Published May 26, 2009

Looking out for retail investors

By JAMIE LEE

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PROPOSALS in the US for new rules to allow certain minority shareholders to nominate independent directors have prompted this question: Should retail investors in Singapore be allowed to have their own representative on the board of directors?

The US Securities and Exchange Commission has proposed to allow shareholders owning a stake of one per cent in the country's 700-largest companies to nominate their independent directors. For mid-sized and small firms, the applicable stakes are 3 per cent and 5 per cent respectively.

The US move was aimed at giving shareholders a more direct way to tackle issues such as executive compensation or a company's risk management practices, The Wall Street Journal had reported, and came amid mounting criticism over poor board management that pushed the US into today's financial crisis.

In Singapore, substantial shareholders - defined as those holding a stake of at least 5 per cent - are already allowed to call for resolutions, including that of electing directors.

But what about non-substantial shareholders? A valid question if one looks at the example of the boardroom tussle at Yellow Pages some two years ago, when majority and controlling shareholder Stanley Tan tried to oust the company's four independent directors - who eventually quit or chose not to stand for re-election - by calling for an extraordinary general meeting (EGM). The great divide at Yellow Pages then prompted a bigger corporate governance issue: are companies watching out for their retail investors?

Some noted that as with most boardroom debacles here, the interests of the 'mums and pops' - who are non-substantial shareholders - are often the last to be thought of and have suggested that these shareholders should have a representative on the board.

Before one says a tempting 'yes' to such a suggestion, it is better to ask whether there are already enough avenues now for retail investors to raise disagreements with boards' decisions.

Last month, minority shareholders rallied together to oppose TTL Holdings' move to issue $40 million of possibly toxic zero-coupon convertible bonds. They feared that it was not in line with the firm's best interests and that minority shareholders' stake would be diluted when the buyer sells down the shares after the bond conversion. Though the opposition was eventually shot down at the EGM, the move by the minority shareholders suggests that small-time investors can make their objections known, without having a board representative.

Is this enough though? Looking at how rights issues are all the rage right now, it is unclear if firms have thoroughly considered the extent of dilution for minority shareholders and how much of that was weighed against the risks of taking on more debt or not raising money for 'pre-emptive' reasons. Still, the idea to have a board representative for the retail investors is still weak because individual directors should not be representing different interest groups, including these small-time players. Abstract as the concept might be, the board should be making critical decisions based on the collective interests of all stakeholders big and small.

Otherwise, the board risks turning into a hodgepodge of lobbyists. It would also be unwise to encourage affirmative action - firms should not be held hostage by the minority simply because they are assumed to be marginalised.

There can be a board representative for retail players, despite the flaws of such an idea. But if this does happen, there must be criteria put in place, such as the nominee being voted in by a certain percentage of shareholders (excluding controlling shareholders).

One way for management to address the call for retail investors to have their own board representative is to create trust. For example, firms should provide more information on how and why directors are being nominated, a disclosure that is now lacking. There is a subtle but important benefit in doing so: building trust. It would go some way in assuring retail investors that the individual directors are inclusive players who are able to weigh the views of all shareholders and work towards the best interests of the company.