Friday 11 December 2009
Raising the bar for independent directors
The Singapore Exchange’s (SGX) latest move to change listing rules to improve corporate governance will place a greater burden on independent directors (IDs). It comes in the wake of recent events which have highlighted how challenging the job can be for IDs, something far removed from the popular notion of the board as a cosy old boys’ club.
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Raising the bar for independent directors
The Singapore Exchange’s (SGX) latest move to change listing rules to improve corporate governance will place a greater burden on independent directors (IDs). It comes in the wake of recent events which have highlighted how challenging the job can be for IDs, something far removed from the popular notion of the board as a cosy old boys’ club.
At the troubled Sino-Environment Technology Group, IDs have sought a court order to call for an extraordinary general meeting (EGM) to remove the executive directors and also to strip them of their powers to execute several types of financial transactions. That followed a special audit by PricewaterhouseCoopers (PwC) which showed that some $85 million worth of transactions were made by the company without board approval or authorisation. In the case of Japan Land, the resignation of independent director Sin Boon Ann forced the company to admit the existence of serious conflicts of interest and a resolve to address them, albeit belatedly. Now, in its proposed listing rule changes, the SGX wants companies to ensure that an ID is sitting on the board at all times. For foreign listings, or companies with offshore principal subsidiaries, at least one ID who is resident in Singapore should be on the board.
But, just placing more responsibilities on the shoulders of IDs, without looking into issues relating to their selection, performance and remuneration, is not going to lead to better corporate governance. The selection of IDs has been a contentious issue. While the current code of corporate governance states that there should be a strong independent element on boards, in practice, the major shareholder often has the power to appoint and remove all the directors, including the IDs. Now that the code is being reviewed, the opportunity should be taken to further tighten the definition of independence by considering, for instance, independence from substantial shareholders (and not just management), and the length of service on the board. Other pertinent issues include how IDs are appointed and renewed, and their performance and effectiveness on a board.
Another controversial issue is that of remuneration. Minority shareholders have traditionally baulked at paying IDs well, but that may be short-sighted. If IDs are to be called upon to play a bigger role in safeguarding the interests of the company and all its shareholders, and if top quality IDs are to be found, then they should be paid well. It is refreshing that the Securities Investors’ Association (Singapore) recently expressed the view that IDs need to be paid well because they need to work harder to ensure that the interests of shareholders, in particular the minority shareholders, are protected.
As was pointed out at a corporate governance conference here this week, the ultimate comfort, whatever the rules and regulations, will be provided by the quality of the IDs sitting on the board.
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