and election
policy that should include how it accepts nominations from minority
shareholders and reviews nominated candidates. The policy should also
include an assessment of the effectiveness of the Board’s processes and
procedures in the nomination, election, or replacement of a director. In
addition, its process of identifying the quality of directors should be aligned
with the strategic direction of the company.

Explanation

It is the Board’s responsibility to develop a policy on board nomination,

which is contained in the company’s Manual on Corporate Governance.
The policy should encourage shareholders’ participation by including
procedures on how the Board accepts nominations from minority
shareholders. The policy should also promote transparency of the Board's
nomination and election process.
The nomination and election process also includes the review and
evaluation of the qualifications of all persons nominated to the Board,
including whether candidates: (1) possess the knowledge, skills,
experience, and particularly in the case of non-executive directors,
independence of mind given their responsibilities to the Board and in light
of the entity's business and risk profile; (2) have a record of integrity and
good repute; (3) have sufficient time to carry out their responsibilities; and
(4) have the ability to promote a smooth interaction between board
members. A good practice is the use of professional search firms or
external sources when searching for candidates to the Board.
In addition, the process also includes monitoring the qualifications of the
directors. The qualifications and grounds for disqualification are contained
in the company’s Manual on Corporate Governance.

The following are the grounds for the disqualification of a director:

1. Permanently Disqualified

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 Persons who have been convicted by final judgment of the court for
offenses involving dishonesty or breach of trust such as estafa,
embezzlement, extortion, forgery, malversation, swindling and theft;
Persons who have been convicted by final judgment of the court for
violation of insurance laws;
Persons who have been judicially, declared insolvent, spendthrift or
unable to enter into a contract; or
Directors, officers or employees of closed insurance companies or
any insurance intermediaries who were responsible for such
institution's closure as determined by the insurance Commission.

2. Temporarily Disqualified

Persons who refuse to fully disclose the extent of their business

interests when required pursuant to a provision of law or of a
circular, memorandum or rule or regulation of the Insurance
Commission. This disqualification -shall be in effect as long as the
refusal persists;
Directors who have been absent or who have not participated for
whatever reasons in more than fifty percent (50%) of all meetings,
both regular and special of the Board of Directors during their
incumbency, or any twelve (12) month period during said
incumbency. This disqualification applies for purposes of the
succeeding elections;
Persons convicted for offenses involving dishonesty, breach of
contract or violation of insurance laws but whose conviction has not
yet become final and executory;
Directors and officers of closed insurance companies and
insurance intermediaries pending clearance from the Insurance
Commission;
Directors disqualified for failure to» observe/discharge their duties
and responsibilities prescribed under existing regulations. This
disqualification applies until the lapse of the specific period of
disqualification of the Insurance Commission;
Directors who failed to attend the special seminar on corporate
governance. This disqualification applies until the director
concerned had attended such seminar,
Persons dismissed/terminated from employment for cause. This
disqualification shall be in effect until they have cleared themselves
of involvement in the alleged irregularity;
Those under preventive suspension;
Persons with derogatory records with the NBI, court, police, Interpol
and insurance authorities of other countries (for foreign directors)
involving violation of any law, rule or regulation of the government
or any of its instrumentalities adversely affecting the integrity and/or
ability to discharge the duties of an insurance director. This

12
 disqualification applies until they have cleared themselves of
involvement in the alleged irregularity;
e Persons who are delinquent in the payment of their obligations as
defined hereunder:

a. Delinquency in the payment of obligations means that obligations of

a person with the insurance company or its related companies
where he/she is a director or officer; or at least two obligations with
other insurance companies, under different credit lines or loan
contracts;

b. Obligations shall include all borrowings from an_ insurance

company, or its related companies obtained by:

i. A director or officer for his own account or as the

representative or agent of others or where he/she acts as a
guarantor, endorsers, or surety for loans from such
institutions;
ii. The spouse or child under the parental authority of the
director or officer:
ii. Any person whose borrowings or loan proceeds were
credited to the amount of, or used for the benefit of a director
or officer;
iv. A partnership of which a director or officer, or his/her spouse
is the managing partner or a general partner owning a
controlling interest in the partnership; and
v. Acorporation, association or firm wholly owned or majority of
the capital is contributed by any or a group of persons
mentioned in the foregoing items 1, 2, and 4.

This disqualification should be in effect as long as the delinquency

persists.

Recommendation 2.7

The Board should have the overall responsibility in ensuring that there is a
group-wide policy and system governing related party transactions (RPTs)
and other unusual or infrequently occurring transactions, particularly those
which pass certain thresholds of materiality. The policy should include the
appropriate review and approval of material or significant RPTs, which
guarantee fairness and transparency of the transactions. The policy
should encompass all entities within the group, taking into account their
size, structure, risk profile and complexity of operations.

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Explanation

Ensuring the integrity of related party transactions is an important fiduciary

duty of the director. It is the Board’s role to initiate policies and measures
geared towards prevention of abuse and promotion of transparency, and
in compliance with applicable laws and regulations to protect the interest
of all shareholders. One such measure is the required ratification by
shareholders of material or significant RPTs approved by the Board, in
accordance with existing laws. Other measures include ensuring that
transactions occur at market prices, at arm’s-length basis and under
conditions that protect the rights of all shareholders.

The following are suggestions for the content of the RPT Policy:

Definition of related parties;

Coverage of RPT policy;
Guidelines in ensuring arm's length terms;
Identification and prevention or management of potential or actual
conflicts of interest which arise;
» Adoption of materiality thresholds and excluded transactions;
¢ Internal limits for individual and aggregate exposures;
« Whistle-blowing mechanisms, and
¢ Restitution of losses and other remedies for abusive RPT's

In addition, the company is given the discretion to set their materiality

threshold at a level where omission or misstatement of the transaction
could pose a significant risk to the company and influence its economic
decision. The IC may direct a company to reduce its materiality threshold
or amend excluded transactions if the IC deems that the threshold or
exclusion is inappropriate considering the company’s size, risk profile, and
risk management systems.

Depending on the materiality threshold, approval of management, the RPT

Committee, the Board or the shareholders may be required. In cases
where the shareholders’ approval is required, it is good practice for
interested shareholders to abstain and let the disinterested parties or
majority of the minority shareholders decide.

Recommendation 2.8

The Board should be primarily responsible for approving the selection and
assessing the performance of the Management led by the Chief Executive
Officer (CEO), and contro! functions led by their respective heads (Chief
Risk Officer, Chief Compliance Officer, and Chief Audit Executive).

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Explanation

It is the responsibility of the Board to appoint a competent management

team at all times, monitor and assess the performance of the management
team based on established performance standards that are consistent
with the company’s strategic objectives, and conduct a regular review of
the company’s policies with the management team. In the selection
process, fit and proper standards are to be applied on key personnel and
due consideration is given to integrity, technical expertise and experience
in the institution’s business, either current or planned.

Recommendation 2.9

The Board should establish an effective performance management

framework that will ensure that the Management, including the Chief
Executive Officer, and personnel's performance is at par with the
standards set by the Board and Senior Management.

