Two-tier voting for independent directors: New dawn or false promise?

Last year, 27 listed companies implemented two-tier voting for a total of 34 independent directors (IDs). This is ahead of mandatory two-tier voting under the SGX rulebook for IDs who have served more than nine years, which comes into effect in January 2022.

New dawn

To recap, the listing rules were revised in 2018 to require an ID who has been a director for an aggregate period of more than nine years to seek approval in separate resolutions by (A) all shareholders; and (B) all shareholders, excluding shareholders who also serve as the directors or the CEO of the company, and associates of such directors and CEOs, in order to continue serving as an ID.

The tenure of the 34 IDs ranged from seven to 27 years, with an average of 16 years. With the exception of two IDs, all have served more than nine years. Of the 34 IDs, one did not pass both the first and second-tier votes, while another from a second company did not pass the second-tier vote. Both have since left their respective boards.

Of the 27 companies, only one held a physical AGM in January 2020 – the others held virtual AGMs. A recent report on shareholder meetings held in Singapore from 2017 to 2020 showed that voting at virtual AGMs in 2020 declined compared to previous years and compared to physical AGMs in 2020 held before Covid-19 measures were implemented.

On average, 65 per cent (ranging from 20 to 87 per cent) of total shares voted in the first-tier round of voting, and just 9 per cent (0.1 to 81 per cent) of total shares voted in the second-tier round.

Not just about independence

Bearing in mind that the second-tier vote only excludes the votes of directors, CEOs and their associates, this means that the votes of substantial and even controlling shareholders are also counted for the second-tier vote (as long as they are not directors, CEOs or their associates).

In 21 cases, there were zero votes against for the second-tier vote. In another eight cases, the votes against were less than five per cent of all votes cast for the second-tier vote. The low percentage of votes cast against in the second-tier vote may be partly due to a combination of general minority shareholder apathy and/or these shareholders not attending virtual meetings in 2020. However, it could also be that minority shareholders do not recognise long-serving IDs as an issue.

Two-tier voting is not only about the independence of long-serving IDs but also about board renewal and succession planning. Given how businesses across most sectors have been buffeted by new and emerging risks, board refreshment is especially pertinent in the post-Covid era.

Retaining one ID beyond nine years on an exception-only basis may be justifiable under certain circumstances, but retaining a whole slate of IDs over a protracted period or even one ID for several decades goes against best practices in corporate governance. Such boards may be less inclined or able to challenge their existing business models or strategies, or recognise emerging risks, or be equipped with the relevant skills and experience to deal with the fast-changing global business environment.

No ID – no matter how competent – is irreplaceable.

Unfulfilled promise?

While it may be too early to assess the full effects of two-tier voting, my view is that on its own, it is unlikely to be transformational.

Well-governed companies would generally already have board renewal and succession planning on their agenda. In particular, robust processes for assessing the continuing independence and competencies of directors would be in place. These companies would likely already have a good balance between continuity and renewal on their boards and unlikely to have extremely long-tenured IDs.

As for the rest, two-tier voting is likely to be approached from a “compliance” perspective, with companies hoping that few minority shareholders will bother with voting or will support the company’s proposal to re-appoint the long-tenured IDs without question.

Minority shareholders may need to step up. They should ask questions about board renewal and succession planning. Especially where companies have performed poorly, or continue to retain long-serving IDs, minority shareholders should consider carefully if it would be best for the companies concerned for them to vote against the re-election or independence of these directors. For the second-tier vote, even a small number of votes can make a difference, especially in cases where the second-tier vote is effectively a “minority shareholders only” vote.

Take the case of the ID who failed the second-tier vote, where the percentage of shares for the second-tier vote was less than 3 per cent of total shares. It was enough to oust the ID who had served more than 26 years. However, another ID in the same company (who had also served 26 years), passed the second-tier vote with a 60 to 40 per cent majority.

True breakthrough yet to come

Two-tier voting for IDs after nine years is a baby step, even more so in Singapore where the votes of major shareholders are counted in the second-tier vote as long as they are not directors, CEOs or their associates.

A bolder step will be to have minority shareholder-only voting or at least two-tier voting for IDs every election, not just after nine years. Some countries, such as Israel and the UK (for companies with a premium listing) have two-tier voting for IDs from the outset, and India is considering doing so. A handful of other countries have minority shareholder-only voting for some IDs. Still others have cumulative voting which makes it easier for minority shareholders to elect an independent director of their choice.

These countries recognise that IDs are supposed to be independent of major shareholders. Until this happens, the true quality of independence of IDs in many companies is unlikely to see much improvement.

The writer is a member of the Review Panel of the Nominating Committee Guidebook in the Corporate Governance Guides for Boards in Singapore, published by the Singapore Institute of Directors.