Current Challenges facing Asian Independent Directors

AsianDirectors Presentation: 2010 ABF Corporate Governance Asia Conference

By Firdaus Salim - Managing Director, AsianDirectors Pte Ltd

Human Driven

Data Mining

Talent Platform


» Utilising Technology to facilitate Corporate Governance

» AsianDirectors LIVE platform enables NC to streamline candidate appointment process

» Over 7,000 candidates with as many as 15 data points per profile

» PLCs, Private Equity, Corporate Secretarial Firms, IPO Listees, Investment Banks

• INED Definition • INED Responsibilities

Introduction to INEDs

• Shareholder Trends • Regulator Trends • Board Trends

Trend Analysis

• Q & A Conclusion


» Independent Non-Executive Director: Director who is free from management influence and acts as a supervisory principal to senior management

Definition of INED?

Roles and Responsibilities?

» Key Areas of Contribution: Constructively challenge and help develop proposals on strategy & review the performance of management in meeting agreed goals and objectives and monitor the reporting of performance

However, INEDs are required to play myriad roles in today’s volatile environment

Risk Management Pay for Performance Succession Planning Stakeholder Engagement


Country Composition Independence?

Singapore (2005) o At least one-third

• Not employed by Co for past 3 years • Family member - Senior executive for past 3 years • Receiving compensation other than dir fees for past 1 year (incl: family member) • 5% or more stake in Co and/or Business dealings worth $200K (incl: family member)

Malaysia (2007)

o At least one-third o Should include a number of directors which fairly reflects the investment in the company by shareholders other than the significant shareholder

• Not employed by Co for past 2 years • Family member – no timeframe but more prescriptive (spouse, parent, bro, sis, child) • Not acting as nominee of exec and/or majority S/H • No business transactions past 2 years worth RM250K • Not engaged as a professional advisor

Indonesia (2006)

o No numerical indicator o One of the Independent Commissioner shall have an accounting or finance background

• Independent Commissioner = who are not originated from an affiliated party • Affiliated Commissioners = having business and family relations with the controlling shareholders, Board of Directors, Board of Commissioners, and with the company itself • Former affiliated members = shall for a certain period of time, be considered as affiliated


Shareholder Trend

Regulatory Trend Board Trend


Shareholder Regulator Board

One Share – One Vote:

» Poll Voting vs Show of Hands – Reinforcing transparency and accountability

» Institutional Investor’s Impact on Poll Voting – Reduces minority power

» Dual Class Share System – Seeking public capital & limiting dilution?

1

Privatisations and Delisting:

» Minority S/H Protection – Victim of majority vote?

» Exit Price – Fair valuation of the delisted company

» Legal Channels? – Companies Act vs Listing Rules

2



Disclosure of Information

» Quarterly Reporting – Room for improvement in most Asian markets

» Depth and Breadth of Disclosure – Detailed compensation info, Board processes ?

» “Action speaks louder than words”– Disclosure mismatches

3

Example of usual remuneration disclosure practices in Singapore



Singapore Exchange - Electronic Poll Voting

o Electronic Voting to steer voting towards a one-share, one vote system rather than a “show of hands”

o SGX shareholders were provided with handsets and smart cards at registration, linking voting rights to their shareholdings based on the size and class of their holdings.

o Votes for each resolution were recorded instantly - and the results were displayed immediately on a screen for all shareholders.

Case Study



Case Study

Disclosure Discrepancies – Englotech Bhd

What was said

“The board believes that the investing public and shareholders should be kept informed of all material business matters, which may influence and affect the group. Timely release of information on the group’s performance and major developments via appropriate channels of communication provides the shareholders and investors with an overview of the group’s operation.” – Annual Report 2008

What has happened

Although it had been delisted in February 2010, Englotechs was publicly reprimanded by Bursa Malaysia for several breaches of the exchange’s listing requirements, one of which was its failure to make an immediate announcement of the defaults in payment of credit facilities by the two subsidiaries. Three of the company’s directors were fined RM113,050.



Regulatory Change vis-à-vis CG codes:

» Code of Governance – Tightened up post financial crisis.

» Redefinition of Independence Regulations - Higher % of INEDs on Corp Board

1

IPO Listings

» Listing Rules – Listing rules tweaked to ensure easier access for quality foreign IPO listings

» Secondary Listings – Exchanges are providing secondary listing access to companies

2



Securities Law

» Minority S/H and Company Delisting Regulatory change to provide increased power to minority shareholders in events of delisting and privatisation

» Insider Trading – Preventive measures stepped up

3

Regulatory Philosophy Moving Forward 4

Country Approach Response

Hong Kong Enforcement Fines

Singapore Stricter Code + Market Awareness Review of code + Public Disclosure

Malaysia Stricter Code + Enforcement Review of Code + Fines

Philippines Incentives Public Awareness of good firms



Maharlika Board- CG Incentives in Philippines

o Philippine Stock Exchange (PSE) has approved the draft listing rules for a new index, aimed to distinguish public companies which voluntarily adhere to higher corporate governance standards

o The proposed criteria for listing in this segment include a minimum float of 30 percent and an increased number of independent directors to three, as compared with the minimum of two independent directors as provided in the existing law

Case Study



Board Composition

» INED Recruitment Process – Process of recruitment is just as important as quality of candidates, reduces inherent reputational risk of INEDs should company face trouble

» Time Commitment – A cap on multiple directorships? + Committee Diversity

1

Liquidity and Cash Flow Issues

» Tremors from Financial Crisis – liquidity a critical issue for many organizations to manage and has quickly elevated issues of cash flow and liquidity to the agendas of many corporate boards

» The Audit Committee’s new responsibilities – Cash flow, short-term obligations, contingent liabilities and the health of formerly reliable suppliers

2



Risk Management

» Setting the tone at the top – Define organisation risk appetite appropriately and to manage the risk effectively

» Risk Committee – Prevalent in Bluechips, board to be cognizant of principal risks

3

Compensation Matters

» Pay for Performance + Pay for Prudence ? – Trends point towards compensation being aligned with prudent risk-taking

» Say on Pay – Effective supervisory oversight and engagement with stakeholders

4



How INED appointment process matters – NEL Holdings

o SGX publicly reprimanded NEL and its directors for dragging their feet on releasing a special auditors' report to shareholders - and asked all listed companies to consult the Exchange before engaging any of NEL's Directors

o The two independent directors based in Singapore were appointed only after E&Y had been appointed NEL's special auditor to investigate possible ‘round-tripping’ deals

o They have received no form of monetary or non-monetary compensation, direct or indirect, for the work they have been doing

o Presence of INED appointment process will add more credence to their case

Case Study



Full Research Paper can be downloaded from

www.asiandirectors.com


• Q&A