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KL mayor should be elected



30 March 2013 / The Star

We keep on hearing the same thing over and over again decisions should only be made in the best interests of a company. And, in the context of a company, those who are best placed to make sure this happens are the independent directors.

Their independence comes from their not having immediate or major interests in the company for which they make decisions. So, they should technically function as the check-and-balance for shareholders.

Recently, we were asked to review the independent directors or rather lack thereof in a large company. This company had been formed by merging three companies within a particular industry. When we reviewed its list of board members, in particular, its independent directors and members of its audit committee, we noted that one person stood out, clearly having assumed far too many roles.

To begin with, he had been on the boards of two of the three companies prior to the merger. In the first of these two companies, he was chairman of its audit committee as well as its independent non-executive director. In the second of these companies, he was not only a non-independent non-executive director, but also a member of the company’s executive committee. He held these positions between the mid-1990s and late-1990s, for periods ranging between nine and 13 years.

In what ways might the holding of so many roles impinge on good governance? We turned to Bursa Malaysia’s Listing Rules and the 2012 Malaysian Code of Corporate Governance (MCCG) for answers to these questions.

Section 1.01 of Bursa’s Listing Rules defines who an independent director is, that is, one who is independent of the management of the company as well as not being involved in any business or relationship which could interfere with how he exercises his judgement or with his ability to act in the best interests of the company and its shareholders. This definition is rather broad, so Bursa gives examples of independent directors, as anyone who is one of the following:

● One who is not an executive director of a company, or its subsidiaries;

● One who has not been an officer of the company within the last two years (in this case, officer is defined under Section 4 of the Companies Act 1965). But it is all right if one has been a non-executive director of the company;

● One who is not a major shareholder of the company;

● One who has not been engaged by the company to advise it, under such circumstances as prescribed by Bursa. One should also not at present be a partner, director or major shareholder of a company or firm which provides the company with professional advisory services under such circumstances as prescribed by Bursa. One may, however, be an independent director of the company or firm providing the professional advisory services; and

● One who has not engaged in any transaction with the company under such circumstances as prescribed by Bursa, or is not at present a partner, director or major shareholder of a company or firm which has engaged in such a transaction. But note that it is all right for one to have been engaged in a transaction with the subsidiaries of the company in question.

Now that we are clear as to who can and cannot be an independent director, the next question we looked at was how long should his or her tenure be. For this, we reviewed the MCCG-2012, which states that such a tenure should not exceed nine years. This is in line with international best practices. Now, this does not mean that an independent director must step down from the board after nine years, but it does mean that he must be considered a non-independent director from then on.

The MCCG-2012 adds that the nine-year cap applies whether or not the tenure is consecutive or cumulative or intervals of stop-and-start again.

We then went on to review audit committees. Who, then, is eligible to form a company’s audit committee?

Section 15.09 of Bursa’s listing rules defines them as directors of a company that fulfil the following requirements:

● They must all be non-executive directors, with a majority among them being independent directors;

● At least one among them must either be a member of the Malaysian Institute of Accountants or have at least three years’ working experience and have passed the examinations specified in Part I of the First Schedule of the Accountants Act 1967. Alternatively, such a person should be a member of one of the associations of accountants specified in Part II of the First Schedule of the Accountants Act 1967; failing which, he should at least fulfil requirements as prescribed or approved by Bursa.

Bursa adds that the board of a company must ensure that it does not appoint any alternate director to the audit committee.

Who then is eligible to chair the audit committee? Bursa says that he or she must be an independent director and must be elected by the other members of the committee.

With all this in mind, let us return to the merged company which has that one director playing various roles in it.

We then examined the asset bases of the three companies that merged, reviewing how substantial each base was. The first company had 33% of the merged assets; the second had 55% of them, leaving the third company with 11%. That one director, in particular, had powerful, or at least decision-making, roles in the first two companies, which now had 88% of the merged assets.

Now, this director had executive as well as non-executive positions in these two companies before the merger. In the merged entity, which is now six years old, this person is still an independent director and also chairs its audit committee. He is well over the nine-year tenure cap. Are his longstanding directorships in the two companies excused because the companies have since merged? Isn’t this just box ticking then?

Our question is not so much whether or not he should still serve on the board, but that it would be prudent to reclassify his role as a non-independent director, given his history with the two previous companies as well as the many roles he played in them.