Published October 20, 2009

Time to update governance practices

By MICHELLE QUAH

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SINGAPORE is long overdue for an update to its Code of Corporate Governance - and one key area that needs to be re-examined is its section on independent directors (IDs).

A more prescriptive guideline is needed to ensure that an independent director, no matter how able and qualified, does not stay on a board beyond a certain amount of time.

Since the Code's issue in 2005, much has changed in the local and international corporate arena, not least being the outbreak of the current economic crisis. Company laws and listing rules have been amended and updated to reflect changing trends - and the best practices laid out in the Code need to be brought up to date as well.

The section on the appointment and responsibilities of IDs needs to be specifically addressed. IDs are appointed to a company's board to be the check and balance to management and majority shareholders. They're also the voice of the minorities, representing the interests of those not present on the board.

Given their weighty responsibilities and the high expectations the public has of them - IDs are typically among the first to be blamed for any corporate malfeasance - one has to ensure there is proper guidance for their role and conduct, as well as their appointment.

As governance advocate Mak Yuen Teen of the NUS Business School puts it: 'Corporate governance failures are the result of failures in various 'gatekeepers' - with one of these being independent directors - because of a lack of supervision, a lack of enforcement, a lack of accountability, a lack of transparency, conflicts of interests, and a deterioration of ethical standards.'

One of the key issues that needs to addressed is the appointment of independent directors. The Code says that IDs should make up at least one-third of the board, and that there should be a formal and transparent process for the appointment of new directors to the board.

But it doesn't account for the fact that the appointment of the IDs is made by the majority - which could well affect the true independence of the board. Should the majority wish to further their own agenda, they could easily push for their own, less-than-independent candidates.

In 2008, two of Swissco International's independent directors resigned because they were unhappy with what they felt was the board chairman's unilateral decision to alter the tenure and process of re-appointing IDs. The chairman had decided to shorten the term of appointment for IDs from three years to one year and to subject them to a yearly evaluation by himself. The IDs felt the move concentrated more power in the hands of the chairman and prevented them from carrying out their duties effectively.

This is a practical issue that the revamped Code may wish to address. It could consider prescribing more transparency in the appointment of IDs, or suggest that an independent body be set up for the appointment of IDs.

There's also the issue of what qualifies as being truly independent. The Code currently lists four, non-exhaustive examples, where a director is deemed not independent, if he:

is/was employed by the company or any of its related companies in the last three financial years;

has an immediate family member who is/was employed by the company or any of its related companies as a senior executive officer whose remuneration is determined by the remuneration committee;

accepts any compensation from the company or any of its subsidiaries other than compensation for board service for the current or immediate past financial year;

is or has a family member who is a substantial shareholder of, or a partner in, or an executive officer of, or a director of any for-profit business organisation to which the company or any of its subsidiaries made, or from which the company or any of its subsidiaries received, significant payments in the current or immediate past financial year.

Governance advocates believe more stringent measures of independence need to be laid out - to bring Singapore in line with practices in competing markets.

In Malaysia, for example, a director who represents a substantial shareholder is not considered an ID. In Hong Kong, it's not enough that a director must be independent at the point of being appointed, he must also inform the Exchange of any subsequent changes that may affect his independence. In the US, the NYSE requires that an assessment of independence needs to be done at least once a year.

Here, the Code is also silent on the tenure of independent directors, only saying that all directors should be required to submit themselves for re-nomination and re-election at regular intervals and at least every three years.

Given that there are more than a handful of examples of boards in Singapore with IDs who have served for more than 10 years, a more prescriptive guideline is needed to ensure that an ID, no matter how able and qualified, does not stay on a board beyond a certain amount of time. It can be argued that a director's independence, no matter how robust at the start, will invariably be affected if he were to serve on a board for too long. In any case, regular renewals are usually healthy and refreshing for a board, a company and its shareholders.

The Code should also be revised to prescribe the number of directorships each ID should have. Many directors have resisted this suggestion. Some genuinely believe that it's the level of commitment that counts, not the number of boards one sits on. Others are loathe to be limited to a set number of boards because of the hefty fees paid to directors.

But it can be argued that the amount of attention one has is a finite sum: chances are, the more boards a director sits on, the less time he has for any one board - and the less effective he might be. IDs need to realise that they have to be held accountable. And the Code should be revised to include a reasonable limit.

The Code is also silent on the preferred conduct of IDs, other than suggesting the various committees that should be formed and their respective roles. Oftentimes, the effectiveness of a board is hampered by having IDs who are unable or unwilling to speak up.

Prof Mak observes: 'Asia has a big problem with independent directors often lacking the courage to speak up when there is a powerful authority figure.'

Other IDs feel they cannot speak up, despite their best intentions. One example was lawyer Lee Suet Fern's high-profile resignation from the board of China Aviation Oil last year. She stepped down as its ID, as she felt the way in which the management and the rest of the board conducted its business prevented her from properly discharging her duties.

The Code could be revised to include more specific guidelines on the conduct of IDs and that of the other directors at board meetings, to ensure directors are given ample opportunity to speak up and be heard.

These last two suggestions could work hand-in-hand with the Code's current prescription for a formal assessment of the effectiveness of the board as a whole and the contribution by each director to the effectiveness of the board.

There are other practical issues which may not effectively be addressed by the Code - which is only a voluntary Best Practices guide, rather than a law. It would be worthwhile considering a revision of some aspects of the law, relating to the enforcement of good conduct on the part of IDs - which may include penalties for bad behaviour.