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What makes a director independent? Issue still hotly debated

The findings of the Board of Directors survey stir debate on this; the lack of board diversity is also a sticking point

The benchmark is now 10 per cent, raised from 5 per cent in 2012 by the Monetary Authority of Singapore (MAS), in response to recommendations by the Corporate Governance Council.


FIVE years have passed since Singapore's corporate governance code set out the guidelines for a strong and independent element on a company's board, but it remains a hotly-debated and emotive topic.

At a press conference and panel discussion held to unveil the findings of the biennial Singapore Board of Directors (BOD) survey on Tuesday, a lively discussion ensued on the topic among members of a guest panel.

What came across clearly was that, for a board to be effective, control must be separated from ownership in publicly-listed companies, and that shareholders need to know that board members are acting in their best interests.

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What was debated, however, was the threshold level that should be adopted to identify substantial shareholders under the Companies Act and the Securities and Futures Act. The benchmark is now 10 per cent, raised from 5 per cent in 2012 by the Monetary Authority of Singapore (MAS), in response to recommendations by the Corporate Governance Council.

But the rival Stock Exchange of Hong Kong (HKEx) is looking to move towards a stringent definition of "independence" in a director - a shareholder who does not hold more than a one per cent interest in the company.

Singapore's threshold of 10 per cent interest may thus need a review, June Sim, senior vice-president and head of Listing Compliance at the Singapore Exchange Regulation (or SGX RegCo) said during the discussion. (see clarification note)

"If you look at a situation where the controlling shareholder is himself the chairman or the CEO, then there is a risk ... that as a shareholder, your economic interests take precedence over your fiduciary duties," she said.

"SGX is not very stringent because in Singapore, we started with 10 per cent, with an early warning by MAS that this 10 per cent must be reviewed over time; I think with HKEx gravitating to 1 per cent, clearly I don't think that requirement should be dropped anywhere, whether in the Code or listing rules."

Tan Boon Gin, chief executive of SGX RegCo, told The Business Times after the unveiling of the survey findings that under the Companies Act, a shareholder with 10 per cent interest has the right to demand for a general meeting of the company.

On whether there should be a cap on the number of directorships that a director can hold, Ms Sim said Singapore, like the United Kingdom, does not impose a cap, though "six" appeared to be the most common limit suggested by survey respondents.

"The long and short of it is we should be concerned. We should have a cap on directorships because ... there is a limit to the amount of time an individual can dedicate to the board. So it is only fair that nominating committees and companies closely scrutinise that front."

She expressed concern about the increasing reliance on the parent company or controlling shareholder to nominate independent non-executive directors.

"One must ensure that the person nominated by the parent company or the controlling shareholder is indeed independent, and does not act under the instructions of the shareholder."

This 10th edition of the BOD Survey 2017, jointly launched by Singapore Institute of Directors (SID), SGX, PricewaterhouseCoopers (PwC) and Singapore University of Social Sciences (SUSS), surveyed a record 203 respondents between May and July.

It found that the level of non-compliance with the Code of Corporate Governance to be high - 30 per cent of respondents said they do not impose limits on the number of years an independent director can serve, nor do they conduct a rigorous review after nine years.

The survey also revealed an uptick in the percentage of respondents who took steps to have more female representation on the board - 39 per cent, up from 14 per cent in the last survey in 2015.

Koh Wei Chern, an associate professor at SUSS, noted, however, that the percentage of respondent firms that set specific diversity targets was only 3 per cent. The main challenge cited remained unchanged from 2015 - that of the lack of suitable female candidates.

Fang Eu-Lin, a partner at PwC, expressed disappointment at the "glacial" pace made on gender diversity, which has made Singapore corporates pale in comparison against their counterparts in Malaysia, Hong Kong and the UK.

Many who took part in the discussion agreed that instead of just focusing on gender diversity, other forms of diversity - such as expertise, age, ethnicity and nationality - should also be considered in the appointment of new directors to boards.

Interestingly, the survey showed a marked fall in the advice sought from external advisers on risk management - from 62 per cent in 2015 to 36 per cent in the latest survey.

The most common type of advice sought by boards remained unchanged from 2015. These were largely legal (77 per cent), followed by financial reporting and tax (71 per cent) and corporate secretarial and compliance (64 per cent).

For panel member Jon Robinson, managing director of Robinson Consulting, the importance of renumeration disclosures cannot be over emphasised.

The survey found that more than half of the respondents did not disclose the detailed remuneration of each director and CEO on a named basis, citing confidentiality and concerns about poaching as reasons.

Mr Robinson said: "This needs to be disclosed because shareholders want to know that board members are not enriching themselves at the expense of the company. Also, shareholders need to know why and what they are paying the directors for."

SGX's Mr Tan said the regulator has taken steps to engage recalcitrant parties.

Mr Robinson, who did a review of annual reports, said: "What struck me is the lack of diversity of age, and there is a whole generation below us. That worries me that the company is heading to a rapidly changing future without the perspective of a younger generation.''

Clarification note: 

The SGX clarified that June Sim is senior vice-president and head of Listing Compliance at Singapore Exchange Regulation (or SGX RegCo) and not the Singapore Exchange.