Can Shareholders Contest Excessive Executive Compensation?
Introduction
Corporate executives may receive substantial salaries, bonuses, allowances, and other benefits. However, compensation becomes legally vulnerable when it is approved without proper corporate authority, exceeds statutory limits, lacks a legitimate business basis, or improperly reduces the corporation’s income and assets.
Shareholders are not entirely without recourse when a board approves an excessive compensation package. Depending on the circumstances, they may challenge the approval through corporate remedies, demand an accounting, seek the return of unauthorized payments, or pursue derivative proceedings against directors and officers who breached their fiduciary duties.
Governing Rule Under the Revised Corporation Code
Section 29 of the Revised Corporation Code of the Philippines governs compensation of directors and trustees. It provides that, unless the bylaws fix their compensation, directors or trustees generally receive no compensation in their capacity as such, except reasonable per diems.
Compensation other than reasonable per diems may be granted only through the vote of stockholders representing at least a majority of the outstanding capital stock, or by a majority of the members in a nonstock corporation, at a regular or special meeting. The total yearly compensation of directors or trustees must not exceed 10% of the corporation’s net income before income tax during the preceding year.
The statutory limit applies to compensation received by directors or trustees in their capacity as members of the board. It does not necessarily prohibit payment for separate services performed in another capacity, such as president, chief executive officer, lawyer, consultant, or technical adviser, provided that the separate engagement is genuine, properly authorized, and reasonably compensated.
Board Compensation and Executive Compensation Are Different
A distinction must be made between compensation received as a director and compensation received for an executive or operational position. A person may simultaneously serve as a director and as a corporate officer, but the legal basis and approval requirements for each payment may differ.
The Securities and Exchange Commission explained in SEC Opinion No. 25-07, 2025 that the phrase “in their capacity as such” limits the statutory prohibition to compensation for services performed purely as directors or trustees. A board member may receive additional compensation for services rendered in a different corporate capacity.
This distinction does not give the board unlimited discretion. A purported executive salary may still be challenged if the position is merely a device for giving unauthorized compensation to a director, if no meaningful services are rendered, or if the amount is grossly disproportionate to the services and financial condition of the corporation.
When Is Compensation Legally Vulnerable?
Shareholders may question a compensation package when one or more of the following circumstances exists:
- No authority under the bylaws or stockholder approval: Compensation for directors is generally improper when it is not authorized by the bylaws or approved by the required stockholder vote.
- Excess of the statutory ceiling: Compensation received by directors in that capacity may not exceed 10% of the corporation’s preceding-year net income before income tax.
- Payment despite corporate losses: When the corporation had no preceding-year net income, the statutory basis for board compensation subject to the 10% limit is absent.
- Self-dealing: Directors should not determine their own per diems or compensation under Section 29 of the Revised Corporation Code.
- Use of a nominal executive position: A title such as chief executive officer or adviser does not automatically validate compensation when the appointment is only a means of paying a director.
- Corporate waste or bad faith: Excessive payments may support a claim when they are plainly harmful to the corporation, approved for personal benefit, or made without reasonable investigation.
What Does the Board’s Business Judgment Protect?
Courts generally respect decisions made by corporate boards concerning management, including the creation of positions and the fixing of compensation. In Filipinas Port Services, Inc., et al. v. Go, et al., G.R. No. 161886, 2007, the Supreme Court recognized the board’s broad authority to create corporate positions and determine compensation when the action is within the corporation’s bylaws and governing law.
The business judgment rule, however, is not a shield for fraud, bad faith, malice, conflict of interest, or an act outside corporate authority. Unsupported allegations of mismanagement are ordinarily insufficient, but evidence showing that directors used corporate funds for personal advantage may justify judicial intervention.
Why Board Approval Alone May Be Insufficient
A board resolution does not always cure an invalid compensation grant. The board manages the corporation, while the stockholders are the owners who supply its capital. These are distinct corporate bodies with different legal powers.
In Land Bank of the Philippines, et al. v. Commission on Audit, G.R. No. 213409, October 5, 2021, the Supreme Court held that a board resolution could not substitute for the stockholder vote required for additional compensation under the then-applicable Section 30 of the Corporation Code. Under the present Revised Corporation Code, the corresponding provision is Section 29.
The same principle was applied in Central Cooperative Exchange, Inc. v. Enciso, et al., G.R. No. 35603, 1988, where the board’s self-grant of compensation and allowances was treated as ultra vires because the authority to fix such benefits was reserved to the stockholders.
Effect of Corporate Losses
Corporate losses are especially significant when the payment is compensation to directors in their capacity as directors. In Gonzaga, et al. v. Commission on Audit, G.R. No. 244816, 2021, the Supreme Court held that bonuses given to directors were properly disallowed because the corporation had incurred losses and had no preceding-year net income from which the payments could properly be taken.
The approval of another regulatory body or the inclusion of an item in an approved corporate budget does not automatically overcome the limitations imposed by the Corporation Code. Regulatory or budgetary approval must still be consistent with the statutory requirements governing director compensation.
Available Remedies for Shareholders
Request for Corporate Records and Information
A shareholder may begin by demanding access to relevant corporate records, subject to the rules of the Revised Corporation Code and the corporation’s legitimate confidentiality interests. The requested documents may include the board resolution, employment or consultancy agreements, compensation committee reports, payroll records, audited financial statements, and minutes of stockholder meetings.
The purpose is to determine whether the compensation was authorized, whether the recipient performed separate executive services, whether the corporation had sufficient income, and whether the approving directors had a personal interest in the transaction.
