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Nine-year cap on independent directors to kick in from 2022

Definition of 'independence' tightened; IDs must make up at least one-third of listed boards

Some 42.2 per cent of companies listed in Singapore have at least one independent director (ID) who has been on the board for over nine years - but they will now have to fix that by January 1, 2022.


SOME 42.2 per cent of companies listed in Singapore have at least one independent director (ID) who has been on the board for over nine years - but they will now have to fix that by January 1, 2022. All companies will also have to ensure that IDs make up one-third of their board seats.

This comes after the Monetary Authority of Singapore (MAS) on Monday made the nine-year threshold for IDs a hard limit written into the Singapore Exchange (SGX) Listing Rules. Beyond nine years, the appointment of the ID will be subject to a two-tier vote by all shareholders excluding directors, CEO and associates. If the ID is not voted in, he or she can continue to serve on the board as a non-independent director.

The nine-year cap on IDs is already practised among the local banks since 2010.

The extension of the practice to other listed companies follows a proposal by the Corporate Governance Council (CGC) in January this year to enforce the "nine-year rule" after it acknowledged that an ID who had served nine years might have had his independence compromised, given the familiarity with management, and can no longer be regarded as independent.

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To date, the director with the longest tenure, before he stepped down in January this year, had been on the board for some 55 years. Before that, the record used to be 59 years, according to to Lawrence Loh, director at the Centre for Governance, Institutions and Organisations (CGIO) as well as deputy head and associate professor of Strategy and Policy at NUS Business School.

Sharing the results of the latest Singapore Governance and Transparency Index (SGTI), Prof Loh, who is the principal investigator of the study, told The Business Times that some 278 companies out of its database of 659 companies have at least one ID who has served for more than nine years.

"In other words, 42.2 per cent of companies have at least one ID who served more than 9 years. On the flip side, 57.8 per cent have all IDs with 9 years or less in tenure,'' the professor said.

The SGTI 2018 results showed that companies need to gear up especially in making concerted efforts to induct IDs onto boards, he said.

"There is still quite some way to go as the number of IDs is on the high side for those who serve more than 9 years. Also, on a broader level, companies should manage their overall director tenures to create more space for IDs to come in," Prof Loh added.

According to the study, whether a chairman is independent or non-independent also affects the proportion of independent directors.

"Companies with independent chairmen have, on average, 54.6 per cent independent directors on the board whereas those with non-independent chairmen have 51.6 per cent,'' Prof Loh added.

MAS also accepted the CGC's other recommendations to strengthen board quality, and issued the revised Code of Corporate Governance (Code), which has been significantly simplified. It now includes a more stringent definition of director independence by lowering the shareholding threshold to determine a director's independence to 5 per cent from 10 per cent.

Ong Chong Tee, MAS deputy managing director (Financial Supervision), said: "The revised Code is more concise and less prescriptive, and is designed to encourage more thoughtful application. It will help spur better corporate governance practices among companies to sustain long-term business performance."

Mr Ong said MAS, as the statutory regulator, deliberately calibrated rules like having more stringent CG standards for banks due to their potential systemic impact.

"Tighter across-the-board regulations could impose additional costs on all listed companies, and these costs must be weighed against the benefits,'' he said.

On concerns that some of the principles in the Code are subject to interpretation and gaming, Mr Ong said the MAS has accepted the Council's recommendation to set up a standing Corporate Governance Advisory Committee by the end of this year to monitor CG developments on a regular basis.

Except for the rules on the 9-year cap on IDs and board composition of one-third IDs, the other changes will take effect for annual reports covering financial years starting January 1, 2019 onwards.

"The longer transition period accords companies sufficient time to ensure the composition of their boards is able to meet the requirements of the Listing Rules,'' Singapore Exchange (SGX) explained.

On the new changes, Stefanie Yuen Thio, joint managing partner at TSMP Law Corporation, said: "The new CG Code focuses on what is important - the core principles of good governance - while streamlining and removing the plethora of rules which could encourage a 'checklist mindset' to governance."

"For example, the requirements for a director to be considered 'independent' have been beefed up, because it is the role of independent directors to protect minority shareholders when their interests diverge from that of management or the majority shareholders,'' Ms Thio said.

The fine-tuned rules will help to ensure that directors do not have significant business or economic interests in the company, or entrenched boardroom friendships, that would compromise their objective decision-making, she added.

Ms Thio, who sits on the CG Council, believes the new Corporate Governance Advisory Committee will add clarity and flexibility for companies.

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