First published in Business Times on March 2, 2016
By Mak Yuen Teen and Chew Yi Hong
WITH effect from Jan 3, 2016, Section 153 of the Singapore Companies Act has been repealed. This section dealt with the age limit of directors and applied to directors who are of or over the age of 70. Unlike other directors, such directors could only be elected directly by shareholders at the annual general meeting (AGM). Further, while other directors generally retire by rotation at the AGM and often only stand for re-election every three years, such directors must be re-elected every year. Section 153 applied notwithstanding anything in the memorandum or articles of the company.
Copyright for cartoon belongs to Mak Yuen Teen and Chris Bennett. Used with permission by BT.
The repeal of Section 153 means that, going forward, directors who are of or over the age of 70 can be appointed, elected and re-elected in the same way as any other director (unless the articles of association require such directors to continue to be re-elected annually).
During the consultation on the review of the Companies Act, the lead author of this commentary gave feedback in support of the repeal of Section 153. Legislation in most developed countries does not contain the equivalent of Section 153 provisions and it is timely that Singapore aligns its legislation with these countries. Today, 70 could be the new 50.
In appointing new directors, age should not be a consideration – so long as the director continues to keep up to date, remains fit and healthy in both mind and body, and has the three Cs of character, competencies and commitment. Directors who are older may bring the benefit of more experience and greater wisdom, having been exposed to different business conditions and challenges. However, effective boards need to have proper succession planning . The original intent of Section 153 was to encourage companies to appoint younger directors and to plan for succession and renewal.
In some other countries without age limit provisions, regulators and companies have adopted measures which help ensure that there is proper renewal and reduce the risk of unhealthy entrenchment. For instance, according to the Spencer Stuart US Board Index 2015, 73 per cent of S&P 500 companies have established a mandatory retirement age for directors, with half of these setting the retirement age at 72 years. Ninety-two per cent of companies practise annual election of directors compared to 51 per cent 10 years ago.
The UK Corporate Governance Code 2010 introduced the controversial recommendation that all directors of FTSE350 companies should be re-elected annually. Interestingly, some institutional investors have spoken out against this as they feel this may encourage short-termism among directors. Whether directors should be re-elected annually or only every few years depends on the ability and willingness of shareholders to remove non-performing directors during their term of office.
IMPACT OF SECTION 153
As part of the forthcoming second report on shareholder meetings in Singapore, we have looked at the impact of Section 153 on companies in AGMs held in 2015 and how its repeal may affect companies going forward. Our report covers 709 Singapore Exchange-listed issuers with a primary listing. However, Section 153 is not relevant to all of these issuers.
First, as it is a Companies Act provision, it does not directly affect the 44 real estate investment trusts (Reits) and business trusts in our study because these trusts are externally managed and their directors are not elected by unitholders. We did not consider the election of directors of the manager or trustee-manager managing the Reit or business trust. Section 153 also generally did not affect issuers that are incorporated overseas – although two issuers incorporated in Bermuda and the Cayman Islands had directors who were elected under Section 153. Interestingly, there was one issuer affected by similar legislation in its foreign country of incorporation.
In total, 244 companies were affected by Section 153 in 2015 and had one or more directors who retired at the AGM under the Section. This represents 42 per cent of all issuers that were potentially subject to the Section 153 requirements. A total of 384 director appointments in these 244 companies were covered by the Section (some directors affected by Section 153 served on multiple boards). Of these 384 director appointments, 11 stepped down after the AGM because the directors did not seek re-election. Of the remaining 373 director appointments in 237 companies, 55 were executive director appointments, 68 were non-executive director appointments and 250 were independent director appointments. Four companies had one director each retiring and not seeking re-election while other directors who were 70 years or older were re-elected.
Looking at the affected companies, the majority of them had only one director affected by Section 153, with a mean of 1.57 director appointments across the affected companies. However, there was one company with seven directors affected by Section 153, one company with five directors, eight companies with four directors, and 25 companies with three directors.
Among the approximately 230 independent and non-executive directors holding 318 directorships who retired under Section 153 and were re-elected to the board in 2015, there are 20 active “golden” directors – those who are 70 years or more and who serve on three or more boards. One such director is on five boards, six are on four boards, and 13 on three boards. In fact, these board counts are on the low side considering that these directors may also sit on boards of other issuers not subject to Section 153. The seven busiest of these directors – the “Magnificent 7” – were not quite ready to ride into the sunset as these 3 per cent of directors accounted for 9 per cent of all the re-appointments.
