An aspect of corporate governance that has long bemused me is the concept of independence in the boardroom. Outside or non-executive directors are key to ensuring a board’s objectivity and effectiveness. And yet it’s not easy to figure out who can be counted upon to consistently think and act independently.
The general prerequisites for the job are clear. Bursa Malaysia’s listing requirements define an independent director of a listed company as a director who is independent of management and free from any business or other relationship that could interfere with the exercise of independent judgement or the ability to act in the best interests of the company.
The stock exchange gives several situations that disqualify a person from becoming an independent director.
A major shareholder or an officer of the company can’t take on that role. The same goes for their family members. An ex-officer can’t be appointed as an independent director until at least three years after leaving the company. A person acting as a nominee or representative of an executive director or a major shareholder can’t be an outside director either.
Adhering to the stock exchange’s definition appears to be challenging for some companies
Under certain prescribed circumstances, those who provide professional advisory services to the company or who have had transactions with the company are also disqualified.
The newest prohibition, introduced in 2022, relates to the length of service of an independent director; an independent director who reaches the 12-year mark must be redesignated as non-independent if the company retains the person on its board.
Best interests
This doesn’t mean anybody who isn’t on the exclusion list is good enough to be an independent director. That’s common sense, but Bursa Malaysia is nevertheless compelled to issue a reminder, through its Practice Note 13, that boards of listed companies must give effect to the spirit, intention and purpose of the stock exchange’s definition of an independent director.
Bursa Malaysia says the boards must still apply the test of whether an independent director or a person proposed to be an independent director, is able to exercise independent judgment and act in the best interests of the listed companies.
The Securities Commission (SC) makes a similar point in the current version of the Malaysian Code on Corporate Governance: ‘In considering independence, it is necessary to focus not only on whether a director’s background and current activities qualify him or her as independent, but also whether the director can act independently of management.’
The so-called test of independence disclosed by many listed companies is little more than a check against Bursa Malaysia’s restricted list to determine whether their independent directors are disqualified. This heavy reliance on the letter of the law is understandable. After all, how do you truly assess a person’s independence, which resides in the heart and mind?
These numbers suggest a lack of commitment to a pillar of good corporate governance
However, even merely adhering to the stock exchange’s definition appears to be challenging for some companies.
This year’s edition of the SC’s Corporate Governance Monitor reveals that as of 1 October, 26 of Malaysia’s 1,010 listed companies had independent directors with tenure of more than 12 years. According to the commission, Bursa Malaysia is ‘taking the necessary action on this matter’, since these companies were not complying with the listing requirements.
It gets worse when you consider that since 2017, the Malaysian Code on Corporate Governance has been promoting a best practice of imposing a nine-year cap on an independent director’s service. The SC says only 18% of listed companies in Malaysia have followed this recommendation. In fact, the number of companies with at least one independent director who had served for more than nine years, has increased from 227 in 2023 to 238 as of 1 October this year.
These numbers are a cause for concern because they suggest a lack of commitment to a pillar of good corporate governance. It is incredibly hard to verify and demonstrate that a board of directors functions with the right balance of independence, but when a company fails to assemble a board that meets the regulators’ rules and standards for independence, tough questions need to be asked.
