My Say: The fading appeal of independent directorship

by Brian Chia and Stephanie Phua on Sunday, 22 March 2009 16:00

The current turmoil in the global financial markets has resulted in many companies teetering on the brink of insolvency. Against this gloomy backdrop, the rise in corporate governance transgressions, incidents of market manipulation, insider trading and fraud has exacerbated the risk of personal liability for the directors of companies, including independent directors.

Unlike an executive director, an independent director is not involved in management and is not an employee of the company. And unlike a non-independent non-executive director, an independent director does not have any moral or other allegiance to any particular shareholder. It stands to reason therefore that when the going gets tough, independent directors will have cogent reasons to exit the company.

But can we blame them? The position of an independent director is a difficult one. Independent directors are perceived as the designated watchdogs of a company. They are expected to represent the interests of a usually diverse group of shareholders (particularly minority shareholders) and provide regular checks and balances. Critically, however, they do not exercise control. When their advice is ignored or a company runs into difficulties — whether through the fault of the managers or merely as a result of corporate misfortunes — serving as an independent director can feel like a thankless task. This, in addition to the spectre of personal liability, will make the job of attracting and retaining the best talent as independent directors very much more challenging in times to come.

Malaysian authorities have not hesitated to take action against errant directors, for example in Transmile Group, NasionCom Holdings and Hwa Tai Industries. This article will explore the wisdom of serving on the boards of companies as an independent director in this volatile economic environment and in turn, what companies can do to continue to attract, recruit and retain the best talent in the market.

Less at stake for independent directors?
Unfortunately not. Legally, independent directors are subject to the same legal duties and liabilities as executive directors who have more control over the day-to-day management of the company. There is no shortage of discussion on the duties and liabilities of directors and standards required of them but we will highlight some common risks faced by independent directors in Malaysia, particularly in the context of an insolvent or near-insolvent company.

Breach of fiduciary duties
Generally, Malaysian directors are required at all times to:
•    Exercise their powers for a proper purpose and in good faith and in the best interests of the company;
•    Exercise reasonable care, skill and diligence (with the knowledge, skill and experience expected of a director having the same responsibilities and any additional knowledge, skill and experience);
•    Exercise sound business judgement in good faith for a proper purpose, without material personal interest, with sufficient knowledge of the matter and in the best interests of the company; and
•    Not use their position or the company’s property to directly or indirectly gain a benefit for themselves or cause detriment to the company.

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