Explanation

Results of performance evaluation should be linked to other human

resource activities such as training and development, remuneration, and
succession planning. These should likewise form part of the assessment
of the continuing fitness and propriety of management, including the Chief
Executive Officer, and personnel in carrying out their respective duties and
responsibilities.

Recommendation 2.10

The Board should oversee that an appropriate internal control system is in

place, including setting up a mechanism for monitoring and managing
potential conflicts of interest of Management, board members, and
shareholders. The Board should also approve the Internal Audit Charter.

Explanation

In the performance of the Board’s oversight responsibility, the minimum

internal control mechanisms may include overseeing the implementation
of the key control functions, such as risk management, compliance and
internal audit, and reviewing the corporation’s human resource policies,
conflict of interest situations, compensation program for employees and
management succession plan.

Recommendation 2.11

The Board should oversee that a sound enterprise risk management

15
 (ERM) framework is in place to effectively identify, monitor, assess and
manage key business risks. The risk management framework should
guide the Board in identifying units/business lines and enterprise-level risk
exposures, as well as the effectiveness of risk management strategies.

Explanation

Risk management policy is part and parcel of a corporation's corporate

strategy. The Board is responsible for defining the company’s level of risk
tolerance and providing oversight over its risk management policies and
procedures.

Recommendation 2.12

The Board should have a Board Charter that formalizes and clearly states
its roles, responsibilities and accountabilities in carrying out its fiduciary
duties. The Board Charter should serve as a guide to the directors in the
performance of their functions and should be publicly available and posted
on the company’s website.

Explanation

The Board Charter guides the directors on how to discharge their

functions. It provides the standards for evaluating the performance of the
Board. The Board Charter also contains the roles and responsibilities of
the Chairman.

Principle 3. Establishing Board Committees

Board committees should be set up to the extent possible to support the

effective performance of the Board’s functions, particularly with respect to
audit, risk management, related party transactions, and other key corporate
governance concerns, such as nomination and remuneration. The
composition, functions and responsibilities of all committees established
should be contained in a publicly available Committee Charter.

Recommendation 3.1

The Board should establish board committees that focus on specific board
functions to aid in the optimal performance of its roles and responsibilities.

Explanation

Board committees such as the Audit Committee, Corporate Governance

Committee, Board Risk Oversight Committee and Related Party

16
 Transaction Committee are necessary to support the Board in the effective
performance of its functions. The establishment of the same, or any other
committees that the company deems necessary, allows for specialization
in issues and leads to a better management of the Board's workload. The
type of board committees to be established by a company would depend
on its size, risk profile and complexity of operations. However, if the
committees are not established, the functions of these committees may be
carried out by the whole board or by any other committee.

Recommendation 3.2

The Board should establish an Audit Committee to enhance its oversight

capability over the company’s financial reporting, internal control system,
internal and external audit processes, and compliance with applicable
laws and regulations. The committee should be composed of at least three
appropriately qualified non-executive directors, the majority of whom,
including the Chairman, should be independent. All of the members of the
committee must have relevant background, knowledge, skills, and/or
experience in the areas of accounting, auditing and finance. The
Chairman of the Audit Committee should not be the chairman of the Board
or of any other committees.

Explanation

The Audit Committee is responsible for overseeing the senior

management in establishing and maintaining an adequate, effective and
efficient internal control framework. It ensures that systems and processes
are designed to provide assurance in areas including reporting, monitoring
compliance with laws, regulations and internal policies, efficiency and
effectiveness of operations, and safeguarding of assets.

The Audit Committee has the following duties and responsibilities, among
others:

a. Recommends the approval the Internal Audit Charter (IA Charter),

which formally defines the role of Internal Audit and the audit plan as
well as oversees the implementation of the IA Charter;
b. Through the Internal Audit (IA) Department, monitors and evaluates
the adequacy and effectiveness of the corporation’s internal control
system, integrity of financial reporting, and security of physical and
information assets. Well-designed internal control procedures and
processes that will provide a system of checks and balances should be
in place in order to (a) safeguard the company’s resources and ensure
their effective utilization, (o) prevent occurrence of fraud and other
irregularities, protect the accuracy and reliability of the company’s
financial data, and (d) ensure compliance with applicable laws and

17
 regulations;

c. Prior to the commencement of the audit, discusses with the External

Auditor the nature, scope and expenses of the audit, and ensures the
proper coordination if more than one audit firm is involved in the
activity to secure proper coverage and minimize duplication of efforts;

d. Evaluates and determines the non-audit work, if any, of the External

Auditor, and periodically reviews the non-audit fees paid to the
External Auditor in relation to the total fees paid to him and to the
corporation's overall consultancy expenses. The committee should
disallow any non-audit work that will conflict with his duties as an
External Auditor or may pose a threat to his independence’. The non-
audit work, if allowed, should be disclosed in the corporation’s Annual
Report and Annual Corporate Governance Report;

f. Reviews and approves the Interim and Annual Financial Statements

before their submission to the Board, with particular focus on the
following matters:
i. Any change/s in accounting policies and practices
ii. Areas where a significant amount of judgment has been exercised
ii. Significant adjustments resulting from the audit
iv. Going concern assumptions
v. Compliance with accounting standards
vi. Compliance with tax, legal and regulatory requirements

g. Reviews the disposition of the recommendations in the External

Auditor's management letter;

h. Performs oversight functions over the corporation’s Internal and

External Auditors. It ensures the independence of Internal and External
Auditors, and that both auditors are given unrestricted access to all
records, properties and personnel to enable them to perform their
respective audit functions;

i. Coordinates, monitors and facilitates compliance with laws, rules and

regulations;

j. Recommends to the Board the appointment, reappointment, removal

and fees of the External Auditor, duly accredited by the Commission,
who undertakes an independent audit of the corporation, and provides
an objective assurance on the manner by which the financial
statements should be prepared and presented to the stockholders; and

18
 k. In case the company does not have a Board Risk Oversight Committee
and/or Related Party Transactions Committee, performs the functions
of said committees as provided under Recommendations 3.4 and 3.5.

The Audit Committee meets with the Board at least every quarter without
the presence of the CEO or other management team members, and
periodically meets with the head of the internal audit.
Recommendation 3.3

The Board should establish a Corporate Governance Committee that

should be tasked to assist the Board in the performance of its corporate
governance responsibilities, including the functions that were formerly
assigned to a Nomination and Remuneration Committee. It should be
composed of at least three members, majority of whom should be
independent directors, including the Chairman.

Explanation

The Corporate Governance Committee (CG Committee) is tasked with

ensuring compliance with and proper observance of corporate governance
principles and practices. It has the following duties and functions, among
others:

a. Oversees the implementation of the corporate governance framework

and periodically reviews the said framework to ensure that it remains
appropriate in light of material changes to the corporation's size,
complexity and business strategy, as well as its business and
regulatory environments;

b. Oversees the periodic performance evaluation of the Board and its

committees as well as executive management, and conducts an
annual self-evaluation of its performance;

c. Ensures that the results of the Board evaluation are shared,

discussed, and that concrete action plans are developed and
implemented to address the identified areas for improvement;

d. Recommends continuing education/training programs for directors,

assignment of tasks/projects to board committees, succession plan for
the board members and senior officers, and remuneration packages
for corporate and individual performance;

e. Adopts corporate governance policies and ensures that these are

reviewed and updated regularly, and consistently implemented in form
and substance;

19
 f. Proposes and plans relevant trainings for the members of the Board;

g. Determines the nomination and election process for the company’s

directors and has the special duty of defining the general profile of
board members that the company may need and ensuring appropriate
knowledge, competencies and expertise that complement the existing
skills of the Board; and

h. Establishes a formal and transparent procedure to develop a policy for

determining the remuneration of directors and officers that is consistent
with the corporation’s culture and strategy as well as the business
environment in which it operates.

