By Mak Yuen Teen

On 12 October 2023, SGX Regco queried UOB-Kay Hian Holdings Limited (UOBKH) on its basis for the designation of Mr Tang Wee Loke as an independent non-executive director (INED). This was after the company announced on 11 August 2023 that the UOBKH board had endorsed the recommendation of its Nominating Committee (NC) that Mr Tang should still be considered independent, notwithstanding that his aggregate interest in UOBKH had increased to approximately 5% arising from his participation in the company’s scrip dividend scheme.

In its response on 16 October 2023, UOBKH maintained its position that Mr Tang can be deemed to be independent. However, on 17 October 2023, UOBKH relented and announced that it had re-designated Mr Tang from an INED to a non-independent non-executive director (NINED) with immediate effect, following “further consultation with SGX Regco”.

While the re-designation of Mr Tang has now brought closure to the matter of Mr Tang’s independence,  this case raises many issues that NCs and boards should consider, including the appointment of former executives as non-executive directors (NEDs), criteria and process for assessing independence of INEDs, and re-designation of NINEDs to INEDs.

A long association with UOBKH-related entities

The following is the profile of Mr Tang extracted from UOBKH’s website before his recent re-designation to NINED:

“Mr Tang Wee Loke – holds a Bachelor of Business Administration degree. He began his career in Kay Hian & Co (Pte) as an Analyst in 1973 and became a Director in 1977. He was appointed Deputy Managing Director of Kay Hian James Capel Pte Ltd in 1990 and of UOB-Kay Hian Holdings Limited in 2000 following the merger of UOB Securities (Pte) Ltd and Kay Hian Holdings Limited. 

He retired from his position as Deputy Managing Director in December 2007 and remained as an Executive Director of UOB-Kay Hian Holdings Limited until 31 December 2011. He was appointed Non-Executive Director from 1 January 2012 and has from 1 January 2015 become an Independent Director. He is Chairman of the Nominating Committee and was appointed a member of the Audit Committee and Remuneration Committee on 1 May 2015. 

He was a committee member of the Stock Exchange of Singapore from 1986 to 1999. He served on the SGX board as an Independent Director from December 2002 to September 2007. He was the founder chairman of the Securities Association of Singapore, which represents the interest of securities trading members in Singapore.”

Regardless of his shareholding in UOBKH, it is difficult to see how Mr Tang can be perceived to be independent, given that his apparently uninterrupted relationships with UOBKH and some of its predecessor entities go back 50 years.

Appointment as NED

After Mr Tang retired as an Executive Director (ED) of UOBKH on 31 December 2011, he was immediately appointed as a NINED the following day.

According to the Practice Guidance for the 2018 Code, NEDs are expected to:

  • be familiar with the business and stay informed of the activities of the company;
  • constructively challenge Management and help develop proposals on strategy;
  • review the performance of Management in meeting agreed goals and objectives; and
  • participate in decisions on the appointment, assessment and remuneration of the executive directors and key management personnel generally.

This applies to all NEDs, including NINEDs.

Guideline 2.5 in the 2005 Code, which was applicable when Mr Tang was appointed as a NINED, states that NEDs should “constructively challenge and help develop proposals on strategy” and “review the performance of management in meeting agreed goals and objectives and monitor the reporting of performance”.

Would Mr Tang be able to fulfil the responsibilities expected of an NED, given that he moved immediately from an executive role to an NED role?

More generally, NCs and boards should consider whether it is appropriate to retain a recently-retired ED as an NED. While the Code and Practice Guidance do not specifically discourage this, the responsibilities of NEDs as specified in the Practice Guidance should prompt NCs and boards to carefully consider such a practice.

Further, in Mr Tang’s case, he was not the most senior executive as he was the Deputy MD, so he would be put in a position of participating in overseeing and monitoring his former boss. Another argument against retaining a senior executive, including a CEO, as an NED immediately upon their retirement is that it may hinder new management from addressing issues or making decisions that may raise questions about past management actions, or proposing changes in strategies.

Re-designation from NINED to INED

Mr Tang could not technically be deemed independent under the Code when he transitioned from an ED to NINED on 1 January 2012 because of the three-year “cooling off” period for former employees of a company or its related corporations.

He was subsequently re-designated to an INED on 1 January 2015. It does not appear that UOBKH announced the re-designation of Mr Tang from an NINED to INED at the time of his re-designation. It was merely disclosed in his profile in the FY2014 annual report, published in April 2015, that he became an INED from 1 January 2015. There does not appear to be any justification provided for his re-designation to an INED in the annual report.

In other words, UOBKH appears to have simply re-designated him to INED as soon as the three-year cooling off period was over – not a day more or a day less. This indicates a highly technical approach to assessing the independence of directors.

UOBKH said in its response to the queries from SGX Regco: “On 1 January 2015, Mr. Tang was re-designated as an independent non-executive director (“ID”), with the recommendation of the then Nominating Committee (“NC”) and the approval of the then Board, in line with the prevailing provisions of the Code of Corporate Governance and applicable requirements.”

Again, this is based on a technical interpretation of the Code provisions. Guideline 2.3 of the 2012 Code, which was applicable at the time of his re-designation, states the “the relationships set out above are not intended to be exhaustive, and are examples of situations which would deem a director to be not independent”. Guideline 4.3 states that “the NC has the discretion to consider that a director is not independent even if he does not fall under the circumstances set forth in Guideline 2.3 or Guideline 2.4…” The intention of the Code is that the assessment of independence should not be a box-ticking exercise.

