Singapore is considered to have one of the most transparent business practices in the world. Interestingly, the Singapore Press recently covered the bitter removal of one of the independent non-executive directors of a locally listed company.

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The whole saga started in early March this year when the managing director asked the independent non-executive director (INED) to resign. The rationale given was that the company wanted to have a new INED who had formal legal training. Interestingly, the current INED had been with the company for nearly 10 years and had been re-elected for another term by the shareholders just last year.

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The INED refused to resign on grounds that he had a fiduciary duty as he was elected by the shareholders.

 

By late March 2009, the company had received a shareholder requisition to propose a resolution to remove him as an INED at the next AGM which was to be held at the end of April 2009. The daughter of the managing director made the requisition. She owns a 13.3% stake. She wrote: “The company and the shareholders will truly benefit if the board has a person, preferably with legal expertise, in place of Mr Tan.”

 

The current INED is an accountant and is well known in Singapore for his corporate governance advocacy.

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At the three-hour AGM, the INED stated that he believed “there was a lack of due process in the board’s deliberations and that there was no clear advantage in his resignation”.

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He was quoted as saying, “I had exercised a high degree of independence and objectivity in my work … I honestly believe that the decision to remove me as an independent director has to do with my willingness to act independently,” as he had in the past queried management on governance matters.

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The Securities Investors Association of Singapore (SIAS) issued a public statement: “Minority shareholders’ interests are protected by directors, especially independent directors.” SIAS stated that it opposed removing INEDs who performed their duties.

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All investors need to appreciate the strong influence of the major shareholder and executives on the board.

 

This raises concerns if the oversight on the board is insufficient and whether it works to provide minority shareholders with fair treatment and protection. There is always a need for a check and balance when decisions are being thought through. Fairness and honesty are expected but often are not practised.

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Companies need to be guided by boards comprising members with an appropriate and diverse range of competencies, knowledge and experience to enable them to effectively carry out their duties and responsibilities.

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These include selecting, guiding, monitoring and challenging management and thus require an ability to step back and act objectively and independently. As well as a balanced composition, boards should ensure that a significant number of members are able to exercise independent judgment.

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In markets where the ownership of companies is more concentrated and where conflicts between controlling and outside shareholders may arise, it is particularly important that boards include a significant number of independent members. They can play a crucial role where there are real or perceived conflicts of interest between controlling and minority shareholders, and as such add or protect the value of the company as a whole for all of stakeholders.

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Generally speaking, in most jurisdictions, regulators raise a red flag when an INED suddenly resigns and especially so if the chairman of the audit committee (also an INED) resigns.

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We know that there are regulators who merely ensure that the box is ticked. Hong Kong-listed companies will usually put out a notice giving the reasons for the INED’s resignation. Sometimes the reasons given are vague, and the more astute investors will interpret and understand that there could be a problem.

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So in the case in Singapore, are regulators satisfied that this INED is replaced? We don’t think that this is enough and suggest that the regulators need to take this a step further.

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Regulators need to start focusing on INEDs’ resignations. We suggest the following:

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● Regulators should engage privately with the INED on the reasons for the resignation; and

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● Regulators should be quick to question the company (in writing) why the INED has resigned.

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The role of all investors is to find out why the INED has resigned. While a company (or a departing INED) will generally be reluctant to make a public statement, investors should seek and get some explanation in private conversations and then draw their own conclusions/take appropriate actions.

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In Europe and many markets now, investigative journalism also plays a key role in bringing issues of concern to the attention of a wider public.

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Many boards become defensive and very vague when asked why an INED has resigned, especially an INED whom the board previously spouted had the right skills and competencies. One has to wonder how often the personal interests of the more powerful board members come into play, pushing and/or even forcing an INED to resign. A board that does not know why the INED has resigned clearly indicates the board is either covering something up or is grossly incompetent.

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In order for transparency to really improve, boards need to be more accountable not only in their nomination process but also when any board member resigns. How can investors stay comfortable investing in a company, if the board decides not to reveal why an INED has resigned.