Independent Directors: Who are They and What is Their Role?
The purpose of the Board of Directors (Board) in companies is to ensure that the company management considers the best interests of everyone (i.e., shareholders, employees, customers, the public, and investors). However, Boards are sometimes unable to make the best decisions because of conflicts of interest. Independent directors thus provide unbiased opinions on these decisions to promote greater transparency and accountability (i.e., good governance) in the institutions that they serve.
This article is about helping independent directors and companies who are interested in good governance to understand the roles, purposes and tasks of independent directors who serve on these Boards, and where their expertise is required.
This article will cover:
What is an Independent Director?
An independent director, is a type of non-executive director (NED) who does not have any material relationship with the company or management that would interfere with the exercise of their independent judgement.
Material relationships could include family, business or employment ties which may affect their independent judgement, and potentially cause a conflict of interest.
One common example is that of a director who is also a shareholder of the company with a controlling interest or a large enough interest to influence the company’s decision. Such director is considered to have a material relationship with the business. A controlling interest usually means a simple majority of total voting rights in unlisted companies or 15% or more in listed companies. Another common example is when a director holds a directorship or has an interest in a competing company.
Note that an independent director and a NED are not the same. A NED is a director who is not an executive or employee of the company — they are “outsiders” to the company. Although NEDs normally sit on the board to offer objectivity or prestige on the company’s management, NEDs may not necessarily be independent. However, all independent directors are a subset of NEDs.
Roles and Responsibilities of an Independent Director
Generally, independent directors are responsible for:
- Being familiar with the business and stay informed of the activities of the company
- Constructively challenging management and helping develop proposals on strategy
- Reviewing the performance of management in meeting agreed goals and objectives, and
- Participating in decisions on the appointment, assessment and remuneration of the executive directors and key management personnel.
Check and balance on company’s management practices
Independent directors play a pivotal role on the Board in providing a check-and-balance to the company’s management practices. While executive officers and managers are tasked with the day-to-day running and management of the company, the Board is responsible for oversight of the company. If the company fails or breaks down in some way — due to a human or financial scandal, corruption of executive officers, or a breach of regulations or procedures that puts people’s lives in danger — it is up to the independent directors to put things right or prevent these failures from happening again.
For instance, when Zilingo’s former CEO Ankiti Bose faced allegations of mismanagement and financial irregularities, she was investigated by the Board and eventually sacked. Independent directors therefore play an important role in ensuring the Board and company management is free from corruption.
Safeguard company’s interests
To safeguard the company’s interests (such as its minority shareholders) or the interests of the public who may invest and hold minority shares in listed companies, independent directors play an important role in preventing majority shareholders from oppressing minority shareholders through their voting rights.
Independent directors are also tasked with ensuring that the organisation stays focused on its mission, balances the interests of its stakeholders, and works to the benefit of all by adhering to good corporate governance principles.
For example, fintech firm BharatPe’s Board had quickly engaged audit firms, such as PricewaterhouseCoopers (PwC), to examine the corporate governance and financial practices of its managing director after they suspected alleged financial malpractices including producing fake invoices. The managing director was later removed from the firm.
Independent directors are not part of management, nor employees of the company, and do not participate in the company’s day-to-day management.
However, as directors, they are bound by the same duties and subject to the same criminal and civil liabilities as all other directors (i.e., duties of loyalty, care and statutory duties which limit directors’ behaviour). Nevertheless, in practice courts have applied more relaxed standards of duties of care, skill, and diligence to independent directors.
There is no uniform standard of skill expected of independent directors, but they are expected to understand what is required of them under the relevant company constitution. They are also required to comply with the obligations as set out under Singapore law in general.
Independent directors are also bound by fiduciary duties (duties of loyalty) to the company and statutory duties under the Companies Act (“CA”). For more information, you may refer to our other article on director’s duties.
Independent directors also serve important roles as Board Chairman. The Chairman is part of the management team. If the Chairman is not independent, the majority of the Board should comprise independent directors.
They chair Board meetings and sign meeting minutes. They will also typically chair shareholder meetings and have a casting vote in the event of a voting deadlock.
Lead independent director
Additionally, lead independent directors provide an independent and objective check on management. In certain cases, the SGX Listing Rules may require lead independent directors to make certain decisions and determinations. For instance, if the Board Chairman has a conflict of interest relating to the exercise of their casting vote (and especially if the Chairman is not independent), companies can appoint an independent director to be a lead independent director.
The lead independent director should be available to deal with shareholders’ concerns if contact through normal channels (i.e., the Chairman or management) are inappropriate or inadequate.
Are Independent Directors Required For All Companies?
No, only Singapore listed companies require independent directors. However, non-listed companies may also choose to appoint independent directors if they wish to. As of 1 January 2022, the listing rules require at least one-third of the Board of Singapore listed companies to comprise independent directors.
What is a listed vs unlisted company?
An unlisted public company is a public company that is not listed on any stock exchange. On the other hand, a listed public company is listed on an exchange and its shares are publicly traded.
What is a public vs private company?
A public company has no cap on its total number of shareholders, while a private company has a total of 50 or fewer shareholders. To list a public company in Singapore, the SGX listing rules and requirements must be met.
Every listed company is also required to have an Audit Committee (AC), the majority of which must be composed of independent directors. Amongst other things, the AC is responsible for the oversight of interested person transactions and whistle-blowing policies. The AC also reviews significant financial reporting issues to ensure the integrity of the company’s financial statements.
Corporate governance requirement
The 2018 Code of Corporate Governance (Code) also requires the appointment of independent directors in listed companies on a ‘comply or explain’ basis. This means that although this requirement is not legally binding, companies must either comply with the guidelines or explain why they have no appointed independent directors.
Who Can be an Independent Director?
