FILIPINAS PORT SERVICES INC v GO, ET AL

G.R. NO. 161886, MARCH 16 2007, FIRST DIVISION (GARCIA, J)

The determination of the necessity for additional offices and/or positions in a corporation, if authorized under the
by-laws is a management prerogative which the courts are wont to review in the absence of any proof that such prerogative
was exercised in bad faith or with malice. Similarly, the Board of Directors may create an executive committee or other
board committees as part of its management prerogative provided that such board committees do not function as an executive
committee as contemplated by Section 35 of the Corporation Code, in which case authority in the by-laws is required.
Questions of policy or of management are left solely to the honest decision of the board as the business manager of the
corporation, and the court is without authority to substitute its judgment for that of the board, and as long as it acts in good
faith and in the exercise of honest judgment in the interest of the corporation, its orders are not reviewable by the courts.

Eliodoro C. Cruz (Cruz) was president of Filipinas Port Services, Inc. (Filport) since 1968. He
lost his bid for re-election in 1991. A year thereafter, Cruz wrote a letter to the corporations Board of
Directors questioning the creation of six (6) positions and the election of certain members of the board
thereto. It would seem that Cruz was unhappy with the Boards action or actions on the matter, for a
year later he filed a petition with the Securities and Exchange Commission (SEC), joined by Mindanao
Terminal and Brokerage Services, Inc. (Minterbro) as co-petitioner, what he calls a derivative suit
supposedly in representation of Filport and its stockholders.

It is Cruzs contention that the creation of an executive committee is not provided for in the by-
laws and the increase in the emoluments of several members of the board is greatly disproportionate to
the volume and character of work of said directors. Further, he questions the re-creation of the positions
of Assistant Vice President for corporate planning, operations, finance and administration and additional
positions where those holding said offices are not doing any work but earning compensation. These acts
of mismanagement according to Cruz are detrimental to the corporation and its stockholders and so the
board must account for the amounts incurred in creating these positions and made to pay damages.

This intra-corporate case was in hibernation until the enactment on July 19, 2000 of the
Securities Regulation Code. And so it was transferred from the SEC to the Manila Regional Trial Court
(RTC) (sitting as a corporate court) and eventually landing in the Davao RTC. Though the RTC found
that Filports Board of Directors had the power to create positions not provided for in the by-laws and
the increases in salaries are reasonable, nevertheless it ordered the directors holding the positions of
Assistant Vice President for Corporate Planning, Special Assistant to the President and Special Assistant
to the Board Chairman to refund to the corporation the salaries they have received as such officers
considering that Filipinas Port Services is not a big corporation requiring multiple executive positions and that said
positions were just created for accommodation.

Upon appeal to the Court of Appeals (CA), the RTC decision was reversed and set aside and
thus the so called derivative suit was dismissed.

ISSUE:

Whether the creation of an executive committee and other offices in the corporation with
corresponding remunerations are within the powers of the Board of Directors.
HELD:

The governing body of a corporation is its board of directors. Section 23 of the Corporation
Code explicitly provides that unless otherwise provided therein, the corporate powers of all corporations
formed under the Code shall be exercised, all business conducted and all property of the corporation
shall be controlled and held by a board of directors. Thus, with the exception only of some powers
expressly granted by law to stockholders (or members, in case of non-stock corporations), the board of
directors (or trustees, in case of non-stock corporations) has the sole authority to determine policies,
enter into contracts, and conduct the ordinary business of the corporation within the scope of its charter,
i.e., its articles of incorporation, by-laws and relevant provisions of law. Verily, the authority of the
board of directors is restricted to the management of the regular business affairs of the corporation,
unless more extensive power is expressly conferred.

The raison detre behind the conferment of corporate powers on the board of directors is not lost
on the Court. Indeed, the concentration in the board of the powers of control of corporate business and
of appointment of corporate officers and managers is necessary for efficiency in any large organization.
Stockholders are too numerous, scattered and unfamiliar with the business of a corporation to conduct
its business directly. And so the plan of corporate organization is for the stockholders to choose the
directors who shall control and supervise the conduct of corporate business.

In the present case, the boards creation of the positions of Assistant Vice Presidents for
Corporate Planning, Operations, Finance and Administration, and those of the Special Assistants to the
President and the Board Chairman, was in accordance with the regular business operations of Filport as
it is authorized to do so by the corporations by-laws, pursuant to the Corporation Code.

The election of officers of a corporation is provided for under Section 25 of the Code which
reads:

Sec. 25. Corporate officers, quorum. Immediately after their election, the directors of a corporation
must formally organize by the election of a president, who shall be a director, a treasurer who may or
may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other
officers as may be provided for in the by-laws.

In turn, the amended Bylaws of Filport provides the following:

Officers of the corporation, as provided for by the by-laws, shall be elected by the board of
directors at their first meeting after the election of Directors. xxx

The officers of the corporation shall be a Chairman of the Board, President, a Vice-President, a
Secretary, a Treasurer, a General Manager and such other officers as the Board of Directors may
from time to time provide, and these officers shall be elected to hold office until their successors are
elected and qualified.

Likewise, the fixing of the corresponding remuneration for the positions in question is provided
for in the same by-laws of the corporation, viz:
xxx The Board of Directors shall fix the compensation of the officers and agents of the
corporation.

Unfortunately, the bylaws of the corporation are silent as to the creation by its board of
directors of an executive committee. Under Section 35 of the Corporation Code, the creation of an
executive committee must be provided for in the bylaws of the corporation.

Notwithstanding the silence of Filports bylaws on the matter, we cannot rule that the creation
of the executive committee by the board of directors is illegal or unlawful. One reason is the absence of
a showing as to the true nature and functions of said executive committee considering that the
executive committee, referred to in Section 35 of the Corporation Code which is as powerful as the
board of directors and in effect acting for the board itself, should be distinguished from other
committees which are within the competency of the board to create at anytime and whose actions
require ratification and confirmation by the board. Another reason is that, ratiocinated by both the two
(2) courts below, the Board of Directors has the power to create positions not provided for in Filports
bylaws since the board is the corporations governing body, clearly upholding the power of its board to
exercise its prerogatives in managing the business affairs of the corporation.

As well, it may not be amiss to point out that, as testified to and admitted by petitioner Cruz
himself, it was during his incumbency as Filport president that the executive committee in question was
created, and that he was even the one who moved for the creation of the positions of the AVPs for
Operations, Finance and Administration. By his acquiescence and/or ratification of the creation of the
aforesaid offices, Cruz is virtually precluded from suing to declare such acts of the board as invalid or
illegal. And it makes no difference that he sues in behalf of himself and of the other stockholders.
Indeed, as his voice was not heard in protest when he was still Filports president, raising a hue and cry
only now leads to the inevitable conclusion that he did so out of spite and resentment for his non-re-
election as president of the corporation.