Published July 20, 2009

Quitting for 'personal reasons' under scrutiny

Study asks if these reasons are really linked to personal circumstances of IDs

By LYNETTE KHOO

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(SINGAPORE) Boilerplate disclosures on resigning directors are still prevalent, while early retirements by directors with very short tenures do warrant a closer look.

These are some of the key issues raised in the latest study by the Corporate Governance and Financial Reporting Centre (CGFRC) at the National University of Singapore.

The CGFRC collected information from company filings on SGXNET on cessation or resignation of directors and key officers from Oct 1, 2007 to May 31, 2009. It found 163 cases of resignation of independent directors (IDs).

The study found that a majority of directors - 69 per cent - tend to attribute their resignations to personal-related reasons while 14 per cent of them cite corporate governance-related reasons.

This raises the question of whether 'personal-related' reasons are really connected to the personal circumstances of the IDs, say the co-authors of the report, CGFRC co-director Mak Yuen Teen and research analyst Cynthia Hu.

One way to assess is to see whether the director also resigns as ID from other boards, they said.

The study therefore zoomed in on the IDs who resigned for 'personal reasons' before March and sit on at least one other board as IDs. Of the 30 IDs who resigned before March, only four resigned from other boards within three months from their resignations.

Five out of 28 IDs who resigned before December 2008 also resigned from other boards within the next six months. But the five IDs still remained on other board(s) as IDs.

When an ID resigns from one board but not the other, it doesn't necessarily reflect badly on the board he is leaving. For instance, the ID may resign only from some boards because he has become more aware of taking on too many directorships. The co-authors believe that in such a case, the company should state the reason clearly as such.

While resignations of IDs half-way through their terms may not always mean that something is amiss, they could be an indicator of corporate governance issues, they add.

The authors cited the case of Oriental Century, where three IDs resigned in April 2007, including two IDs who served less than one-two years. Two years later in March this year, fraud was uncovered at Oriental Century's Chinese subsidiaries.

On a positive note, SGX's change in template for cessation of directors on Oct 1, 2007 has led to improvement in disclosures. Before the change, an earlier study by NUS Business School found that most director resignations were included under 'Miscellaneous' announcements or buried under other news announcements.

It is also more common now for IDs to flag corporate governance issues when resigning, which was virtually unheard of before SGX's change of the announcement template, the report says.

'Multiple resignations from the same board citing disagreement with management or controlling shareholders would be of particular concern,' the co-authors say.

A case in point was Advance SCT, which saw a spate of departures of its IDs, who cited difficulties in discharging their duties because of the lack of timely information and regular updates from management. A special audit subsequently found a lack of veracity in certain transactions by the group's Malaysian subsidiaries.

The CGFRC study also found 63 cases of directors retiring and not seeking re-election. It would not have captured all retirements because prior to June 9, 2008, SGX's announcement template was named 'resignation' instead of 'cessation'.

Some 33 per cent of these directors had served for three years or less. There were eight IDs who served for one year or less. These cases may indicate that the director himself, the board or controlling shareholders had a change of heart.

The co-authors felt that 'fair weather' directors who resign at the first sign of difficulty for a company are arguably breaching their duties to the company.

IDs that BT spoke to appear to understand this principle pretty well.

Robson Lee, an ID on several listed companies, noted that IDs should not opt out at the first sign of trouble by resigning but ensure that problems detected under their watch are properly resolved and accounted for before they step down.

'From my experience and observations, the SGX gives enormous support to IDs when red flags are detected,' he added. It is available for consultations by the IDs and provides suggestions and guidance under such circumstances.

Lim Jit Poh, chairman of ComfortDelGro and ID of some listed firms, felt that it is not true that IDs step down the moment problems crop up. 'Most face the problems and discharge their responsibilities,' he said. Mr Lim remains as chairman of China Printing & Dyeing, after its parent firm went broke and its CEO and deputy CEO absconded.

Ng Joo Khin, a lawyer at Stamford Law and ID of a Chinese firm, said he believes that 'an ID who resigns citing difficulties in discharging his duties would most likely have already spent months reaching out to the company's management to resolve any such difficulties or differences before quitting'.