Time for independent directors to redefine themselves by standing up for investors

ONE of the first questions I ask myself when trying to determine if shares in a company are worth owning is: Whose company is this?

Understanding who controls a company helps set my expectations - for better or worse - on how it is likely to be run, and how minority investors like me might be treated.

Yet, I almost never bother checking the identities of the independent directors (IDs), who are supposed to look out for small investors like me if push ever came to shove. The reason, I suppose, is that I do not really believe that it matters who IDs are.

For most of my professional life, the idea of having a strong element of independence on corporate boards has been widely embraced. This thinking can be traced back to 1992, when a committee in the United Kingdom headed by the late Adrian Cadbury published its recommendations on, among other things, the arrangement of corporate boards to mitigate corporate governance risks.

Among the key recommendations of the so-called Cadbury Report were that the posts of chairman and CEO should be kept separate, and that there should be non-executive directors of sufficient calibre and number to carry significant weight in a company's decisions.

These practices are pretty much set in stone now. Yet, whatever their number or calibre, IDs really have little to gain personally by going against the wishes of a company's top executives or dominant shareholder. If anything, having a reputation for being cooperative is more likely to get them invited to join the boards of more public-listed companies.

To be clear, I am not suggesting that public-listed companies can do without properly qualified IDs on their boards any more than they can do without an independent auditor. Yet, much like independent auditors, one ID is not any different from another from the viewpoint of small investors like me.

In the wake of the Eagle Hospitality Trust (EHT) debacle, and the spate of mergers by real estate investment trusts (Reits) over the past year, I cannot help but wonder if too much is now being expected of IDs.

In particular, is the supposed independence of these directors being weaponised to justify transactions that favour the controlling shareholder at the expense of minority investors? And, are IDs at risk of becoming scapegoats for irresponsibility elsewhere in the corporate and financial market ecosystem?

EHT directors arrested

On Oct 2, the manager of Eagle Hospitality Trust (EHT) revealed that all its current and former Singapore-based directors had been arrested on "reasonable suspicion" that disclosure requirements may have been breached.

Among the individuals who were arrested were three current IDs, namely, Lau Chun Wah @ Davy Lau, Kelvin Tan Wee Peng and Tarun Kataria; and two former IDs, namely, Carl Gabriel Florian Stubbe and Ng Kheng Choo.

Salvatore G Takoushian, who is CEO and an executive director of EHT's manager, was also arrested.

The manager of EHT said these six individuals were arrested on Oct 1 and subsequently released on bail. EHT's manager said that it understood that investigations were still ongoing, and that none of the six individuals had been charged yet.

The announcement sent reverberations around the market. Some market watchers expressed surprise that the authorities were going after the IDs, and worried that doing so would make it harder for companies aspiring to a public listing in Singapore to enlist suitably qualified IDs.

Some of the current and former directors of EHT's manager also happen to sit on the boards of other companies and Reit managers. After news of their arrest broke, at least six other companies and Reit managers made announcements on the status of these directors on their boards.

For the most part, the tone of these announcements was nonchalant. All of them said the directors in question could continue in their current roles for now. Some of the companies and Reit managers had to be prompted by Singapore Exchange queries before confirming that the continued suitability of these directors would be assessed as investigations at EHT progress.

To be sure, the IDs as well as other parties involved in the EHT case should not expect to be spared the consequences of breaking any rules. Yet, the authorities should not confine their investigations to whether any rules were broken.

They should also closely study what the promoters of EHT were trying to accomplish with the listing of that Reit in Singapore, and look into whether more needs to be done to improve the quality of Reit listings in the local market.

Compliance-driven independence

This brings me back to the controversial proposed merger of Sabana Reit and ESR-Reit.

Quarz Capital Management and Black Crane Capital, which have influence over more than 10 per cent of Sabana Reit, have said they will vote against the transaction. The main contention is that the effective consideration being offered to unit-holders of Sabana Reit is a steep discount to its net asset value per share.

Hong Kong-listed ESR Cayman, which owns the managers of both Reits, has stated that there is no conflict of interest in the transaction. This is because its stake in Sabana Reit's manager is held through a trust, with an independent third-party trustee based in Singapore.

The managers of the two Reits do not share information, and there is no overlap in management personnel or board members. And the board of Sabana Reit's manager consists entirely of IDs, none of whom were appointed by ESR Cayman.

Over the last few weeks, however, Sabana Reit's justification of the independence of one of its IDs - namely, Ng Shin Ein - has come under scrutiny.

On Sept 21, the manager of Sabana Reit published an addendum to its 2019 annual report with information on how Ms Ng had been re-designated from a non-ID to an ID last year.

The addendum noted that Ms Ng was deemed to be independent even though she was, until Oct 25, 2019, a non-executive director of Blackwood Investment, which held a 45 per cent stake in Sabana Reit's manager.

The addendum also said she was deemed independent despite having received payments from a related company of the manager called InfinitySub in 2018 and 2019. These payments were for the sale of her shares in Blackwood to InfinitySub.

Mak Yuen Teen, known for incisive commentary on corporate governance matters in Singapore, raised several questions in a blog on Sept 22 with a headline that said it all: "Sabana Reit: Independent Overnight?"

On Oct 5, Sabana Reit's manager published a six-page response.

While there isn't space here to properly recount all the points and counterpoints raised, my view is that Sabana Reit is attempting to justify Ms Ng's independence in terms that are far too compliance-driven to be convincing to most small investors.

In the end, investors will judge IDs by what they do. And, if IDs are to remain relevant, the time may have come for them to redefine themselves by standing up for small investors when it matters.