SEC imposes strict 9-year limit for independent directors

The Securities and and Exchange Commission (SEC) is imposing a maximum cumulative nine-year term limit for independent directors of publicly listed companies starting in February, a move that will boost board independence, analysts said.

SEC Memorandum Circular No. 7, which was signed by SEC Chairperson Francisco Ed. Lim on Jan. 26, stated that an independent director is elected for a one-year term and can only serve for a maximum cumulative term of nine years in the same listed company.

The circular will take effect on Feb. 1 after publication in two newspapers of general circulation.

Independent directors who were elected before the effectivity of the circular will also be covered by the nine-year limit, starting from calendar year 2012.

For continuous or consecutive service, the nine-year term limit will end on the date of the annual stockholders’ meeting or on another date approved by the SEC.

In cases of intermittent service, the independent director’s total tenure must still not exceed nine years.

Under the circular, if an independent director becomes a non‑independent director or an officer of the company within the nine‑year limit, that person may only be reappointed as an independent director after a two‑year cooling‑off period starting from the date they stop serving in the non‑independent role.

If an independent director serves more than six months, the term will be considered one full year.

All independent directors that have reached the nine-year limit will be “barred perpetually” from re-election as an independent director of the same company. However, the person can still serve as a non-independent director or officer of the same company without a cooling off period.

Incumbent independent directors that have served the maximum nine-year limit at the time of the circular issuance may continue to serve until the company’s 2026 annual stockholders’ meeting.

Under the previous rules, persons can serve as independent directors for up to nine years, but companies may apply for exemptive relief to extend their term.

The new SEC circular removes the flexibility of companies to seek exemptive relief.

Companies that exceed the maximum cumulative term limit for an independent director may face a basic penalty of P1 million per violation, plus P30,000 for each month that the director remains in office beyond the allowed term, in addition to other sanctions under existing laws.

A third or succeeding offense for the same violation may lead to the suspension or revocation of the company’s primary or secondary license.

Stronger governance

Meanwhile, analysts said the tighter rules on independent directors’ term limits will enhance board independence and strengthen governance over time. In the near term, however, they noted this could spark changes in boards of listed firms ahead of the annual stockholders’ meetings this year.

“The term limit for independent directors is a major step to strengthen corporate governance. It will prevent director entrenchment that could affect perceived independence. The limit will likewise open corporate boards to new members with fresh ideas and perspectives,” China Bank Capital Corp. Managing Director Juan Paolo E. Colet said in a Viber message.

Toby Allan C. Arce, head of sales trading at Globalinks Securities and Stocks, Inc., said the cap will ensure directors are really independent and avoid issues like too much familiarity, management capture, and passive oversight.

“It also accelerates board refreshment, which can enhance diversity in skills, age, gender, and professional background,” he said in a Viber message.

Mr. Arce noted that the policy forces companies, especially large conglomerates and banks, to balance director independence with preserving institutional memory, as losing experienced independent directors risks weakening boards if succession isn’t planned ahead.

“Companies that treat this as an opportunity to redesign board composition — rather than merely comply — are likely to emerge with stronger oversight frameworks and clearer role definitions between executive, non-executive, and independent directors,” he said.

BDO Securities President John Tristan D. Reyes said the new rules will help bring in new perspectives and skills as new independent directors are appointed to boards of listed firms.

“In the short term, however, it may create challenges for companies that depend on long‑serving directors with deep knowledge of their business, especially in more complex or regulated sectors,” he said. “As companies prepare for the 2026 annual stockholders’ meetings, many will speed up succession planning, adjust board composition, and provide more detailed disclosures on their refresh plans. Some may face continuity issues if several long‑tenured directors need to step down at the same time,” he added.

Mr. Colet, however, called on the commission to go further, emphasizing that much more can be done to enhance public companies’ governance.

“For example, public shareholders should have a greater say in electing independent directors. This can be done through a requirement that an independent director must also receive a majority of the votes cast by public shareholders, or through a rule that at least one independent director should be elected solely by public shareholders,” he said.

Mr. Arce said investors will also likely scrutinize not just rule compliance but also whether replacement directors bring relevant expertise, genuine independence, and real board influence.

“Poorly executed transitions could raise red flags, while thoughtful board renewal could strengthen investor confidence,” he said. — Alexandria Grace C. Magno