Compensation of directors

Published December 18, 2019, 12:00 AM

by manilabulletin_admin

Atty. Jun De Zuñiga
Atty. Jun De Zuñiga

Directors of corporations, in general, shall not receive any compensation as such directors, except for reasonable per diems, in the absence of any provision in the bylaws fixing their compensation. They may receive compensation, other than reasonable per diems, only upon the vote of the stockholders representing at least a majority vote of the outstanding capital stock (Section 29, Revised Corporation Code).

In no case shall the total yearly compensation of the directors exceed ten percent (10%) of the net income before income tax of the corporation during the preceding year. Moreover, directors are not allowed to participate in the determination of their own per diems or compensation (ibid.).

The rationale for the above rule is explained as follows: “Appointment to the board is a consequence of corporate ownership. An owner or member is ordinarily expected to assume the post of director or trustee, and manage the corporation for his ultimate benefit. Thus, the law does not generally authorize the payment of compensation to a shareholder or member as director or trustee” (Herbosa and Recalde, The Revised Corporation Code, p. 143). Directors render services gratuitously and the return upon their shares adequately furnishes the motives for services without compensation (SEC Opinion dated Sept. 8, 1975).

As mentioned, a director cannot participate in determining his own compensation because there is conflict of interest in such situation. If compensation is to be determined for all members of the board, the board may set up a special committee on compensation and its recommendations shall be subject to stockholders’ approval (Herbosa and Recalde, ibid., p. 144). Any such compensation without proper authorization in the bylaws or by the vote of the stockholders may be recovered in a stockholders’ suit. The stockholders cannot ratify a board action fixing their salaries. Such action, being contrary to law, cannot be ratified. The stockholders themselves, by the requisite vote, must fix the compensation (De Leon, The Corporation Code, pp. 286 and 288).

On the grant of per diems, there are two standards for their approval: First, the per diems should be reasonable and, second, the directors cannot participate in the determination thereof. What is a “reasonable” per diem depends on the circumstances. A reasonable per diem is not subject to tax as there is no income on the part of the director, since its amount is only enough to cover his costs. On the other hand, an excessive per diem amounts to compensation and becomes generally subject to tax (Herbosa and Recalde, supra, p. 144). Under the old Corporation Code, there was no mention as to whether the board of directors can approve the grant of per diems and, thus there was the conclusion then that the board has such authority to fix per diems for themselves. This issue has now been clarified under Section 29 of the Revised Corporation Code whish expressly states that “directors or trustees shall not participate in the determination of their own per diems and compensation.”

Directors may also receive compensation in addition to reasonable per diems, when they render services to the corporation in a capacity other than as directors. As the Supreme Court held, the proscription against granting compensation to directors is not a sweeping rule as the phraseology of the law allows the same when they render services to the corporation in a capacity other than as directors (Western Institute of Technology vs. Salas, 278 SCRA 216).

A blessed and merry Christmas to all!

The above comments are the personal views of the writer. His email address is [email protected]