Are long-tenure directors bad for effective corporate governance?

THE length of director tenure, and therefore the value of setting term limits, has emerged as a contentious topic of debate in recent years. Early this year, the Singapore Exchange and the Corporate Governance Council launched a public consultation for amendments to the 2012 Code of Corporate Governance. One important issue lies in the review of the criteria that determine director independence.

The current Code lists six tests of director independence to determine that a director has no relationship with the firm, its related corporations, its substantial shareholders or its officers. While pecuniary relationships clearly exclude a director from being independent, a gray area is non-pecuniary relationships such as informal social ties that have developed between directors and management over time. According to the current Code, "the independence of any director who has served on the board beyond nine years from the date of his first appointment should be subject to particularly rigorous review". This guideline was intended as a safeguard against the loss of objectivity arising from too-friendly relationships between long-serving directors and management.

The Consultation Paper by the Corporate Governance Council highlights that almost 30 per cent of independent directors in Singapore have tenure of over nine years. This is raised as a concern, as the relatively high concentration of ownership in Singapore's publicly listed firms accentuates the risk of expropriation against minority shareholders when long-serving independent directors become beholden to majority shareholders.