Asia’s independent directors lack independence; controlling shareholders to blame, says investor group

Though new rules in Asia have kicked in over the past year, they are far from the reforms needed to incentivise directors to challenge majority shareholders not acting in a firm’s best interest, says Asian Corporate Governance Association.

Hong Kong Exchange (HKEX) board
A longstanding issue for the region is that independent directors have "no incentive" to challenge controlling shareholders on their proposals, said Asian Corporate Governance Association. On average, 62 per cent of listed companies in Singapore and Hong Kong are owned by their top three investors. Image: RISECC BY 2.0, via Flickr

If there is one thing that the thousands of listed companies across Asia have in common, it is the concentration of shareholder power – often in the hands of a corporation, family or the state. 

Regulatory requirements to put so-called “independent directors” on the boards of issuers to act as a counterbalance to controlling shareholders, while protecting minority shareholder interests, have not stopped concentrated shareholding from increasing in Asia’s markets.

Amar Gill, secretary general of the Hong Kong-based investor group Asian Corporate Governance Association (ACGA), which counts finance heavyweights like BlackRock, Goldman Sachs and Singapore sovereign wealth fund GIC among its members, is the latest in the long line of critics to question the independence of these directors in the region.

Gill, who previously headed BlackRock’s Asia Pacific investment stewardship team, took over the leadership of ACGA last month, and was speaking on the sidelines of a regional forum organised by brokerage and investment group CITIC CLSA last Wednesday.

“There is no incentive for an independent director to tell a controlling shareholder that a proposal that he or she is putting to the company doesn’t seem to be right,” said Gill. The controlling shareholder usually has veto power over nominating and re-nominating independent directors to the board, he added. 

Further, Gill said that while independent directors often speak with executives and controlling shareholders, the chances of them meeting up with minority shareholders is “pretty much zero”. “If independent directors are not meeting independent shareholders, how can you expect them to be independent?” he questioned.

“That is a major issue, not just in Asean markets, but most markets in Asia, where you have controlling shareholders. It’s a structural problem for our markets,” said Gill.

As a result, independent directors end up being appointed to comply with listing rules. For instance, the bourses in Singapore, India and Hong Kong mandates one-third of the board to be made up of independent directors. In India’s case, if the chairperson is not independent, majority of the board needs to be made up of independent directors.

In the past few years, a string of directors, including independent directors, have been arrested or charged in Singapore – which has long touted its squeaky-clean image to position itself as Asia’s leading financial hub. 

In March, five directors of Singapore-listed consumer health company Cordlife were arrested for potentially breaching listing rules by failing to disclose that the firm had exposed thousands of cord blood units to irregular temperatures which led to their damage, despite learning about it nine months before. 

In February 2022, five directors of publicly-listed education provider Raffles Education were apprehended for neglecting to disclose that the company had been served a lawsuit demanding immediate repayment of loans which amounted to over half of its then-market capitalisation. To make matters worse, a year before, one of the former independent directors who disagreed with the board’s decision to withhold disclosures revealed that she was asked by the chairman and chief executive to hold back announcing her resignation for months, so as not to “attract unnecessary attention”.

Average ownership concentration of listed companies by the largest three investors, end-2020 (%)

In 2020, the top three investors owned, on average, 62 per cent of listed companies Singapore and Hong Kong, 66 per cent in the Philippines and 72 per cent in Indonesia. This is despite the proliferation of corporate stewardship codes to support greater shareholder involvement over the past decade. Image: Gabrielle See / Eco-Business

Mak Yuen Teen, professor of practice and director of the Centre for Investor Protection at the National University of Singapore (NUS) Business School, told Eco-Business that there have been many other cases in the city-state, where regulators have not punished independent directors missing the mark.

This includes instances where independent directors have aligned themselves to controlling shareholders, said Mak, citing the examples of mainboard-listed property investor Datapulse Technology and homegrown beauty giant Best World. In the latter case, languishing stock prices led activist investors to call for an extraordinary general meeting in March this year, to remove three independent directors and get accountability for director remunerations and the lack of dividend payouts.

