Corporate Governance and Compensation: Lessons from the LBP Subsidiaries COA Ruling

The Supreme Court's 2021 ruling in Land Bank of the Philippines v. Commission on Audit (G.R. No. 213409) clarifies important rules on corporate governance and compensation for directors of government-owned and controlled corporations (GOCCs) and their subsidiaries. The case involved P5,133,830.02 in additional allowances and benefits that Land Bank subsidiaries paid to officials who served on their boards. The Court affirmed the Commission on Audit's (COA) disallowance of these payments, offering clear guidance on when directors may receive compensation beyond per diems.

The Facts

Land Bank of the Philippines (LBP), a government financial institution, owns several subsidiaries, including Land Bank Insurance Brokerage, Inc., Land Bank Realty Development Corporation, LBP Leasing Corporation, Masaganang Sakahan, Inc., and LBP Countryside Development Foundation, Inc. In 2003, COA's annual audit revealed that certain individuals served simultaneously as officers of the parent company and as board members or corporate officers of the subsidiaries. For their services to the subsidiaries, these individuals received various benefits and allowances.

COA issued a Notice of Disallowance for P5,133,830.02, representing additional benefits paid to board members of the subsidiaries. The grounds: the subsidiaries' by-laws did not provide for such benefits, and the payments violated the constitutional prohibition against double compensation.

The Issue

The central question was whether the subsidiaries' board resolutions granting additional compensation to their own members were valid, particularly where the board was composed mostly of representatives from the sole stockholder—the parent company.

The Ruling

The Supreme Court dismissed the petition and affirmed COA's disallowance with modification. The Court held that the payments lacked legal basis on several grounds.

First, under the Corporation Code, directors shall not receive compensation other than reasonable per diems unless the by-laws provide otherwise or the stockholders representing at least a majority of the outstanding capital stock approve it at a stockholders' meeting. The subsidiaries' by-laws contained no provision for additional benefits. A board resolution could not substitute for stockholder approval—even where the board was composed of representatives from the sole stockholder. The Court emphasized the distinction between the board, which manages corporate affairs, and the stockholders, who own the corporation. Allowing the board to grant itself additional compensation would present a clear conflict of interest.

Second, the payments violated Office of the President Memorandum Order No. 20, which suspended the grant of salary increases and new or increased benefits to GOCC personnel in senior officer positions, including board members, unless approved by the President. The petitioners failed to show such approval or prove that the benefits were not "new" or "increased."

Third, the Court rejected the argument that the subsidiaries, being private corporations under the Corporation Code, were outside COA's jurisdiction. The 1987 Constitution explicitly extends COA's authority to GOCCs and their subsidiaries. Since the payments went to LBP officials who are civil servants, the amounts were considered public funds.

Liability for the Disallowance

The Court held that the board members who received the disallowed amounts were liable to refund them. Their claim of good faith was not a valid defense. The Court noted that these officials were both payees and approving officers—they passed resolutions granting themselves additional compensation. This direct participation in illegal disbursements barred any excuse from liability.

However, the Court relieved the other approving and certifying officers—accountants, treasurers, cashiers, and general managers—from personal liability, absent evidence of bad faith, malice, or gross negligence. Public officers are presumed to have performed their duties regularly and in good faith.

Practical Takeaways

• Board resolutions cannot replace stockholder approval. Even if the parent company is the sole stockholder, its representatives on a subsidiary's board act as directors, not as proxies for stockholder voting. Additional director compensation requires stockholder approval at a meeting or a by-law provision.

• Directors face a conflict of interest when voting on their own compensation. The Court treated such self-granted benefits as ultra vires acts that arrogate a power reserved to stockholders.

• GOCC subsidiaries are within COA's jurisdiction. Payments to civil servants, even from subsidiary funds, are treated as public funds subject to audit and disallowance.

• Executive approval is required for new benefits. GOCCs and their subsidiaries must obtain presidential approval before granting new or increased benefits to senior officers and board members.

• Good faith is not a blanket defense. Recipients of disallowed amounts must refund them unless they can prove the payments were genuinely for services rendered or exceptional circumstances warrant excuse. Officers who both approved and received illegal benefits face solidary liability.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.