The renowned Frank Sinatra was both an acclaimed actor and a singer in the 1940s and 1950s – balancing these sides of his career perfectly.

In order to gain more artistic freedom for his work, he attempted to move into the business side of the music industry and founded his own record label company for which he was made the chairman by default.

Given the allure that the chairmanship position carries, he was commonly known as “chairman of the board” thereafter.

The hype surrounding the position of chairman resulted in the moniker being stuck and was used by those in the creative industry for his performative work, until his death in 1998.

At one point, Frank Sinatra was even quoted saying: “I’m trying to figure out, chairman of what board? People come up to me and seriously say ‘well, what are you chairman of?’ and I can’t answer them.”

Whilst the notion of artistic freedom may have since not lasted in the music industry, the allure and attention towards a chairmanship position in the corporate sector continue to hold.

In this regard, it is perhaps not surprising to anecdotally gather that the stipulation in the latest Malaysian Code on Corporate Governance (revised in April 2021 by Securities Commission Malaysia) which generated the highest level of contemplation within the boardrooms of listed companies relates to the position of chairman.

Specifically, Practice 1.4 of the Malaysian Code on Corporate Governance calls for the chairman of the board not to be a member of the audit committee, nomination committee, and remuneration committee.

The introduction of the said practice was considered to be seismic as a review by KPMG Management & Risk Consulting Sdn Bhd in April 2021 showed that nearly 70% of the top 100 listed companies by market capitalisation in Malaysia had their board chairmen double hatting as members of board committees.

In addition, attempting to effect a change amongst board chairmen was always to going to be a delicate proposition given that a sizeable number of listed companies in Malaysia have marquee names or high stature individuals as their chairmen, comprising former top government officials, dignitaries and corporate statesmen.

Against this backdrop, it is worth unravelling the intended outcome envisaged by the regulator through the introduction of this stipulation.

In adding a veneer of clarity on this matter, the Securities Commission vide Guidance to Practice 1.4 of the Malaysian Code on Corporate Governance contended that having the same person assume the positions of the chairman of the board and chairman of the audit committee, nomination committee or remuneration committee gives rise to the risk of self-review and may impair the objectivity of the chairman and the board when deliberating on the recommendations put forth by the board committee.

Judge, jury and executioner

Candidly put, there are concerns that there may be tilted framing of matters flowing from the board committee to the board and the board chairman runs the risk of simultaneously acting as the “judge, jury and executioner”.

The reasoning offered in Guidance to Practice 1.4 of Malaysian Code on Corporate Governance appears to be aligned with leadership studies which show that an effective chairman is one who guides on the side and provides opportunities for collective exploration of the board rather than imbuing premeditated notions.

In fact, a research by INSEAD’s Corporate Governance Centre in 2018 which entailed surveys with 200 board chairmen from 31 countries across the globe and 80 interviews with chairmen revealed that the collective productivity of the board may suffer when the person at the head of the table has strong views on a particular issue.

To this end, one may be reminded of the leadership style manifested by Abraham Lincoln who long evoked the spirit of egalitarianism with an ongoing appeal for human life, intellectual humility, and moral courage.

Known as “The Great Emancipator”, President Lincoln was a self-made man who consistently found the courage to invigorate the spirits of those around him.

Progressive companies

Indeed, it is heartening to note that progressive companies have viewed the stipulation as an opportunity to reassess the board and board committee configuration and promote recalibration.

These progressive companies seemingly commit to a continual cycle of renewal vis a vis diversity considerations, changing needs of the external as well as internal environment over time and the company’s business strategy. Selected companies have also taken the extra mile by introducing supplementary measures which include limiting the size of board committee as this would also serve as a means to promote objectivity across board committees.

By ensuring that the configuration of a board committee does not extend to a size that would be more than half of the board, the company can seek comfort that there is no premeditated consensus amongst board members when recommendations flow from the board committees to the board.

Remuneration package

In addition, it is interesting to note that in effecting the demarcation of board chairmen from board committees, some companies have also undertaken to review the remuneration package of the board chairman to ensure that the recalibration does not compromise the overall competitiveness of the chairman’s remuneration package which is critical to attract high calibre individuals.

Whilst progressive companies have taken this stipulation (i.e. detachment of board chairman from board committees) on their stride, there are still a discernible number of companies which continue to dither or even attempt circumvent the application of the practice.

For example, some companies have undertaken to perform a cosmetic change by detaching the board chairman from the board committees on paper but in essence, continue to have them as a permanent invitee of the board committee.

Rather interestingly, there are also companies which do not subscribe to the saying, “what is good for the goose should also be good for the gander”.

This cohort opt to harp on strict literal reading that the application only relates to the audit committee, nomination committee or remuneration committee (promulgated by the Malaysian Code on Corporate Governance) and resultantly, they are insisting that the board chairman should be allowed to assume additional positions or be able to continue occupying other board committees such as risk committee, investment committee, procurement committee and the like.

It is acknowledged that some may argue on the exceptions to the rationale of introducing this practice.

Heightened objectivity

One may posit that the chairman is capable of displaying heightened objectivity and thus, can mediate deliberations flowing from the board committee to the board in a non-partisan manner.

Alternatively, the board members may represent strong minded individuals who will not allow recommendations from the board committee (comprising the chairman) to be steamrolled at the board level.

These are certainly valid considerations but as with most intricate corporate governance matters, it is best to err on the side of prudence when it comes to policy making and application in substance by listed issuers across varied sizes and sectors.

All in all, it is worth emphasising that effective board chairmen are ones who do not call the shots or take centre stage by being first among equals or but rather, they create enabling conditions for other directors to cogitate on matters put forth for deliberations. Such chairmen recognise their role to be less of a commander but more of facilitator.

As Frank Sinatra has famously sung, “come fly with me”.

Kasturi Nathan is head of governance and sustainability of KPMG Malaysia. Krishman Varges is Associate director, governance and sustainability of KPMG Management & Risk Consulting Sdn Bhd. The views expressed here are the writers’ own.

The article was first published here.

Photo by Quino Al on Unsplash.