What nominating committees should do in a criminal investigation
REPORTS of directors of listed issuers being called in for questioning by police investigators surface every now and then.
Should these directors be allowed to continue to serve on boards in the listed companies? The short answer: What is in the best interest of the company and its shareholders?
Nominating committee’s obligations
Under SGX Listing Rule 720(1), issuers must ensure under Mainboard Rule 210(5)(b) (or the equivalent Catalist Rule) that directors comply with the character and integrity requirements on a continuing basis.
It is the responsibility of the company’s nominating committee (NC) to disclose its independent assessment of the continued appointment of the director in compliance with this rule. This must be done via an announcement on SGXNet or the company’s annual report and Notice of AGM when the director is up for re-election.
When a director or board is under investigation, the NC must rigorously satisfy itself as to whether the allegations against the directors and conditions or restrictions imposed by the regulatory authority or government agency would cast any doubt on their suitability or continuing ability to act as directors; or more crucially, affect shareholders’ confidence in the company. The NC should also consider whether any measures need to be undertaken to safeguard against risks associated with the directors’ continued appointment.
The NC should ask itself whether it is in the best interest of the company and the shareholders for the director to remain on the board while an investigation is ongoing.
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The NC should also monitor material developments relating to the investigation or require the director concerned to update on material developments. This will enable the NC to continue to consider the developments and assess the director’s suitability in compliance with the character and integrity limbs of the rules, if necessary, via SGXNet.
Three scenarios
There are three typical scenarios when an investigation gets underway. Some questions for the NC are as follows:
Scenario 1: The entire board is under investigation.
1. How does this investigation impact investor confidence in the company, and the timeliness and accuracy of the company’s announcements?
2. Should the NC consider appointing one or two new independent directors (IDs) to give investors confidence that the board is now subject to additional checks and balances? The resignation of the entire board may not be practical.
3. Should the NC consider designating one of the incoming IDs as a Lead ID?
4. In searching for new IDs, should the NC seek the help of an external party, such as a professional search firm or SID to give confidence in the independence of the new IDs?
5. If doubts about the integrity of the investigative process persist, should the new IDs form a special committee to oversee the investigative process? This may assure the market that the company is cooperating fully in the investigative process and is not being impeded or influenced in any way by the board.
Scenario 2: A director is being investigated for an offence involving the company.
1. What is the director being investigated for?
2. If the investigations point to potential wrongdoing by the director or impropriety in the company’s affairs, how can investors’ confidence and shareholders’ interest be protected if the director remains on the board?
3. Should a special committee be appointed to oversee the investigation or the matters of concern?
4. Should an independent law firm or audit firm be appointed to conduct expedient reviews of the company’s internal controls and recommend enhanced approval processes and interim measures?
5. Should there be Chinese Walls or changes to reporting lines to ensure the integrity of investigations?
6. Should there be additional checks and balances on the director’s power and authority, particularly for executive directors?
7. Is the board taking the position that the acts were unauthorised?
8. Is the board seeking legal advice and reserving its rights against the director?
9. Will these considerations make it difficult for the board to continue to be a well-functioning board?
Scenario 3: A director is being investigated for something that does not involve the company.
1. Will the director be able to dedicate sufficient time if he remains on the board while the investigation is ongoing?
2. How much of a distraction will it be from the important business of the company?
3. What is the reputational impact on the company?
Best interests of the company and shareholders
The questions listed are not exhaustive but are aimed at helping address crucial points. They are difficult questions and require judgment and robust decision-making by the NC.
The critical issue is not whether the director will be convicted or acquitted, nor what is best for them. Rather, the focus of the NC and the board should be on charting a course for the best of the company and its shareholders.
If the NC chooses to retain the directors during the period of the investigation, the NC must ensure that the directors continue to provide updates on material developments related to the investigations. The company is, after all, subject to the continuing obligation of ensuring that its directors possess the character and integrity required under the listing rules.
This is the second of a four-part series on criminal investigations and special audits.
The writer is a council member of the Singapore Institute of Directors.
Copyright SPH Media. All rights reserved.
