Empowering corporate boards

THE debate over corporate governance has long centred on the balance of power. Corporate scandals, such as those at Enron and WorldCom, expose the dangers of powerful CEOs under weak boards. These scandals led to sweeping reforms that sought to restore trust in the governance ecosystem, including confidence in boards to monitor their CEOs.

Yet, the board not only plays an oversight role but also a value creation role. The latter function entails non-executive directors providing advice and resources that the CEO can leverage to create value for stakeholders. And an appropriate balance of power between the board and management is essential for the board to effectively perform these two roles and fulfil its responsibilities.

Board-management relationship

The Code of Corporate Governance recognises that an appropriate level of board independence and diversity in board composition is vital to enable the board to make decisions in the best interests of the company.

The definition of an independent director (ID) has been tightened over the years. From January, an ID serving beyond nine years must seek approval for continued appointment as an ID through a two-tier vote. Another key change is the requirement for IDs to make up at least one-third of the board; in the case that the Chair is not independent, IDs should make up a majority of the board.

The broader regulatory ecosystem also preserves the board's independence. The 2018 Singapore Exchange (SGX) listing rules for dual class shares (DCS) companies and the 2021 Special Purpose Acquisition Companies (SPAC) framework are recent examples.

For instance, all shares carry one vote each for the appointment and removal of IDs in firms with DCS structures. Board monitoring over a SPAC's acquisition process is also critical - SGX requires more than 50 per cent of IDs to approve acquisitions proposed by SPAC founders.

Board oversight is also important in listed firms with significant family ownership and management involvement. Independent boards bring with them substantive safeguards to protect the interests of non-family stakeholders.

Effective collaboration with management is also enabled through board diversity. SGX now requires issuers to have in place a board diversity policy that addresses gender, skills and experience, and any other relevant aspects of diversity. Issuers must disclose, in their annual report: (a) the board diversity policy; (b) targets for achieving the stipulated diversity, accompanying plans and timelines for achieving the targets; (c) progress towards achieving the targets within the timelines; and (d) a description of how the combination of skills, talents, experience and diversity of its directors serves the needs and plans of the issuer.

Having a range of skillsets equips boards to identify opportunities to create value and mitigate risks, while a diversity of views generates more alternatives and avoids groupthink.

Creating value for stakeholders

Recent trends and the evolving business landscape have given greater urgency to board transformation. Boards must increasingly balance the dynamics with management to create value for stakeholders.

The increasing importance of environmental, social and governance (ESG) issues is set to drive major changes in a board's agenda. Investors, regulators, and other influential stakeholders are demanding more accountability from boards on ESG performance.

SGX recently mandated that all directors must undergo a one-time training on sustainability. Growing shareholder activism and regulatory changes are driving companies to step up their game. Activist investors have been successful in changing board composition. A case in point is Exxon, whereby a relatively unknown hedge fund won enough votes to install three new directors on its board in 2021 to improve board accountability.

The digital revolution presents another trend that boards must manage.

A McKinsey & Company report on "Boards and the Cloud" in 2021 highlighted increasing board attention on digital transformations, large technology investments, and shifts to the cloud. Not surprisingly, board expertise and training at the intersection between technology and business are needed to navigate the opportunities and risks of the digital economy.

And while there are growing opportunities in the digital economy, the risks are not trivial. According to Skadden's 2022 Insights, there was a spike in SPAC-related lawsuits and continued activity in event-driven suits focused on issues of cyber security, the pandemic and cryptocurrency over the past two years. Cybersecurity Ventures predicts that ransomware risks will exceed US$265 billion (S$360 billion) globally by 2031.

These changes highlight that boards must have a broad set of perspectives and the relevant skillsets to deal with the complexities of today's environment.

Balancing act

Director independence and diversity empower boards to discharge their oversight and value creation roles. Empowered boards monitor CEOs with a firm hand and support them with resources and advice to drive value creation.

The balance of power is not a zero-sum game. There is a fine line between board control and board support, hence the common refrain of directors keeping their "noses in, fingers out". And to ensure healthy board dynamics with management, boards should put in place mechanisms before a crisis occurs.

The challenge of managing board-management relationships can be likened to the act of flying a kite; this entails investing in a good kite, understanding the wind direction, and knowing when to pull or let the line out. Similarly, empowered boards should steer their companies with competent CEOs, keep a pulse on changes in the environmental conditions, and maintain an appropriate balance between monitoring and collaborating.

The writer is a member of the Advocacy & Research and Environmental, Social & Governance Committees at the Singapore Institute of Directors.