Give minority shareholders more say in choosing independent directors: experts
By Ryan Huang, Channel NewsAsia | Posted: 20 November 2009 2039 hrs

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SINGAPORE: As part of efforts to improve corporate governance, some experts believe that minority shareholders should be given more say in the appointment of independent directors.

However, others are of the view that it will be more effective to focus on implementing disclosure processes.

The mixed views were presented at the inaugural Asian Corporate Governance Conference, organised by the Securities Investors Association of Singapore, on Friday.

When the scandal surrounding Indian IT services firm Satyam hit the news early this year, the spotlight was thrown on the firm's independent directors. Some questioned if they were accountable for overlooking the company's fake accounts.

With the lessons learnt, some experts said one way to improve corporate governance and transparency is to give minority shareholders more say in choosing independent directors by allowing what is known as "cumulative voting".

For Asia, this is currently only being practised in the Philippines.

Lee Kha Loon, head, Asia Pacific, CFA Institute, said: "Cumulative voting allows you as an investor to accumulate your share to vote for one director. Assuming that you have five directors up for voting, instead of just (giving) one vote for each director, you can actually accumulate all your five votes for one director.

"So in the case of election of directors, the minority shareholders have a bigger chance of voting in a nominee."

Another way to improve governance is to tweak the process to allow a balance of views between independent shareholders and owners.

Professor CK Loh, Chinese University of Hong Kong, said: "One of the proposals that I have is, why don't we do a two-pronged vote? One, the person would need a 50 per cent vote or more to be elected in. At the same time, we can also count the votes of the independent shareholders. In such a case, only the independent shareholders can vote."

But some experts believe what will help more is to focus on disclosure practices. This involves disclosing the rationale behind appointments and having directors give their reasons for their decisions.

Lee Suet Fern, senior director, Stamford Law, said: "If one had a disclosure as to the process the nominating committee undertook – whether or not they just got their golfing chum, or whether they actually took a proper and careful process to see what gaps there were, and the skill-sets from the board – I think that will automatically put a better search process and put a better quality independent director on the board."

Jonathan Moreno, head, Corporate Governance Office, The Philippine Stock Exchange, said: "We feel that if and when we have that rule, the directors –particularly the independent directors – knowing full well that their decisions will be disclosed, will be a little circumspect.

"They can no longer hide because they know when they make a decision, it will be public. They will have a very good explanation for arguing for and against a corporate action."

There were also suggestions to limit the time that directors are allowed to serve and the number of directorships an individual can hold.

"It's hard to provide a one-size-fits-all. One possibility is to provide broad categories. For example, if one was working full time, then perhaps the limit should be a certain number. And if one was retired and didn't have a full-time job, that limit could be a higher number," said Ms Lee.

Experts said stock exchanges are expected to play a key role in this area, through regulatory changes and investor education.

Mr Moreno said: "A stock exchange can have in its rules, listing and disclosure rules, certain requirements that would call for independent directors to do certain things, and it could also set up programmes that would educate the investing public - particularly retail investors who are mostly the smaller investors."


- CNA/so