In my view, for a director who was a former employee to be considered independent, there should be a reasonable break in his relationship with the company. As mentioned earlier, it appears that Mr Tang has an unbroken 50-year association with UOBKH and some of its predecessor entities.

If a retired executive has left for several years with no ongoing relationship with the company, and is subsequently appointed as a director, it may be reasonable to deem them to be independent if there is a robust assessment process, justification and disclosure. OCBC, for example, does appoint former senior executives to the board and deem them to be independent, but these senior executives were not appointed to the board as NINEDs immediately following their retirement and do not appear to have advisory or business relationships before they were appointed to the board.

My interpretation of the spirit of the three-year cooling off period for employment relationship in the Code (and now the listing rules) is that there ought to be a clean break in the relationship between the director and the company and its related corporations. It should also not be the case that a director in such circumstances can be automatically re-designated to an INED without proper assessment, justification and disclosure.

Faulty two-tier vote

UOBKH further defended the independence of Mr Tang as follows: “On 28 April 2021, Mr. Tang’s independence was approved at the Company’s annual general meeting through a two-tier vote of all the shareholders of the Company and of all the shareholders excluding the directors and the chief executive officer of the Company and associates of the directors and the CEO. The two tier-vote was in accordance with the then requirements of the SGX RegCo, which required such a vote for independent directors who have served for more than nine years.”

It is true that Mr Tang passed the two-tier vote in accordance with the then SGX requirements but unfortunately, the rule was faulty to start with. Under the second-tier vote, only Mr Wee Ee Chao, Mr Andrew Suckling and Mr Tang were required to abstain from the vote. United Overseas Bank Limited (UOB), the largest shareholder with 313,360,043 (37.44%) of the shares, did not have to abstain. The total number of shares in support of the second-tier vote was 317,178,198, while 4,364,720 shares voted against. Assuming UOB voted all its shares, it means that Mr Tang would not have passed the second-tier vote if UOB had to abstain. In all countries that I am aware of that has a two-tier vote, a controlling shareholder like UOB would not have been allowed to vote on the second-tier vote.

It is just as well that SGX Regco has decided to do away with the two-tier vote and impose a hard 9-year tenure limit for INEDs.

Problematic assessment process

SGX Regco also asked  the company to “explain how is the NC equipped and adequately resourced to carry out the assessment of Mr. Tang’s independence, noting that Mr. Tang is the Chairman of the NC.”

UOBKH said that there are three board members in the NC (including Mr. Tang), and that “Mr. Tang has always recused himself from deliberations on his own independence, which have therefore been considered by the other members of the NC.”

Mr. Tang’s independence has been considered most recently by the two remaining NC members, which include one INED and one NINED – a barely independent NC.

The company said that the “NC also consulted external legal counsel to clarify and seek advice on issues relating to Mr. Tang’s independence.”  Unfortunately, external legal counsels may only confirm whether the assessment of independence complies with the letter of the rules, not necessarily the spirit or whether it is in accordance with good governance.

UOBKH should have aimed much higher

As SGX Regco pointed out in its queries and as the company has acknowledged, Mr Tang must either resign or be re-designated as an NINED when the hard 9-year rule for INED becomes effective by the Company’s AGM to be held by April 2024 for the financial year ending 31 December 2023. It is puzzling why UOBKH stood its ground when it was initially queried by SGX Regco, as it was only a matter of months before Mr Tang will have to be re-designated to NINED, if he is deemed independent now.

UOBKH was banned by SGX RegCo in December 2022 from undertaking new mandates to act as an issue manager or full sponsor for SGX Mainboard and Catalist initial public offering (IPO) and reverse takeover (RTO) submissions. It is “subject to certain requirements” imposed by SGX RegCo in respect of its introducing activities as a full sponsor. It also has to “satisfactorily” address and fulfil all “recommendations, conditions, and directions” that SGX RegCo has imposed on it.

Prior to this, MAS had imposed a $375,000 “composition penalty” on UOBKH in August 2022, after it was said to have failed to comply with business conduct requirements under SFA regulations and anti-money laundering and countering the financing of terrorism requirements. UOBKH was found to have failed to “implement adequate controls for its corporate finance (CF) business and failed to ensure that its CF business was subject to internal audit” and had “material lapses in its control processes” during various periods.

Under such circumstances, one would expect UOBKH to focus on improving its corporate governance. While the regulatory actions were not aimed at the UOBKH directors and the regulators have not raised questions about the board, one may have expected that the board would undertake a proper review of its composition to ensure that it has the appropriate independence, competencies and diversity (UOBKH continues to have an all-male board) to ensure that it is effective in overseeing management and operations.

Further, as a full sponsor, UOBKH should set a good example for issuers it is sponsoring. How is it going to advise companies that it sponsors on compliance with SGX rules and on issues such as board composition, when its own approach to such matters is so contentious?

Conclusion

The UOBKH case raises issues such as the appointment of a retired senior executive as an NED, assessment of independence, and re-designation of NINEDs to INEDs. These are just some of the issues that NCs often have to deal with in the course of discharging their responsibilities.

NCs have a critical role in supporting the board in ensuring good corporate governance and should not discharge their responsibilities through a purely box-ticking exercise.

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The author is Professor (Practice) of Accounting at the NUS Business School, where he specialises in corporate governance. He conducts a number of professional development programs for directors particularly in Malaysia, including for those serving on nominating committees.  The views in this article are his personal views.