A Question of Entitlement: Perks and the SSS Director

by Santiago F. Dumlao, Jr.

Background

THE Philippine Social Security System (SSS) has significant investments in several local
companies which entitles it to nominate representatives to the Board of Directors of these companies.
Typically, the SSS Chairman and/ or President would be the designated representatives, but as it
sometimes happens, SSS is entitled to more Board seats, and thus, other SSS officers are then
additionally designated.
As members of the investee Board of Directors, these SSS nominees are granted various kinds of
remuneration or compensation. There is the per diem paid for attendance at Board or committee
meetings. There are year-end bonuses. There are profit-sharing schemes or bonuses, where the
Directors share in the net income generated during the year by the companies they serve. Sometimes,
there are stock option plans where the Directors are granted the opportunity to subscribe to the
common stock of the company at option prices within an exercise period. If the market price of the
stock rises higher than the option price, it naturally becomes profitable to exercise the option and then
turn around and sell at a profit or gain.

Enter P.Noy

THESE compensation schemes have been questioned under the Aquino administration as
excessive entitlements that constitute abuse of authority. In addition, these have been labeled as
corrupt and unconscionable by the media at large.

The Pros and Cons

ONE extreme view is that the SSS nominee in the Board should not gain anything from his/her
Directorship because the payments are received in his/her capacity as SSS representative, so these
payments should be turned over to his/her principal, i.e. to the SSS. In this view, the Director has already
been compensated in full by the SSS.

The opposite extreme view is that the SSS nominee holds his/her office in the nature of a special
privilege and that these added entitlements are deserved compensation for the additional burden and
personal liability they take on as Directors of the investee companies.

In between these views are other opinions:

Per diems, it is said, are granted to every Director for participating and contributing in the deliberations
of the Board or its committees. The Director, therefore, is being paid for his/her work as a Board
Member, not as an SSS nominee. In fact, he/she is open to potential liability for decisions of the Board
and assumes certain collective responsibility and accountability with the other Directors.

Year-end bonuses, says one view, are out-of-the-ordinary payments. Therefore, these should be
returned to the SSS.
Profit-Sharing schemes are granted out of the income generated by the company. The profits accrue
from the SSS investment. Therefore, the profit-sharing should be turned over to the SSS and not
pocketed by the SSS nominee.

Stock options, says another view, arise from the investment made in the company by the investor.
Whatever gain that is to be made from stock options should accrue to the investor or the SSS, and not
the SSS nominee to the Board.

The view has been expressed that in some cases, the Board has expressly provided that the
stock option plan is for the exclusive personal benefit of the Director and cannot be transferred or
assigned. In this case, it is said that the Director has the rightful entitlement to the stock option. But a
contrary view has also been expressed that in such a case, the exclusivity clause is self-serving because it
is the Board itself that adopted the exclusivity policy to favor the Board of Directors, of which the SSS
nominee is a member.

One former SSS CEO has said that, "I used my own personal money to buy the stocks under the
stock option plan. SSS did not give me the funds to purchase them. Why then should the profit, if any, go
to SSS? Besides, there continues to be the risk of the stock price going down."

These payments or entitlements have created some controversy because in some companies,
the perks, stock options and the gains have turned out to be relatively huge.

The extra generous amounts might be currying undue favor for the representatives of
government institutions in these Boards. It is widely speculated that Malacañang has intervened in the
choice of nominees to the Boards of such companies as San Miguel Corporation, Philex Mining and
Union Bank, which have provided handsome perks to its Directors.
A view has also been expressed that since the Chairman or President and other officers of the
SSS have been recruited from the private sector, where compensation is comparatively higher, the perks
from directorships serve to augment or equalize the compensation of these SSS executives, to "make
up" for their reduced income after joining government service.

The opinion of the Department of Justice has been sought on the legality of receiving these
perks as personal benefits to the SSS nominees to the Boards of its investee companies.

One former SSS CEO is of the opinion that per diems are personal entitlements. As for the other
perks, whether they are to be kept or turned over to SSS is a matter of conscience.

Discussion Guides:

1. What are the ethical issues here?

2. Should a distinction be made between and among the different compensation schemes to determine
what is ethical and unethical behavior?

3. Should the ethical issue be affected by the amount or size of the entitlements or payments involved?
4. If the opinion of the Department of Justice made the payments legal, did it also make them ethical?
Justifiable? Acceptable? Excusable?

5. What would you do if you were the Nominee-Director?