The establishment of a Corporate Governance Committee does not

preclude companies from establishing separate Remuneration or
Nomination Committees, if they deem necessary.

Recommendation 3.4

Subject to a corporation's size, risk profile and complexity of operations,

the Board should establish a separate Board Risk Oversight Committee
(BROC) that should be responsible for the oversight of a company’s
Enterprise Risk Management system to ensure its functionality and
effectiveness. The BROC should be composed of at least three members,
the majority of whom should be independent directors, including the
Chairman. The Chairman should not be the Chairman of the Board or of
any other committee. At least one member of the committee must have
relevant thorough knowledge and experience on risk and risk
management.

Explanation

The establishment of a Board Risk Oversight Committee (BROC) is

generally for conglomerates and companies with a high risk profile.

Enterprise risk management is integral to an effective corporate

governance process and the achievement of a company's value creation
objectives. Thus, the BROC has the responsibility to assist the Board in
ensuring that there is an effective and integrated risk management
process in place. With an integrated approach, the Board and top
management will be in a confident position to make well-informed
decisions, having taken into consideration risks related to significant
business activities, plans and opportunities.

The BROC has the following duties and responsibilities, among others:

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. Develops a formal enterprise risk management plan which contains the
following elements: (a) common language or register of risks, (b) well-
defined risk management goals, objectives and oversight, (c) uniform
processes of assessing risks and developing strategies to manage
prioritized risks, (d) designing and implementing risk management
strategies, and (e) continuing assessments to improve risk strategies,
processes and measures;

. Oversees the implementation of the enterprise risk management plan

through a Management Risk Oversight Committee. The BROC
conducts regular discussions on the company’s prioritized and residual
risk exposures based on regular risk management reports and
assesses how the concerned units or offices are addressing and
managing these risks;

. Evaluates the risk management plan to ensure its continued relevance,

comprehensiveness and effectiveness. The BROC revisits defined risk
management strategies, looks for emerging or changing material
exposures, and stays abreast of significant developments that
seriously impact the likelihood of harm or loss;

. Advises the Board on its risk appetite levels and risk tolerance limits;

. Reviews at least annually the company’s risk appetite levels and risk
tolerance limits based on changes and developments in the business,
the regulatory framework, the external economic and business
environment, and when major events occur that are considered to
have major impacts on the company;

Assesses the probability of each identified risk becoming a reality and

estimates its possible significant financial impact and likelinood of
occurrence. Priority areas of concern are those risks that are the most
likely to occur and to impact the performance and stability of the
corporation and its stakeholders;

. Provides oversight over Management's activities in managing credit,

market, liquidity, operational, legal and other risk exposures of the
corporation. This function includes regularly receiving information on
risk exposures and risk management activities from Management; and

. Reports to the Board on a regular basis, or as deemed necessary, the

company’s material risk exposures, the actions taken to reduce the
risks, and recommends further action or plans, as necessary.

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Recommendation 3.5

Subject to a corporation's size, risk profile and complexity of operations,

the board should establish a Related Party Transaction (RPT) Committee,
which should be tasked with reviewing all material related party
transactions of the company and should be composed of at least three
non-executive directors, majority of whom should be independent,
including the Chairman.

Explanation

Examples of companies that may have a separate RPT Committee are

conglomerates and universal/commercial banks in recognition of the
potential magnitude of RPTs in these kinds of corporations.

The following are the functions of the RPT Committee, among others:

a. Evaluates on an ongoing basis existing relations between and among

businesses and counterparties to ensure that all related parties are
continuously identified, RPTs are monitored, and subsequent changes
in relationships with counterparties (from non-related to related and
vice versa) are captured. Related parties, RPTs and changes in
relationships should be reflected in the relevant reports to the Board
and regulators/supervisors;

b. Evaluates all material RPTs to ensure that these are not undertaken on
more favorable economic terms (e.g., price, commissions, interest
rates, fees, tenor, collateral requirement) to such related parties than
similar transactions with non- related parties under similar
circumstances and that no corporate or business resources of the
company are misappropriated or misapplied, and to determine any
potential reputational risk issues that may arise as a result of or in
connection with the transactions. In evaluating RPTs, the Committee
takes into account, among others, the following:

1. The related party’s relationship to the company and interest in the

transaction;

2. The material facts of the proposed RPT, including the proposed

aggregate value of such transaction;

3. The benefits to the corporation of the proposed RPT;

4. The availability of other sources of comparable products or

services; and

22
 5. An assessment of whether the proposed RPT is on terms and
conditions that are comparable to the terms generally available to
an unrelated party under similar circumstances. The company
should have an effective price discovery system in place and
exercise due diligence in determining a fair price for RPTs;

c. Ensures that appropriate disclosure is made, and/or information is

provided to regulating and supervising authorities relating to the
company’s RPT exposures, and policies on conflicts of interest or
potential conflicts of interest. The disclosure should include information
on the approach to managing material conflicts of interest that are
inconsistent with such policies, and conflicts that could arise as a result
of the company’s affiliation or transactions with other related parties;

d. Reports to the Board of Directors on a regular basis, the status and

aggregate exposures to each related party, as well as the total amount
of exposures to all related parties;

e. Ensures that transactions with related parties, including write-off of

exposures are subject to a periodic independent review or audit
process; and

f. Oversees the implementation of the system for identifying, monitoring,

measuring, controlling, and reporting RPTs, including a periodic review
of RPT policies and procedures.

Recommendation 3.6

All established committees should be required to have Committee

Charters stating in plain terms their respective purposes, memberships,
structures, operations, reporting processes, resources and other relevant
information. The Charters should provide the standards for evaluating the
performance of the Committees. It should also be fully disclosed on the
company’s website.

Explanation

The Committee Charter clearly defines the roles and accountabilities of

each committee to avoid any overlapping functions, which aims at having
a more effective board for the company. This can also be used as basis
for the assessment of committee performance.

23
Principle 4. Fostering Commitment

To show full commitment to the company, the directors should devote the
time and attention necessary to properly and effectively perform their duties
and responsibilities, including sufficient time to be familiar with the
corporation’s business.
Recommendation 4.1

The directors should attend and actively participate in all meetings of the
Board, Committees, and Shareholders in person or through tele-
Nvideoconferen cing conducted in accordance with the rules and
regulations of the Commission, except when justifiable causes, such as,
iliness, death in the immediate family and serious accidents, prevent them
from doing so. In Board and Committee meetings, the director should
review meeting materials and if called for, ask the necessary questions or
seek clarifications and explanations.

