Don’t assume new board will lead to good corporate governance

Published February 14, 2017


First published in Business Times on February 14, 2017

THE report “Natural Cool board ouster leaves doubts over stake divestment” (BT, Feb 10) made reference to questions that I posed as a shareholder at the extraordinary general meeting (EGM) of Natural Cool Holdings held on Feb 8.

The agenda of the meeting involved nine resolutions, five relating to the removal of the existing directors and four to the appointment of new directors. Three of the four new directors were proposed as independent directors. The overarching agenda for the meeting is about board changes.

I had previously written a commentary and made other comments which were critical of some of the decisions of the incumbent board. However, just as the existing board should be transparent and accountable, the proposed directors should also be held to similar standards. The requisitioning shareholders cited corporate governance reasons for removing the directors so it is only appropriate that they and the proposed directors practise what they are preaching. Yet, when I asked about how the proposed directors were identified and whether there are relationships between the directors (especially the independent directors) and the requisitioning shareholders, one of the proposed directors said that my questions were a diversion and irrelevant to the agenda of the meeting. How can questions about the search and nomination process and relationships between the independent directors and requisitioning shareholders be irrelevant, when independent directors are expected to be independent of major shareholders (holding 10 per cent or more of the shares) of the company and the meeting is about appointing them?

There is no basis for claiming that my questions are a diversion because I am not aligned with any particular group of shareholders or with the existing board and management. My questions were purely to satisfy myself that the skills and competencies of the proposed directors were carefully considered and that the independent directors are indeed independent. I have previously written that shareholders should not vote for directors if there is insufficient transparency about their appointments and backgrounds.

Thankfully, the chairman intervened and said that my questions were relevant, and asked if any of the proposed independent directors would speak. One of them did, and although he mentioned that he had no connection with the company, it still leaves open the question of whether the independent directors have relationships with the requisitioning shareholders.

I also mentioned that the new directors, who are unlikely to be fully apprised of the strategies of the company and the stake divestment, should objectively evaluate these matters. They should certainly not have already made their minds up before they know the full facts.

The shareholders who have been requisitioning meetings over the past few months did not nominate themselves as directors. This can be positive or negative. If the directors who have now been appointed can exercise independent judgement without influence from these shareholders, that would be positive. However, if the requisitioning shareholders are exerting their influence through the newly appointed directors, it would be negative. This is especially because shareholders do not owe fiduciary duties to the company and are allowed to act in their own interest even where they have conflicting interests, while directors owe fiduciary duties and must put the company’s interest first. While major shareholders exerting influence in the background may be deemed to be shadow directors, this may be difficult to prove.

At the EGM, I also asked the sponsor, Prime Partners Corporate Finance, if they had interviewed the proposed directors. The sponsor replied that it was not required by the listing rules. Rule 226(2) of the Catalist Rulebook states that in undertaking continuing activities for an issuer, the sponsor is expected to “advise its issuer on the suitability of directors arising from proposed changes in the issuer’s board of directors”. Further guidance on the sponsor’s role in advising on changes to the board is provided in Practice Note 2C. How can the sponsor discharge its responsibilities in this regard if it does not even interview the proposed directors? If the sponsor had attempted to do so and failed, or the proposed directors declined to be interviewed, that can be communicated to shareholders. While it is understandable that the sponsor would want to be seen to be neutral in such boardroom tussles, neutrality does not mean doing nothing.

I would urge shareholders to attend the company’s next annual general meeting. They should not take for granted that there will be good corporate governance just because there is a new board in place. Hopefully, questions about the strategies of the company, the stake divestment and the independence of the directors would not be met with a reply that they are not relevant to the agenda.

Mak Yuen Teen


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