Directors of the board of a listed issuer, especially that of independent directors, play a crucial role in the proper governance and commercial success of the company.
Directors have important fiduciary duties
The 2018 Code of Corporate Governance (CG Code) describes in its first Principle that an effective board of a company is one which is “collectively responsible and works with Management for the long-term success of the company.” “Directors are fiduciaries who act objectively in the best interests of the company and hold Management accountable for performance,” the Code adds.
A fiduciary is a person who has undertaken to act on behalf of others in circumstances which give rise to a relationship of trust, confidence and loyalty. When shareholders invest in a company, they entrust directors with the powers to manage the company, and also place reliance on directors to achieve sustainable business performance. An individual who accepts a directorship appointment thus accepts this responsibility.
Singapore Exchange Regulation (SGX RegCo) therefore places great emphasis on the process by which the Board of companies selects and appoints directors. Disclosures in relation to the resignation of these directors are similarly important.
The Corporate Governance Advisory Committee (“CGAC”) has also issued a revised Practice Guidance 4, which can be found here, to provide guidance on the board nomination process.
Boards and Nominating Committees should exercise judgment in the assessment of the independence of directors and be cognisant of overboarding
The CGAC’s Practice Guidance 2 on board composition states the need for the Board to have a strong and independent element. The board and Nominating Committee (NC) should exercise their judgment in their assessment of the independence of directors to determine whether any circumstance or relationship exists which might impact a director’s independence, or the perception of his or her independence. Where the Board determines that directors are independent notwithstanding the existence of such circumstances or relationships, the Board should disclose the relationships and its reasons for determining that the directors are nonetheless independent in its annual report and announcements where applicable.
Where an individual has multiple directorships in listed entities, he/she may be at risk of overboarding, failing to devote sufficient time and resources to the issuer(s) in question. It is crucial that directors have sufficient capacity to properly discharge their fiduciary duties to the company.
The CGAC’s Practice Guidance 4 on board memberships states that responsibilities of a director are complex and demanding. Directors need to make the substantial time commitment required to fulfil their responsibilities and duties to the company and its shareholders. A director with many major commitments can be, or be perceived to be, ineffective because he or she is unable to devote sufficient time to properly discharge his or her duties on the board.
The Practice Guidance therefore recommends that the board and NC of each company take into account the number of directorships and principal commitments of each director in assessing ability to discharge his or her duties. Some boards cap the number of directorships and principal commitments of each director. Others take into account whether an individual director holds a full-time executive position in determining the practicality of multiple directorships and principal commitments, as well as the financial year-ends of the respective companies.
Resignations and disclosure of the cessation
SGX RegCo requires directors (as well as executive officers) who are resigning from their appointments to inform the exchange in writing as soon as possible of such developments via an SGXNet filing[1].
The disclosure template for such cessation announcements requires detailed reason(s) for the cessation. We have noticed boilerplate statements such as "to pursue personal interest" or "for personal reasons" being routinely disclosed. These reasons are not informative on their own. Elaboration is necessary if the reasons for resigning are material information to investors.
Directors who are resigning must ensure that concerns about the company, such as corporate governance matters, internal controls or otherwise, should be made clear to the public in the cessation announcement. In such circumstances, personal reasons should not be the reason for cessation. Other examples of clarity in reasons for resignations which SGX RegCo has noted in company announcements include board renewal, retirement, inability to properly discharge his/her fiduciary duties, inability to share the same vision with the board members on the strategic direction and business plans of the company and sometimes, differences in decisions over the company’s business and future plans. In other instances, resignations could be due to overboarding.
The disclosure template also requires several questions to be answered. These focus on key areas of concern, such as whether any unresolved differences in opinion on material matters between the person and the board of directors, including matters which would have a material impact on the group or its financial reporting, exist. Also required is a response to a question on whether any matter in relation to the cessation that needs to be brought to the attention of the shareholders of the listed issuer exists. Therefore, directors, particularly independent directors, should where appropriate, cite the reason or reasons behind their decisions especially if there are material governance concerns and matters concerning the management of company’s affairs which have a material impact on the company’s financial performance or operations.
Past performance as directors should be considered for new appointees
In determining whether a potential director is suitable to be appointed to the board, NCs are required to perform stringent due diligence on every candidate. Such due diligence should extend to whether each directorship candidate has fully discharged his/her duties and obligations during his/her previous directorship of an SGX-listed company. The Board and NC should also take into consideration whether a candidate had previously served on the board of companies with adverse track record or a history of irregularities. In instances where the candidate is or was under investigation by professional associations or regulatory authorities, clarity should be sought on whether there are matters that would have a bearing on the candidate’s suitability to be appointed. The Board and NC must rigorously satisfy themselves as to the candidate’s suitability , including assessment on whether a candidate’s resignation from the board of any such company would cast any doubt on their ability to act as a director of the listed issuer.
SGX RegCo has noted several instances when directors resigned from listed issuers shortly before or after the company is issued with a modified audit opinion or emphasis of matters relating to material going concern issues, and/or prior to the need for independent review or special audit. Such issuers are at relatively higher risk, considering material irregularities or uncertainties concerning the issuer’s financials could exist, the auditor has significant doubts on the issuer’s abilities to continue as a going concern, and/or where authorities could potentially have regulatory concerns about the issuer.
If directors or executive directors, especially those in the finance function, are considering a decision to vacate the board or management positions, these “jump ship” directors should consider if their resignation would place the company in jeopardy, or if their departure would compromise the company’s ability to look into the matters of concern. In most instances, shareholders’ interests will be better served by the director staying on the board and helping to guide the company to look into and resolve the matters of concern. In respect of a vacancy in the Audit Committee (AC), the listing rules provide two months but no later than three months to fill the position. Appointing a new member to the board and AC will take time and is even more arduous for a company with going concern issues. A company needs continuity in the steering hands to guide it through the tempest.
Another instance where directors should remain with the company to take active steps to resolve the issues raised is when short seller or media reports highlight company-specific issues or transactions.
For Catalist issuers, the continuing sponsor will also be responsible for assessing the suitability of each director and is required to perform due diligence on and satisfy itself as to the suitability of each directorship candidate. This is in line with the guidelines “Assessing Suitability of Directors and Executive Officers” dated 20 July 2018. The continuing sponsor should perform background checks on candidates as required and flag potential candidates that had “jump shipped” or left previous directorships during inclement times at the company concerned.
SGX RegCo is closely monitoring such situations and reserves the right to object to, and publicly query the appointment of, directors who have previously “jumped ship”. In such a circumstance, the issuer’s NC (and continuing sponsor, if applicable) will have to publicly reply to SGX RegCo’s queries, put up their defence and vigorously justify their decisions that the director concerned is deemed suitable despite his/her history of “jumping ship”. If responses are not satisfactory, SGX RegCo may exercise its administrative powers under Rule 1405(1)(e) and issue a Notice of Compliance (NOC) objecting to the appointment of that candidate to directorships of SGX-listed companies. The issuer’s board (and continuing sponsor, if applicable) will then have to publicly state its considerations on whether or not to remove said director from their post.
Conclusion
As previously mentioned, the quality of board directors is crucial to the long-term success of the issuer. Here it is important to remind issuers and directors that quality transcends mere compliance with the Listing Rules. The individual must be committed both in form and substance including being prepared to continue his/her role and responsibilities even as the company goes through ups and downs. Only in such instances can directors claim to uphold their fiduciary duty to the company as well as its shareholders.
June Sim
Head of Listing Compliance
SGX RegCo
Sean Lim
Assistant Vice President
SGX RegCo
