Published November 3, 2021 at 1:59 PM SINGAPORE (THE BUSINESS TIMES) - Boards in Singapore are appointing more independent directors, even as the average board size is shrinking, according to a
report published by the Singapore Institute of Directors (SID) on Wednesday (Nov 3). The 2021 Singapore Directorship Report found that the percentage of independent directors on boards has risen to 54.4 per cent. It marks an increase from 50.7 per cent in the previous report in 2018, and 47.5 per cent when the study was first conducted in 2014. The study, which covered 658 companies, 24 real estate investment trusts and 13 business trusts, highlights some of the emerging trends on
listed boards, following revisions to the 2018 Code of Corporate Governance and codification of certain requirements in the listing rules. Mr Ng Wai King, chairman of the Singapore Directorship Report working committee at SID, said: "Following the revisions to the Code of Corporate Governance in 2018, the 2021 Directorship Report shows a clear shift towards having greater independence on boards, with more independent directors being appointed, along with greater separation of CEO and
chairman roles." Independent directors, by virtue of not having a material relationship with the company and not being part of its executive team or involved in its day-to-day operations, function as a watchdog and play a vital role in risk management and good governance.
Some 77.7 per cent of firms were observed to have at least half or more of their board being made up of independent directors, an improvement of 7.4 percentage points in 2018, and significantly higher than the 54.5 per cent in 2014.
Some 75.1 per cent of companies now have different individuals serving in the positions of chairman and chief executive, up from 67.1 per cent in 2014. A greater proportion of companies (30.8 per cent) are also appointing independent chairs, up from 23.1 per cent in 2018.
The report noted that the introduction of certain provisions in the 2018 Code likely contributed to the increasing percentage of independent directors on the board. Provisions 2.2 and 2.3 require that independent directors make up a majority of the board where the chairman is not independent; and for non-executive directors to make up a majority of the board.
At the same time, the study found the average board size has been shrinking. The most common board size has dropped to five, from six in previous studies. Some 25.8 per cent of the companies studied this year had five-member boards, up from 22.9 per cent in 2018.
This could be an "unintended effect" from provisions 2.2 and 2.3 in the 2018 code.
The report noted: "Firms appear to be taking steps to comply with these requirements by reducing the numbers of their executive directors, as well as appointing more independent directors and/or non-independent non-executive directors."
In terms of diversity, the study found that the number and percentage of women directors on boards has been increasing gradually since 2014, but "gender diversity on boards remains a challenge".
Just 12.7 per cent of all board seats are occupied by women, but it still represents an increase from 10.8 per cent in 2018. When it comes to the chair position, only 6.5 per cent are women.
Even so, the study found that more than half of all boards (52.7 per cent) now have at least one woman director, up from 49.3 per cent in 2018, and nearly a fifth of boards have more than one woman director.
Mr Ng said: "The appointment of more female directors is also a positive takeaway from the report but the pace is still slow. While these are encouraging signs, more should be done to improve board diversity and disclosure of remuneration."
The report also noted that there is growing awareness to make sustainability a board agenda item, and companies are beginning to establish a separate sustainability board committee, but at a "tentative pace".
Just eight firms - all large-cap companies - disclosed information about the presence of a board-level sustainability committee. The overwhelming majority (98.8 per cent) of companies did not disclose information on or do not have a sustainability board committee, the study found.
The Singapore Directorship Report 2021 studied information from 695 listed entities, comprising 658 companies, 24 real estate investment trusts and 13 business trusts.
It is produced by SID, with the support of the Accounting and Corporate Regulatory Authority and Singapore Exchange, and in partnership with Deloitte, Handshakes, Nanyang Technological University and Singapore Institute of Technology.
- CFA Institute
- Advocacy
- Board Independence & Independent Board of Directors
Overview
To be effective, boards must take steps, both in their structures and in their nominating procedures, to ensure that insiders and executive owners are unable to exercise undue control over the board’s activities and decisions.
CFA Institute Viewpoint
Company boards should have an independent majority. An independent majority on the board is more likely to consider the best interests of shareowners first. It also is likely to foster independent decision-making and to mitigate conflicts of interest that may arise.
Insiders as Independent Directors
- Position: Current and former executives and directors of an issuer should not be permitted to sit as an independent non-executive directors until five years after leaving the relevant positions, and then only under certain restrictions.
- Rationale: Insiders such as individuals from these groups can retain emotional, financial, professional, and personal ties to the issuer, its management, and its directors. This retained loyalty may compel the insider to decide on matters in a way that does not first serve the interests of shareowners.
Independent Director’s Connection to the Company
- Position: Independent non-executive directors should not have been connected to a director, chief executive, or substantial shareowner of the issuer within the preceding five years.
- Rationale: Individuals with such links to insiders are more likely to make decisions on the basis of those links than on what is best for shareowners. After five years, the allegiance may diminish to a point where the independent, non-executive director may make decisions that run counter to the interests of the insider.