Let independent directors hold shares and wear multiple hats within reason

THERE has been no lack of effort made to raise corporate governance standards in Singapore. The general belief is that with better corporate governance, investor confidence in local equities may rise.

Playing a key role in corporate governance are non-executive independent directors (IDs), who may constitute the majority on listed boards.

An ID is someone who does not have a material relationship with the company or management that would interfere with the exercise of his independent judgment. This includes not being a substantial shareholder of an entity, with a stake of 5 per cent or more.

Like other board directors, an ID contributes in charting strategic direction, managing risks, reviewing management performance and appointing key members of the management. 

IDs are expected to be vigilant guardians of the activities of the board as a whole, and ensure that corporate assets are used only for the company, thereby promoting the interests of all shareholders.

Owning shares

Some IDs own shares in the companies where they are board members. Singapore’s largest listed company, DBS Group , typically pays its non-executive directors 70 per cent of their fees in cash and the remaining 30 per cent in share awards.

An individual may be an existing shareholder of an entity prior to being appointed as an ID. Also, some IDs buy shares of the entities in whose boards they serve during certain trading windows.

In fact, Singapore’s Code of Corporate Governance recommends that companies implement schemes that encourage non-executive directors to hold shares in the company. This follows the “skin in the game” principle, that holding shares will better align the directors’ interests with those of shareholders. The main caveat is that share-based compensation should not be to the extent that independence may be compromised.

Indeed, an ID who holds shares in an entity could be more attuned to the needs of minority investors, and be extra vigilant in assessing transactions with major shareholders. They may also pursue value-unlocking initiatives that benefit all shareholders. 

But could being a shareholder taint an ID’s independence?

An ID who holds shares in an entity could become overly focused on the near-term and less mindful of longer-term risks. Or, the ID could be reluctant to pull the brakes on management aggressively growing a business.

Furthermore, an ID with shareholding interests might refrain from questioning the merits of a potential deal that may be well received by the market. They might also hesitate to support spending more on building business resilience, because this harms short-term profitability.

While an ID’s stake in a company may be small in percentage terms, the value of the said stake can be worth several hundred thousand dollars or even a few million dollars. This could be material to the said ID’s financial well-being.

Perhaps there is a need to limit not just the percentage of shares owned, but also the value of shares held by IDs in entities where they serve. In other words, an independent director’s stake should not be 5 per cent or more, and it should not exceed a certain amount – say a million Singapore dollars.

Safeguards in place

As the work of listed boards often takes place behind closed doors, investors may struggle to judge how effective IDs are in carrying out their roles. 

Some IDs sit on multiple listed boards, besides serving as consultants or on boards of charities, government entities, educational establishments, as well as professional bodies. Do such persons have sufficient time and bandwidth to be effective IDs?

In Singapore, many individuals who leave senior full-time roles in finance, corporates, law, accounting or public service go down a well-trodden path of sitting on boards of private companies and other entities.

An example is Tan Huay Lim, who served as a partner at professional services firm KPMG Singapore until he retired in September 2015. He is an ID of several Singapore and Hong Kong listed groups. In Singapore, he is an ID at entities such as Sheng Siong Group , the trustee-manager of Dasin Retail Trust (DRT), the manager of Elite Commercial Reit and the manager of OUE Commercial Reit .

Wearing all of those hats has not stopped him from getting intimately involved in DRT. In his role as lead independent director of DRT’s trustee manager, he made the news for allegedly placing himself in opposition to DRT’s substantial unitholder, Zhang Zhencheng. Zhang, also a director and shareholder of DRT’s trustee-manager, has filed a claim against Tan, alleging that Tan’s conduct has been “oppressive” and “in disregard” to Zhang’s interests.

The risk of overstretched independent directors might not be as large as some might think.

The assumption behind that risk is that IDs take on multiple appointments for the money without the intention to properly dedicate their time and energies to their companies. After all, IDs receive fees for their services, and additional fees are received for taking on roles such as lead independent director or chairman of board committees.

But while one can earn several hundred thousand dollars a year from serving as an ID of a few listed groups, being an ID also comes with huge responsibilities and potential liabilities.

Those liabilities mean that, generally, these individuals have a strong incentive to take their responsibilities seriously and refrain from taking on too many appointments.

Instead of prescribing limits on multiple directorships, the market might instead benefit from tougher enforcement against negligent IDs. This will strengthen the structural self-policing mechanism that already exists, and nudge individuals who take on ID roles from becoming over-stretched.

It is hoped that individuals serving as IDs do self-assessments regularly to satisfy themselves that they can fulfil their roles effectively. Fellow board members can contribute too, by helping to ease out IDs who cannot fulfil their roles.