Singapore Exchange Regulation (SGX RegCo) says it will limit the tenure of independent directors (IDs) serving on the boards of listed issuers to nine years. Some years in the making, the requirement might spark a so-called “great resignation” in boardrooms across the listed entities.
Tan Boon Gin, CEO of the Singapore RegCo, says he has no problem with the “great resignation” provided a “great recruitment” happens simultaneously, resulting in the appointment of many new directors and the renewal of boards in the process.
“The last three years have seen greater scrutiny of the independence, preparedness, and composition of the board, as companies have weathered a pandemic, witnessed a series of high-profile cases, experienced digital and other business transformations, and the ESG (environmental, social, and governance) movement,” says Tan on Jan 11, a day after the nine-year cap announcement was made.
“If the great recruitment results in many great recruits to the boards of our listed companies, I believe we can initiate a great reboot in how our IDs perform and are perceived,” he adds.
Tan, citing Sidney Weinberg, says that IDs are always the “outside directors” of a company. Weinberg, a former head of Goldman Sachs, said in 1949 that new IDs reset the clock regarding the relationship with management.
According to Weinberg, the lack of familiarity with management is positive if it opens the way for greater independence manifested in the form of more and sharper questions posed by directors and more fact-finding required of management.
“New IDs are also less likely to simply go with the flow and vote in favour of the matter at hand if they are not getting the answers they want or not understanding the answers they are getting,” adds Tan.
Also, new IDs help to refresh boards, bringing other perspectives and a fresh point of view to the board’s deliberations. Weinberg noted that IDs function as an interpreter between the outside world and the company’s internal operations. “And if we are now living in a poly-crisis world, we need a polyglot board more than ever to interpret fresh challenges and propose fresh ideas,” says Tan.
For all these observations made on business practices at the highest level, Weinberg started as a janitor’s assistant at Goldman Sachs, brushing hats and cleaning spittoons before becoming a broker and then rising to CEO. “Perhaps our new rules will create opportunities for directors as insightful and groundbreaking as Mr Weinberg to emerge,” says Tan. Under the new rules set by SGX RegCo, the two-tier vote mechanism for companies to retain long-serving IDs who have been on the boards for more than nine years will be removed with immediate effect.
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Enhanced remuneration disclosures
Previously, long-serving IDs could remain independent if the company’s shareholders approved their appointment. The shareholders don’t include the directors and the CEO of the issuer, as well as the associates of these directors and CEO.
Issuers widely used this mechanism to retain hundreds of long-serving IDs, inhibiting board renewal and progress on board diversity, says the market regulator in its Jan 11 statement. SGX RegCo says the proposal to cap the tenure of IDs stemmed from recommendations by the Corporate Governance Advisory Committee (CGAC). To ease the transition process, IDs whose tenures exceed the nine-year limit can continue to be deemed independent until the issuer’s annual general meeting (AGM) is held for the financial year ending on or after Dec 31 this year. The market regulator says this effectively gives affected issuers more than a year to search for new IDs.
Simultaneously, SGX RegCo will require listed issuers to disclose the exact amount and the breakdown of remuneration paid to directors and CEOs in their annual reports. The proposal, which similarly stemmed from recommendations by the CGAC, took into consideration concerns about competition, sensitivity and privacy. However, market participants were said to have “largely supported” the proposal. The new rule will take effect for annual reports prepared for the financial years ending on or after Dec 31, 2024.
The “increased transparency will enable investors to assess whether the directors and CEO are appropriately incentivised”. “Information to be disclosed must include base or fixed salary, variable or performance-related income or bonuses, benefits in kind, stock options granted, share-based incentives and awards, and other long-term incentives,” adds the statement.
Tan thanked the CGAG and the market for supporting the rules, saying that the changes “provide an opportunity for companies to inject new skills, experience and knowledge into their boards, all of which will be invaluable in guiding the business for the long term”.
“Various participants within the market community have indicated they are ready to support companies in meeting these requirements, so we encourage companies to tap them when making the necessary changes,” he adds.
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Minister for Social and Family Development Masagos Zulkifli called the move an “important” one that will “promote good governance, as well as greater diversity that strengthens boards’ decision-making process”.
Adds the minister: “This also is in line with our action plans in the White Paper on Singapore Women’s Development to increase the representation of women on boards. I encourage companies to use this opportunity to think actively about succession planning and refresh their boards with the right mix of board directors to best chart their path forward.”
Industry reactions
President and CEO of the Securities Investors Association (Singapore) or SIAS, David Gerald, says the new ruling is a positive move. “Shareholders rely on independent directors to ask the necessary questions and shape the business strategy towards the best outcome for investors and the company. Making clear how IDs and executive directors, including the CEO, are rewarded when doing so also informs investors’ decision-making. We hope companies will embrace these new rules wholeheartedly to elevate their governance and improve overall market standards.”
Agreeing, Singapore Institute of Directors chairperson Wong Su-Yen adds: “The rapidly evolving environment companies are operating in requires boards to draw on a broader range of backgrounds and expertise than ever before.”
“The rules on board renewal released by SGX RegCo serve as a catalyst for boards and nominating committees to take stock of the capabilities required to propel growth for the future and identify new directors with complementary experience and skills,” she adds.
“SID’s board appointment services provide access to an extensive directory of directors who are qualified and ready to serve as IDs. Boards who leverage this pool of directors will invariably widen their reach, be it in terms of gender, age, ethnicity, industry background, functional expertise, or geographical exposure,” says Wong.
The CGAC also welcomed the amendments, noting that “there is general support for the Listing Rule amendments as expressed in the responses to SGX’s consultation and that the changes are similar to the practices of other major listing jurisdictions”.
In light of the listing rule amendments, the CGAC has recommended “consequential changes” to the Code of Corporate Governance to the Monetary Authority of Singapore (MAS). It adds that the CGAC will also make significant changes to the practice guidance.
Lim Tuang Lee, assistant managing director (capital markets) at the Monetary Authority of Singapore, says that high standards of corporate governance, characterised by strong accountability and transparency, are critical in upholding investor confidence in Singapore’s capital markets.
He adds that the latest enhancements, which align with global best practices, are important to strengthen director independence further, encourage board renewal and improve market transparency.