Explanation

A director's commitment to the company is evident in the amount of time

he dedicates to performing his duties and responsibilities, which includes
his presence in all meetings of the Board, Committees and Shareholders.
In this way, the director is able to effectively perform his/her duty to the
company and its shareholders.

The absence of a director in more than fifty percent (50%) of all regular
and special meetings of the Board during his/her incumbency is a ground
for disqualification in the succeeding election, unless the absence is due
to illness, death in the immediate family, serious accident or other
unforeseen or fortuitous events.
Recommendation 4.2

The non-executive directors of the Board should concurrently serve as

directors to a maximum of five Insurance Commission Regulated Entities
and Publicly Listed Companies to ensure that they have sufficient time to
fully prepare for meetings, challenge Management's proposals/views, and
oversee the long-term strategy of the company.
Explanation

Being a director necessitates a commitment to the corporation. Hence,

there is a need to set a limit on board directorships. This ensures that the
members of the board are able to effectively commit themselves to
perform their roles and responsibilities, regularly update their knowledge
and enhance their skills. Since sitting on the board of too many companies
may interfere with the optimal performance of board members, in that they

24
 may not be able to contribute enough time to keep abreast of the
corporation’s operations and to attend and actively participate during
meetings, a maximum board seat fimit of five directorships is
recommended.
Recommendation 4.3

A director should notify the Board where he/she is an incumbent director

before accepting a directorship in another company.

Explanation

The Board expects commitment from a director to devote sufficient time

and attention to his/her duties and responsibilities. Hence, it is important
that a director notifies his/her incumbent Board before accepting a
directorship in another company. This is for the company to be able to
assess if his/her present responsibilities and commitment to the company
will be affected and if the director can still adequately provide what is
expected of him/her.

Principle 5. Reinforcing Board Independence

The board should endeavor to exercise an objective and independent

judgment on all corporate affairs.

Recommendation 5.1

The Board should be composed of at least twenty percent (20%)

independent directors.
Explanation

The presence of independent directors in the Board is to ensure the

exercise of independent judgment on corporate affairs and proper
oversight of managerial performance, including prevention of conflict of
interests and balancing of competing demands of the corporation. There is
increasing global recognition that more independent directors in the Board
lead to more objective decision-making, particularly in conflict of interest
situations. In addition, experts have recognized that there are varying
opinions on the optimal number of independent directors in the board.
However, the ideal number ranges from one-third to a substantial majority.

25
Recommendation 5.2

The Board should ensure that its independent directors possess the
necessary qualifications and none of the disqualifications for an
independent director to hold the position.
An Independent Director refers to a person who:

a. 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 his election/appointment,

is not or was not a regular director, officer, or employee of the covered

entity's substantial stockholders and their related companies during the
past three (3) years counted from the date of his election/appointment,

is not an owner of more than two percent (2%) of the outstanding

shares or a stockholder with shares of stock sufficient to elect one (1)
seat in the board of directors of the covered entity, or in any of its
related companies or of its majority corporate shareholders;

is not a relative by affinity or consaguinity within the fourth (4"") degree

of a director, officer, or stockholder holding shares of stock suffcient to
elect one (1) seat in the board of the covered entity or any of its related
companies or of any of its substantial stockholders;

is not acting as a nominee or representative of any director or

substantial shareholder of the covered entity, any of its related
companies or any of its substantial shareholders;

is not or was not retained as professional adviser, auditor, consultant,

agent or counsel of the covered entity, any of its related companies or
any of its substantial shareholders, either in his personal capacity or
through his firm during the past three (3) years counted from the date
of his election/appointment;

is independent of management and free from any business or other

relationship, has not engaged and does not engage in any transaction
with the covered entity or with any of its related companies or with any
of its substantial shareholders, whether by himself or with other
persons or through a firm of which he is a partner or a company of
which he is a director or substantial shareholder, other than
transactions which are conducted at arm’s length and could not
materially interfere with or influence the exercise of his judgment;

. Was not appointed in the covered entity, its subsidiaries, affiliates or

related companies as Chairman "Emeritus", "Ex-Officio", Regular

26
 Directors, Officers or Members of any Advisory Board, or otherwise
appointed in a capacity to assist the board of directors in the
performance of its duties and responsibilities during the past three (3)
years counted from the date of his election/appointment;

i. is not affiliated with any non-profit organization that receives significant

funding from the covered entity or any of its related companies or
substantial shareholders; and,

j. is not employed as an executive officer of another company where any

of the covered entity's executives serve as regular directors.

Related company refers to (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 will allow/enable such 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.

Recommendation 5.3

The Board’s independent directors should serve for a maximum

cumulative term of nine years. After which, the independent director
should be perpetually barred from re- election as such in the same
company, but may continue to qualify for nomination and election as a
non-independent director. In the instance that a company wants to retain
an independent director who has served for nine years, the Board should
provide meritorious justification/s and seek shareholders’ approval during
the annual shareholders’ meeting.

Explanation

Service in a board for a long duration may impair a director's ability to act
independently and objectively. Hence, the tenure of an independent
director is set to a cumulative term of nine years. Independent directors
(IDs) who have served for nine years may continue as a non-independent
director of the company. Reckoning of the cumulative nine-year term is
from 02 January 2015 for Insurance Companies and 21 September 2016
for Pre-Need Companies and Health Maintenance Organization, in
connection with IC Circular Letter No. 2018-36 dated 26 June 2018.

Any term beyond nine years for an ID is subjected to particularly rigorous

review, taking into account the need for progressive change in the Board
to ensure an appropriate balance of skills and experience. However, the
shareholders may, in exceptional cases, choose to re-elect an

27
 independent director who has served for nine years. In such instances, the
Board must submit to the Insurance Commission a formal written
justification and a shareholder's approval during the annual shareholders’
meeting.
Recommendation 5.4

The positions of Chairman of the Board and Chief Executive Officer

should be held by separate individuals and each should have clearly
defined responsibilities.

Explanation

To avoid conflict or a split board and to foster an appropriate balance of

power, increased accountability and better capacity for independent
decision-making, it is recommended that the positions of Chairman and
Chief Executive Officer (CEO) be held by different individuals. This type of
organizational structure facilitates effective decision making and good
governance. In addition, the division of responsibilities and accountabilities
between the Chairman and CEO is clearly defined and delineated and
disclosed in the Board Charter.

The CEO has the following roles and responsibilities, among others:

a. Determines the corporation's strategic direction and formulates and

implements its strategic plan on the direction of the business;

Communicates and implements the corporation’s vision, mission,

values and overall strategy and promotes any organization or
stakeholder change in relation to the same;

Oversees the operations of the corporation and manages human and

financial resources in accordance with the strategic plan;

Has a good working knowledge of the corporation’s industry and

market and keeps up-to-date with its core business purpose;

Directs, evaluates and guides the work of the key officers of the
corporation;

Manages the corporation’s resources prudently and ensures a proper

balance of the same;

Provides the Board with timely information and interfaces between the
Board and the employees;
28
 h. Builds the corporate culture and motivates the employees of the
corporation; and

i. Serves as the link between internal operations and external

stakeholders.

