Clearer definition of independent director needed

TOO flexible corporate governance rules that do not mandate but merely make recommendations on board compositions have given way to "a lot of form rather than substance" when it comes to the definition of independent directors (IDs) - whom some call "the conscience of a board".

This is how legally trained IDs can get away with their firms representing the listed company (listco) in lawsuits, as long as the transaction sum abides somewhat to the limit of the Practice Guidance of no more than S$50,000 in a fiscal year (which is just a guide and not a rule).

Or, how family businesses can appoint cousins, nephews, nieces and in-laws as IDs, because only immediate family relationships cannot be considered independent for the purpose of director appointments in Singapore-listed companies.

The perceived independence of IDs - or lack thereof - has become more contentious in merger and privatisation situations, noted Mak Yuen Teen, associate professor of accounting at the NUS Business School, who together with corporate governance observer Chew Yi Hong, last week unveiled results of their Governance Index for Trusts (Gift) 2020.

In their report, both authors made scalding remarks about the corporate governance of some real estate investment trusts and business trusts listed here - including the difficulty for IDs to be perceived to be truly independent when practically all the directors of Reit managers and trustee-managers are appointed by the shareholders of the Reit managers, rather than unitholders.

They also added that while the regulations specify a list of criteria for determining independence, they in fact allow the board to determine that a director is still independent even if they don't meet these criteria.

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There are also cases of IDs making lateral moves to related trusts once they hit the nine-year tenure on the board of a Reit. Some IDs also have other relationships with the sponsor or controlling unitholder.

Another point that also applies to the broader listed universe is that quite a number of IDs serve on three or more listed boards while having a full-time job, which beg the question of whether they can truly devote sufficient time to their role.

Independence questioned

Shai Ganu, managing director and global practice leader, executive compensation, at Willis Towers Watson, said that many small- and mid-cap companies tend to have boards with a high proportion of non-IDs.

This is due to the "disproportionately large" percentage of listcos that have a controlling shareholder, as opposed to Anglo-Saxon jurisdictions in North America and Europe, where share ownership is more decentralised and the biggest shareholder is usually an institutional investor.

"But when you have a controlling shareholder that is a family member of an entrepreneurial company, things are slightly different. The controlling shareholder - in most cases a patriarch or matriarch who serves as a chairman or chairwoman - tends to appoint more non-IDs."

Other factors cited by Prof Mak that can impair independence include IDs who are involved in other consulting, advisory, or nominee roles, or whose firms are providing other services (usually legal) to the listco.

He added that besides immediate family relationships, business relationships and substantial shareholding relationships can also impair independence, but these fall within the Practice Guidance and not the Code, and so is not subject to the comply-or-explain rule.

He cited as an example Sabana Reit's re-designation of Ng Shin Ein as an independent non-executive director last year, despite her recent business dealings with InfinitySub, a related corporation of the manager.

He said that the flexibility of rules here have permitted loose definitions of IDs. The rules in many overseas jurisdictions are far stricter. For instance, in Hong Kong, almost all its criteria for independence are in the listing rules, and the exchange reviews the determination of IDs by the company and may question the company on its choices, so the decisions are not just up to the board.

And good luck if a lawyer who serves on the board tries to offer the services of his firm to the listco, no matter how small the case or transaction sum is. The company risks being challenged by the exchange in this matter.

No talent shortage

The irony is that there is no shortage of candidates for IDs in Singapore, most industry watchers say. But it comes down to the decision of major shareholders that may prefer to pick their candidates from their own personal network in order to maintain their control over the company.

The Singapore Institute of Directors and professional search firms here offer board appointment services that companies can tap to find suitable directors, but not every company uses these services.

In the search for the ideal ID, there are many textbook definitions of traits that make a good candidate, but Mr Ganu offers an interesting layman one: "It should be someone who doesn't really need the job for sustaining their lifestyles, either for the fees or social standing it gives them," he said. According to him, many IDs don't need the money but want it for the social standing, to keep them "engaged and important" in the business community.

Agreeing, Prof Mak said: "IDs must not covet the position so much that they refuse to challenge and fear losing their directorship. They must be convinced that they can add value before agreeing to serve, and they must be prepared to resign, although that should be a last resort and not the first thing they do when they face issues in discharging their responsibilities."

The power balance that IDs afford is crucial, given that even the most altruistic founder can be biased to act in his own interests at times, even at the expense of minorities, employees and other stakeholders.