The remuneration of independent directors may compromise their independence, if they are getting share options or performance share awards tied to the financial performance or other outcomes that the controlling shareholders want, said Mak.

Another instance that often flies under the radar is where independent directors have business or other ties with the company, said Mak. For example, Singapore’s largest telco Singtel, which is also the country’s second-largest listed company, has two independent directors from the law firm Allen & Gledhill, which serves as their legal adviser.

One of them, Christina Ong, chairperson and senior partner of A&G, who has served on Singtel’s board since 2014, will either need to resign or be designated as “non-independent” by the annual general meeting this year to comply with the new nine-year tenure limit for independent directors, introduced by the Singapore Exchange Regulation (SGX RegCo) last January. Ong is among the 462 independent directors of Singapore-listed companies set to step down and be replaced this year, according to the country’s national association of company directors.

While it is commonplace in Singapore for lawyers to serve as independent directors of a company that their firms provide legal services to, “this is not considered acceptable or is certainly not normal practice in other markets,” said Mak.

“I would expect the quality [of independent directors] to be better in markets with greater institutional investor activism, stronger regulatory enforcement, and greater ability of investors to sue directors,” Mak said, adding that Singapore is relatively poor in all these areas, as issuers only need to heed the criteria for independence on a comply or explain basis.

Shareholder activism in Asia

Asia has seen an uptick in shareholder activism over the years. In 2023, activists secured 93 board seats, up from 90 in 2022. Image: Diligent Market Intelligence

In contrast, the enforcement of the independence of directors in Hong Kong and Malaysia are more prescriptive, as they are included in the listing rules, he said. Meanwhile, though adherence to the independence criteria for directors is voluntary in the United Kingdom and Australia, the greater scrutiny by institutional investors and the lack of controlling shareholders in those two countries “make a difference”, added Mak.

No easy fix

Gill praised Singapore for putting a hard stop on the tenure of independent directors, introducing named disclosure on director remuneration and being an early mover in adopting the Taskforce on Climate-related Financial Disclosures (TCFD). However, these are “tweaks”, rather than “bold reform of corporate governance rules”, he said.

In Malaysia, despite the stock exchange regulator pushing for corporate governance reform, “enforcement remains an issue” due to corruption and political scandals, said Gill. He added that there is also a “lack of genuine independence” among most independent directors, “exacerbated by generous remuneration or incentive policies.” Meanwhile, in the Philippines, “vice-like control” over the market by big families and its “Goldilocks” economy – with moderate economic growth and low inflation – “leave little room for reform initiatives,” he said.

But Mak said that while it is easy to point out these problems, which are not new, it is much harder to fix them. While stricter rules on independence  such as being more prescriptive about business relationships between directors and companies or imposing a tenure limit and improving board diversity – can help, addressing the issue at its core “would require regulators and shareholders to be more willing and able to hold directors accountable”, he said.

In addition, regulators could improve the access that independent directors have to them to raise concerns, and take their concerns more seriously, said Mak. Some independent directors had shared with him that when they had previously raised concerns with SGX RegCo, it tended to take the view of the majority of the board, even if some of the independent directors may be aligned with the management or controlling shareholders.

Other “more drastic measures” have been used in some countries, such as Israel and the UK, to change the way independent directors are elected, through a two-tier vote – meaning by a majority of all shareholders and non-controlling shareholders – or even a minority shareholders-only vote, said Mak. Alternatively, there could be a nominating committee made up of not just directors, so the appointment or re-appointment of directors does not become “a self-selection process“, he said.

In Southeast Asia, Mak believes Bursa Malaysia is doing “a much better job” than its Singapore counterpart in holding directors accountable. He has also seen an increasing willingness by minority shareholders in the region to hold directors accountable, most recently in the accounting fraud case involving Thailand-listed wire maker Stark Corporation, which saw over a thousand minority shareholders coming together to launch a class action against the company and its directors.


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