Independent directors: use different approach

Published July 29, 2014

First published in Business Times on July 29, 2014


I REFER to the report “Keppel leads the pack in governance and transparency” (BT, July 25) in which I was quoted as posing a question to a panel discussion at the CPA Australia forum, where the results of the latest Governance and Transparency Index (GTI) were presented.

The question I posed was in response to a discussion about the “nine-year” guideline on independent directors in the 2012 Code of Corporate Governance, under which the independence of directors should be subjected to a “particularly rigorous review” after nine years. In addition to the lack of clear guidance on how a “particularly rigorous review” is to be conducted, I was concerned about relying solely on the nominating committee or the board to determine if a director who has served beyond nine years should continue to be considered to be independent. This is because of the inherent conflict faced by the nominating committee and the board in this.

In fact, the nominating committee and the board are also conflicted in the initial and ongoing assessment of independence of directors, and in other issues such as recommending board appointments and re- election/retirement of directors. In the case of the latter issues, a check-and-balance is having shareholders vote on the election or re-election of directors.

In countries such as Malaysia and Hong Kong, the code of corporate governance recommends that the independence of directors should be subject to a separate shareholders’ vote after nine years. If shareholders vote against the independence of the directors in this separate vote, then the company can still choose to retain the director as a non-executive director, but should not label him as an independent director. Alternatively, the board can just redesignate the director as a non-independent, non-executive director, without seeking a shareholders’ vote.

At the forum, I had expressed doubt about whether such a shareholders’ vote would be effective, if all shareholders get to vote on the continuing independence of the directors after nine years. After all, those who are familiar with our corporate landscape would know that there are many independent directors who have an inter-dependent relationship with controlling shareholders. If the vote is to be meaningful, then controlling shareholders should not vote. If we are unwilling to follow a highly prescriptive approach whereby a director is automatically considered non-independent after a certain number of years and prefer to adopt a more principle-based approach instead, then we need to do more than just ask boards to undertake a “particularly rigorous review” and leave it to the nominating committee and board members to assess each other’s independence for as long as an independent director continues to serve on the board.

A common objection to such a proposal is that minority investors are not sufficiently informed to vote on the independence of directors because independence is “a state of mind”. Other objections are that certain minority investors, such as activist funds, may have vested interests, or that institutional investors may blindly follow the advice of proxy advisory firms and adopt a “tick the box” approach to independence

Yet, we are prepared to have rules on interested-party transactions where only disinterested shareholders are allowed to vote – in effect to allow these shareholders alone to assess and decide on the merit of these transactions. We do this precisely to mitigate the conflict of interest of having shareholders vote on transactions in which they have an interest

And, of course, no one would argue that minority shareholders should not be allowed to vote on the election of directors because they are not in a position to determine if a director is sufficiently qualified to serve on the board. It is always easy to argue against change and to cite the possible negative implications of changes. These arguments fail to consider the unsatisfactory nature of the existing practice whereby the assessment of the independence and continuing independence of directors is left solely in the hands of a conflicted nominating committee and board, with controlling shareholders wielding considerable influence on the continuing service of independent directors.

If we want to take a more conservative approach to the issue of having non-controlling shareholders vote on the continuing independence of directors after nine years, we can make this vote non-binding. In other words, the vote is merely feedback from the non-controlling shareholders to the board as to whether they perceive the director to be independent and this feedback is taken into account by the board in assessing the independence of a director.

We may be underestimating the ability of minority shareholders to gauge the independence of a director (or whether a director is moribund) after nine years of observing the behaviour of the director at shareholders’ meetings. After all, perception is an important factor in determining independen

Mak Yuen Teen



Comments are closed.