The Board and the Independent Director:
Enhancing Performance and Shareholder Value
YBhg Datuk Ali Abdul Kadir
Chairman, Securities Commission
8 April 2003
Distinguished speakers and guests, ladies and gentlemen.
1. I am pleased to be here this morning to deliver the keynote address for this seminar on “The Board and the Independent Directors: Enhancing Performance and Shareholder Value” jointly organised by the Securities Industry Development Centre (SIDC) and Malaysian Institute of Corporate Governance (MICG).
2. The Securities Commission (SC) is especially proud to be associated with efforts by the MICG and other industry associations whose objective is to actively promote among our corporations wider acceptance of the principles of corporate governance. As the capital market regulator, the SC can craft new laws and regulations to close loopholes and eliminate excesses. Some changes in laws, regulations and accounting practices are both appropriate and necessary, but these changes alone will not address many of the challenges that still beset the corporate sector. This seminar is particularly pertinent in that it focuses on the most important player in the corporate system, the one that is ultimately in charge – the board of directors.
3. Indeed, the assessment of corporate conduct by shareholders and other stakeholders has placed increasing attention on the role of the board. This has led to evolving judicial interpretations of a board’s legal and fiduciary duties, including the duties and obligations of directors. Boards are charged with ensuring that corporate governance failures do not occur. Hence more emphasis is now being placed on the structure and composition of the board and its ability to provide the strategic leadership and independent oversight of management performance.
4. We have seen how good corporate governance can play a major role in determining the competitiveness of our companies and markets. Capital markets thrive when corporate leaders and board of directors are good stewards of the companies they lead and investors enter the market because they trust that they will get a fair return for their investment. During the Asian financial crisis, and more recently in corporate America and Europe, leaders of corporations have violated the trust that shareholders have placed on them. When investors lose confidence, they withdraw from the market and in the process, everyone gets hurt, not just the perpetrators of egregious acts. In the wake of these massive corporate governance failures, investors now expect higher degree of transparency and accountability from companies in return for their investments. They expect the companies they put their money in to be more efficient, better managed and innovative given competitive pressures from new markets and advances in technology.
5. With investors viewing corporate governance practices as a key factor in their investment decisions, a company’s reputation for good corporate governance is just as important as its practice of good governance. This is evidenced by the “corporate governance premium” recognised and bestowed by investors. By and large, a company’s reputation and image is measured by consistent good practices, which in-turn is translated into a cash equivalent and factored into its share price. Extending that logic, if you multiply that by like players of the same market then you get a robust capital market with a stellar market reputation.
Ladies and gentlemen,
6. I put it to all of you today that the task of leading the charge for a flowering of corporate governance in our corporate sector rests with the board of directors. The early entrepreneurs in Malaysia who were fortunate to lead great companies did not lose sight of the imperative of creating and building corporations for the long term. In the late 1990s, the lessons of building these great companies were lost in the rush to make quick profits. That is why today as we all work together to rebuild faith in the Malaysian corporate sector, the reform effort must be driven primarily by the board representing the owners. The board of directors is after all the fulcrum that balances the ownership rights enjoyed by shareholders with the discretion granted to managers to run the business. The board should have oversight of the operations of the business and be responsible for monitoring, measuring and rewarding or penalising management’s performance. They are bound by their fiduciary duties to look after the interests of the shareholders by establishing accountability, giving strategic direction, providing long-term perspectives and helping the company focus on the real value-creating parts of the business.
Board efficiency and effectiveness
7. Board efficiency and effectiveness are not just “nice to haves” but are absolute necessities in today’s increasingly competitive environment. It is trite but true that an effective board should comprise both executive and independent directors possessing the right mix of relevant skills sets and experience. This makes it important that board members are chosen more for what they can contribute than for the titles they bring to the table. All too often in the past, we have chosen directors for the positions they hold, rather than their commitment, time, availability and competence. The Listing Requirements of Kuala Lumpur Stock Exchange (KLSE) clearly states that a public-listed company must have at least two independent directors, or one-third of its board comprise independent members, whichever number is higher. In the wake of that ruling, I have heard rumblings that there is a dearth of talented people in Malaysia who can be invited to join the boards of public listed companies (PLCs). I do not believe for one moment that given the nation’s relatively high level of development, one can go round and say that it is impossible to recruit independent non-executive directors with sufficient business knowledge and who are able to work cohesively with other board members and help provide the best guidance and advice to management. The willingness and ability of people to assume the heavy burden of a board membership is what drives the corporate governance system. No checklist by the SC or KLSE can ever ensure good governance by PLCs. Only good people can.
