The Concept of Centralized Management by the Corporation Through the Board of Directors.
The power to create corporations is one of the attributes of sovereignty. 1 The exercise
of this power is legislative in character, and that Legislature may, subject to the restrictions of
the Constitution, create a particular corporation by direct act, or make provisions, by general
law, for the organization of corporations by natural persons upon compliance with the
prescribed conditions.2
Under the Constitution,3 the Congress cannot, except by general law, provide for the
formation, orgnanization, or regulation of private corporations. The same Constitutional
provision however allows government-owned or controlled corporations to be created or
established by special charters in the interests of the common good and subject to the test of
economic viability.4
A corporation’s management is centralized in the Board of Directors, to whom also are
granted corporate powers as may be provided in its charter. The corporate feature of
“centralized management” imbues the corporate medium with stable and efficient system of
governance and dealings with third parties, since management prrogatives are centralized in its
Board of Directors. Under the “Theory of Original Power”, the source of power of the Board
comes directly from the law,5 and that the Board is originally and directly granted corporate
powers as the embodiment of the corporation. This theory has no democratic notions, but
actually is more akin to the principles of autocracy. It recognizes that one of the attractive
features of the corporate vehicle for the efficient and economical management of corporate
affirs is promoted by centralization of control in a small group of decision-makers, which is the
Board of Directors.
The Peculiar Agency Role of the Board.
Under the Law,6 the Board is the main agency by which all corporate powers and
authority is exercised , and strictly speaking, any other officer appointed to represent the
corporation, is a mere appointee or sub-agent of the Board. In the case of ABS-CBN
Broadcsating Corp. v. Court of Appeals, 7 the Supreme Court has characterized the power of the
Board of Directors as follows:
1
McCullogh v. Maryland, 4 Wheat. 316, 4 L.Ed. 579
2
Fisher, The Philippine Law on Stock corporations (1929 Ed.) p.3.
3
Sec. 16, Art. XII of the 1987 Constitution
4
Feliciano v. Commission on Audit, 419 SCRA 363 (2004)
5
Sec. 23, Corporation Code
6
Ibid.
7
301 SCRA 572 (1999)
“Corporate powers, such as the power to enter into contracts, are
exercised by the Board of Directors. However, the board may delegate such
powers to either an executive committee or officials or contracted managers, of
which the delegation must be for specific purpose. The delegation to officers
makes the latter as agents of the corporation; accordingly, the general rules of
agency as to the binding effects of their acts would apply. For such officers to be
deemed fully clothed by the corporation to exercise a power of the Board, the
latter must specially authorize them to do so.”
In the case of Premium Marble Resources v. Court of Appeals, 8 the Court was emphatic
in saying that in the absence of an authority from the Board of Directors, no person , not even
the officers of the corporation, can validly bind the corporation. It held that in the absence of
any board resolution authorizing the filling of a suit for the corporation, then any suit filed on
behalf of the corporation should be dismissed, since the power of the corporation to sue ans be
sued in court is lodged with the Board of Directors that exercises its corporate powers. 9
In a corporate setting, although the Board is an agent of the corporation, since the
principal is a mere juridical concept, it realistically is not in a position to countermand the
decision of its agent, the Board. In fact, unlike in an ordinary principal-agent relationship, the
corporate principal does not really have its own mind to allow it to decide the matters for itself-
the mind of the corporation is principally that of its own agent, the Board. Therefore, the
determination of the board is practically and legally the determination of the principal
corporation itself.
This line of discussion brings us therefore to the logical crossroad that provides that
although legally, the Board is the agent of the principal corporation, since the principal does not
have real existence or a mind of its own to make decisions, the Board is, by the exercise of its
business judgment, the very principal speaking and acting in all transactional and corporate
operations. In a manner of speaking, the Board acts both as an agent of the corporation , and
the very personification of the corporation in the outside world, and practically stands as the
principal for corporate powers and affairs, and that the officers and representatives that it
appoints are its own agents.
The Business Judgment Rule.
The corporate principle recognizing corporate power and competence to be lodged
rimarily with the board of Directos is embodied in the “business judgment rule”. A resolution or
8
264 SCRA 11 (1996)
9
Ibid. Reiterated in Monfort Hermanos Agricultural Dev. Corp. V. Monfort, 434 SCRA 27 (2004)
transaction pursued within the corporate powers and business operations of the corporation,
and passed in good fiath by the Board of directors, is valid and binding; and generally, hte
courts have no authority to review the same or substitute their own judgment, even when it
can ne proven that the exercise of such power may cause losses to the corporation.
In the case of Montelibano v. Bacolod-Murcia Milling Co., Inc., 10 the Supreme Court had
earlier established the principle that when a resolution is “passed in good faith by the board of
directors, it is valid and binding , and whether or it it will cause losses or decrease the profits of
the corporation, the court has no authority to review them, adding that it is a well-known rule
of law that questions of policy or management are left soley to the honest decision of officers
and directors of a corporation , and the court is withour authority to substitute its judgment for
that of the board of directors; the board is the business manager of the corporation, and so
long as it acts in good faith, its orders are not reviewable by the courts.11
Illuminating also is the case of Gamboa v. Victoriano,12 where the Supreme Court held
the the courts cannot supplant the discretion of the board on administrative and management
matters as to which they have legitimate power of action, and contracts which are intra vires
entered into by the Board are binding upon the corporation and courts will not interfere unless
such contracts are so unconscionable and oppressive.
As emphasize in the case of Philippine Stock Exhange Inc., v. Court of Appeals, 13 also
seems to establish another theoretical basis for the business judgment rule vis-a-vis the control
of the State, based on the recognition of the corporation merely as an association of individuals
who thereby do not give up through the medium of the corporation their management
prerogatives, and thus:
“x x x questions of policy and of management are left to the honest
decision of the officers and directos of a corporation, and the courts are without
authority to substitute their judgment for the judgment of the board of directors.
The board is the business manager of the corporation, and as long as it acts in
good faith, its orders are reviewable by the courts.”
10
5 SCRA 36 (1962)
11
Estacio v. Pampanga Electric Coop, Inc., 596 SCRA 542 (2009)
12
90 SCRA 40 (1979)
13
281 SCRA 232 (1997)
