Navigating GOCC Compensation: Board Authority and Disallowed Benefits in the Philippines

The Supreme Court recently settled important questions about when directors and officers of government-owned and controlled corporations (GOCCs) may receive gratuity or retirement benefits. In Aguilar v. Commission on Audit (G.R. No. 258527, May 21, 2024), the Court upheld the disallowance of over PHP 90 million in gratuity benefits paid by the Philippine National Construction Corporation (PNCC) to its directors and senior officers from 2007 to 2010. The ruling clarifies the limits of a GOCC board's authority to grant additional compensation and the liability of recipients when such payments are disallowed.

The Facts of the Case

PNCC was originally a private construction corporation. After a debt-to-equity conversion in 1983, the government acquired 76.8% of its capital stock, and the corporation was renamed PNCC. By 2007, government ownership had reached 90.3%.

Anticipating the turnover of its tollway operations to private entities, the PNCC Board of Directors passed several resolutions from 2005 to 2009 authorizing gratuity benefits for its directors and senior officers. These included gratuity pay equivalent to one month's gross remuneration for every year of service and the creation of a Retirement Fund.

The Commission on Audit (COA) disallowed the payments, totaling PHP 90,748,975.21, finding them excessive, unreasonable, and illegal. The COA held that the Board lacked authority to create the Retirement Fund and that the benefits violated several regulations governing GOCCs.

The Core Issue

The central question was whether the COA committed grave abuse of discretion in affirming the disallowance and holding the petitioners liable to return the amounts they received.

The Court's Ruling

The Supreme Court denied the petition and affirmed the COA's disallowance. The Court made several key rulings:

PNCC is a GOCC. The Court reiterated that PNCC is a GOCC without an original charter, subject to COA audit jurisdiction. The Court rejected the argument that an earlier case (Pabion) had established PNCC as a private corporation. That case involved a different issue—whether the SEC could compel a shareholders' meeting—and did not address the Board's power to grant benefits.

Board authority was limited. The Court held that the gratuity benefits constituted additional compensation, which required compliance with several regulations:

• Section 6, Presidential Decree No. 1597 requires GOCCs to observe presidential guidelines on compensation and fringe benefits.
• Memorandum Order No. 20 (2001) suspended the grant of new or increased benefits to senior positions in GOCCs without presidential approval.
• Administrative Order No. 103 (2004) suspended the grant of new gratuity benefits to GOCC officials, including board members.
• DBM Circular Letter No. 2002-2 provides that board members of GOCCs are non-salaried officials not entitled to retirement benefits unless expressly provided by law.

The Corporation Code's compensation limit applied. Even if the Board had authority, Section 30 of the Corporation Code (then in effect) limits total yearly director compensation to 10% of the corporation's net income before tax during the preceding year. PNCC had been incurring losses from 2003 to 2006, so this requirement was not met.

Liability for Return

Applying the rules on return established in Madera v. COA and related cases, the Court held that the petitioners—who were both approving officers and recipients—were liable to return the disallowed amounts. The Court found no basis to excuse their return, as the benefits were not "genuinely given in consideration of services rendered" under the exceptions recognized in Madera.

The Court also noted that two petitioners who failed to appeal the disallowance within the prescribed period could no longer contest it, as the decision had become final and executory as to them.

Practical Takeaways

• GOCC boards have limited authority to grant compensation beyond what laws and presidential issuances expressly allow. Board resolutions alone cannot authorize gratuity or retirement benefits for directors and officers.
• Prior presidential approval is often required. GOCCs must secure approval from the Office of the President or the DBM before implementing new or increased benefits for senior officials.
• Directors of GOCCs are generally non-salaried and entitled only to per diems for actual attendance at meetings, unless a law expressly provides otherwise.
• Recipients of disallowed benefits may have to return them. Even approving officers who acted in good faith may be liable as recipients, unless the amounts fall under narrow exceptions recognized by the Court.
• Appeals from COA disallowances must be timely filed. Failure to appeal within the prescribed period makes the disallowance final and executory, barring any further challenge.

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