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The porous defense of  business judgment rule

(Article published in the Oct 12,2011 issue of Manila Standard Today) 

It is the “direct or indirect endorsement by high government officials...”, as phrased by former President Fidel V. Ramos’ Memorandum Order No. 61, dated 09 November 1992, that is determinative of a behest loan; the rest of the characteristics that were mentioned are simply features of a simply faulty loan.  It is the order, euphemistically described as “endorsement” which, that puts an examined loan under the category of a “behest loan.” 

The presumption, borne out of our earthly (i.e. on the ground) experience, is that a behest from those above robs their underlings of the latters’ integrity; they are given no choice all. They thus may have been moved to be lenient where otherwise they would have been strict.  They are told to examine with a blind eye what they otherwise would scrutinize, as if under a microscope, whatever defects and weaknesses the mandated transaction might have. 

The implication, of course, will not hold if the behest came from Plato’s Philosopher King or old Israel’s Yahweh or our own native Maykapal (in traditional meaning of “source of all blessings” not in the current street language referring to the thickness of mukha, or face).  Unfortunately, none of these esteemed heavenly rulers have ever governed our side of paradise. 


And since the fact of behest, as brought out during the first hearing of the Senate hearings last Friday (Oct 7), is generally accepted by the public, those defending the loans granted by the Development Bank of the Philippines to the Honourable Roberto V. Ongpin’s two corporations during the administration of Gloria Macapagal-Arroyo are, in addition to screaming the emotive cry of “Witchhunt!”, insisting that the loans are all above board.  The argument is that the then lords of the manor, assuming they made the behest, did not cause their serfs to do anything wrong—a herculean burden of proof even if only half of the litany of defects now made public were to be established. 

What the defenders of the DBP transaction could be expected to do, when the first line of defense eventually, as it now seems to be beginning to, crumbles, is to fall back and seek cover under what is known as the Business Judgment rule.  In a relatively recent case, Ong Yong v. Tiu, G.R. No. 144476, April 8, 2003, the Supreme Court, quoting an earlier decision in the late 70s, defined it thus: “xxx Contracts intra vires entered into by the board of directors are binding upon the corporation and courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to wanton destruction to the rights of the minority, as when plaintiffs aver that the defendants (members of the board), have concluded a transaction among themselves as will result in serious injury to the plaintiff stockholders.”  The Ong Yong case involved a lower court’s intrusion, which Supreme Court held improper, into the corporate affairs of First Landlink Asia Development Corporation (FLADC) ordering it to decrease its capital stock even if FLADC’s directors and stockholders had not consented thereto.   

As explained in the website of Corporate Board Minutes, the rule acts as a shield to “the director or officer from errors of judgment that resulted in the allegedly negligent act or omission provided they acted in good faith in a matter of business policy or business judgment” (quoted in “The Business Judgment Rule: Checking the Autocracy in the Board Room” by Janelyn P. Ng, writing for the University of Sto. Thomas Law Review [vol LII, p. 149]). But, it ought not be forgotten that, as ruled in another case, Republic Telecommunications Holdings, Inc. v. Court of Appeals, G.R. L-135074, January 29, 1999, the Business Judgment Rule does admit of some exceptions, “bad faith, being one of them, gross negligence another.” 

Public interest, I submit, is a third.  The social contract among those directly interested in the affairs of a corporation is always to be thought of, nay subject to, the broader and deeper contract amongst the community’s members who may be affected.  Those in business are not absolutely autonomous entities; they are wired, interactively, to those who are not only in their immediate vicinity but also those who stand to be prejudiced or benefitted by their actions. 

And when the activity is conducted in an industry that, like banking, is, both in the mind of the legislators (granting without conceding that there be any in all cases) and of the public, “imbued with public interest”, the standard of social responsibility of those in business is heightened and transcends the narrow interests of the immediate players.  

It is not acceptable, I submit, to simply accept as the last word on the DBP loan to RVO that the loan was repaid, that DBP made money (much more than it otherwise would have had it not entered into the loan and/or joined in the Philex sale), and that, therefore, “all’s well that ends well.” 

A thorough examination, I suggest, is necessary, of the cost of such profit, of the risks that were taken to obtain it, of the damage done to those who would otherwise have been benefitted, as they should have been, by the use of their funds been faithful to the bank’s primary mission, and, lest we forget, the individual (i.e. personal) accountabilities of all those who had participated in the processes that generated the loan and effected the transaction. 

All these, I am hopeful, the able senators at the joint hearings on the matter, would, with patriotism and fidelity to the people, with fairness towards all, look into.