More training, tighter regulations needed as board directors face ‘increasingly demanding’ role
By NAVENE ELANGOVAN
The Business Times, 19 February 2024
BOARD directors are facing increasing demands from regulators and the market, and need self-discipline to keep up to date on the affairs of their companies, say industry observers.
Mandatory training hours, performance appraisals and a cap on the number of directorships that individuals can hold were among some suggestions given by industry observers to nudge board directors to do their due diligence on companies.
Last month, the High Court found Goh Jin Hian, who is the former non-executive director of insolvent marine fuel supplier Inter-Pacific Petroleum (IPP), liable for breach of director’s duties, statutory duties and losses suffered by the company amounting to US$146 million plus interest.
The liquidators of IPP had accused Goh – the son of former prime minister Goh Chok Tong – of “sleepwalking through his time as a director” and failing to discover and stop drawdowns in trade financing to fund alleged non-existent or sham transactions.
High Court Justice Aedit Abdullah, in brief remarks issued on Jan 24, noted that while a director is not an internal auditor checking every singular detail, the obligation is to monitor the affairs of the corporation.
“This entails, among others, at least broad-level supervision of the activities of the officers of the corporation, for the protection of the company, shareholders and creditors,” the judge said.
Increasing demands on directors
Industry observers acknowledged that board directors face challenges in keeping up with the affairs of the companies whose boards they sit on.
Prof Lawrence Loh, director of the Centre for Governance and Sustainability at the National University of Singapore Business School, said that directors increasingly have to oversee not just the business aspects of a company but also aspects of its sustainability and governance.
“I think the director now seems to be on the receiving end of many demands from various stakeholders like regulators, investors and consumers,” he noted.
Access to information was also another challenge, said Robson Lee, a partner at law firm Kennedys Legal Solutions.
Lee said that in his personal experience, it was not unusual for the management of listed companies to provide non-executive directors – who are not full-time employees of the company – with bare-bones details on proposals requiring board approvals, for instance.
Nevertheless, market watchers said it was the responsibility of board directors to be “self-disciplined” and take an active interest in the affairs of their companies to avoid facing criminal charges or negligence suits for not being vigilant.
Lee said it was on directors to be “reasonably and continuously well-informed” regarding their legal and regulatory obligations.
Adrian Chan, vice-chairman of the Singapore Institute of Directors (SID), said that those who join as board directors should refer to the annual reports of a company, speak to outgoing directors and meet with people across different management levels to understand the company’s business.
More regular training
Chan felt that there should be more training for directors. He suggested that regulators impose further disclosures and practice guidance on training for board directors to nudge reluctant directors to voluntarily attend training. For example, regulators could specify the areas and the number of training hours required by directors.
“After a while, once it’s been socialised enough, then you move into the listing rules to include mandatory training,” he added.
This would be similar to mandatory training hours required by other professions such as law and dentistry, and also help to professionalise directorships, said Chan.
However, Lee of Kennedys Legal Solutions felt that the consequence of being charged in court for ignorance or negligence should be “sufficient motivation” for all directors to be well-informed and knowledgeable regarding their companies.
More structured appointment process
Prof Loh said that in some cases, the law may not be enough of a deterrent for errant directors as some cases may fall into a “grey area” where there is no criminal breach of trust.
Additional training is also insufficient to ensure that directors stay on top of their companies’ affairs, he added.
“Ultimately it’s about (their) personal qualities and personal responsibility,” he noted.
He suggested implementing a more rigorous and structured process to appoint qualified directors, rather than appointing people through personal networks.
He also suggested that board directors be subjected to appraisals, much like senior management in a company.
These initiatives would better ensure that companies appoint directors who take the effort to do their due diligence on companies, he said.
Imposing a cap on directorships
Market watchers were mixed on whether there was a need to impose a hard cap on the number of directorships a person could hold.
In Singapore, there are no restrictions on the number of directorships a person can hold.
The 2023 Singapore Directorship Report published by SID indicated that 85 per cent of listed company directors held only one board seat, while 10 per cent held two directorships and the remaining 5 per cent held more than two directorships.
Lee of Kennedys Legal Solutions took the view that the authorities should recommend individuals not to accept directorships in more than four companies at any time, given the time and bandwidth required in overseeing the affairs of a company.
SID’s Chan, however, felt that imposing a cap could be “short-sighted” as individuals may have legitimate reasons for sitting on multiple boards. Rather, the focus should be on hiring qualified candidates, he added.
Beyond the individual, the company culture also plays a part in ensuring directors carry out their responsibilities, said Prof Loh.
“The board chairman has to set the tone of what the board members are expected to do, and make sure it’s not just a quarterly gathering for socialisation,” he added.