The roles and responsibilities of the Chairman are provided under

Recommendation 2.3.

Recommendation 5.5

The Board should designate a lead director among the independent

directors if the Chairman of the Board is not independent, including if the
positions of the Chairman of the Board and Chief Executive Officer are
held by one person.

Explanation

In cases where the Chairman is not independent and where the roles of
Chair and CEO are combined, putting in place proper mechanisms
ensures independent views and perspectives. More importantly, it avoids
the abuse of power and authority, and potential conflict of interest. A
suggested mechanism is the appointment of a strong “lead director”
among the independent directors. This lead director has_ sufficient
authority to lead the Board in cases where management has clear
conflicts of interest.
The functions of the lead director include, among others, the following:

a. Serves as an intermediary between the Chairman and the other

directors when necessary;
b. Convenes and chairs meetings of the non-executive directors; and
c. Contributes to the performance evaluation of the Chairman, as
required.

Recommendation 5.6

A director with a material interest in any transaction affecting the

corporation should abstain from taking part in the deliberations for the
same.

Explanation

The abstention of a director from participating in a meeting when related

party transactions, self-dealings or any transactions or matters on which

29
 he/she has a material interest are taken up ensures that he has no
influence over the outcome of the deliberations. The fundamental principle
to be observed is that a director does not use his position to profit or gain
some benefit or advantage for his himself and/or his/her related interests.

Recommendation 5.7

The non-executive directors (NEDs) should have separate periodic

meetings with the external auditor and heads of the internal audit,
compliance and risk functions, without any executive directors present to
ensure that proper checks and balances are in place within the
corporation. The meetings should be chaired by the lead independent
director.

Explanation

NEDs are expected to scrutinize Management's performance, particularly

in meeting the companies’ goals and objectives. Further, it is their role to
satisfy themselves on the integrity of the corporation’s internal control and
effectiveness of the risk management systems. This role can be better
performed by the NEDs if they are provided access to the external auditor
and heads of the internal audit, compliance and risk functions, as well as
to other key officers of the company without any executive directors
present. The lead independent director should lead and preside over the
meeting.

Principle 6. Assessing Board Performance

The best measure of the Board’s effectiveness is through an assessment

process. The Board should regularly carry out evaluations to appraise its
performance as a body, and assess whether it possesses the right mix of
backgrounds and competencies.

Recommendation 6.1

The Board should conduct an annual assessment of its performance,

including the performance of the Chairman, individual members and
committees. Every three years, the assessment may be supported by an
external facilitator.

Explanation

Board assessment helps the directors to thoroughly review their

performance and understand their roles and responsibilities. The periodic

30
 review and assessment of the Board’s performance as a body, the board
committees, the individual directors, and the Chairman show how the
aforementioned should perform their responsibilities effectively. In
addition, it provides a means to assess a director's attendance at board
and committee meetings, participation in boardroom discussions and
manner of voting on material issues. The use of an external facilitator in
the assessment process increases the objectivity of the same. The
external facilitator can be any independent third party such as, but not
limited to, a consulting firm, academic institution or professional
organization.
Recommendation 6.2

The Board should have in place a system that provides, at the minimum,
criteria and process to determine the performance of the Board, the
individual directors, committees and such system should allow for a
feedback mechanism from the shareholders.
Explanation

Disclosure of the criteria, process and collective results of the assessment

ensures transparency and allows shareholders and stakeholders to
determine if the directors are performing their responsibilities to the
company. Companies are given the discretion to determine the
assessment criteria and process, which should be based on the
mandates, functions, roles and responsibilities provided in the Board and
Committee Charters. In establishing the criteria, attention is given to the
values, principles and skills required for the company. The Corporate
Governance Committee oversees the evaluation process.

Principle 7. Strengthening Board Ethics

Members of the Board are duty-bound to apply high ethical standards, taking
into account the interests of all stakeholders.

Recommendation 7.1

The Board should adopt a Code of Business Conduct and Ethics, which
would provide standards for professional and ethical behavior, as well as
articulate acceptable and unacceptable conduct and practices in internal
and external dealings. The Code should be properly disseminated to the
Board, senior management and employees. It should also be disclosed
and made available to the public through the company website.

Explanation

A Code of Business Conduct and Ethics formalizing ethical values is an

31
 important tool to instill an ethical corporate culture that pervades
throughout the company. The main responsibility to create and design a
Code of Conduct suitable to the needs of the company and the culture by
which it operates lies with the Board. To ensure proper compliance with
the Code, appropriate orientation and training of the Board, senior
management and employees on the same are necessary.

Recommendation 7.2

The Board should ensure the proper and efficient implementation and
monitoring of compliance with the Code of Business Conduct and Ethics
and internal policies.
Explanation

The Board has the primary duty to make sure that the internal controls are
in place to ensure the company’s compliance with the Code of Business
Conduct and Ethics and its internal policies and procedures. Hence, it
needs to ensure the implementation of said internal controls to support,
promote and guarantee compliance. This includes efficient communication
channels, which aid and encourage employees, customers, suppliers and
creditors to raise concerns on potential unethical/unlawful behavior without
fear of retribution. A company’s ethics policy can be made effective and
inculcated in the company culture through a communication and
awareness campaign, continuous training to reinforce the code, strict
monitoring and implementation and setting in place proper avenues where
issues may be raised and addressed without fear of retribution.

B. DISCLOSURE AND TRANSPARENCY

Principle 8. Enhancing Company Disclosure Policies And Procedures

The company should establish corporate disclosure policies and procedures

that are practical and in accordance with best practices and regulatory
expectations.
Recommendation 8.1

The Board should establish corporate disclosure policies and procedures

to ensure a comprehensive, accurate, reliable and timely report to
shareholders and other stakeholders that gives a fair and complete picture
of a company’s financial condition, results and business operations.
Explanation

Setting up clear policies and procedures on corporate disclosure that

32
 comply with the IC’s disclosure requirements that are essential for
comprehensive and timely reporting.

Recommendation 8.3

The Board should fully disclose all relevant and material information on
individual board members and key executives to evaluate their experience
and qualifications, and assess any potential conflicts of interest that might
affect their judgment.
Explanation

According to best practices and standards, proper disclosure includes

directors and key officers’ qualifications, share ownership in the company,
membership of other boards, other executive positions, continuous
trainings attended and identification of independent directors.
Recommendation 8.4

The company should provide a clear disclosure of its policies and

procedure for setting Board and executive remuneration, as well as the
level and mix of the same in the Annual Corporate Governance Report
consistent with ASEAN Corporate Governance Scorecard (ACGS) and the
Revised Corporation Code. Also, companies should disclose the
remuneration on an individual basis, including termination and retirement
provisions.

Explanation

Disclosure of remuneration policies and procedure enables investors to

understand the link between the remuneration paid to directors and key
management personnel and the company’s performance.
The Code of Corporate Governance requires only a disclosure of all fixed
and variable compensation that may be paid, directly or indirectly, to its
directors and top four management officers during the preceding fiscal
year.

