Why are independent directors rarely held accountable?

Published December 01, 2017

By Mak Yuen Teen

I often hear that it is becoming onerous to be an independent director in Singapore but I actually think independent directors here have a relatively cushy life, especially compared to their counterparts in other markets.

The reason I say this is if we look at the large number of corporate scandals and corporate governance failures here, independent directors are almost never called to account. It’s like they were never there. In terms of criminal actions, there are some minor exceptions like at Chuan Soon Huat and Airocean, although at Airocean, the only independent director who was ultimately taken to task after appeals was the chairman. There is also the odd reprimand imposed by SGX although reprimands specifically directed at independent directors have been rare. Since the first reprimand was issued to listed issuers/directors by SGX in March 2009, there have only been two cases where independent directors were specifically named in the reprimand and they were at China Sky and NEL.

A few years ago, I co-supervised a student thesis on administrative sanctions imposed by the Stock Exchange of Hong Kong between 1999 and 2012 and found that there were 153 sanctions over that period, including censures and criticisms for different breaches. 20.3% were targeted at individual directors, including independent directors. [The study also looked at share price impact of sanctions and impact of sanctions on board turnover].

In Malaysia, Bursa Malaysia regularly reprimands and imposes fines on companies and directors, and in 2011, two former independent directors of the audit committee of Transmile were jailed for one year and fined RM300,000 for authorising the furnishing of a misleading statement to Bursa Malaysia in the company’s quarterly results.

The lack of enforcement actions against directors creates moral hazard and leads to other consequences, such as directors not taking their responsibilities seriously or over-extending themselves by accepting too many directorships to collect more fees, which in turn contribute to poor corporate governance and corporate failures. In fact, if there is strong enforcement, we probably need to worry less that independent directors are appointed by controlling shareholders or that long tenure will cause a director to lose his independence. In the US, we sometimes see independent directors who are appointed by the CEO (who is often also the Chairman) turning around and firing the CEO for poor performance or other issues. They are under pressure to act despite friendships because of the high risk of attracting shareholder lawsuits if they don’t. A Harvard Business School case on a U.S. company called Circon which I have used in my classes illustrates this – although some may argue that the independent directors should have acted sooner in that case. Enforcement can help ensure that even beholden independent directors will not go too far in pleasing their puppet master.

I am not arguing that we should become highly litigious or start filling up Changi Prison with independent directors. Directors are human and will make mistakes so should not be punished for poor business decisions – provided they have acted in good faith and with reasonable diligence.

I have sometimes heard the argument that more enforcement actions will discourage people from serving on boards, further aggravating the so-called shortage of directors. The shortage of directors is a myth. While it may have been true when the concept of independent directors was first introduced, it cannot be true today. Assuming all our listed companies have a majority of independent directors – and based on the average board size of about 7 and assuming about 800 listed companies – we need to fill about 3,200 independent director positions for these companies. If each director holds an average of two directorships, we need 1,800 directors. Surely, we can find 1,800 good men and women. The real truth is that companies and nominating committees are just not casting their net wide enough.


Copyright for cartoon belongs to Mak Yuen Teen

I have in the past written to dispel this myth but recently heard a good argument blowing it out of the water. This was in the context of a discussion as to whether there should be a tenure limit for independent directors. Someone had argued – yet again – that imposing a tenure limit will aggravate the shortage of independent directors. A highly experienced director retorted that if an independent director has to leave a board after the tenure limit is reached, he or she will be able to join the pool and serve on other boards. So when companies say there is a shortage, what they really mean is that there is a shortage of directors they “trust” (perhaps to do the bidding of the controlling shareholder or management). The so-called shortage of independent directors is a lazy excuse often used to preserve the status quo.

The same myth is also used against other proposed improvements in corporate governance. For example, it has been suggested that requiring directors standing for election at AGMs to justify their contributions would discourage suitably qualified directors from serving and further reduce the pool of directors, even though this is practised in some countries. Good directors are apparently so hard to find that they have to be mollycoddled so that they will not walk away. I wish it was so easy to make some directors just walk away.

It was therefore refreshing to hear a different view from an experienced director who serves on boards in companies here and in large international companies. Last year, I had attended an AGM and witnessed a retail shareholder haranguing the board. He was rude and scolding the board and I felt he had gone way too far. A few days later, I met one of the directors at a function and told him that I felt sorry for the board. He replied that much worse happens in  overseas companies and it’s “par for the course”. He certainly did not give any impression that the shareholders should just be grateful that he is willing to serve – even though he is very experienced and sought after. He told me that directors here just do not have the same sense of accountability as those in overseas companies he serves on. This lack of sense of accountability goes back to the lack of enforcement.


Copyright for cartoon belongs to Mak Yuen Teen

It’s time our regulators take a close look at the actions of directors, including independent directors, when companies are caught in corporate governance scandals or failures and hold directors accountable if they have failed to discharge their fiduciary duty and acted with the necessary skill, care or diligence.

However, there is an accountability gap where our rules are concerned.

Given that many of our companies are foreign listings that are incorporated overseas, directors of such overseas-incorporated companies are not subject to the director duties in our Companies Act. We need to incorporate director duties into other regulatory requirements in order to hold such directors to similar standards as those in Singapore-incorporated companies and to be able to enforce against directors of such companies. The fact that we have allowed this lacuna to exist for so long demonstrates that we have not carefully considered the adequacy of our regulatory framework before we started chasing foreign listings in massive numbers. One possibility is to incorporate director duties into the Securities and Futures Act since the SFA does not depend on country of incorporation. Sanctions can be criminal or civil like for other breaches of the SFA.

In addition, director duties could also be spelt out in the listing rules – as HK does – so that SGX is also able to take enforcement actions for less serious breaches of director duties. And finally, it’s really high time for us to review the penalties in our Companies Act for breaches of director duties under section 157. In particular, the maximum fine of $5,000 in today’s environment is grossly inadequate. Clearly, we have forgotten about inflation when it comes to penalties for breaches of director duties. Perhaps the maximum prison term of one year should also be reviewed since prison conditions today are probably not quite as dreadful as days gone by, although I would stop short of recommending caning directors for breaches for director duties.

If we do not take directors, including independent directors, to task for breaches of duties, many of our rules will only be good on paper.


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