S’pore-listed SMEs may scramble for new directors in 2024; more diversity in skills, gender needed

A new listing rule stipulates that directors who have served for more than nine years will no longer be considered independent.

By KANG WAN CHERN

The Straits Times, 18 October 2023

 

SINGAPORE – Regulators want listed companies here to start reviewing their boards to avoid scrambling to replace independent directors once a tough new listing rule takes effect in 2024.

The rule stipulates that directors who have occupied board seats in the same company for more than nine years will no longer be considered independent. Companies will have to adjust their boards by April 2024.

Data shows that 20.9 per cent of 2,209 independent directors polled have served for more than nine years and will need to be replaced or redesignated to comply with the new rule.

These directors can be redesignated as non-independent or non-executive directors, or resign by 2024, according to a Singapore Institute of Directors report on Wednesday.

Researchers for the report collected information from 650 companies, 42 real estate investment trusts and five business trusts listed here.

It noted that companies are more likely to replace their long-serving independent directors with new ones rather than go through the complications of redesignating them.

This could lead to a scramble to appoint new independent directors in 2024, and given that the hiring process takes around three months or more, firms should start adding new ones now, noted Singapore Exchange Regulation (SGX RegCo) managing director June Sim.

Action for companies with financial years ending on Dec 31 must occur by their April annual general meetings, when shareholders vote on new directors, added Ms Sim, who was speaking at a panel to launch the report.

The study noted that the highest percentage of directors who have served more than nine years sit on the boards of mature firms, defined as those listed for more than nine years.

A breakdown showed that 43 of the 485 mature firms with long-serving independent directors have three or more such officers who must be replaced or redesignated by 2024.

Almost all of these firms are small or mid-cap companies, which are likely to face significant difficulties in attracting experienced independent directors.

Accounting professor Ho Yew Kee at the Singapore Institute of Technology (SIT) said this is because directors of smaller companies have less support and a lot more hands-on work compared with larger companies.

“Therefore, finding competent directors willing to serve on a smaller board can be challenging. Our concern is that some of the smaller companies end up getting people on the board simply to meet listing requirements but who are not truly competent or independent.”

Ms Sim said: “For these companies, there will be a mad rush to comply. As regulators, we are engaging the sponsors of the Catalist issuers to get them to take action now.”

The report showed a higher percentage of board seats being filled by independent directors, reflecting a progressive shift to greater independence on the corporate floor.

There were 3,261 directors occupying 4,051 board seats in 2023 – 54.5 per cent were independents, up from 47.5 per cent when the report was first produced in 2014.

Associate Professor Victor Yeo from Nanyang Business School said refreshing a board with high-quality independent directors is important, as they bring in new ideas, avoid groupthink and ensure independence and objectivity in evaluating a company’s performance.

He added that mindsets on having more female independent directors are changing, with women now contributing to a larger share of senior management and taking part in decision-making.

The report noted that women hold 15.4 per cent of the 2,209 independent directors seats, up from 12.4 per cent in 2021.

Meanwhile, more than half the companies in the study have at least one woman on their board – 58.5 per cent in 2023, up from 52.7 per cent in 2021. Large-cap firms have the highest percentage of women directors at 22.4 per cent, compared with 17.2 per cent in 2021.

SGX RegCo chief executive Tan Boon Gin said: “Since we mandated diversity disclosures, female directors have filled almost 25 per cent of the independent board seats that have become available.

“This is encouraging. We expect at least another 300 independent director seats to become available with the commencement of the nine-year rule.”

SIT’s Professor Ho said companies should include independent directors with more diverse skill sets in their succession plans.

“In the past five to eight years, expertise in risk management was critical and understanding sustainability has become more important,” he said.

“(Independent directors) will also need to look at greater governance over technology and cyber security to be able to fulfil their role as a board member for the long-term interest of the company.”