LONG TENURE OF SECTION 153 DIRECTORS
Not surprisingly, older directors also tend to have longer tenures. Among the Section 153 independent director re-appointments in 2015, nearly 60 per cent of them have served on the board for nine years or more. This compares with 26.4 per cent of all independent director appointments with tenure of more than nine years based on The Singapore Directorship Report 2014 published by the Singapore Institute of Directors (SID) and the Institute of Singapore Chartered Accountants (ISCA). Some of the older directors have served for extremely long tenures on all their boards. The longest tenured independent director who was re-elected under Section 153 has served on the board of an insurance issuer since Feb 17, 1971, a tenure of 45 years up until today (including the first 24 years as the managing director of the issuer). The next two longest tenured Section 153 independent directors are fellow directors who have been on the board of an industrial testing services issuer since 1983 and 1984.
Another way of looking at this is the cumulative number of years on their boards. For example, one director who serves on four boards had a cumulative tenure of 96 years and counting on those boards. Another director who served on four boards was a little bit fresher – he has served a cumulative tenure of 80 years and counting on these boards.
Some Section 153 directors joined boards as independent directors in the last few years, suggesting that boards feel that their skills and experience are relevant to them (although boards in general in Singapore are known to recruit directors based on other considerations). However, for certain Section 153 directors, all their current directorships date back many years. For example, one director who serves on four boards had 1998 as the most recent initial appointment onto those boards, while another director who also serves on four boards had 1999 as the most recent initial appointment year on three of those boards (and no disclosure of appointment date for the fourth, perhaps because it was too far back for the company to have a record). The director mentioned earlier who had a cumulative tenure of 96 years is possibly the most entrenched director of all, having being appointed to his four boards between 1991 and 1993.
On another note, Section 153 directors are most definitely “old boys”. They are almost always male directors, and the longest serving and busiest ones are all men.
SUCCESSION PLANNING
Based on the statistics reported above, Section 153 clearly had a major impact on Singapore-incorporated listed companies – which brings us to the impact that its repeal may have on succession planning and board renewal. While we agree with removing the age limit because it is discriminatory, we are against directors, particularly independent directors, entrenching themselves. The long tenured Section 153 directors will now only have to stand for re-election with the same frequency as other directors – generally every three years. Our concern is that for those companies with Section 153 directors in particular, its repeal will take the board’s attention even further away from considering succession planning and board renewal since these directors no longer have to be elected annually. As it is, lack of succession planning and board renewal is a weakness of many boards here. Without a self-instituted mandatory retirement age, annual elections of directors and activist shareholders giving impetus to board renewal, the repeal of Section 153 may have the unintended consequence of further inhibiting succession planning and board renewal here.
CONCERNS OVER INDEPENDENCE
Long tenure of independent directors raises concerns not only about lack of board renewal but also about the independence of these directors. The code of corporate governance in Hong Kong recommends that the appointment of independent directors who have served more than nine years be subject to a separate resolution and should include the reasons why the board believes he is still independent and should be re-elected. In Malaysia, the code recommends that the independence of a director who has served beyond nine years should be subject to a separate vote by shareholders annually. We recommend going further and that our Code – or, better still, our listing rules – should specify that independent directors who have served more than nine years be elected annually. This should apply to all independent directors regardless of age.
This is especially important because most issuers pay lip service to the “particularly rigorous review” of independence of directors who have served nine years that is recommended in the 2012 Code of Corporate Governance. While a small number of issuers have commendably decided to re-designate some of their independent directors who have served nine years to non-independent directors, to our knowledge, no independent director has been redesignated a non-independent non-executive director because he failed the “particularly rigorous review”.
Issuers should also be required to provide clear justification for proposing these directors for re-election. Some markets require clear justification for all directors who are proposed for election. Shareholders should question the directors and the nominating committee chairs on the continuing contributions and independence of directors who have served for extended periods. Most importantly, shareholders should be prepared to vote against such re-appointments if they are not convinced.
- Mak Yuen Teen is an associate professor at the NUS Business School where he teaches corporate governance and ethics. Chew Yi Hong is an active investor and has been involved in a number of corporate governance research projects in Singapore and the region
