Singapore, Malaysia turn the heat up on entrenched INEDs as Hong Kong backpedals

by Jane Moir, ACGA

1 April 2022

Markets in the region are giving minority shareholders a bigger say over long-serving independent directors, but Hong Kong sticks with the status quo, writes Jane Moir, ACGA Research Director for Hong Kong & Singapore

Regulators in Singapore and Malaysia are gently dusting off the cobwebs. From January 2022, both markets made it harder for issuers to rubber stamp the re-appointment of independent directors who, in the view of investors, have overstayed their welcome.

A two-tier shareholder vote is now required when INEDs reach nine years on the board, affording investors greater say over anchored independents in markets where tenures can span up to 20, 30 or even 40 years.

The Singapore Exchange (SGX) has embedded this requirement into its listing rules, shifting away from the softer comply or explain mantra of the CG Code. This marks a significant step up from merely prodding issuers to do a “rigorous review” of INEDs who hit the nine-year mark—which tended to culminate in boilerplate disclosure.

While Malaysia keeps the two-tier vote provision in its Code on Corporate Governance (MCCG), its bourse is upping the ante. As of 1 January 2022, Bursa Malaysia is capping INED tenure at 12 years. Independent directors who fall into this category will be expected to resign, or move to a non-independent role, by 1 June 2023.

This leaves Hong Kong as an outlier.

The market would have trumped Singapore and Malaysia by giving independent shareholders a lone vote on INEDs serving more than nine years under proposed changes to the CG Code. The plan was however shelved in December 2021 despite gaining majority support during the consultation process.

Instead, the city’s bourse Hong Kong Exchanges and Clearing (HKEX) is asking issuers to make greater disclosure of why entrenched INEDs should remain in place from January 2022. It will also modify its CG Code to require issuers whose INEDs are all long-serving to appoint a new independent director. This will be on a comply or explain basis and takes effect from 1 January 2023.

Meanwhile it will remain only a provision of the Code that the re-appointment of INEDs serving more than nine years be subject to a separate resolution where all shareholders get to vote. It should be noted that a growing number of large issuers, including Hang Seng Index constituents, who are secondary listed in Hong Kong are not obliged to follow the CG Code at all.

What is the problem?

While investors may tolerate INEDs serving longer terms if the purpose is to offer a deeper understanding of the business, it holds less sway where majority control is at play. Yet this is a structural feature of several Asian markets, where family or majority interests dominate the shareholding. These listed companies have a tendency to appoint from personal networks guaranteed to toe the line—and they stick with the programme.

When Singapore consulted on long-serving INEDs in January 2018 it found that almost one in three INEDs at listed companies served for more than nine years, with some tenures stretching to 30 or 40 years.

A similar theme emerged in 2021 when Hong Kong consulted the market on changes to its CG Code. HKEX found that one in five INED positions were held by long-serving individuals and these directors sit across a third of all issuers. And at 166 listed companies—7% of all issuers—every INED on the board had lingered for nine years or more. During ACGA’s recent research on board diversity at the top 100 in Hong Kong , we found an INED whose tenure at a listed company had spanned 37 years. He was 83.

Other markets in the region are meanwhile more willing to draw a line on overstayers, or are at least moving in that direction. Thailand and the Philippines follow the Hong Kong nine-year plus shareholder vote model, and India limits INED tenure to two, five-year terms under the Companies Act. India allows re-appointment after a three-year cooling off period, (until recently it was two) as long as issuers justify this on the basis of performance and independence.

New Securities and Exchange board of India (SEBI) rules which came into force on 1 January 2022 however mandated that any appointment, reappointment or removal of independent directors must be through a special resolution requiring 75% of votes in favour to pass. See our blog, “India nudges the elephant” published on 24 November 2021 .

Meanwhile in an update to their CG Code in December 2021 Taiwan regulators made their first reference to tenure of INEDs, settling on three terms of three years. In separate regulations, reasons should now be given to shareholders if there is a nomination of an INED who passes this nine-year mark.

Progress, but not perfect

All of this represents more of a progressive, than paradigm, shift. A super majority vote is of negligible effect where there are controlling interests and even a two-tier vote has limitations.

Singapore’s regime for example leaves the door open for a controlling shareholder to sway the outcome. It mandates a vote by all shareholders and a separate one by investors who are not a director, CEO or their associates. Those holding majority control (or shareholders connected to one) can therefore cast their vote as part of the second camp as long as they do not fall into one of the restricted categories.

Malaysia takes a slightly different tack. One vote is required by large shareholders who have the largest chunk of voting shares (at least 33%), the ability to appoint a majority of directors or execute decision-making at the company. A separate vote will be comprised of non-large shareholders who agree by a simple majority. The resolution passes if both vote in favour. If the large shareholders abstain, the vote will fail.

This only happens at the nine-year mark. In contrast, London’s regime for voting on INEDs at premium listed companies with controlling shareholders has since 2014 required a dual-process vote to be conducted annually. Under this approach, an INED’s appointment is approved by an ordinary resolution of shareholders and a separate ordinary resolution of the independent shareholders.

Hong Kong covers its ears

Hong Kong would have excluded controlling shareholders and their associates from a vote on long-serving INEDs under proposals in an April 2021 review of the CG Code and related listing rules. In the (somewhat rare) event that there were no majority interests, it would have excluded directors, the CEO and their associates.

The consultation which ended in June 2021 attracted 214 submissions of which 65% were in favour of the independent shareholder vote for INEDs.

The minority camp included listed companies and their advisors who argued that barring controlling shareholders from the process would violate the fundamental “one share, one vote” principle. Ironically, a number of these issuers happen to be among the most vocal champions of Weighted Voting Rights (WVR) in Hong Kong.

Indeed, 2021 was a happy one for the issuer camp, with the regime tweaked to attract more WVR IPOs and a new SPAC framework introduced in lightning speed.

At a time when other standards of shareholder protection are on the wane in Hong Kong, the Exchange missed a golden opportunity to balance the scales and make voting for INEDs more meaningful.

About the Author(s)

Jane Moir
Research Director, Hong Kong & Singapore, ACGA

Jane Moir
 joined ACGA as a Research Director focussed on Hong Kong and Singapore. Prior to joining ACGA, she worked as a barrister and financial journalist, including 11 years at the South China Morning Post covering legal and regulatory issues. Jane has also worked as a part-time lecturer in law at HKU Space and was a contributing writer for Lexis-Nexis on securities law, corporate crime and money laundering.

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