According to the Securities Commission’s (SC) Corporate Governance Monitor 2022, there are 6.834 board members representing 959 Bursa Malaysia listed companies. They include multiple board members as the total number of board members is 5,649 members.

Of the total, 3,550, board members are Independent Non-Executive Directors (INED), which translates to 51.9%, while another 2,183 or 31.9% are Executive Directors. The last categroy is Non-Independent Non-Executve Directors with 1,101 board members or 16.1%.

Interestingly, 64% of new board appointments in 2022 were for the position of INEDs, which reflects corporate Malaysia’s ability to meet the stringent requirement of having more INEDs, especially among smaller capitalised companies.

• High INED turnover is usually a red flag ie. a reflection of trouble within a company’s leadership

• Timely for regulators to issue an updated guideline to compel directors to disclose reason for resignation

High Turnover

Typically, a new board member, especially an INED, stays for a period of time, and in most cases, we do see an INED taking up the role rather seriously and serving the board for the period allowed under the Malaysian Code of Corporate Governance, which is set at nine years.

However, there are cases whereby INED turnover is rather high, and new board members – with tenure of less than one year or just one to two years or merely just a month or two into the new role – leave abruptly. They are then replaced with another new INED and the process repeats again and again to the extent so many changes are happening within a short space of time.

From governance perspective, this is usually a red flag as a constant change in board composition is a reflection of trouble within the company’s leadership. Perhaps, the voices and opinions of these INEDs are not taken seriously.

Transparency

When an INED or any director leaves, an announcement to Bursa Malaysia is made with a simple explanation that the said director is resigning either to “pursue other interest” or “due to personal reaons or commitments”.

However, in most instances, the truth is far from it.

As a board member who is leaving a corporation for whatever flimsy excuses, should they be compelled to reveal the truth to the public as well as to the authorities, like Bursa Malaysia or the SC?

While most companies have a Whistleblowing Policy that allows not only company’s employee but also other third-party providers to report to the deisgnated person on matters that are improper or illegal, there appears to be little avenue, if any, available to hear the grouses of a descending board member for matters that are brought at the level of board level or board committee level for discussions, other than perhaps being captured in the minutes of the meeting itself.

In some cases, a high turnover of board members, especially INEDs, means trouble exists within the company, especially concerning governance issues as well as finances. This could later blow-up and cause significant damage to stakeholders as the matter raised had been brushed aside and ignored.

Exceptions

There are exceptions to the rule whereby a director resigns from the board due to valid reasons, especially when Conflict of Interest (COI), Potential COI and Perceived COI exist. COI arises when interests of a person interfere with the interests of the corporation os the said person has interests that may make it difficult to perform his/her role objectively or effectively.

A director is required to make a declaration by completing the COI or Potential COI or Perceived COI Declaration as and when the COI situation arises at the ealiest. The declaration will then be reviewed by the Audit Committee (AC) and the Board and recorded accordinly.

The person who has the COI or Potential COI or Perceived COI should abide by and comply with the AC’s determination on the reasonable steps and measures to manage, resolve or eliminate the COI or Potential COI and mitigate the impact of it.

If it cannot be resolved, the said person ought to tender his resignation due to COI, or Perceived COI.

The resignation of a director also could be if he/she has served beyond the nine-years tenure as well as due to actual retirement. In both of these cases, the reasons are crystal clear.

Lately, corporate Malaysia has seen the resignation of INEDs due to COI or Potential COI but more often than not, directors, especially INEDs due to COI or Potential COI but more often than not, directors, especially INEDs, simple resign and walk away without giving the real reason for their move.

Perhaps, it is time for the regulators to issue an updated a guideline for the resignation of a director which will compell resigning directors to disclose the reason for their action, especially when it is more than “personal reasons or commitments”.

Voting Guide at AGMs

The Institutional Investors Council Malaysia (IIC) has taken note of this development as it has an impact on how the IIC views the company’s governance process overall.

For the IIC, there are clear guidelines that may have not been adopted by the public listed companies. For example, among the guidelines where the IIC has recommended to its members to VOTE AGAINST or ABSTAIN in an AGM is for the re-election of the Board Nomination Committee (NC) members for failure to adhere to board composition and gender diversity issues, which includes the 30% women directors on the board.

Other agendas whereby the IIC recommends its member to either VOTE AGAINST or ABSTAIN include the election/re-election of active politicians, excessive remunerations paid to EDs and/or CEOs, the re-election of INEDs beyond the nine-year tenure, failure to have clear policy or guidelines on succession planning and matters related to board evaluation. The IIC also recommends a VOTE AGAINST any proposal that involves payent of any share options or performance-based incentive to non-EDs.

At the same time, corporates must respect the voting process done at AGMs, especially the vote against the re-election of directors.

The mandate given by shareholders must be respected and not turned into  a sideshow as there have been instances whereby certain directors were re-elected by the board post-AGM even though these directors were rejected by the shareholders at the preceding AGM.

The article was first published by The Star.

Photo by Nick Fewings on Unsplash.