Recommendation 8.5

The company should disclose its policies governing Related Party

Transactions (RPTs) and other unusual or infrequently occurring
transactions. The material or significant RPTs should be reviewed and
approved by the Board and submitted for confirmation by majority vote of
the stockholders in the annual stockholders’ meeting. All material or
significant RPTs for the year should be disclosed in its Annual Company
Report or Annual Corporate Governance Report.

33
 Explanation

A full, accurate and timely disclosure of the company’s policy governing

RPTs and other unusual or infrequently occurring transactions, as well as
the review and approval of material and significant RPTs, is regarded as
good corporate governance practice geared towards the prevention of
abusive dealings and transactions and the promotion of transparency.
These policies include ensuring that transactions occur at market prices
and under conditions that protect the rights of all shareholders. The said
disclosure includes directors and key executives reporting to the Board
when they have RPTs that could influence their judgment.

Recommendation 8.6

The company’s corporate governance policies, programs and procedures

should be contained in its Manual on Corporate Governance, which
should be submitted to the regulators and posted on the company’s
website.
Explanation

Transparency is one of the core principles of corporate governance. To

ensure the better protection of shareholders and other stakeholders’
rights, full disclosure of the company’s corporate governance policies,
programs and procedures is imperative. This is better done if the said
policies, programs and procedures are contained in one reference
document, which is the Manual on Corporate Governance. The
submission of the Manual to regulators and posting it in companies’
websites ensure easier access by any interested party.

Principle 9. Strengthening The External Auditor’s Independence And

Improving Audit Quality

The company should establish standards for the appropriate selection of an

external auditor, and exercise effective oversight of the same to strengthen
the external auditor's independence and enhance audit quality.
Recommendation 9.1

The Audit Committee should have a robust process for approving and
recommending the appointment, reappointment, removal, and fees of the
external auditor. The appointment, reappointment, removal, and fees of
the external auditor should be recommended by the Audit Committee,
approved by the Board and ratified by the shareholders. For removal of
the external auditor, the reasons for removal or change should be
disclosed to the regulators and the public through the company website
and required disclosures.

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Explanation

The appointment, reappointment and removal of the external auditor by

the Board’s approval, through the Audit Committee’s recommendation,
and shareholders’ ratification at shareholders’ meetings are actions
regarded as good practices. Shareholders’ ratification clarifies or
emphasizes that the external auditor is accountable to the shareholders
or to the company as a whole, rather than to the management whom he
may interact with in the conduct of his audit.
Recommendation 9.2

The Audit Committee Charter should include the Audit Committee's

responsibility on assessing the integrity and independence of external
auditors and exercising effective oversight to review and monitor the
external auditor's independence and objectivity and the effectiveness of
the audit process, taking into consideration relevant Philippine
professional and regulatory requirements. The Charter should also contain
the Audit Committee's responsibility on reviewing and monitoring the
external auditor's suitability and effectiveness on an annual basis.

Explanation

The Audit Committee Charter includes a disclosure of its responsibility on

assessing the integrity and independence of the external auditor. It
establishes detailed guidelines, policies and procedures that are contained
in a separate memorandum or document. Nationally and internationally
recognized best practices and standards of external auditing guide the
committee in formulating these policies and procedures.
Moreover, establishing effective communication with the external auditor
and requiring them to report all relevant matters help the Audit Committee
to efficiently carry out its oversight responsibilities.
Recommendation 9.3

The company should disclose the nature of non-audit services performed

by its external auditor in the Annual Report to deal with the potential
conflict of interest. The Audit Committee should be alert for any potential
conflict of interest situations, given the guidelines or policies on non-audit
services, which could be viewed as impairing the external auditor's
objectivity.
Explanation

The Audit Committee, in the performance of its duty, oversees the overall
relationship with the external auditor. It evaluates and determines the
nature of non-audit services, if any, of the external auditor. Further, the
Committee periodically reviews the proportion of non-audit fees paid to the

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 external auditor in relation to the corporation’s overall consultancy
expenses. Allowing the same auditor to perform non-audit services for the
company may create a potential conflict of interest. In order to mitigate the
risk of possible conflict between the auditor and the company, the Audit
Committee puts in place robust policies and procedures designed to
promote auditor independence in the long run. In formulating these
policies and procedures, the Committee is guided by nationally and
internationally recognized best practices and regulatory requirements or
issuances.

Principle 10. Increasing Focus On Non-Financial And Sustainability

Reporting

The company should ensure that the material and reportable non-financial
and sustainability issues are disclosed.
Recommendation 10.1

The Board should have a clear and focused policy on the disclosure of
non-financial information, with emphasis on the management of economic,
environmental, social and governance (EESG) issues of its business,
which underpin sustainability. Companies should adopt a globally
recognized standard/framework in reporting sustainability and non-
financial issues.
Explanation

As external pressures including resource scarcity, globalization, and

access to information continue to increase, the way corporations respond
to sustainability challenges, in addition to financial challenges, determines
their long-term viability and competitiveness. One way to respond to
sustainability challenges is disclosure to all shareholders and other
stakeholders of the company’s strategic (long-term goals) and operational
objectives (short-term goals), as well as the impact of a wide range of
sustainability issues.

Disclosures can be made using standards/frameworks, such as the G4

Framework by the Global Reporting Initiative (GRI), the Integrated
Reporting Framework by the International Integrated Reporting Council
(IIRC) and/or the Sustainability Accounting Standards Board (SASB)’s
Conceptual Framework.

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 Principle 11. Promoting A Comprehensive And Cost-Efficient Access To
Relevant Information

The company should maintain a comprehensive and _ cost-efficient

communication channel for disseminating relevant information. This channel
is crucial for informed decision-making by investors, stakeholders and other
interested users.
Recommendation 11.1

The company should have a website to ensure a comprehensive, cost

efficient, transparent, and timely manner of disseminating relevant
information to the public.

Explanation

The manner of disseminating relevant information to its intended users is

as important as the content of the information itself. Hence, it is essential
for the company to have a strategic and well-organized channel for
reporting. These communication channels can provide timely and up-to-
date information relevant to investors’ decision-making, as well as to other
interested stakeholders.

C. INTERNAL CONTROL SYSTEM AND RISK MANAGEMENT FRAMEWORK

Principle 12. Strengthening The Internal Control System And Enterprise

Risk Management Framework

To ensure the integrity, transparency and proper governance in the

conduct of its affairs, the company should have a strong and effective
internal control system and enterprise risk management framework.
Recommendation 12.1

The Company should have an adequate and effective internal control

system and an enterprise risk management framework in the conduct of
its business, taking into account its size, risk profile and complexity of
operations.

Explanation

An adequate and effective internal control system and an enterprise risk

management framework help sustain safe and sound operations as well
as implement management policies to attain corporate goals. An effective
internal control system embodies management oversight and control
culture; risk recognition and assessment; control activities; information and
communication; monitoring activities and correcting deficiencies.

