Giving boardroom independence a shelf life

  • Opinion
  • Saturday, 29 Apr 2017

LET’S saunter down memory lane, all the way back to 1979. Tun Hussein Onn was our Prime Minister then and the leaders of the United States, Britain and the Soviet Union were Jimmy Carter, Margaret Thatcher and Leonid Brezhnev.

Watershed events that year included the start of the Iran hostage crisis, the Soviet invasion of Afghanistan, and the signing of the Egypt–Israel Peace Treaty.

Thatcher’s election in May was a political and economic turning point, not just in Britain but also globally.

And between Jan 29 and Feb 4, Deng Xiaoping was on an “official goodwill visit” to the US. It was the first American trip by a Chinese leader since the founding of the People’s Republic of China three decades earlier.

At the time, the Internet and smartphones were the stuff of science fiction. What was new and cool in 1979 though were the McDonald’s Happy Meal and the Sony Walkman.

Yes, plenty has changed since 1979. But for at least two Malaysian men, there is one constant – each joined the board of a listed company that year and has stayed on until today. Astonishingly, despite having spent almost four decades with the same corporations, they are both considered to be independent directors.

Here’s an amazing quirk in the rules on boardroom independence. If an employee of either of these unrelated companies retires or resigns, and is appointed to the board in a non-executive capacity, he must be designated a non-independent director.

It doesn’t matter how long he has worked in the company. He may have been there for say, three years, which isn’t much compared with the two long-serving directors’ 37 years or so, but going by Bursa Malaysia’s listing requirements, the duo are independent and he’s not.

In their latest annual reports, the two companies insist that these directors remain objective and impartial despite their length of service. They argue that the tenure of an independent director should not be decisive in assessing his independence. Soon, this matter may be out of their hands.

And there will be many others who will be similarly affected because it’s not unusual at all to find independent directors who have been appointed in the 1990s and even the 1980s. The board of one listed company has the same chairperson, who’s designated as independent, since November 1986.

The latest version of the Malaysian Code on Corporate Governance, released on Wednesday by the Securities Commission (SC), recommends a new measure that will make it harder for listed companies to have the same independent directors for more than 12 years.

The previous Code requires a company to seek annual shareholder approval if it wants to retain an independent director beyond nine years.

That is still in place, but in addition, after the independent director has served his 12th year on the board and the company continues to need him, he can only stay if shareholders shows support through a two-tier voting process at a general meeting.

In Tier 1, only the company’s large shareholders vote on the resolution to keep the director as an independent board member. The rest votes in Tier 2.

A simple majority of votes determines the outcome of the Tier 2 voting. It’s the same for Tier 1 if there are more than one large shareholder.

The resolution is successful only if shareholders in both tiers vote for it. Otherwise, the director can’t stay on as an independent. He can remain as a non-independent director, but that will probably mean that the company doesn’t have the minimum number of independent directors.

The SC calls the two-tier voting process “a speed bump” that will compel boards to rethink the wisdom of having long-serving independent directors. The regulator argues that the many years that independent directors spend in the same companies create doubt about their effectiveness and ability to challenge the management and fellow board members.

“In considering independence, it is necessary to focus not only on whether a director’s background and current activities qualify him or her as independent, but also whether the director can act independently of management,” says the SC in the Code.

“Stakeholders are increasingly concerned about the potential negative impact that directors’ long tenure may have on their independence. The long tenures of independent directors and familiarity may erode the board’s objectivity. Due to long or close relationship with board and management, an independent director may be too sympathetic to their interests or too accepting of their work.

“There could also be occasions where an independent director may become a ‘dependent’ director due to prolonged insular recruitment processes and attractive remuneration packages and material benefits.”

The two-tier voting process will definitely draw a lot of attention to the issue of independence and length of tenure.

It’s too easy to assume that the passage of time erodes independence, but boards should certainly be asked to justify the need to cling on to independent directors for decades.

But it has to be kept in mind that compliance with the Code is voluntary. When releasing the document, the SC revealed that 52 companies didn’t even table specific resolutions for the reappointment of independent directors who had served for more than nine years.

So here’s the larger question: Will the market punish listed companies that don’t try hard enough to apply the Code’s practices?

  • In 1979, executive editor Errol Oh was a lot younger than he is now.
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