How Many Independent Directors Should a Board Have?

Norman Marks, CRMA, CPA, is a vice president for SAP and has been a chief audit executive and chief risk officer at major global corporations for more than 20 years.

 

When I reviewed the updated corporate governance code from Singapore (see my earlier post on this site), I was struck by the guideline that one third of the board members should be independent. Is that enough?

The board needs to have membership that represents and protects the interests of it's stakeholders, and is able to not only provide advice but challenge management directions and actions.

In the case of Singapore, government entities have a major (if not controlling) stake in many large corporations. I can see that such major stockholders need representation on the board. However, their representatives may not meet the definition used in Singapore of independent directors: independent both of management and 10% shareholders.

So, in that context, I would prefer guidelines to the effect that:

  1. The board should have a majority of directors that are independent of management.
  2. Except where a single entity owns all the shares, at least one third of the directors should be independent of both management and the 10% shareholders.

What do you think?

Posted on Jun 15, 2012 by Norman Marks

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  1. While a Board comprising one-third independent directors ("IDs") may not be enough, prescribing outright majority across the board, may have a problem in Singapore - the supply side of the equation. The pool of IDs - effective IDs, is not that big. One area of improvement could be expanding the definition to include independence from business relations - for example, a director of a law firm that provides legal assistance to the company - is the director independent? Why should $200,000 be the yardstick cast in stone? (Why not have a threshold determined annually, say in the lines of materiality, set by auditors?) The idea of being independent of business relations has already been incorporated in Business Trusts here, which require a higher degree of independence.

    At the same time, is the number of IDs - one-third or half, as stated in the revised Code, really that important? Rather it is the quality of IDs that matter - IDs who are independent in the true sense - who do not depend at all on directors' fees. Cross directorships should also be considered while determining independence.

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