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Hard limits on independent director tenure is an opportunity for boards

Alvin Chiang
Alvin Chiang • 4 min read
Hard limits on independent director tenure is an opportunity for boards
SGX Group. Photo: Albert Chua/The Edge Singapore
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The announcement by Singapore Exchange Regulation (SGX RegCo) on Jan 11 limiting independent directors’ tenures to nine years came as little surprise to those who have been following the public discourse leading up to it. Part of this decision to do so lies in the view that despite attempts to encourage board succession planning and renewal, Singapore continues to have a disproportionate population of long-tenured independent directors (IDs).

One may argue that tenure does not solely define independence, but to have an ID (and this was uncovered by a Nanyang Business School study done in June 2022) serving for close to 50 years is certainly a stretch. That same study also revealed that around three-quarters of long-serving IDs are concentrated within the smaller companies, which are also likely to be family-run or owner-managed businesses.

Birds of a feather

Most of these smaller boards tend to comprise professionals and trusted business advisors who typically fit into the lawyer, banker and accountant archetypes. That's well and good, especially when they are able to lend a perspective on regulatory issues required of a listed company. But certainly, there is merit in considering what other perspectives are needed in light of the business strategy that will ensure the longevity and future success of the company.

The tendency for many of these smaller boards is to default towards the use of personal networks when conducting a director search. To be clear, there is nothing wrong with tapping on personal contacts to source for directors; in fact, it would be negligent not to do so. But to solely rely on one’s acquaintances is clearly inadequate insofar as thoroughness is concerned. After all, “birds of a feather” does come to mind if we were to examine our own social circles.

Yet beyond personal contacts and nominations by controlling shareholders, the 2022 Singapore Board of Directors Survey revealed that often very little else is done. Only around a quarter of respondents made use of third-party services provided by the Singapore Institute of Directors or search firms for that matter. If this is indeed representative of the broader population, then one must wonder how rigorous a typical director search in Singapore must be.

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Embracing the new rule

Regardless, the fact remains that this hard limit is set to come online in about a year, and Boards with IDs who are past or reaching the nine-year mark will need to start thinking hard about how this will affect them. Clearly, for many, this will involve dusting off and scrutinizing their plans for director succession (assuming that there is already one to begin with).

While such an exercise may come across as tedious and even unnecessary to some, why not use this as an opportunity for the Board to raise governance standards and improve the quality of its succession planning? We can already see from the latest Russell Reynold Associates 2023 Global Corporate Governance Trends report that there is growing scepticism over the calibre of boards globally. It thus makes perfect sense for Nominating Committees to re-examine their pipeline of potential directors with the aim of augmenting their Board’s current composition with new skills, experience and knowledge that will put it in good stead for the foreseeable future.

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Conversations on what constitutes diversity to one’s Board should take place. Gender representation is no doubt important, but Boards would be remiss not to conduct discussions around other aspects of diversity. In so doing, the Board’s diversity policy can be further sharpened and clarified; which of course will help since this is also a required disclosure mandated by the Singapore Exchange.

Casting the net wider

There has been some concern over whether boards will be subjected to undue pressure following the introduction of this new rule; some respondents to an earlier consultation by SGX RegCo cited limited talent within Singapore as a potential challenge in finding suitable replacements. Such views are to be expected, given the current state of play.

As a nation we have been made acutely aware of Singapore’s need to attract and develop human capital early on; so to suggest a dearth of top talent for boards today sounds rather far-fetched. Light on experience perhaps, but then again even the most seasoned directors have to start from somewhere. All that is needed are the opportunities to present themselves. And for that to happen boards here will need to cast their nets wider and make their director searches that much more robust.

Alvin Chiang is a consultant at Russell Reynolds Associates. All views are his own.

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