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 Moreover, an effective enterprise risk management framework typically
includes such activities as the identification, sourcing, measurement,
evaluation, mitigation and monitoring of risk.
Recommendation 12.2

The Company should have in place an independent internal audit function

that provides an independent and objective assurance, and consulting
services designed to add value and improve the company's operations.
Explanation

A separate internal audit function is essential to monitor and guide the

implementation of company policies. It helps the company accomplish its
objectives by bringing a systematic, disciplined approach to evaluating
and improving the effectiveness of the company’s governance, risk
management and control functions. The following are the functions of the
internal audit, among others:
a. Provides an independent risk-based assurance service to the Board,
Audit Committee and Management, focusing on reviewing the
effectiveness of the governance and control processes in (1)
promoting the right values and ethics, (2) ensuring effective
performance management and accounting in the organization, (3)
communicating risk and control information, and (4) coordinating the
activities and information among the Board, external and internal
auditors, and Management;

Performs regular and special audit as contained in the annual audit

plan and/or based on the company’s risk assessment;

Performs consulting and advisory services related to governance and

control as appropriate for the organization;

Performs compliance audit of relevant laws, rules and regulations,

contractual obligations and other commitments, which could have a
significant impact on the organization;

Reviews, audits and assesses the efficiency and effectiveness of the

internal control system of all areas of the company;
Evaluates operations or programs to ascertain whether results are
consistent with established objectives and goals, and whether the
operations or programs are being carried out as planned;

Evaluates specific operations at the request of the Board or

Management, as appropriate; and

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 h. Monitors and evaluates governance processes.

A company’s internal audit activity may be a fully resourced activity

housed within the organization or may be outsourced to qualified
independent third party service providers.

Recommendation 12.3

Subject to a company’s size, risk profile and complexity of operations, it

should have a qualified Chief Audit Executive (CAE) appointed by the
Board. The CAE shall oversee and be responsible for the internal audit
activity of the organization, including that portion that is outsourced to a
third party service provider. In case of a fully outsourced internal audit
activity, a qualified independent executive or senior management
personnel should be assigned the responsibility for managing the fully
outsourced internal audit activity.

Explanation

The CAE, in order to achieve the necessary independence to fulfill his/her

responsibilities, directly reports functionally to the Audit Committee and
administratively to the CEO. The following are the responsibilities of the
CAE, among others:

a. Periodically reviews the internal audit charter and presents it to senior

management and the Board Audit Committee for approval:

b. Establishes a risk-based internal audit plan, including policies and

procedures, to determine the priorities of the internal audit activity,
consistent with the organization’s goals;

c. Communicates the internal audit activity’s plans, resource

requirements and impact of resource limitations, as well as significant
interim changes, to senior management and the Audit Committee for
review and approval;

d. Spearheads the performance of the internal audit activity to ensure it

adds value to the organization;

e. Reports periodically to the Audit Committee on the internal audit

activity's performance relative to its plan; and

f. Presents findings and recommendations to the Audit Committee and

gives advice to senior management and the Board on how to improve
internal processes.

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Recommendation 12.4

Subject to its size, risk profile and complexity of operations, the company
should have a separate risk management function to identify, assess and
monitor key risk exposures.

Explanation

The risk management function involves the following activities, among

others:

a. Defining a risk management strategy;

b. Identifying and analyzing key risks exposure relating to economic,

environmental, social and governance (EESG) factors and the
achievement of the organization's strategic objectives;

Evaluating and categorizing each identified risk using the company’s

predefined risk categories and parameters;

Establishing a risk register with clearly defined, prioritized and residual

risks;

Developing a risk mitigation plan for the most important risks to the
company, as defined by the risk management strategy:

Communicating and reporting significant risk exposures including

business risks (i.e., strategic, compliance, operational, financial and
reputational risks), control issues and risk mitigation plan to the Board
Risk Oversight Committee; and

Monitoring and evaluating the effectiveness of the organization's risk

management processes.

Recommendation 12.5

In managing the company’s Risk Management System, the company

should have a Chief Risk Officer (CRO), who is the ultimate champion of
Enterprise Risk Management (ERM) and has adequate authority, stature,
resources and support to fulfill his/ner responsibilities, subject to a
company’s size, risk profile and complexity of operations.

Explanation

The CRO has the following functions, among others:

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 a. Supervises the entire ERM process and spearheads the development,
implementation, maintenance and continuous improvement of ERM
processes and documentation;

b. Communicates the top risks and the status of implementation of risk

management strategies and action plans to the Board Risk Oversight
Committee;

c. Collaborates with the CEO in updating and making recommendations

to the Board Risk Oversight Committee;

d. Suggests ERM policies and related guidance, as may be needed; and

e. Provides insights on the following:

e Risk management processes are performing as intended;

e Risk measures reported are continuously reviewed by risk owners

for effectiveness; and

e Established risk policies and procedures are being complied with

There should be clear communication between the Board Risk Oversight

Committee and the CRO.

D. CULTIVATING A SYNERGIC RELATIONSHIP WITH SHAREHOLDERS

Principle 13. Promoting Shareholder Rights

The company should treat all shareholders fairly and equitably, and also
recognize, protect and facilitate the exercise of their rights.

Recommendation 13.1

The Board should ensure that basic shareholder rights are disclosed in the
Manual on Corporate Governance and on the company’s website.

Explanation

It is the responsibility of the Board to adopt a policy informing the

shareholders of all their rights. Shareholders are encouraged to exercise
their rights by providing clear-cut processes and procedures for them to
follow.

Shareholders’ rights relate to the following, among others:

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e Pre-emptive rights;
e Dividend policies;
e Right to propose the holding of meetings and to include agenda items
ahead of the scheduled Annual and Special Shareholders’ Meeting;
e Right to nominate candidates to the Board of Directors;
Nomination process; and
e Voting procedures that would govern the Annual and Special
Shareholders’ Meeting.

The right to propose the holding of meetings and items for inclusion in the
agenda is given to all shareholders, including minority and foreign
shareholders. However, to prevent the abuse of this right, companies may
require that the proposal be made by shareholders holding a specified
percentage of shares or voting rights. On the other hand, to ensure that
minority shareholders are not effectively prevented from exercising this
right, the degree of ownership concentration is considered in determining
the threshold.

Further, all shareholders must be given the opportunity to nominate

candidates to the Board of Directors in accordance with the existing laws.
The procedures of the nomination process are expected to be discussed
clearly by the Board. The company is encouraged to fully and promptly
disclose all information regarding the experience and background of the
candidates to enable the shareholders to study and conduct their own
background check as to the candidates’ qualification and credibility.

Shareholders are also encouraged to participate when given sufficient

information prior to voting on fundamental corporate changes such as: (1)
amendments to the Articles of Incorporation and By-Laws of the company;
(2) the authorization on the increase in authorized capital stock; and (3)
extraordinary transactions, including the transfer of all or substantially all
assets that in effect result in the sale of the company. In addition, the
disclosure and clear explanation of the voting procedures, as well as
removal of excessive or unnecessary costs and other administrative
impediments, allow for the effective exercise of the shareholders’ voting
rights. Poll voting is highly encouraged as opposed to the show of hands.
Proxy voting is also a good practice, including the electronic distribution of
proxy materials.

The related shareholders’ rights and relevant company policies should be

contained in the Manual on Corporate Governance.

The Board should encourage active shareholder participation by sending

the Notice of Annual and Special Shareholders’ Meeting with sufficient
and relevant information at least 21 days before the meeting.

