New regulatory rules to limit the tenure of Independent Directors in a move to strengthen corporate governance in Singapore – are these changes enough?

Singapore Exchange Regulation (SGX RegCo) recently announced that it is compulsory for listed companies to limit the tenure of independent directors to nine years. Independent directors who presently exceed the nine-year limit will be deemed independent only until the issuer’s annual general meeting is held for the financial year ending on or after 31 December 2023.

The regulators and market commentators have opined on the raison d’etre and justifications for the latest listing rule. The regulatory amendment to limit the tenure of independent directors is a move in the right direction to strengthen corporate governance and to institutionalise the renewal of the audit committee.

Hardwiring the nine-year limitation tenure for independent directors to serve on the boards of listed companies was a regulatory change that was widely anticipated. Thus, listed companies and market watchers were unfazed when the SGX RegCo announced the new rule last week.

There is increasing public opinion however that the market regulators should conduct a more comprehensive review and further amend existing listing rules to better equip independent directors in their governance roles of listed companies.

Many listed companies in Singapore, especially Catalist companies, have boards where the C-Suite members and controlling shareholders are the same persons, or who are associates. Senior executive management who are concurrently controlling shareholders (or their associates) have a dominant say as to whether an independent director is appointed or re-appointed to the Board. The remuneration of independent directors is also subject to the approval of the annual general meeting, where the controlling shareholders normally would have a pre-dominant say whether independent directors’ fees are approved. In a contentious AGM of a Catalist company in October 2022, the resolution to approve the fees of independent directors were voted down because various controlling shareholders were unhappy with the independent directors.

One of the reasons for limiting the tenure of independent directors is to ensure that the independent directors “do not get too cosy” with the executive management. This is certainly most important to ensure that independent directors are able to properly discharge their duties to the company objectively and not be influenced by their long-term relationships or even friendships with senior management that may develop over time. It is however equally important that the regulators consider revamping existing listing rules to enhance the ability of independent directors to act without fear or favour.

Nomination of and remuneration of Independent Directors

Presently, in many listed companies (especially Catalist companies), each of the Nominating Committee, the Remuneration Committee and the Audit Committee comprises the same independent directors with each committee headed by an independent director who concurrently sits in the other two committees. Market commentators have voiced the concern that such a composite structure in relation to the nominating committee and remuneration committee may have the undesirable effect of independent directors “scratching each other’s backs” when it comes to making recommendations on the re-appointment of one or more fellow independent Board member(s) retiring by rotation at a coming AGM. It is also not unusual for one executive director (who may also be a controlling shareholder) to sit in either or both the Nominating Committee and the Remuneration Committee.

There is a real risk that this structure of Board committees may not provide for adequate objectivity in the nominations process for appointing or re-electing independent directors. Likewise, the recommendation of annual directors’ fees by the remuneration committee for the concurrence of the Board and approval of the AGM may be influenced by the executive director(s) who is/are in the same committee. Quite often, even if the nominating and remuneration committees comprise wholly of independent directors, the committee meetings are held consecutively before a scheduled Board meeting in the presence of executive directors and senior management who could have an over-bearing “moral-suasive” influence on those committees’ deliberations and decisions mere by their presence at the meetings.

Market regulators should consider further amendments to the listing rules to strengthen the ability of Independent Directors to act without fear or favour

To entrench the objectivity and to further safeguard the roles and functions of independent directors to act without fear or favour, the market regulators may wish to consider implementing the following listing rules:

1. The Board should comprise a majority of independent directors who have no present or prior professional, business, pecuniary, or any direct or indirect familial relationships with any director or substantial shareholder of the company. Having a majority of such independent directors on the Board strengthens the Board’s position to query errant senior management (including executive directors and/or the chief executive officer) on any suspected misconduct and to even exercise the power of suspension, where necessary.
2. The nominating and remuneration committees should comprise entirely of persons who are not concurrently members of the Board. This is to prevent the appointment of independent directors from “an old-boys club” in the friendship circle of senior management. Such committee members could be appointed by the Board from a list of experienced and qualified persons whose names are provided by independent professional bodies such as the Securities Investors Association (Singapore) or the Singapore Institute of Directors. Such persons could be appointed for a term of say two years purely with the defined roles of (i) assessing the suitability of new Board members, and appraising the performance and contributions of both executive and independent directors who are seeking re-election to the Board, and (ii) deliberating on and recommending the annual remunerations of all directors.
3. The appointment or re-election of independent directors to the Board and the approval of independent directors’ fees at the annual general meeting should only be voted upon by shareholders who are not directors or executives of the company, or their proxy shareholders.

Enshrining the independence of the CFO

It may also be appropriate to require the CFO (or the equivalent senior finance position) to report directly to the Audit Committee or its chair. Recent reported cases (for example, Trek 2000 and Agritrade International) show where the CFO colluded with the chief executive founder to commit fraud and forgery ostensibly under the undue influence of the superior executive officer. Prescribing the regulatory requirement that the CFO reports directly to the Audit Committee or the chairman of the Audit Committee will reduce the likelihood of collusion between CFO and CEO, or the CFO acting under duress and pressure from his executive superior, to commit fraud or forgery.

Equipping the Audit Committee with the requisite financial resources to discharge its roles and responsibilities

The annual budget of the company should allocate financial resources to a bank account under the direct control of the audit committee. This is to enable the audit committee to hire professional advisers (such as lawyers and an internal audit team) in the event of an investigation of management, without having to seek the concurrence of the management who controls the finances. Woe betide the audit committee when management is not willing to disburse monies for the audit committee to appoint professional advisers to conduct a proper investigation on any suspected transgression by senior management.

Concluding remarks

The position of the market regulators that the nine-year hard rule will not prevent listed companies from appointing new qualified persons to replace incumbent independent directors is correct. Listed companies should not wait till the eleventh hour just before the expiry of the nine-year term to source for replacement independent directors.

In addition to the nine-year limitation rule, the suggested further amendments to the listing rules will hopefully enhance the institutionalisation of the audit committee to act in the best interests of the company and minority shareholders, without fear or favour.