Trade-off of Board Objectivity vs Knowledge Accumulation – a relook at the proposed SGX limit on Independent Director (ID) Tenure at 9 years
Since 2018, all ID is subjected to a nine-year tenure restriction on director independence but with a last resort option for the shareholders to ultimately make the call via a two-tier voting mechanism when this limit was breached. The judgement to extend the ID tenure (beyond the stipulated 9 years) to mitigate the risk of Board governance issues arising from incomplete understanding of the company’s business of a short-tenured board is given to the shareholders. However, observation from the Singapore Board of Directors Survey 2022 shows that more than half of all Boards (67%) with long-tenured IDs are considering to take the option of extending beyond the 9 years by putting through the two-tier voting process. This has effectively allows the Board to circumvent the ID 9 years limit.
The broader issue is how to ensure ID independence? Is there a relationship between tenure and entrenchment? The Singapore Code of Corporate Governance states that an independent director (ID) is “one who is independent in conduct, character and judgement, and has no relationship with the company, its related corporations, its shareholders or its officers that could interfere, or be reasonably perceived to interfere, with the exercise of the director’s independent business judgement in the best interests of the company”. The Code is silent on tenure and it is ultimately a judgement call by the shareholders to assess the independence of long serving ID. So, the question of whether long tenure clouds the independence of ID and if so what is the magic number of years?
An interesting research paper by Sterling Huang (Singapore Management University) and Gilles Hilary (Georgetown University) in Zombie Board: Board Tenure and Firm Performance 12 February 2018 looked into the relationship between firm value and Board tenure. It is observed that an increase in board tenure from five to seven years is associated with an increase in ROA of 4.3% while a decrease in board tenure from 13 to 11 years is associated with an increase of 1.2% of the standard deviation. The sample has an average board tenure of 8.2 years, median of 7.7 years. The average age of a CEO is 55 years old, with an average tenure of eight years, with shareholding of 2% and with a majority of the sample firms with independent boards of an average of nine board members. The level of tenure empirically associated with the maximum Tobin’s Q is approximately 8 to 11 years. It seems a 9 years tenure limit is consistent with empirical evidence.
It is perhaps due that SGX moves in to tighten the governance. Many jurisdictions eg Malaysia,United Kingdom, India, Hong Kong have put in place tenure limits for independent directors, the question is how effective is this being actually implemented by the Boards – a discretionary option that is inevitably taken as default is a mockery of the policy itself.