CFA Society Sri Lanka has announced that a new research report on “Independent Directors in Asia Pacific”, from CFA Institute, finds that, while certain markets in the region have made significant progress in fostering board independence of listed companies, other markets lag behind. The report, which covers Australia, Hong Kong SAR, India, Japan, Malaysia, and Singapore, shows that although standards of corporate governance standards have been steadily improving across the region, some markets suffer from weak legal protections, concentrated ownership structures, or deeply ingrained traditional attitudes that are not conducive to board independence.
“Good corporate governance standards not only protects the interests of investors and improves their trust in capital markets, but also acts as a key driver of investment performance,” Mary Leung, CFA, Head, Advocacy, Asia Pacific, at CFA Institute, said.
Dinesh Warusavitharana, CFA, President, CFA Society Sri Lanka, said, “As an organization driven by the mission to lead the investment management profession globally for the ultimate benefit of the society, CFA Society Sri Lanka considers improving corporate governance standards an important part of its advocacy efforts. Board independence is a key cornerstone of corporate governance. He further added that CFA Society Sri Lanka works very closely with Securities Exchange Commission to improve corporate governance standards in the listed companies in Sri Lanka”
Some of the key findings are:
Inadequate representation of independent directors on boards of listed companies
CFA Institute believes that independent directors should constitute a majority of the board. Of the six markets analyzed, only Australia requires it, while only one-third, or two directors, are needed for the other markets.
Long tenures of independent directors
A long tenure may compromise the independence of directors but in four analyzed markets – Australia, Hong Kong SAR, Japan, and Singapore, there are no limits on tenures of independent directors. India has adopted a 10-year limit, while Malaysia is considering a 12-year maximum.
Directors serve on several boards concurrently
There is no limit on how many boards a director may sit concurrently in Australia, Hong Kong SAR, Japan, and Singapore. It is not uncommon for a director in Hong Kong SAR to serve on more than six boards, as the city’s regulations only require a justification when appointing such a person. Malaysia allows five concurrent directorships, and India, seven.
The separation of the roles of Chair and CEO, and Chair independence
CFA Institute believes that the same person should not perform the roles of chair and CEO and that the chair should be an independent director. Although Chair-CEO separation is relatively common in most of the markets in the region, Japan stands out as an outlier. In the deeply traditional business culture, less than 20% of companies follow this practice. Only Australia and Malaysia recommend that the chair be independent.
Board diversity
CFA Institute believes that board diversity fosters a better exchange of ideas and leads to better decision making. Gender diversity on boards of companies in Asia Pacific is generally lower than in North America or Europe. Australia and Malaysia, where women occupy more than a quarter of board seats, lead among the six markets analyzed. Japan lags, with less than 6%. In Hong Kong SAR, around 37% of boards have no women directors.
CFA Institute recommends five major areas to strengthen the role of independent directors and improve corporate governance standards in the region:
- Ensure mandatory separation of chair and CEO and require that the chair be an independent director.
- Designate a lead independent director accountable to non-controlling shareholders when the chair of the company is non-independent.
- Place a hard cap on the maximum tenure of an independent director.
- Provide mandatory director training with relevant competencies for independent directors.
- Encourage board diversity, in particular by appointing more women directors.
“Although each market defines independent directors differently through regulation and market practice, and each is in its own stage of economic growth and development, it is of the view of CFA Institute that good progress has been made toward broader recognition of the role of independent directors in improving corporate governance standards in the past five decades” Aruna Alwis, CEO, CFA Society Sri Lanka, added. The report can be obtained via the CFA Institute website on https://info.cfainstitute.org/Independent_Directors_APAC.html.