The risks of having minority controlling shareholders in firms

IN conversations on corporate governance with practitioners here, some still hold the view that independent directors need only to be independent from management (sometimes referred to as independent from management and business relationships) but need not be independent from significant shareholders because the interests of these shareholders and those of the company are generally aligned. They believe that in cases where there is misalignment, interested person or related party transaction rules can provide adequate safeguards.

When the first Code of Corporate Governance was introduced in Singapore in 2001, independence was defined as independence from management only. At that time, the Corporate Governance Code in the United Kingdom similarly defined independence as independence from management only. Ownership of UK companies tended to be dispersed, with few companies having large shareholders, while in Singapore, ownership is concentrated among one or a few large shareholders in most companies.

By the time the Singapore Code was revised in 2005, UK had embraced the broader concept of independence from both management and significant shareholders because more companies, particularly overseas companies, that are listed on the London Stock Exchange have significant shareholders. More recently, the rules for UK companies with a Premium Listing have introduced stricter requirements for companies with controlling shareholders, including on the election of independent directors. The Council on Corporate Disclosure and Governance here had proposed moving to the broader definition of independence in 2005, but it was rejected. Finally, in 2012, the Singapore Code was revised to include independence from 10 per cent shareholders.