KUALA LUMPUR: A mandatory tenure limit of 12 years for independent directors will be introduced in the Listing Requirements early next year.
The Securities Commission (SC) said in its Corporate Governance Monitor 2021 that this would help facilitate a structured board refreshment among listed companies.
“We think this is the sweet spot because the directors are typically appointed on a three-year term.
“The feedback that we have received from stakeholders are that we can’t cut off too soon like six years, as directors need time to be familiar with the business and understand the operations before they can really contribute,” an SC official said at a technical briefing recently.
The SC official explained that 12 years is already at four terms of three years each.
“Independent directors who have been on the board for too long may impair the objectivity of the board.
“They may also deny the board the opportunity to refresh their composition – to bring in new skills through new directors with different experience to the board,” the official said.
“We want to avoid group think with this 12-year term limit. We feel that if a director sits there for too long, they may develop group think and there is less opposing views that could (otherwise) generate a more robust discussion.
The SC official said the 12-year timeframe is also premised on many institutional investors’ good governance policy.
“Some have a very clear policy where they will not vote for the extension of independent directors after nine years, while some said they won’t vote (for the term renewal) after 12 years.
“After taking into consideration some of these practices out there, we felt that cutting off at 12 years will be fair to the board, shareholders and stakeholders.”
According to the regulator, as of Oct 31, 46% of listed companies have at least one long-serving independent director on the board with a tenure of nine years or more, while 500 board positions were held by the same independent director for more than 12 years, out of which 89 are for more than 20 years.
“On some boards, the challenge is more acute as they have two or three independent directors with tenure as long as 30 years,” it noted.
Commenting on this, the Minority Shareholders Watchdog Group chief executive officer Devanesan Evanson told StarBiz that the move to limit the tenure of independent directors is a good one.
“Independent directors become less and less independent over time and it is a timely move to put a cap on the tenure of independent directors. The long-tenure independent directors can continue to serve on the board but cannot be classified as independent directors,” he said.
“This, however, may result in the size of the board increasing as the company strives to meet the ratio of independent directors to total board composition. Currently, at least 50% of the board must comprise independent directors under the Malaysian Code on Corporate Governance,” he added.
Institute of Corporate Directors Malaysia president and chief executive officer Michele Kythe Lim told StarBiz that over the long term, this move will improve a company’s competitiveness and financial performance.
“The recent Malaysia Board Diversity Study showed that a diverse and independent board is in a better position of strength to achieve sustainable financial performance, indicating a correlation between board diversity and company’s financial performance,” Lim said.
“In particular, boards with 30%-50% independent directors showed higher return on equity and stronger revenue growth compared to boards with fewer independent directors,” she added.
Lim said the mandatory tenure limit for independent directors is the right step to strengthening best practices on boards.
She said should a board feel that an independent director can still contribute expertise and knowledge beyond the tenure limit, the director can be retained as a non-independent director or company adviser.
Meanwhile, SC executive chairman Datuk Syed Zaid Albar said boards are under pressure from rising regulatory expectations and increasing shareholder activism.
“For companies to remain resilient and competitive, both through and beyond the pandemic, boards must continuously assess their composition to determine if they have the right skill-set to perform their functions effectively,” Syed Zaid said in his speech during the release of the Corporate Governance Strategic Priorities 2021-2023.
“Board positions were never intended to be lifelong positions. As the economy and the dynamics of the marketplace evolve and change, boards need to be refreshed to bring in new talent, fresh perspectives and competencies that are more aligned with the current and future demands of the business,” he added.
The SC yesterday issued its Corporate Governance Strategic Priorities 2021-2023 to promote, among other things, environmental, social and governance (ESG) fitness and leadership of boards.
Devaneson said companies can be motivated to subscribe to ESG themes instead of viewing it as a burden.
“Firstly, from within the company, boards will realise that ESG is the right thing to do, the right way to go – a sort of self-discipline that appreciates that apart from shareholders interest, one must also consider stakeholder interest.
“Secondly, from an external perspective, institutional investors expect a certain degree of ESG compliance before they are prepared to invest in a particular company,” he added.
Lim said that in a nutshell, ESG can no longer be an afterthought like how corporations used to approach corporate social responsibility prior to this.
“ESG must be integrated into the core business strategy, driven by the board and embedded in every unit of the organisation. Getting the mindset right from the beginning is of utmost importance.
“A key consideration for companies is to understand that ESG and sustainability is not just a box-ticking exercise,” Lim said.
“It is more than just fulfilling regulatory requirements but also driving the right values throughout the whole company to establish long-term success – both for the company, the environment and the communities it operates within.
“It should not be a greenwashing exercise,” she added.