Featured Article - The Independent Director, A Myth or Reality?

Much has been made of the role of 'Independent Directors' in Singapore. Differing opinions have emerged regarding the responsibility of an 'Independent Director' but there has been little or no discussion surrounding the fundamental question of whether the concept of the 'Independent Director' is a legal reality or a myth. In order to settle the legitimacy of the office of the 'Independent Director', this question
needs to be considered.

THE COMPANIES ACT AND COMPARABLE LEGISLATION
The Companies Act makes no distinction between Independent, Non-Executive, or Executive Directors with regard to their responsibility as a Director. The Act merely states that 'a Director shall at all times act honestly and use reasonable diligence in the discharge of the duties of his office'. It neither defines nor indicates the existence of the position of an 'Independent Director'. Therefore, there is no formal recognition of 'Independent Director' by the local laws. The relevant laws in the UK, Australia, and Hong Kong offer the same definition of Directors' duties, following the common law principle that 'Directors must act bona fide in the interests of the company'. It should be noted, however, that the Hong Kong's Securities and Futures Commission hasrecognised that' there is a growing general expectation by market commentators that independent non-executive directors are appointed to the board to represent the minority shareholders'. This is the stance that minority shareholders have taken in Singapore.

ORIGIN OF THE NOTION OF THE 'INDEPENDENT DIRECTOR' IN SINGAPORE
The Code of Corporate Governance ('the Code'), which lacks the force of law, introduced the notion of the 'Independent Director' in Singapore. Clause 2 of the Code, entitled 'Board Composition and Balance', advocates 'a strong and independent element' on the Board. It defines an Independent Director as 'one who has no relationship with the company, its related companies or its officers that could interfere, or reasonably perceived to interfere, with the exercise of the Director's independent business judgement with the view to the best interests of the company'. It illustrates four relationships as examples of situations which would deem a director to lack independence. The Code promotes independence on the Board by stipulating that an 'Independent Director' should be able to exercise objective judgment on corporate affairs, in particular, independent of management. It further declares, 'No individual or small group of individuals should be allowed to dominate the Board's decision making.' The Code falls short, however, of expressly mentioning independence from majority shareholders. Whilst it seeks to preserve the independence of 'Independent Directors', there is nothing in the Code to ensure the successful implementation of this noble objective. Further, the Code does not provide any mechanism to achieve its objective.

LACK OF 'INDEPENDENCE' IN THE OFFICE OF INDEPENDENT DIRECTORS
As the law stands, the majority shareholder(s) can dictate the composition of the Board. Although all shareholders can vote on the appointment of Directors, the dominance of the majority ensures that their nominees prevail. This undermines the implied objective of the Code. To be truly 'Independent', a Director cannot be, nor perceived to be, controlled. It is fallacious to expect an 'Independent Director' to exercise his or her mind impartially against the wishes or interest/s of the majority shareholder(s), when the tenure of his or her office depends on their appointment by the majority shareholder(s). If the authors of the Code were serious about practically ensuring a'strong and independent element on the Board', then the Code should stipulate that the appointment of Independent Directors should be made by an independent party and not by the majority shareholder(s).

In the recent case of Isetan, minority shareholders attempted to unseat three non-executive directors whom they referred to as 'Independent Directors'. The move arose because of the alleged failure by these directors to ensure that the Board resolves to distribute the Section 44A tax credit to shareholders. This clearly demonstrates the expectations of minority shareholders that non-executive directors display independence in decision-making at Board level.

Although it is well accepted that the duty of all directors is to protect the interests of shareholders including minority shareholders, it is the so-called 'Independent Directors' who are entrusted by the minority shareholder(s) to protect their interests. In spite of their appointment by majority shareholder(s), 'Independent Directors' are expected to pay particular attention to the interests of the minority shareholder(s). It is this juxtaposition that diminishes the actual and perceived independence of 'Independent Directors'. This is especially true when their interests may be compromised by the expectations of the majority shareholder(s). As a guiding principle, they should always act impartially, looking out for the best interest of the company, its shareholders and in particular its minority shareholders. 'Independent Directors' should discharge their duties without fear or favour.

Until such time that the appointment of 'Independent Directors' is made by an impartial source, it is questionable
whether there will ever be a 'strong and independent element on the Board'. Securities Investors Association (Singapore) (SIAS), Singapore Institute of Directors (SID), Association of Chartered Certified Accountants (ACCA), the Institute of Certified Public Accountants of Singapore (ICPAS) and the Law Society could together play a pivotal role here on behalf of minority shareholders. They could provide suitable candidates as 'Independent Directors' to corporate Boards. The 'Nomination Committee' could then invite the nominees from these institutions or from minority shareholders of the company directly to the Board.This would demonstrate a fundamental desire to promote independence. For this to eventuate, there must be momentum from legislative quarters and a similar 'corporate will' to adopt this position on their Board. Until such time, the concept of the 'Independent Director'will remain a myth to the detriment of minority shareholders.

Source: first appeared in FOCUS, the official journal of ACCA Singapore - Quarter 1, 2007