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Recommendation 13.2

The Board should encourage active shareholder participation by sending

the Notice of Annual and Special Shareholders’ Meeting with sufficient
and relevant information at least 21 days before the meeting.

Explanation

Required information in the Notice include, among others, the date,

location, meeting agenda and its rationale and explanation, and details of
issues to be deliberated on and approved or ratified at the meeting.
Sending the Notice in a timely manner allows shareholders to plan their
participation in the meetings. It is good practice to have the Notice sent to
all shareholders at least 28 days before the meeting and posted on the
company website.

Recommendation 13.3

The Board should encourage active shareholder participation by making

the result of the votes taken during the most recent Annual or Special
Shareholders’ Meeting publicly available the next working day. In addition,
the Minutes of the Annual and Special Shareholders’ Meeting may be
available on the company website within Five (5) business days from the
end of the meeting.

Explanation

Voting results include a breakdown of the approving and dissenting votes

on the matters raised during the Annual or Special! Stockholders’ Meeting.
When a substantial number of votes have been cast against a proposal
made by the company, it may make an analysis of the reasons for the
same and consider having a dialogue with its shareholders.

The Minutes of Meeting include the following matters: (1) A description of

the voting and the vote tabulation procedures used; (2) the opportunity
given to shareholders to ask questions, as well as a record of the
questions and the answers received; (3) the matters discussed and the
resolutions reached; (4) a record of the voting results for each agenda
item; (5) a list of the directors, officers and shareholders who attended the
meeting; and (6) dissenting opinion on any agenda item that is considered
significant in the discussion process.
Recommendation 13.4

The Board should have an alternative dispute mechanism to resolve intra-

corporate disputes in an amicable and effective manner. This should be
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 included in the company’s Manual on Corporate Governance.

Explanation

It is important for the shareholders to be well-informed of the company’s

processes and procedures when seeking to redress the violation of their
rights. Putting in place proper safeguards ensures suitable remedies for
the infringement of shareholders’ rights and prevents excessive litigation.
*The company may also consider adopting in its Manual on Corporate
Governance established Alternative Dispute Resolution (ADR)
procedures.

E. DUTIES TO STAKEHOLDERS

Principle 14. Respecting Rights Of Stakeholders And Effective Redress For

Violation Of Stakeholder’s Rights
The rights of stakeholders established by law, by contractual relations and
through voluntary commitments must be respected. Where stakeholders’
rights and/or interests are at stake, stakeholders should have the opportunity
to obtain prompt effective redress for the violation of their rights.
Recommendation 14.1

The Board should identify the company’s various stakeholders and

promote cooperation between them and the company in creating wealth,
growth and sustainability.

Explanation

Stakeholders in corporate governance include, but are not limited to,

customers, employees, suppliers, shareholders, investors, creditors, the
community the company operates in, society, the government, regulators,
competitors, external auditors, etc. In formulating the company's strategic
and operational decisions affecting its wealth, growth and sustainability,
due consideration is given to those who have an interest in the company
and are directly affected by its operations.

Recommendation 14.2

The Board should establish clear policies and programs to provide a

mechanism on the fair treatment and protection of stakeholders.

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 Explanation

In instances when stakeholders’ interests are not legislated, companies’

voluntary commitments ensure the protection of the stakeholders’ rights.
The company’s Code of
Conduct ideally includes provisions on the company’s policies and
procedures on dealing with various stakeholders. The company’s
stakeholders include its customers, resource providers, creditors and the
community in which it operates. Fair, professional and objective dealings
as well as clear, timely and regular communication with the various
stakeholders ensure their fair treatment and better protection of their
rights.

Recommendation 14.3

The Board should adopt a transparent framework and process that allow
stakeholders to communicate with the company and to obtain redress for
the violation of their rights.

Explanation

The company’s stakeholders play a role in its growth and long-term

viability. As such, it is crucial for the company to maintain open and easy
communication with its stakeholders. This can be done through
stakeholder engagement touchpoints in the company, such as the Investor
Relations Office, Office of the Corporate Secretary, Customer Relations
Office, and Corporate Communications Group.

Principle 15. Encouraging Employees’ Participation

A mechanism for employee participation should be developed to create a

symbiotic environment, realize the company’s goals and participate in its
corporate governance processes.

Recommendation 15.1

The Board should establish policies, programs and procedures that

encourage employees to actively participate in the realization of the
company’s goals and in its governance.

Explanation

The establishment of policies and programs covering, among others, the

following: (1) health, safety and welfare; (2) training and development; and
(3) reward/compensation for employees, encourages employees to
perform better and motivates them to take a more dynamic role in the

45
 corporation. Active participation is further fostered when the company
recognizes the firm-specific skills of its employees and their potential
contribution in corporate governance. The employees’ viewpoint in certain
key decisions may also be considered in governance processes.

Recommendation 15.2

The Board should set the tone and make a stand against corrupt practices
by adopting an anti-corruption policy and program in its Code of Conduct.
Further, the Board should disseminate the policy and program to
employees across the organization through trainings to embed them in the
company’s culture.

Explanation

The adoption of an anti-corruption policy and program endeavors to

mitigate corrupt practices such as, but not limited to, bribery, fraud,
extortion, collusion, conflict of interest and money laundering. This
encourages employees to report corrupt practices and outlines procedures
on how to combat, resist and stop these corrupt practices. Anti- corruption
programs are more effective when the Board sets the tone and leads the
company in their execution.

Recommendation 15.3

The Board should establish a suitable framework for whistleblowing that

allows employees to freely communicate their concerns about illegal or
unethical practices, without fear of retaliation and to have direct access to
an independent member of the Board or a unit created to handle
whistleblowing concerns. The Board should be conscientious in
establishing the framework, as well as in supervising and ensuring its
enforcement.

Explanation

A suitable whistleblowing framework sets up the procedures and safe-

harbors for complaints of employees, either personally or through their
representative bodies, concerning illegal and unethical behavior. One
essential aspect of the framework is the inclusion of safeguards to secure
the confidentiality of the informer and to ensure protection from retaliation.
Further, part of the framework is granting individuals or representative
bodies confidential direct access to either an independent director or a unit
designed to deal with whistleblowing concerns. Companies may opt to
establish an ombudsman to deal with complaints and/or established
confidential phone and e-mail facilities to receive allegations.

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Principle 16. Encouraging Sustainability And Social Responsibility

The company should be socially responsible in all its dealings with the
communities where it operates. It should ensure that its interactions serve its
environment and stakeholders in a positive and progressive manner that is
fully supportive of its comprehensive and balanced development.

Recommendation 16.1

The company should recognize and place an importance on the

interdependence between business and society, and promote a mutually
beneficial relationship that allows the company to grow its business, while
contributing to the advancement of the society where it operates.

Explanation

The company’s value chain consists of inputs to the production process,

the production process itself and the resulting output. Sustainable
development means that the company not only complies with existing
regulations, but also voluntarily employs value chain processes that takes
into consideration economic, environmental, social and governance issues
and concerns. In considering sustainability concerns, the company plays
an indispensable role alongside the government and civil society in
contributing solutions to complex global challenges like poverty, inequality,
unemployment and climate change.

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