What SGX RegCo expects of nomination committees when directors join or resign
The quality of board directors is crucial to the long-term success of the issuer; the individual must uphold their fiduciary duty to the company and its shareholders.
DIRECTORS of a listed issuer, especially independent directors, play a crucial role in the proper governance and commercial success of the company.
The 2018 Code of Corporate Governance (CG Code) describes in its first principle that an effective board is one which is "collectively responsible and works with management for the long-term success of the company". "Directors are fiduciaries who act objectively in the best interests of the company and hold management accountable for performance," the Code adds.
A fiduciary is a person who has undertaken to act on behalf of others in circumstances which give rise to a relationship of trust, confidence and loyalty. Shareholders entrust directors with the powers to manage the company and to achieve sustainable business performance. An individual who accepts a directorship appointment thus accepts this responsibility.
Singapore Exchange Regulation (SGX RegCo) therefore places great emphasis on the process by which the board selects and appoints directors. Disclosures in relation to the resignation of these directors are similarly important.
The Corporate Governance Advisory Committee (CGAC) has also issued a revised Practice Guidance 4 to provide guidance on the board nomination process.
BE COGNISANT OF OVERBOARDING
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
The CGAC's Practice Guidance 2 on board composition states the need for the board to have a strong and independent element. The board and nominating Committee (NC) should exercise their judgment in determining whether any circumstance or relationship exists which might impact a director's independence, or the perception of his or her independence.
Where the board determines that directors are independent notwithstanding the existence of such circumstances or relationships, the board should disclose the relationships and its reasons for determining that the directors are nonetheless independent in its annual report and announcements where applicable.
Where an individual has multiple directorships in listed entities, he/she may be at risk of overboarding, failing to devote sufficient time and resources to the issuer(s) in question. It is crucial that directors have sufficient capacity to properly discharge their fiduciary duties to the company.
The CGAC's Practice Guidance 4 on board memberships states that the responsibilities of a director are complex and demanding. Directors need to make the substantial time commitment required to fulfil their responsibilities and duties to the company and its shareholders. A director with many major commitments can be, or be perceived to be, ineffective because he or she is unable to devote sufficient time to properly discharge his or her duties on the board.
The Practice Guidance therefore recommends that the board and NC take into account the number of directorships and principal commitments of each director in assessing the ability to discharge his or her duties. Some boards cap the number of directorships and principal commitments of each director. Others take into account whether an individual director holds a full-time executive position, as well as the financial year-ends of the respective companies.
DISCLOSE RESIGNATIONS PROMPTLY
SGX RegCo requires directors who are resigning from their appointments to inform the Exchange as soon as possible via an SGXNet filing.
The disclosure template for such cessation announcements requires detailed reason(s) for the cessation. We have noticed boilerplate statements such as "to pursue personal interest" or "for personal reasons" being routinely disclosed. These reasons are not informative on their own. Elaboration is necessary if the reasons for resigning are material information to investors.
Resigning directors must ensure that concerns about the company, such as corporate governance matters or internal controls, are disclosed in the cessation announcement, and not use personal reasons as the reason for cessation.
Other examples of clarity in reasons for resignations include overboarding, board renewal, retirement, inability to properly discharge his/her fiduciary duties, inability to share the same vision with the board members on the company's strategic direction and business plans, and sometimes, differences in decisions over the company's business and future plans.
The disclosure template also seeks to obtain clarity on key areas of concerns, such as whether any unresolved differences in opinion on material matters between the person and the board of directors, including matters which would have a material impact on the group or its financial reporting, exist.
Also required is a response on whether any matter in relation to the cessation needs to be brought to the attention of the shareholders of the listed issuer. Therefore, directors, particularly independent directors, should, cite the reason(s) behind their decisions especially if there are material governance concerns and matters concerning the management of corporate affairs which have a material impact on the company's financial performance or operations.
CONSIDER PAST PERFORMANCE
In determining suitability of potential directors, NCs are required to perform stringent due diligence on candidates. Such due diligence should extend to whether each directorship candidate has fully discharged his/her duties and obligations during his/her previous directorship of an SGX-listed company, and whether a candidate had previously served on the board of companies with adverse track records or a history of irregularities.
Where the candidate is or was under investigation by professional associations or regulatory authorities, clarity should be sought on whether there are matters that would have a bearing on the candidate's suitability to be appointed. The board and NC must rigorously satisfy themselves as to the candidate's suitability and ability to serve on their board, taking the above information into consideration.
SGX RegCo has noted several instances when directors resigned from listed issuers shortly before or after the company is issued with a modified audit opinion or emphasis of matters relating to material going concern issues, and/or prior to the need for independent review or special audit. Such issuers are of relatively higher risk.
If directors or executive directors, especially those in the finance function, are considering stepping down, these "jump ship" directors should consider if their resignation would place the company in jeopardy, or compromise the company's ability to look into the matters of concern.
In most instances, shareholders' interests will be better served by the director staying on the board and helping to guide the company to resolve the matters of concern. Appointing a new member to the board and audit committee will take time and is even more arduous for a company with going concern issues. A company needs continuity in the steering hands to guide it through the tempest.
Another instance where directors should remain with the company to take active steps to resolve the issues raised is when short seller or media reports highlight company-specific issues or transactions.
For Catalist issuers, the continuing sponsor is required to perform sufficient due diligence and will need to satisfy itself on the suitability of each candidate. This is in line with the guidelines Assessing Suitability of Directors and Executive Officers. The continuing sponsor should perform background checks on candidates and flag potential candidates that had previously "jumped ship".
SGX RegCo is closely monitoring such situations and reserves the right to object to, and publicly query the appointment of, directors who have previously "jumped ship". The issuer's NC (and continuing sponsor, if applicable) will then have to publicly reply to SGX RegCo's queries and vigorously justify their decision that the director concerned is deemed suitable despite his/her history of "jumping ship". If responses are not satisfactory, SGX RegCo may exercise its administrative powers under Rule 1405(1)(e) and issue a Notice of Compliance (NOC) objecting to the appointment of that candidate to directorships of SGX-listed companies. The issuer's board (and continuing sponsor, if applicable) will then have to publicly state its considerations on whether or not to remove said director from their post.
COMMITMENT FOR LONG-TERM SUCCESS
As previously mentioned, the quality of board directors is crucial to the long-term success of the issuer. Here, it is important to remind issuers and directors that quality transcends mere compliance with the Listing Rules. The individual must be committed both in form and substance including being prepared to continue his/her role and responsibilities even as the company goes through ups and downs. Only in such instances can directors claim to uphold their fiduciary duty to the company as well as its shareholders.
- The writers are from SGX RegCo. June Sim is head of Listing Compliance and Sean Lim is assistant vice president.
Share with us your feedback on BT's products and services
