It was reported early this week that the government intends to establish a taskforce to coordinate efforts to make Malaysia an excellent nation under Corporate Governance Watch (CGW). The taskforce to be set up will be spearheaded by former Bank Nagara governor Tan Sri Dr Zeti Akhtar Aziz and the committee will study the report by CGW
Last week, the Securities Commission (SC) released its Corporate Governance Monitor 2019 and in essence it was a document detailing corporate Malaysia’s adoption and compliance to the Malaysian Code of Corporate Governance 2017 (Code), which was released in April that year.
While the media had highlighted some of the information that was revealed in the report, in particular those related to remunerations of CEOs as well as board’s diversity, the focus of this week’s column is on independent directors – indeed a touchy subject but an important one.
According to the SC in its report, out of our 930 listed companies, we have 5,231 directors holding 6,497 board positions, of which 3,244 board positions were held by 2,503 independent non-executive directors.
Hence, these directors held 49.9% of all board positions and 47.8% of the pool of all directors. Not bad! We indeed have a very high percentage of these directors. Question is are they really independent?
Based on the code, the tenure of an independent director shall not exceed a cumulative term limit of nine years.
Upon completion of the nine years, if the board intends to retain an independent non-executive director, it should justify and seek annual shareholders’ approval. If the board continues to retain the director after the 12th year, the board should seek annual shareholders’ approval through a two-tier voting process.
While this sounded logical, SC’s actual findings were beyond belief in terms of tenure of our independent non-executive directors on listed companies. Firstly, the longest serving independent non-executive director, according to the SC, is 40 years!
There are three such directors who have been serving between 31 years and 40 years while 66 others who are holding office between 21 and 30 years and 322 are still serving their board between 13 and 20 years. A total of 394 are between nine to 12 years. Good news is that about 50% of all these directors have been serving their respective boards for not more than three years and hence bringing the overall independent non-executive directors’ tenure among all listed companies to a decent number of five years as at 31 December 2018 against seven years in 2015.
Secondly, our independent non-executive directors are not young. According to the report, most of them are between the ages of 61 years and 70 years.
The average age of a male independent non-executive director is 62 years and the woman at 57 years. The youngest is 26 years old while the most senior is 92 years old, a position held by him for the past 24 years! Looks like most of our independent non-executive directors are from the pool of retirees.
Thirdly, in terms of companies, there are 273 companies that have independent non-executive directors who are serving for more than 12 years. A total of 218 companies have independent non-executive directors that have been serving them between 13 years and 20 years, 52 companies between 21 years and 30 years and three companies between 31 years and 40 years!
Last but not least, according to the SC, a total of 414 listed companies sought shareholders’ approval with a stand-alone resolution (special business) to retain 742 long-serving independent non-executive directors in 2018 and only 43 did not seek annual shareholders’ approval.
While the findings definitely do not surprise the companies or the independent non-executive directors’ concern, these findings are mind-boggling to minority shareholders as well as to the investing public at large.
In today’s environment, where a company’s board of directors carries a heavy burden of governance and to ensure the duty of care is observed, how does one remain independent after the three-year period is beyond comprehension, let alone 12, 20, 30 or even 40 years.
According to Bursa Malaysia Listing Rules (LR) Chapter 1, Para 1.01, an independent non-executive director is defined as a director who is independent of management and free from any business or other relationship which could interfere with the exercise of independent judgement or the ability to act in the best interests of or a listed issuer. An independent director is one who:
- is not an executive director;
- has not been within the last two years and is not an officer of the company;
- is not a major shareholder the company;
- is not a family member of any executive director, officer or major shareholder of the company;
- is not acting as a nominee or representative of any executive director or major shareholder of the company;
- has not been engaged as an adviser by the company or is not presently a partner, director (except as an independent director) or major shareholder of a firm which provides professional advisory services to the company; or has not engaged in any transaction with the company or is not presently a partner, director or major shareholder of a firm which has engaged in any transaction with the company.
The rules above are clear but certain qualification raises more doubts and that perhaps lies our problem, especially point (e). To prove someone is not a nominee is not an easy task as we can very well accept the fact that most listed companies today (especially those which are family-owned) tend to introduce “friends” as independent non-executive directorsinto their companies to ensure that their “interest” remains protected.
While we may have a nomination committee (NC) to appoint these newbies, there is a strong likelihood that the NC too is compromised when the majority of individual shareholders work behind the scenes to get their known friends on the board as an independent non-executive director.
One way to ensure such directors are truly independent is to ensure that the vetting process is carried out by an independent external party. This can be done by the Institute of Corporate Directors (ICDM) which in actual fact encourages all directors to register with them. ICDM can play the role of a match maker and recommend to listed companies’ NC at least three potential candidates whenever there is a vacancy within the Board.
Point (c) too is a concern as Bursa LR allows a person who is not a major shareholder to be an independent non-executive director. Hence, anyone with less than 5% equity stake qualifies to be an independent non-executive director. This is another worrying trend as an independent non-executive director with some form of ownership of the company will indeed be compromised in his/her position when it comes to voting for a major issue at board level.
Imagine if an independent non-executive director holds even 100,000 shares of company which has a share price of RM5 per share. His/her vested interest is worth some half a million ringgit and surely when it comes to voting, the only interest he/she is concerned is his/her own and how it will impact his/her net worth. Hence, for such directors to play an effective role, he/she shall not hold any shares for that matter and point (c) should instead be re-worded to that effect.
On tenure of these directors, clearly there are a significant number of directors who have overstayed their welcome and by right should retire gracefully. Perhaps the SC could initiate legal provisions via the Companies Act, 2016, to disqualify any such director that is on the board of companies for more than nine years.
The issue of the nine-year tenure too is a concern and in fact most board members can be “comfortable” with other executive directors within a very short space of time, and likely not even more than a few months.
Hence, we should also amend our governance structure to have such directors not to serve the same board for more than five years, before making more stringent the tenure period of not more than three years. ICDM can also play the role here in rotating the independent non-executive directors among listed companies and widening the pool of talent that is available
After all, these directors are serving minorities and they ensure there are proper check and balances.
We do not and cannot afford financial scandals that could impact the stock market as we have seen in the past, both in our public companies and government-linked companies.