DESPITE the capital market's efforts to improve corporate governance, the appointment of independent directors, in many cases, remains one of form over substance, says Securities Commission (SC) deputy chief executive Datin Zarinah Anwar.
The persistent cases of minority shareholder exploitation demonstrated the failure of independent directors to give effect to the role and responsibility intended to be discharged by them, either by condoning the wrong of the executive director, or by being unaware of such wrong in the first place, she said.
Zarinah told the Corporate Governance: Adding Vision to Oversight conference in Kuala Lumpur yesterday that it was important for independent directors to be of sufficient calibre and numbers for their views to carry significant weight in a board of directors' decisions.
It was partly also for that reason that the Malaysian Code on Corporate Governance advocated that one-third of the board of a listed company should comprise independent directors, she added.
Independent, in this context, means independent of management and free from any business or other relationship that could interfere with the exercise of independent judgment, or the ability to act in the interests of the stakeholders, she emphasised.
Independent directors should have an inquiring mind, should question intelligently, debate constructively, challenge vigorously and decide dispassionately.
And they should listen sensitively to the views of others, inside and outside the board, she added.
As for non-executive directors, Zarinah said they had two important contributions to make to the governance process.
The first was in reviewing the performance of the board and of the executive, and hence non-executive directors should be given access to all the company's books and accounts.
They should be able to address the strategic aspect of their responsibilities carefully and should ensure that the chairman is aware of their views.
If the chairman is also the chief executive officer, board members should look to a senior non-executive director, who might be the deputy chairman, as the person to whom they should address any concerns about the combined office of chairman/CEO and its consequences on the effectiveness of the board, she said.
Zarinah said the second vital contribution was taking the lead where potential conflicts of interest arose.
An important aspect of effective corporate governance, she said, was the recognition that the specific interests of the executive management and the wider interests of the company may at times diverge, for example, on takeovers, boardroom succession or directors' fees.
She noted that the ACCA, in its November 2002 report on corporate governance, found that while 90% of boards in Kuala Lumpur, Hong Kong and Singapore had discussed financial reporting and disclosure, only 50% had carried out formal reviews of their corporate governance practices.
And, even then, the reviews tended to focus on disclosure and compliance rather than on enhancing transparency.
Zarinah said regulators might be able to legislate and provide laws to ensure independence based on proximity and relationship, but we cannot regulate independence concerning the mindset.
Therein lies the biggest challenge: to prevent or in some cases, overcome the 'board capture' culture, whereby directors (even independent directors) become beholden to the company or its current CEO in ways too subtle that it cannot be captured in customary or legislative definitions of 'independence'.
Without this independence, Zarinah said, the board of directors would have failed to fulfil its role as the internal enforcer, the supervisory mechanism for good corporate governance.