Ladies and gentlemen,
The role of an independent director
8. In your folders, you will find a book that has been jointly produced by MICG and the SIDC on independent directors, where it clearly shows that different jurisdictions have notions of what is an ‘independent directors’. Realising the varying concepts, the Malaysian Code on Corporate Governance recommended that the term ‘independent should refer broadly to the crucial aspects of independence, and this would be independence from management and independence from a shareholder. The significant shareholder is further constrained by requirements that a component of the board reflects the investing public or the minority shareholder in the company. The book then goes on to explain that a non-executive director is not a full-time director but one who attends board meetings to contribute his expertise to the board. It was also clearly noted that a non-executive director may not necessarily be independent in that he could have business and management arrangements with the corporation or other relationships including family relationships with other directors.
9. It then seems clear that a truly “independent director” should not be involved in the day-to-day running of the company’s business or indeed, be involved in management. He should be free from any business or other relationships which could interfere with the exercise of independent judgement or the ability to act in the best interests of the corporation. My remarks address the independent non-executive director. The independent director has a crucial role in ensuring that the board is an effective board and through which good corporate governance can be promoted throughout the entire company. Among other things, the independent director is expected to provide a balanced and independent view. It calls for persons of caliber, integrity, with requisite business acumen, and the credibility, skills and experience to bring independent judgement on issues of strategy, performance and resources, including key appointments and standards of conduct.
10. The KLSE in its Practice Note 13 of 2002, provides more clarity on the requirements relating to the roles of independent directors. If you are an independent director, I suggest you familiarise yourself with the contents of this Practice Note so that you are aware of your duties and functions. Of course all directors should at all times act honestly and use reasonable diligence in the discharge of his duties. The heavy responsibility is of course not that of the independent non-executive director alone. However, if you have not realised it yet, the role of the independent, non-executive directors is indeed quite different from that of other board members. You are expected to do more than merely provide comments and monitor the financial performance of the company, as you are the designated watchdog.
11. In short, the independent director cannot approach his duties in a minimalist way, but instead exercise more than just the usual standard of care. You are required to probe, robustly engage the management, take a position even if it is not in line with the majority owners and management. You are after all responsible for ensuring that transaction placed for board consideration will create value for the company and its shareholders. From the outset, you have a fundamental duty to shareholders, particularly minority shareholders, as well as to ensure compliance with all the relevant laws and regulations.
12. I would add that is not an exaggeration that the presence of independent directors in the board is contributory to the successful implementation of the Malaysian Code of Corporate Governance. It seems a tall order, but I believe that this challenge can be met and it is the hope of the SC that this new breed of directors will help advance the cause of corporate governance in this country through their exercise of informed judgement. As far as the companies on whose board these independent directors serve, I would like to put on record as saying that independent directors must be given free access to the records and information of the company as well as independent legal advice and the services of the company secretary if they find this to be necessary to fulfil their duties. Denying them these resources, including quality information and advice, would not only be doing the independent directors a disservice, but it would be inconsistent with the spirit of the Code.
The need to promote higher disclosure standards
13. This then leads me to my next point about the role of executive and independent non-executive directors in encouraging high disclosure standards and ensuring that all required disclosures are made. This is particularly pertinent in the context of the SC’s policy shift to a disclosure-based system of regulation or DBR. DBR is predicated on the diligence of the board of directors, as they are individually and collectively responsible for the company’s compliance with the laws and regulations, including the relevant Listing Rules and Codes. In as much as DBR accords greater flexibility for issuers to raise capital, it behooves the board to be aware that DBR carries with it an onerous regime of information disclosure. One cannot go without the other. Therefore, board members especially the independent directors must make a particular effort to understand the workings of the company, especially its financial and accounting system so that they are able to ask management how it got its numbers for the proposed issue.
14. In this context, the effectiveness of boards in discharging its duties depends critically on the management providing them with the right information and on the board understanding what is tabled for their decision. We are now on the final leg of the disclosure-based journey which started in 1996, and to ensure the success of full DBR, directors are responsible for ensuring that all material information are disclosed in a timely and transparent manner to the markets to enable investors to make informed decisions.
Ladies and gentlemen,
15. As I mentioned earlier in my remarks, the SIDC and MICG have jointly published a book on Independent Directors: Perceptions, Roles and Responsibilities. This book is intended to add to the discussion on the role of independent directors, providing a platform for various viewpoints expressed by experienced practitioners. It is intended to encourage people who have been appointed as independent directors to further understand the demands of their office. I would like to express my appreciation to the writers for their time and contribution towards making this book a reality.
16. Finally, and if I may be quite frank, it is in the interest of the company to educate and train their independent directors. Indeed, all directors should regularly attend programmes for updates on the latest thinking in corporate governance. The KLSE mandatory continuing education for directors could insure a minimum background for all directors in terms of their knowledge of governance. Forums such as this one today will do well to persuade our corporate captains that it is their own best interests to rise to meet the challenges of higher global standards.