Fearless directors, more than diverse boards, will help drive shareholder value creation

AS an investor on the local bourse, I like seeing diversity in the boards of listed groups. Drawing inputs from people of different genders, nationalities, and work backgrounds helps ensure better decision-making. 

With more robust decision-making, a company can deliver stronger financial results on a sustainable basis for the benefit of long-term investors.

Moreover, having diverse boards signals to employees that a group values diversity. This can help the business attract talent from varied backgrounds. 

I note that the board diversity policy of DBS Group – Singapore’s largest company by market capitalisation – provides that the board’s nominating committee shall endeavour to ensure that female candidates are considered when identifying people to be appointed as new directors. The aim is to have no fewer than two female directors on the board, and the target is 30 per cent female board representation by 2030.

As a shareholder, I feel assured when the bank’s nominating committee says there is a right balance of industry knowledge, skills, background, experience, professional qualifications, age and gender on the board.

Still, the question of what makes a truly diverse board is tricky to answer. Perhaps having directors who studied in a wide range of universities, or possess different educational qualifications matters. The perspectives of directors may also vary based on marital status, living arrangements, areas of interest outside work, race or religion.

However, that a board has directors who behave fearlessly matters more than whether too many members hold degrees from elite universities or are married with children.

Rule changes – whereby independent directors of listed entities who have served for over nine years can no longer be deemed to be independent – will help boards refresh and stay relevant. Still, what is crucial is to have board members with the right character and not just the right skills or credentials.

Board meetings are not livestreamed to shareholders. As confidential and price-sensitive matters are discussed, such meetings are necessarily closed-door events. Besides, even with the attendance record of various directors at board meetings, shareholders may be clueless as to whether a board member participates actively at such meetings. 

Hopefully, with physical annual general meetings, small shareholders will at least get to see board directors in person and possibly interact with them.        

I think having fearless board members matters greatly.

Executive remuneration

First, I am tired of the justifications to explain the princely sums paid to some corporate chiefs of listed groups. While profits may have jumped, could the profits have grown largely because of favourable external events? 

For example, among the local banks, strong profits in 2022 were made possible by rising interest rates. In some businesses, healthy profits resulted from large capital investments.

Moreover, no matter how competent leaders are, they and the entities they lead can screw up. Many organisations have at times failed to meet expectations of customers and stakeholders.

As listed groups award head honchos annual pay packages that can be worth several million-dollar Housing and Development Board resale flats or many multiples of median household income, I fear the effect this has on inequality. 

If societies get pulled apart by a disproportionate share of economic rewards going to the few, the ensuing social strife can destroy the sustainability of businesses.

I hope to see fearless board members who can reset pay structures such that the economic pie is well shared out among all staff in a company. The pay of chief executives should be reined in such that their remuneration makes sense to the general public. 

As a shareholder, I will be proud if Singapore has many relatively poorly paid chief executives by global standards because I think this helps business sustainability. Sharing economic rewards more equally strengthens the social compact. 

Second, fearless board members are needed to carefully scrutinise key investments. Misadventures may result in painful impairments. Can bad investment calls be avoided with robust due diligence?

Management teams need to take risks, so a business can grow. Good management teams also need to act fast to seize opportunities.

Still, board members can add value by going way beyond rubber-stamping when matters are brought to the board for approval. In a more complex world, there is much to gain from raising probing questions and challenging assumptions so that precious equity capital is wisely deployed. 

Third, fearless boards can work hard to help a company get its strategy right. With challenges posed by geopolitical tensions, high inflation, rising interest rates, climate change, and the rise of artificial intelligence among others, being correct on where a business grows or how a business pivots is critical to shareholder value creation.

For example, I note that DBS held its annual board strategy off-site in September 2022 to deliberate on matters such as the bank’s Greater China strategy, competitive advantage in the digital finance space and sustainability issues.

Addressing undervaluation

Fourth, many listed entities here are undervalued. Some property groups trade at half of book value or less, despite owning high-quality assets.

Fearless board members need to champion strategic reviews to help unlock value for all shareholders. This is especially so for listed groups with families as controlling shareholders. 

Should the share market underprice a business, the board must actively find a solution. If boards focus on creating shareholder value, more people will participate in the equities market here, thereby improving trading liquidity and share prices.

I am not asking for boards that tie management down such that decision-making stalls, nor for acrimonious boards where directors spend time on internal feuds.

I think having directors who robustly discuss issues and are at times provocative strengthens governance and boosts performance.

By investing in listed equities, one buys into a business, with trading liquidity, under a framework that stipulates standards of governance. This can be a good way to build up wealth to fund retirement needs as we live longer. 

May investors be able to place their faith in fearless board directors who will zealously guard and advance their interests.