New ID term limit a catalyst for improving board performance

COME Jan 1, 2022, the SGX rule on term limits for independent directors (IDs) will come into effect. This term limit is set at nine years, beyond which an ID can no longer be considered independent unless that director passes a two-tier vote, of which the second tier comprises shareholders who are not the board directors and the chief executive officer, and their associates. In addition to this, the Exchange will now require independent directors to make up a third of the board.

These were all part of updates to the Singapore Code of Corporate Governance, which was revised in 2018. The intent behind these listing rule changes was to raise the bar on board independence. However, so as not to cause undue disruption, a three-year grace period was put in place to allow for sufficient time for the long-tenured directors to rotate off their boards.

What happens should a director fail to obtain the required support? There are two possible courses of action:

• The director continues to serve on the board, but now as a non-independent, non-executive director (or Ni-ned); or

• The board replaces that director with another who can be deemed independent.

The implication of the first option is that the proportion of IDs on the board will change. If it so happens that the board is relying on this director being independent to comply with the one-third ID rule, the company will need to re-examine its composition.

Boards' response: A burning platform? or opportunity for meaningful change?

While there are forward-looking boards, which as part of their succession planning have used these past three years to make the necessary arrangements, our cursory analysis of SGX mainboard companies revealed that quite a fair number have yet to do so and risk running afoul of the rules once they kick in.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

One can only speculate on the reasons as to why this is so, but it is likely that the directors on these boards have decided to try and press on with the two-tier voting process. Case in point: In a BT article ( April 9, 2021), the National University of Singapore's associate professor Mak Yuen Teen pointed out that 27 companies had already implemented two-tier voting for 34 IDs in 2020.

It will no doubt be worth observing in the months to come, how many directors agree to subject themselves to the two-tier process, and how the votes ultimately pan out. Will the rules need to be further refined? Given that one of the fundamental drivers behind all this is to encourage board renewal, we should look at the current situation not as a burning bridge but as an opportunity to drive meaningful change in the diversity of our boards.

What's your board looking like?

A skill/experience matrix is one of the common and often-used methods boards use to obtain a view of its current composition. This typically requires mapping each director's skills and experiences and analysing them against what the board thinks are important traits to the business. While there is some degree of judgement involved, it helps provide some clarity around what each director brings to the table.

Most boards, as part of their annual evaluation, often stop at that. But why not take it one step further, and contrast this against additional director skillsets deemed necessary to help the company achieve its long-term strategic vision? Conversely, are any of the existing traits less relevant in the context of the future economy? When do you think these changes will need to happen?

Overlay all these insights against the current tenures of the existing slate of IDs in the board, and you have the beginnings of a succession plan. It also allows boards to think more broadly about who to induct into its ranks, beyond the usual slate of bankers, lawyers, and accountants.

Making the most of the upcoming rule change

The writing is clearly on the wall when it comes to term limits for IDs. India already has a 10-year limit for IDs built into its Companies Act.

In its latest update to its Corporate Governance Code in April this year, Malaysia not only tightened the conditions required for two-tier voting but intends to introduce a 12-year hard limit for IDs on companies listed on its bourse.

Whether Singapore will follow suit when our turn comes is anyone's guess, but rather than simply embarking on an exercise to conform to the pending rule change, there is value in boards taking a harder look at their composition through a diversity lens. And not just simply diversity in terms of gender, but in the broader context of thought, experience, and knowledge - key ingredients for a high-performing board.

Having that broad, independent perspective does matter, and the board that can collectively draw upon the breadth of expertise it has at its disposal would not only be an invaluable resource to the management team.

That diversity also serves as the foundation for good corporate governance, helping to shape corporate decisions that affect the sustainability and longevity of the enterprise in the long run.

• The writer is consultant at Russell Reynolds Associates (Board & CEO Advisory Partners)