In many of corporate Malaysia’s boardrooms, independence will soon have a mandatory shelf life. Bursa Malaysia is amending its listing rules in 2022 to bar anybody from serving as an independent director of a listed company for more than 12 years. If the company retains any independent directors after their 12th year, their status will switch to non-independent.
This can be a complication for the company because the listing requirements demand that at least a third of the board is made up of independent directors. And to comply with the Malaysian code of corporate governance, the company has to meet an even higher standard – independent directors should form at least 50% of the board. Large companies, as defined by the code, are expected to do even better than that: they are encouraged to assemble boards that have a majority of independent directors.
It is therefore likely that once the new rule kicks in, listed companies will have to continually look for new faces to replace long-serving independent directors. This is precisely what the regulators want.
Once the new rule kicks in, listed companies will have to continually look for new faces to replace long-serving independent directors
Anti-groupthink
In July, Bursa Malaysia issued a consultation paper to seek feedback on, among other things, the proposed tenure limit for independent directors. The paper pointed out: ‘The boardroom is where strategic decisions are made, governance is exercised, and risk is overseen. Hence, periodic board renewal is necessary to attract new ideas and foster diverse perspectives in the boardroom. This is especially essential for independent directors to avoid entrenchment and to ensure that they continue to provide more rounded consideration of issues, foster constructive challenge and guard against any biases or groupthink.’
The Securities Commission (SC) highlights a similar point in its corporate governance 2021 report, released in November 2021. ‘Stakeholders, particularly institutional investors, are expecting boards to have a more rigorous process around the direction of selection and nomination. Boards will need to navigate a rapidly changing and challenging business environment, and maintaining optimal board composition is key to ensure the company not only survives but thrives.’
Although neither Bursa Malaysia nor the SC is saying so, it is possible that the mandatory tenure limit for independent directors will eventually be shortened to nine years, in line with current corporate governance best practice.
Boost independence
This move to boost board independence is an example of how thinking on corporate governance has evolved over the past two decades. When the Malaysian corporate governance code was introduced in March 2000, there was no discussion of the pitfalls of an unchanging boardroom line-up. But as the code underwent reviews, it began incorporating elements that ensured greater scrutiny of independent directors.
The 2012 edition of the code recommended that once independent directors had served for nine years, they had to be redesignated as non-independents if they were to stay on with the company. However, there was an escape clause: the board could maintain such long-serving directors as independents by securing shareholder approval at a general meeting.
When the SC next revamped the code in 2017, the recommendations on independent directors were tightened. After an independent director had served for 12 years, their reappointment had to be approved annually via a two-tier voting process designed to dilute the dominance of large shareholders. In addition, the code encouraged board policies that limited the tenure of independent directors to nine years.
The latest edition of the code, published in April 2021, says the two-tier voting process should start after the independent director’s ninth year instead of the 12th year.
Long tenure
Despite these clear regulatory signals, the reliance on long-serving independent directors is still a concern. According to the SC, as at 31 October 2021, 46% of listed companies had at least one independent director who had served for nine years or more. Not only had 500 independent directors held their positions for more than 12 years, but 89 of them had done so for at least two decades.
‘On some boards, the challenge is more acute as they have two or three independent directors with tenure as long as 30 years,’ the SC pointed out.
And consider this: audit committees are required to have a majority of independent directors.
We know that the mandatory tenure limit cannot guarantee true independence in the boardrooms, but we can hope it will push listed companies to refresh their boards regularly, thus paving the way for more diversity, quality and, yes, independence.