Demand for Review or Rescission
Shareholders may ask the board or the stockholders to suspend, reduce, or rescind the compensation package. A formal demand should identify the legal defect, state the corporate harm, preserve objections, and request corrective action within a reasonable period.
Where the issue concerns compensation received by directors, the demand should specifically address the bylaws, the required stockholder vote, the 10% limitation, the corporation’s preceding-year net income, and the participation of interested directors in approving their own benefits.
Derivative Action
When the injury is suffered primarily by the corporation, the usual remedy is a derivative action brought by a qualified shareholder on behalf of the corporation. The action may seek the return of unauthorized compensation, damages, cancellation of the transaction, or other relief benefiting the corporation.
A derivative action is different from a personal action. A shareholder ordinarily cannot recover personally for a decrease in share value that merely reflects damage suffered by the corporation. The corporation is generally the real party in interest for claims involving misuse of corporate assets.
Direct Action for Individual Shareholder Injury
A direct action may be available when the shareholder suffers a distinct injury separate from the corporation’s loss. Examples may include denial of voting rights, refusal to provide legally required information, or impairment of a specific shareholder right.
The proper characterization of the action matters. A claim seeking reimbursement of corporate funds will ordinarily be treated as corporate in nature, while a claim involving a personal voting or inspection right may be brought directly by the affected shareholder.
Action for Accounting and Restitution
Shareholders may seek an accounting to determine the amount paid under the disputed compensation package. If the payments are found unauthorized or illegal, the recipients and responsible approving officers may be required to return the amounts, subject to the applicable rules on liability and good faith.
Potential Liability of Directors and Officers
Directors and officers may incur liability when they knowingly approve unlawful compensation, act in bad faith, are grossly negligent, or place their personal interests above those of the corporation. Participation in both the approval and receipt of the benefit is a significant fact in evaluating responsibility.
In Gonzaga, et al. v. Commission on Audit, G.R. No. 244816, 2021, the Court treated the directors’ awareness of the statutory restrictions and the corporation’s losses as inconsistent with good faith. The recipients and approving officers were therefore exposed to refund consequences for unauthorized benefits.
Likewise, Land Bank of the Philippines, et al. v. Commission on Audit, G.R. No. 213409, October 5, 2021, recognized that additional benefits granted without the required authority may be ultra vires and void, with refund obligations generally following when the recipients participated in approving the illegal disbursements.
How Shareholders Should Build the Record
A challenge should be supported by documents rather than conclusory accusations. The following evidence is commonly important:
- the corporation’s articles, bylaws, and amendments;
- board and stockholder resolutions approving the compensation;
- employment, consultancy, or management agreements;
- audited financial statements and income tax records;
- payroll, bonus, allowance, and reimbursement records; and
- communications showing conflicts of interest, lack of services, or concealment.
Shareholders should also compare the disputed payments with the corporation’s size, financial performance, executive responsibilities, industry conditions, and compensation practices for similarly situated officers. A high salary is not automatically unlawful; the issue is whether it was authorized, genuinely earned, and consistent with fiduciary obligations and corporate interest.
Illustrative Scenarios
Scenario one: Director bonuses despite losses. A corporation incurs losses but its directors approve Christmas and anniversary bonuses for themselves. The payments are vulnerable because director compensation is subject to Section 29 and the corporation generated no preceding-year net income.
Scenario two: CEO compensation approved under a valid employment agreement. A director is separately appointed as chief executive officer under a written agreement approved through proper corporate procedures. The compensation may be valid if the executive services are real, the amount is reasonable, and the arrangement is not a disguised self-grant.
Scenario three: Board resolution granting allowances to directors. The board approves monthly allowances for its members without a bylaw provision or stockholder approval. The resolution may be invalid, particularly if the allowances are compensation rather than reasonable per diems.
Important Distinction Between Per Diems and Compensation
Reasonable per diems are treated differently from compensation. SEC Opinion No. 25-07, 2025 states that Section 29 does not require prior stockholder or member approval for the fixing of reasonable per diems, although stockholders may review their reasonableness and seek relief if the amounts are excessive.
This does not mean that every allowance is a per diem. A recurring payment unrelated to attendance, meetings, or actual board duties may be treated as compensation. Its label will not control if the substance of the payment shows that it is a salary, bonus, or personal benefit.
Recommended Steps Before Filing a Case
- Review the articles, bylaws, compensation policies, and relevant corporate resolutions.
- Determine whether the payment was for board service or for a separate executive position.
- Check the corporation’s preceding-year net income before income tax.
- Obtain the required stockholder approval records and identify interested directors.
- Send a written demand for records, explanation, suspension, or reimbursement.
- Assess whether the claim belongs in a direct action, derivative action, or another corporate proceeding.
- Preserve financial records and communications before seeking judicial relief.
Conclusion
Shareholders may contest excessive compensation when the package lacks corporate authority, violates Section 29 of the Revised Corporation Code, exceeds the statutory limit applicable to director compensation, or reflects bad faith and misuse of corporate assets.
The strongest challenge is supported by corporate records showing that the directors approved benefits for themselves, bypassed the required stockholder vote, ignored corporate losses, or used an executive title to disguise unauthorized compensation. The usual corporate remedies include inspection and accounting, a demand for corrective action, a derivative suit, and recovery of improperly disbursed funds.
Before filing, shareholders should distinguish legitimate executive pay from compensation received solely as a director and should establish the corporation’s actual financial condition and approval process. Courts generally respect reasonable business decisions, but that protection does not extend to self-dealing, unlawful payments, fraud, or acts beyond corporate authority.
About Nicolas and De Vega Law Offices
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