ARX Series 18 June 2021
Independent Directors in Asia Pacific
Regulations and Practice in Selected Markets
An overview of regulations and practices concerning independent non-executive directors in listed companies in Australia, Hong Kong SAR, India, Japan, Malaysia, and Singapore.
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Board independence is one of the cornerstones of corporate governance. Independent board directors are key to mitigating the agency problem of corporations in which ownership and control are separated. They monitor and counterbalance executive management or controlling shareholders on the board by ensuring that decisions are made in the best interest of the company and are fair to all shareholders. When independent directors fall short or breach their duties and responsibilities, the quality of decision making by the board and its overall competence and effectiveness become impaired.
CFA Institute defines an independent director as a member of the board of directors who is not biased or otherwise controlled by the company management, other groups exerting control over the management, or shareholders. As a matter of best practice, independent directors should constitute a majority of the board, and play a significant role on board committees, such as the nomination, audit, and remuneration committees. We also believe that the chair of the board should be an independent director.
In practice, the roles and functions of independent directors vary significantly from market to market because of differences in regulation, ownership structure, types of shareholders, history, and cultural context. Similarly, regulatory definitions of independence and the criteria used for its evaluation differ among markets. These differences are particularly pronounced among markets in Asia Pacific—a region with a wide range of historical, legal, regulatory, and cultural contexts, where weak legal protections and concentrated ownership structures are common. It is not uncommon, for example, that independent directors are incentivized to submit to the decisions of the controlling shareholders because they tend to have much greater influence on the election and retention of independent directors. Studies have found that powerful management, especially those holding both CEO and chairperson positions, could weaken the independence of independent directors, because they are empowered to adjust board members’ compensation. Given these challenges, the ability for independent directors to disagree with founders and top management so they may uphold corporate governance standards becomes vital.
In this report, we explore the following key points:
- the effectiveness of regulatory reforms in strengthening the role and responsibilities of independent directors;
- issues limiting director independence;
- the extent to which independent directors act with true independence, particularly in markets with controlling shareholders;
- the adequacy of qualifications and skillsets of independent directors; and
- whether having an independent chair, separate from the CEO, contributes to board effectiveness.
We examine regulatory frameworks and codes of corporate governance to understand how regulators and standard setters approach board and director independence. Our research was also informed by insights from industry practitioners who shared how these concepts are applied in practice.
Sivananth "Siva" Ramachandran, CFA, is the Director of Capital Markets Policy, India at CFA Institute. In his role, he is responsible for advocating policy positions on issues that impact Indian capital markets, including corporate governance, ESG, and financial reporting, to name a few. Siva was part of a SEBI working group that reviewed the related party transaction regulations. He is frequently quoted in media. Siva has nearly 13 years of experience in financial services. Prior to joining the CFA Institute, he spent five years at Morningstar, and led their global index product development team. He also served as a spokesperson for sustainability at Morningstar India. Prior to his time at Morningstar, Siva spent nearly five years at MSCI where he co-authored research papers on small cap investing, portfolio construction, and economic exposure. Siva has an MBA from the Indian Institute of Management, Lucknow. He also holds the chartered financial analyst (CFA) and professional risk management (PRM) designations, and the fundamentals of sustainability accounting (FSA) credential provided by the Sustainability Accounting Standards Board (SASB).
Piotr Zembrowski, CFA, is manager, advocacy research and content, Asia Pacific Advocacy & Policy Outreach, at CFA Institute. He conducts research into financial regulation, to support the advocacy team's development and promotion of capital markets policy perspectives in Asia Pacific. He is also responsible for content management and editorial aspects of Asia-Pacific Research Exchange (ARX), an online research-publishing platform. Piotr has four years of experience as a financial journalist in Hong Kong, covering asset management, fintech and ESG, among other topics. Previously, he worked at TD Bank in Canada, where he was responsible for development of online and mobile banking and investing platforms. Piotr has a Master of Science degree in astronomy from University of Toronto and a Master of Journalism degree from the University of Hong Kong. He earned his CFA charter in 2006.
Sara Cheng, JD, is Senior Director of Capital Markets Policy and Strategy, Asia Pacific at CFA Institute. She is responsible for advocating policy development in Asia Pacific, writing research centered on capital markets and financial regulation and engaging with financial regulators and standard-setting bodies on policy advocacy. Sara’s work experience spans close to 20 years in the finance industry having worked in investment banking, legal, compliance and securities regulation. Before CFA Institute, she worked in the CEO office of the Hong Kong Securities and Futures Commission from 2012 to 2017. Before becoming a regulator, she worked at Goldman Sachs in New York, Mumbai and Hong Kong where she held a range of diverse compliance roles in asset management, investment banking and investment research from 2004 to 2011. At Goldman Sachs in Hong Kong, she was Head of Research Compliance for Asia with oversight across key markets, including Hong Kong, China, Japan, Singapore, Korea, Taiwan and India. Sara also previously worked as a US corporate lawyer and holds licenses in the states of New York and New Jersey. She is a strong supporter for diversity and mentoring. While at the Securities and Futures Commission, she founded and chaired the Women’s Network for which she received the 2015 Employee Award for outstanding contribution to the Commission. She is also a mentor to many young professionals.
Mary Leung, CFA, is the head, standards and advocacy, Asia Pacific, at CFA Institute. She is responsible for the development, maintenance, and promotion of capital markets policy perspectives in the APAC region. She also oversees the promotion and development of CFA Institute professional standards in the region. Mary has over 20 years of experience in the global financial industry, having worked in corporate finance, wealth management advisory, and fund management. Previously, she was with Coutts & Co, where she was director of Business Development and Management for North Asia. Prior to that she was executive director at UBS AG, where she led the Corporate Advisory Group in Hong Kong. With experience in both the buy- and sell-sides, Mary has a strong understanding of the drivers and dynamics of different investor groups, including institutional investors, corporates, family offices, asset owners, and high-net-worth individuals. Mary graduated from Peterhouse, Cambridge with a degree in Engineering. She is a CFA charterholder and speaks English, Putonghua, and Cantonese.