Board independence sees uneven progress in Asia Pacific, said CFA Institute recently when releasing its new report “Independent Directors in Asia Pacific”.
The report, which covers Australia, Hong Kong SAR, India, Japan, Malaysia, and Singapore, shows that although standards of corporate governance have been steadily improving across the region, some markets suffer from weak legal protections, concentrated ownership structures, or deeply ingrained traditional attitudes not conducive to board independence.
Good corporate governance not only protects the interests of investors and improves their trust in capital markets, but also acts as a key driver of investment performance, said Mary Leung, CFA, Head, Advocacy, Asia Pacific at CFA Institute.
“As an organisation driven by the mission to lead the investment management profession globally for the ultimate benefit of the society, CFA Institute considers improving corporate standards an important part of its advocacy efforts. Board independence is a key cornerstone of corporate governance,” she noted.
The gradual improvement of the corporate governance regimes in the region enables investors to be more active in voicing their opinions on the companies or their management, CFA Institute said.
However the following issues that CFA Institute labeled “most concerning” might inhibit this progress, entrench the power of the management, and weaken board independence despite more open and direct investor engagement in recent years, the organisation noted.
Inadequate representation of independent directors on boards of listed companies. Independent directors should constitute a majority of the board. Of the six markets CFA Institute analysed, only Australia requires it, while only one-third, or two directors, are needed for the other markets.
Long tenures of independent directors. A long tenure may compromise the independence of directors but in four analysed markets—Australia, Hong Kong, Japan, and Singapore, there are no limits on tenures of independent directors. India has adopted a ten-year limit, while Malaysia is considering a 12-year maximum.
Directors serve on several boards concurrently. There is no limit on how many boards a director may sit concurrently in Australia, Hong Kong SAR, Japan, and Singapore. It is not uncommon for a Hong Kong SAR director to serve on more than six boards, as the city’s regulations only require a justification when appointing such a person. Malaysia allows five concurrent directorships, and India, seven.
The separation of the roles of Chair and CEO, and Chair independence. The same person should not perform the roles of chair and CEO and that the chair should be an independent director. Although Chair-CEO separation is relatively common in most of the markets in the region, Japan stands out as an outlier. In the deeply traditional business culture, less than 20% of companies follow this practice. Only Australia and Malaysia recommend that the chair be independent.
Board diversity. Board diversity fosters a better exchange of ideas and leads to better decision making. Gender diversity on boards of companies in Asia Pacific is generally lower than in North America or Europe. Australia and Malaysia, where women occupy more than a quarter of board seats, lead among the six markets we analysed. Japan lags, with less than 6%. In Hong Kong, about 37% of boards have no women directors.
“Many of these issues are not straightforward,” Sivananth Ramachandran, CFA, Director, Capital Markets Policy, India at CFA Institute, said. “For example, long tenures may lead to entrenchment of directors and impact their independence. But many independent directors need time to understand the business and the industry, and add value. Best practices must optimally balance both sides of these issues.”
CFA Institute recommends five major areas to strengthen the role of independent directors and improve corporate governance in Hong Kong SAR and the region:
- Ensure mandatory separation of chair and CEO and require the chair to be an independent director.
- Designate a lead independent director accountable to non-controlling shareholders when the chair of the company is non-independent.
- Place a hard cap on the maximum tenure of an independent director.
- Provide mandatory director training with relevant competencies for independent directors.
- Encourage board diversity, in particular by appointing more women directors.