More regulatory changes needed to enable IDs to act without fear or favour: Opinion
Market regulators should conduct a more comprehensive review and further amend existing listing rules to better equip independent directors in their governance roles of listed companies.
Singapore Exchange Regulation (SGX RegCo) recently announced that it is compulsory for listed companies to limit the tenure of independent directors to nine years.
Independent directors who presently exceed the nine-year limit will only be deemed independent until the issuer's annual general meeting is held for the financial year ending on or after Dec 31, 2023.
The regulators and market commentators have opined on the raison d'etre and justifications for the latest listing rule.
The regulatory amendment to limit the tenure of independent directors is a move in the right direction to strengthen corporate governance and to institutionalise the renewal of the audit committee.
Hardwiring the nine-year limitation tenure for independent directors to serve on the boards of listed companies was a regulatory change that was widely anticipated.
Thus, listed companies and market watchers were unfazed when SGX RegCo announced the new rule last week.
There is increasing public opinion, however, that the market regulators should conduct a more comprehensive review and further amend existing listing rules to better equip independent directors in their governance roles of listed companies.
Many listed companies in Singapore, especially Catalist companies, have boards where the C-Suite members and controlling shareholders are the same persons, or who are associates.
Senior executive management who are concurrently controlling shareholders -- or their associates -- have a dominant say as to whether an independent director is appointed or re-appointed to the board.
The remuneration of independent directors is also subject to the approval of the annual general meeting, where the controlling shareholders normally would have a predominant say whether independent directors' fees are approved.
In a contentious annual general meeting (AGM) of a Catalist company in October 2022, the resolution to approve the fees of independent directors was voted down because various controlling shareholders were unhappy with the independent directors.
One of the reasons for limiting the tenure of independent directors is to ensure that the independent directors "do not get too cosy" with the executive management.
This is certainly most important to ensure that independent directors are able to properly discharge their duties to the company objectively and not be influenced by their long-term relationships or even friendships with senior management that may develop over time.
However, it is equally important that the regulators consider revamping existing listing rules to enhance the ability of independent directors to act without fear or favour.
Scratching each other's back
At present, the nominating, remuneration and audit committees in many listed companies -- especially Catalist companies -- comprise the same independent directors. Further, each committee is typically headed by an independent director who concurrently sits in the other two committees.
Market commentators have voiced their concerns about such a composite structure.
For example, this may have the undesirable effect of independent directors "scratching each other's back" when it comes to making recommendations on the re-appointment of one or more fellow independent board members retiring by rotation at a coming AGM.
It is also not unusual for one executive director -- who may also be a controlling shareholder -- to sit in either or both the nominating committee and the remuneration committee.
There is thus a real risk that there may not be adequate objectivity in the nomination of persons to appoint or to re-appoint as independent directors.
Likewise, there is a likelihood that the recommendation of the annual directors' fees by the remuneration committee for the concurrence of the board and the approval of the AGM may be subject to the influence of the executive directors who are also in the same committee.
Quite often, even if the nominating and remuneration committees comprise wholly of independent directors, such committee meetings are held consecutively before a scheduled board meeting -- in the presence of executive directors and senior management.
These individuals could have an overbearing "moral-suasive" influence on the outcome of the deliberations and decisions of the nominating and remuneration committees by their mere presence at the committee meetings.
Possible amendments to listing rules
To entrench the objectivity and to further safeguard the roles and functions of independent directors to act without fear or favour, the market regulators may wish to consider implementing the following listing rules:
The board should comprise a majority of independent directors who have no present or prior professional, business, pecuniary, or any direct or indirect familial relationships with any director or substantial shareholder of the company.
Having a majority of such independent directors on the board strengthens the board's position to query errant senior management -- including executive directors and the chief executive officer (CEO) -- on any suspected misconduct, and to even exercise the power of suspension where necessary.
The nominating and remuneration committees should consist entirely of persons who are not concurrently members of the board.
This is to prevent the appointment of independent directors from "an old-boys club" in the friendship circle of senior management.
Such committee members could be appointed by the board from a list of experienced and qualified persons whose names are provided by independent professional bodies such as the Securities Investors Association (Singapore) or the Singapore Institute of Directors.
Such persons could be appointed for a term of, say, two years, purely with certain defined roles.
These defined roles could include assessing the suitability of new board members, and appraising the performance and contributions of both executive and independent directors who are seeking re-election to the board, as well as deliberating on and recommending the annual remunerations of all directors.
The appointment or re-election of independent directors to the board and the approval of independent directors' fees at the annual general meeting should only be voted upon by shareholders who are not directors or executives of the company, or their proxy shareholders.
In addition, it may also be appropriate to require the chief financial officer (CFO) -- or the senior finance person holding the equivalent position -- to report directly to the audit committee or the chairman of the audit committee.
There have been recent reported cases -- such as Trek 2000 and Agritrade International, for example -- where the CFO colluded with the chief executive founder to commit fraud and forgery, ostensibly under the undue influence of the superior executive officer.
Prescribing the regulatory requirement that the CFO reports directly to the audit committee or the chairman of the audit committee will reduce the likelihood of any collusion between the CFO and the CEO, or the CFO acting under duress and pressure from his executive superior, to commit fraud or forgery.
Furthermore, the annual budget of the company should allocate financial resources placed in a bank account operated under the direct control of the audit committee.
This is to enable the audit committee to hire professional advisers, such as lawyers and a professional internal audit team, to advise the audit committee in an investigation on management, without having to seek the concurrence of the management who controls the finances.
Woe betide the audit committee when management is not willing to disburse monies for the audit committee to appoint professional advisers to conduct a proper investigation on any suspected transgression by senior management.
The position of the market regulators that the nine-year hard rule will not prevent listed companies from appointing new qualified persons to replace incumbent independent directors is correct.
Listed companies should not wait until the eleventh hour just before the expiry of the nine-year term to source for replacement independent directors. This would be inexcusable.
In addition to the nine-year limitation rule, the suggested further amendments to the listing rules will hopefully enhance the institutionalisation of the audit committee to act in the best interests of the company and minority shareholders, without fear or favour.
The writer is a partner at Kennedys Legal Solutions.
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