There are general requirements that all directors must meet, such as:
- Age. In general, all directors must be at least 18 years old and of full legal capacity (i.e., mental capacity to make decisions on their own, and mentally/physically fit to perform their duties). There is no upper age limit for directors.
- No Disqualifications. An independent director cannot be an undischarged bankrupt (except with the permission of the Singapore courts or written permission of the Official Assignee), or previously convicted of offences like fraud or dishonesty.
- Nationality. There are no nationality requirements for directors. However, foreign companies seeking a listing on the SGX must have at least two independent directors who are resident in Singapore.
- Natural person. An independent director must be an individual, not a corporation or other non-individuals.
Beyond these basic requirements, an independent director must also be independent in conduct, character, and judgement.
They must also have no relationship (whether familial, business, financial, employment, or otherwise) with company management, its related corporations, or shareholders holding more than 5 per cent of the company’s shares.
Examples of persons who are considered to be non-independent and thus ineligible to be an independent director include:
- Employees: A director who is employed by the company or its related corporations for the current or past 3 financial years (i.e., CEO of a related company)
- Family Members: A director with an immediate family member who is, or has been in any of the past 3 financial years, employed by the company or its related corporations and whose remuneration is determined by the Remuneration Committee (RC), or have close family ties with each other as determined by the Nominating Committee.
The Board should state its list of independent directors in the company’s annual report. The Board should also provide reasons if it determines a director to be independent despite having relationships or circumstances which suggest that the director is not independent (for e.g., having a shareholding interest in a competing company but is not a direct competitor).
Do Independent Directors Receive a Salary or a Director’s Fee?
Unlike directors’ fees, directors’ salaries do not need to be approved through an ordinary resolution (i.e., a vote held in a shareholders’ meeting, where at least 50% of the shareholders voted in favour of the resolution).
Only a Board resolution (i.e. Board’s written consent) is required to pay the directors’ salary. However, independent directors cannot be employed by the company as this would create an employer-employee relationship that makes them non-independent.
Conversely, directors’ fees are statutorily subject to an additional safeguard of shareholder approval through an ordinary resolution. Therefore, receiving a director’s fee is more appropriate for an independent director, rather than a director/employee’s salary.
In the case of public-listed companies, the SGX Listing Rules require that the fees payable to independent directors must be by a fixed sum, and not by a commission on or a percentage of profits or turnover.
Independent directors are remunerated according to their level of contribution, while taking into consideration factors such as effort, time spent, and responsibilities. Such remuneration should be appropriate to attract, retain and motivate the directors to provide good stewardship of the company for the long term.
Do Companies Need to Disclose Directors’ Fees?
It is not mandatory that you disclose to your shareholders the fees paid to your directors. However, disclosing this in your annual report is in line with good corporate governance practices in Singapore (as well as internationally).
Shareholders can also compel the company to disclose the amount of compensation paid to directors if:
- At least 10% of the total shareholders of the company issues a written notice; or
- A shareholder (or multiple shareholders) with at least 5% of the total issued shares of the company issue a written notice
How are Independent Directors Appointed?
Every year, the Nominating Committee (NC) determines if a director is independent. The NC is established by the Board of the company, comprising at least three directors. The majority of these directors are required to be independent directors, including the NC Chairman.
Is There a Limit to the Number of Independent Directors That Can be Appointed?
No, there is no maximum limit on the number of independent directors.
What is the Length of an Independent Director’s Appointment?
There is a term limit and age limit on an independent director’s appointment, as follows:
- 9-year term limit: An independent director has a 9-year term limit to their appointment. As of 1 January 2022, independent directors who wish to serve beyond their 9-year term must seek and gain approval by all shareholders excluding the Chief Executive Officer (CEO), directors and their associates (insofar as they hold shares).
- 70 years of age: An independent director’s term of appointment will last until they reach the age of 70 years. The office of a director of a public company or its subsidiary will become vacant at the end of the next annual general meeting after he/she attains the age of 70 years. Such a person may only be re‐appointed through an ordinary resolution passed at an annual general meeting.
How Can an Independent Director Resign From Their Role/the Company?
Independent directors are free to resign from their office by giving notice to the company. This is subject to any contractual agreements between the independent director and the company concerning their notice period or other conditions stipulated in their agreement.
When an independent director wishes to resign, he/she must comply with the relevant procedures stated in the company’s constitution. For example, the resignation must be done by way of a resignation letter which would include provisions confirming that the director has no legal claims against the company (or waives any such claims).
In addition, the company will have to lodge a prescribed notice with ACRA within one month of the person ceasing to be a director of the company.
When might an independent director be unable to resign from the Board?
The independent director cannot resign if their resignation will leave the company with no director who is ordinarily resident in Singapore. This will render the resignation invalid .
Can an Independent Director be Removed From the Board?
For public companies, shareholders may, by ordinary resolution, remove directors before their period of office expires.
If the director, who has been removed, had been appointed to represent the interests of a particular class of shareholders or debenture holders, then he/she will not be removed until a successor has been appointed.
In the case of public companies, directors should be careful not to commit an offence under section 152(8) of the Companies Act. In other words, directors of public companies cannot be removed from office by any director or the Board. Directors are not permitted to remove another director without first referring the matter to the shareholders for approval.
An independent director plays an important role in managing good corporate governance and ensuring Board objectivity, thereby protecting the interests of the company and shareholders. Specifically, they play major roles in the Audit Committee, Nominating Committee, and Remuneration Committee. These include safeguarding the company’s financial integrity, determining a director’s independence, and deciding the remuneration of directors respectively. They are also bound by directors’ duties.
If you have further questions or require guidance on the appointment of independent directors, you can engage a corporate services firm here. An experienced corporate services firm can help you comply with the legal requirements of appointing an independent director, or with choosing the right independent directors for your company.
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